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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE MUSICLAND GROUP, INC. ("MGI")
(Exact name of Company as specified in its charter)
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<S> <C>
DELAWARE 41-1307776
(State of Incorporation) (I.R.S. Employer
Identification No.)
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AND
MUSICLAND STORES CORPORATION ("MSC")
(Exact name of Company as specified in its charter)
DELAWARE 41-1623376
(State of Incorporation) (I.R.S. Employer
Identification No.)
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MUSICLAND STORES CORPORATION
THE MUSICLAND GROUP, INC.
10400 YELLOW CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343
(612) 931-8000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Company's Principal Executive Offices)
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JACK W. EUGSTER,
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS OF MGI AND MSC
MUSICLAND STORES CORPORATION
THE MUSICLAND GROUP, INC.
10400 YELLOW CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
(612) 931-8000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
JANNA R. SEVERANCE, ESQ.
MOSS & BARNETT
4800 NORWEST CENTER
90 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402-4129
(612) 347-0367
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: / /
If this form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective registration statement for the same offering: / /
If this form is a post-effective amendment filed pursuant to rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
AGGREGATE OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE(3) OFFERING PRICE(4) REGISTRATION FEE
<S> <C> <C> <C> <C>
9 7/8% Series B Senior Subordinated Notes due 2008
(1)............................................. $150,000,000 $1,000 $150,000,000 $44,250
Guarantee (2)..................................... (5) (5) (5) (5)
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(1) Issued by The Musicland Group, Inc. ("MGI").
(2) Guarantee of the Notes by Musicland Stores Corporation ("MSC"), which owns
100% of MGI.
(3) Minimum Note denomination.
(4) Estimated solely for purposes of calculating the registration fee. Fee
calculated pursuant to Rule 457(f)(2) based on the par value of the 9.875%
Series A Senior Subordinated Notes of MGI (and associated Guarantee by MSC)
to be exchanged for the securities being registered.
(5) No additional value is attributed to the Guarantee, which is inseparable
from the Series B Notes.
------------------------------
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL , 1998
PROSPECTUS
$150,000,000
[LOGO]
OFFER TO EXCHANGE 9 7/8% SERIES B SENIOR SUBORDINATED NOTES FOR ANY AND ALL
OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2008
Offer to Exchange 9 7/8% Series B Senior Subordinated Notes Due 2008, which
have been registered under the Securities Act of 1933, as amended, for any and
all of its outstanding 9 7/8% Senior Subordinated Notes Due 2008. The Exchange
Offer will expire at 5:00 p.m., Eastern Standard Time, on , 1998
(minimum of 20 and maximum of 30 business days following the commencement of the
Exchange Offer) (the "Expiration Date") unless the Exchange Offer is extended.
The Musicland Group, Inc. ("MGI" or the "Issuer") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying letters of transmittal (each a "Letter of Transmittal,"
collectively the "Letters of Transmittal" and, together with this Prospectus,
the "Exchange Offer"), to exchange its 9 7/8% Series B Senior Subordinated Notes
Due 2008 (the "New Notes") which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which this Prospectus is a part, for an equal principal amount of its
outstanding 9 7/8% Series A Senior Subordinated Notes Due 2008 (the "Old Notes")
outstanding in the principal amount of $150,000,000 as of the date of this
Prospectus. The Old Notes were originally sold on April 6, 1998 (the "Issue
Date") to a limited number of qualified investors in reliance upon exemption
from registration under the Securities Act (the "Private Placement").
The Issuer will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., Eastern Standard Time, on
, 1998, unless extended. Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. See "The Exchange Offer."
The New Notes will be obligations of the MGI evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the
Indenture (as defined), which governs both the Old Notes and the New Notes, and
to the benefits of the Guarantee of Musicland Stores Corporation ("MSC" or the
"Guarantor"), which owns 100% of MGI. All references to the "Company" shall
include MSC, MGI, and MGI's subsidiaries. The principal asset of MSC is the
stock of MGI; MSC has no business operations other than those conducted by MGI.
The form and terms of the New Notes are in all material respects identical
to the form and terms of the Old Notes, except that the offer and issuance of
the New Notes will have been registered under the Securities Act and, therefore,
the New Notes will not bear legends restricting their transfer. The Old Notes
and the New Notes are collectively, and sometimes individually, referred to as
the "Notes." See "Description of the Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Issuer and the Guarantor under the Registration Rights
Agreement, dated April 6, 1998 (the "Registration Rights Agreement"), among the
Issuer, the Guarantor and Donaldson Lufkin & Jenrette Securities Corporation, BT
Alex. Brown, and NationsBanc Montgomery Securities LLC (the "Initial
Purchasers"). Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action letters issued
to third parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than any holder that is an "affiliate" of the Company, as
defined under Rule 405 of the Securities Act), provided that such New Notes are
acquired in the ordinary course of such holder's business and such holder is not
engaged in, and does not intend to engage in, a distribution of such New Notes
and has no arrangement with any person to participate in the distribution of
such New Notes. However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. By tendering the Old Notes in exchange for
the New Notes, each holder, other than a broker-dealer, will represent to the
Company that (i) it is not an affiliate of the Company (as defined under Rule
405 of the Securities Act), (ii) any New Notes to be received by it were
acquired in its ordinary business and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange
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Offer must acknowledge that it will deliver a Prospectus in connection with any
resale of such New Notes. The Letters of Transmittal state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that it will make this Prospectus available to any broker-dealer for
use in connection with resale for a period starting on the Expiration Date and
ending on the earlier of (i) the close of business 360 days after the Expiration
Date or (ii) the date when (A) all Old Notes have been exchanged for New Notes,
(B) all Old Notes have been sold pursuant to a Shelf Registration Statement (as
defined) or pursuant to Rule 144 under the Act, and (C) all New Notes have been
sold (as contemplated by "Plan of Distribution," herein) by any broker-dealer
who acquires such New Notes in exchange for Old Notes pursuant to this Exchange
Offer. In addition, until [ , 1998] (90 days after the date of this
Prospectus), all dealers effecting transactions in the New Notes may be required
to deliver a prospectus. See "Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Notes or the New Notes. The Initial Purchasers have agreed that one or more of
them will act as market-makers for the New Notes. However, the Initial
Purchasers are not obligated to so act and they may discontinue any such
market-making at any time without notice. Moreover, the New Notes and Old Notes
could trade at prices that may be higher or lower than their principal amount if
a market were to develop for either of them. The Company does not intend to
apply for listing or quotation of the New Notes or Old Notes on any securities
exchange or stock market. Therefore, there can be no assurance as to the
liquidity of any trading market for the New Notes or Old Notes or that an active
public market for the New Notes or Old Notes will develop. See "Risk
Factors--Absence of Public Market."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. No underwriter
is being used in connection with the Exchange Offer.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE OF THIS PROSPECTUS.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED FINANCIAL
POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED
IN THIS PROSPECTUS, INCLUDING IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROSPECTUS AND UNDER THE HEADING "RISK FACTORS." ALL SUBSEQUENT
WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR
PERSONS ACTING ON THE COMPANY'S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY
BY THE CAUTIONARY STATEMENTS.
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY"
SHALL INCLUDE MSC AND MGI AND ITS SUBSIDIARIES. THE PRINCIPAL ASSET OF MSC IS
100% OF THE OUTSTANDING COMMON STOCK OF MGI AND MSC ENGAGES IN NO INDEPENDENT
BUSINESS OPERATIONS. THE INDUSTRY DATA REFERRED TO IN THIS OFFERING MEMORANDUM
ARE DERIVED FROM INFORMATION BY VERONIS, SUHLER AND ASSOCIATES, AN INDUSTRY
RESEARCH ORGANIZATION AND STRATEGIC RECORD RESEARCH, A MARKET RESEARCH
ORGANIZATION. WHILE THE COMPANY BELIEVES THAT THE INFORMATION CONTAINED THEREIN
HAS BEEN OBTAINED FROM RELIABLE SOURCES, THERE CAN BE NO ASSURANCE THAT SUCH
INFORMATION IS ACCURATE AND COMPLETE. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES AND SUCH INFORMATION IS
SUBJECT TO THE ASSUMPTIONS SET FORTH IN CONNECTION THEREWITH AND THE INFORMATION
CONTAINED HEREIN. SEE "RISK FACTORS--FORWARD-LOOKING STATEMENTS."
THE COMPANY
The Company is the leading specialty retailer of prerecorded music in the
United States and is one of the largest national full-media retailers of music,
video sell-through, books, computer software and related products. The Company's
stores operate under two principal strategies: (i) mall based music and video
sell-through stores (the "Mall Stores"), operating under the principal trade
names Sam Goody and Suncoast Motion Picture Company ("Suncoast"), and (ii)
non-mall based full-media superstores (the "Superstores"), operating under the
trade names Media Play and On Cue. At December 31, 1997, the Company operated
1,363 stores in 49 states, the District of Columbia, the Commonwealth of Puerto
Rico, the Virgin Islands and the United Kingdom. For the year ended December 31,
1997, the Company had consolidated revenues of $1.8 billion, including $1.2
billion from the Mall Stores and $0.6 billion from the Superstores, and EBITDA
(as defined) of $85.4 million.
MALL STORES
SAM GOODY. Sam Goody is a well established music retailer that provides a
broad selection in an exciting, customer friendly shopping environment. Sam
Goody stores offer a full line of music, along with video and related products,
and typically carry from 4,500 to 8,500 compact disc titles, depending upon
store size and location, with the largest stores carrying up to 45,000 titles.
The music stores are predominantly found in mall locations and range in size
from 1,000 to 30,000 square feet, averaging 4,300 square feet. Many of the music
stores previously operated under the Musicland name have been converted to the
Sam Goody name. At December 31, 1997, the Company operated 713 Sam Goody music
stores with total square footage of approximately three million square feet or
37% of the Company's total store square footage.
SUNCOAST. Suncoast is the dominant mall based video sell-through retailer
in the United States offering a broad selection and excellent customer service
in an entertaining atmosphere. The typical Suncoast store is 2,400 square feet
in size and features 8,000 to 10,000 video titles along with movie and video
related apparel, digital video discs ("DVD"), special order video and other
related products. At December 31, 1997, the Company operated 409 Suncoast stores
with total square footage of approximately one million square feet or 12% of the
Company's total store square footage.
SUPERSTORES
MEDIA PLAY. Media Play is a full-media, superstore retailer of
entertainment software products providing a superior assortment at competitive
prices in a fun and exciting family oriented environment. Media Play stores
average 48,000 square feet and are in freestanding and strip mall locations
primarily in urban and suburban areas. The extensive merchandise assortment,
including up to 50,000 compact disc titles, 50,000 book titles, 15,000 video
titles and 2,000 computer software programs, complemented by
1
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other media and related products including magazines, video games, educational
toys, greeting cards and apparel, appeals to customers of all ages and
encourages browsing. The non-mall locations and largely self-service environment
lower operating costs and enable Media Play to offer products at competitive
prices. At December 31, 1997, the Company operated 68 Media Play stores with
total square footage of approximately three million square feet or 39% of the
Company's total store square footage.
ON CUE. On Cue is a full-media retailer in small towns, generally with
populations between 8,000 and 20,000 people, providing a wide assortment of
entertainment software products at competitive prices. On Cue stores offer
customers a convenient local store to shop for music, books, video, computer
software and related products with superior customer service to encourage repeat
business. On Cue stores average 6,200 square feet in size and carry
approximately 5,000 compact disc titles, 6,500 book titles and 2,000 video
titles. On Cue customers also have access to over 100,000 home entertainment
titles through the Company's special order program. At December 31, 1997, the
Company operated 157 On Cue stores with total square footage of approximately
one million square feet or 12% of the Company's total store square footage.
Beginning in 1995, the Company's financial results began to deteriorate as a
result of: (i) aggressive expansion of product offerings and new store openings
by most of the Company's non-mall competitors; (ii) severe price discounting of
music products by certain non-mall competitors; (iii) a lack of strong selling
hits in the music industry, which depressed sales throughout the industry; and
(iv) the Company's own rapid expansion of Media Play stores in response to
encouraging initial results. In 1996 management initiated restructuring programs
designed to improve the Company's cash flow and profitability. The major
components of the restructuring programs included: (i) closing 114
underperforming stores, which in the last full year of their operations lost an
aggregate of $17.7 million on an operating contribution basis; (ii) closing one
of the Company's two distribution centers, which reduced the Company's working
capital investment by approximately $20 million and contributed to a $6.9
million reduction in distribution costs in 1997; and (iii) improving inventory
management techniques, which increased the Company's inventory turnover from 1.8
times during 1996 to 2.1 times during 1997. Inventory levels at year-end 1997
were $55.8 million below those of the prior year with approximately $30 million
of the reduction due to store closings and the remainder attributable to
distribution efficiencies and improved inventory management. The Company reduced
Media Play advertising expense by $7.9 million in 1997 from the prior year as a
result of closing stores in entire markets and the introduction of a less
costly, but more targeted, program of newspaper advertising inserts. In
addition, in 1997 the Company began to benefit from positive trends in the music
retailing industry, including a retreat from severe price discounting and an
increase in unit sales. As a result, the Company's EBITDA increased from $35.1
million in 1996 to $85.4 million in 1997, and comparable store sales improved
from a decrease of 0.6% in 1996 to an increase of 4.5% in 1997.
The Company's principal executive offices are located at 10400 Yellow Circle
Drive, Minnetonka, Minnesota 55343, and its telephone number is (612) 931-8000.
COMPETITIVE STRENGTHS
The Company believes that it benefits from the following competitive
advantages:
LARGEST NATIONAL MUSIC RETAILER. The Company is the largest specialty
retailer of music in the United States, with music available in all 1,363
stores. The Company's leading market presence allows the Company to: (i) spread
its fixed operating costs over a large revenue base; (ii) realize distribution
savings through freight consolidation; (iii) take advantage of vendor discounts
and cooperative advertising programs; (iv) negotiate more effectively with
national landlords; (v) use national advertising media; and (vi) benefit from
market clustering. A national distribution of stores also minimizes the impact
on the Company of regional business trends. In recent years, as a result of
adverse industry conditions, a number of mall based music chains have closed
hundreds of stores. Although the Company has also closed
2
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underperforming stores, the Company was the single music retailer in 285 malls
at the end of 1997 compared to 274 malls at the end of 1996.
SOPHISTICATED INVENTORY MANAGEMENT AND DISTRIBUTION SYSTEMS. Management
believes that the Company's proprietary retail inventory management ("RIM") and
distribution systems are the most sophisticated in the industry, allowing the
Company to manage its inventory more effectively than its competitors. The RIM
system performs comprehensive merchandise control functions on both an
individual store and a company wide basis. It maintains an inventory profile for
every store, incorporates an "intelligent" new release allocation system and
adjusts and monitors store inventory on a daily basis. The RIM system allows the
Company to meet demand for fast selling titles and carry a broad range of
current hits and catalog titles while avoiding excess inventory and substantial
returns. In January 1997, the Company consolidated its distribution operations
into its state-of-the-art, centrally located facility in Franklin, Indiana, that
contains 715,000 square feet. This facility incorporates computerized processing
and laser technology for receiving, storing, sorting and shipping new product
and returns. This technology has enabled the Company to implement "just-in-time"
inventory management with certain vendors, which reduces working capital.
STRONG BRAND NAME RECOGNITION. The Company benefits from strong national
brand name recognition and continually markets to strengthen the brand images
for each of its retail concepts. A 1997 national survey by Strategic Record
Research determined that more music consumers preferred shopping at the
Company's stores than at other music stores. Strong brand name recognition
offers advantages in advertising, in-store events and marketing partnerships.
The Company is able to attract large corporate partners such as Pepsi-Cola,
Sears, VISA, MasterCard and L'Oreal for cross promotions, events and sweepstakes
that the Company believes are attractive to shoppers. The Company's monthly
REQUEST magazine, with an annual audited circulation of 6 million copies, is an
award winning, cutting edge music publication. REQUEST offers numerous cross
marketing opportunities with Sam Goody and the Company's other concepts and
reinforces the Company's brand names with consumers.
LONG-STANDING VENDOR RELATIONSHIPS. The Company believes its relationships
with major music and video vendors are among the best in the industry. Strong
vendor relations allow the Company to be creative in its marketing programs and
business operations. The Company's long-standing relationships with vendors are
further enhanced because: (i) the Company's large selection of products provides
vendors with a needed outlet for their catalog product, which is generally more
profitable than hit product; and (ii) the Company's RIM system allows the
Company to manage product returns at rates below the industry average, which is
an economic benefit to the vendors. Management believes that the continued
support of its vendors in 1996 and 1997 is a testament to the strength of its
vendor relationships.
BUSINESS STRATEGY
The Company's objective is to continue to increase revenue, cash flow and
profitability. Management believes that the Company's recent operating results
have begun to reflect the successful implementation of its business strategy.
The key elements of the Company's business strategy are as follows:
STRENGTHEN STORE BASE. After closing 236 underperforming stores over the
past three years, management believes that its current store base is well
positioned for future growth. Management intends to improve sales by enhancing
brand name awareness and increasing store traffic through creative advertising
and marketing programs. Management also intends to remodel certain stores in
order to enhance their appeal to customers. While management does not currently
intend to significantly expand its store base, the Company will open selected
new stores in order to fill out existing markets or capitalize on attractive
leasing opportunities. The Company will continue to assess the profitability of
its stores and will close a limited number of underperforming stores in the
coming years, if the closings can be accomplished economically.
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CAPITALIZE ON FAVORABLE INDUSTRY DYNAMICS. The Company expects sales of its
products to increase due to: (i) increased consumer spending; (ii) favorable
demographic trends; and (iii) the advent of new technologies. Through 2001,
consumer spending on pre-recorded music, video sell-through and trade books is
projected to grow at compounded annual growth rates of 5.6%, 11.2% and 5.8%,
respectively (according to Veronis, Suhler & Associates). Demographic shifts
over the next few years are expected to contribute to sales growth. The 15 to 24
age group, whose members are known to be mall-shoppers and strong music buyers,
is projected to be 4.1% larger in the year 2000 than its size in 1995. The
principal book buying population, between 35 and 54 years of age, is projected
to grow in the same period by 12.3%. Children's music, video, books and toys
should benefit by a growth of 6.4% in the 5 to 14 age group in the same period
(source: U.S. Bureau of Census 1996). Historically, the introduction of new
technology, such as compact discs, has had a positive impact on the Company's
business, and the most encouraging new technology today is DVD. Veronis, Suhler
& Associates projects that by 2001 annual consumer spending on DVDs will be
approximately $1.2 billion. Most of the Company's stores carry DVD, and Suncoast
in particular is pursuing the early adopters of this new format.
INCREASE GROSS MARGIN. The Company believes the following initiatives will
benefit gross margin: (i) selective price decisions in response to the
competitive environment in various markets; (ii) adjustments to merchandise
assortment to include more higher margin products; and (iii) cross promotions on
product lines to increase sales of high margin ancillary products, such as
apparel.
REDUCE WORKING CAPITAL. The Company plans to continue reducing working
capital by: (i) expanding the "just in time" inventory program, which completely
eliminates backup inventory, to include more products and selective additional
vendors; (ii) implementing more precise buying rules to reduce returns; and
(iii) eliminating less profitable product lines.
IMPROVE MEDIA PLAY PROFITABILITY. The Company will concentrate on improving
profitability in all concepts, but particularly in Media Play. The Company's
efforts to increase sales, improve gross margin, increase customer traffic and
reduce operating costs in its Media Play stores include the following
initiatives: (i) introducing new merchandise assortments; (ii) altering
departmental and store layouts; and (iii) reducing operating costs through
improved store management, expense control and inventory management. Of the
Company's four concepts, Media Play showed the most significant profitability
improvement in 1997.
4
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THE EXCHANGE OFFER
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Registration Rights Agreement..... The Old Notes were sold by the Company on April 6, 1998
(the "Issue Date") in the Private Placement to
Donaldson, Lufkin & Jenrette, Securities Corporation, BT
Alex. Brown, and NationsBanc Montgomery Securities LLC
(the "Initial Purchasers"), who placed such Old Notes
with institutional investors. In connection therewith,
the Company executed and delivered for the benefit of
the holders of the Old Notes the Registration Rights
Agreement obligating the Company to file with the
Commission within 60 days after the date of issuance of
the Old Notes, a registration statement under the
Securities Act relating to an exchange offer for the Old
Notes (the "Exchange Offer") and to use its best efforts
to cause such registration statement to become effective
within 150 days after the Issue Date.
The Exchange Offer................ The New Notes are being offered in exchange for an equal
principal amount at maturity of Old Notes. As of the
date hereof, there was outstanding $150,000,000
principal amount of Old Notes. Because the New Notes
will be recorded in the Company's accounting records at
the same carrying value as the Old Notes, no gain or
loss will be recognized by the Company upon the
consummation of the Exchange Offer. See "The Exchange
Offer--Accounting Treatment." Holders of the Old Notes
do not have appraisal or dissenter's rights in
connection with the Exchange Offer under the Delaware
General Corporation Law (the "DGCL"), which is the law
of the state of incorporation of the Issuer and the
Guarantor.
Based on interpretations by the staff of the Commission,
as set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by holders
thereof (other than any holder who is an "affiliate" of
the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities
Act; provided, however, that such New Notes are acquired
in the ordinary course of the holder's business and such
holder is not engaged in, and does not intend to engage
in, a distribution of such New Notes and has no
arrangement with any person to participate in a
distribution of such New Notes. The staff of the
Commission has not considered the Exchange Offer in the
context of a no action letter and there can be no
assurance that the staff of the Commission would make a
similar determination with respect to the Exchange
Offer. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." To
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale
or register the New Notes prior to offering or selling
such New Notes. The Company has agreed, pursuant to the
Registration Agreement and subject to certain specified
limitations therein, to register or qualify the New
Notes for offer or sale under the securities or "blue
sky" laws of such jurisdictions as may be necessary to
permit the holders of New Notes to trade such New Notes
without any restrictions or limitations under the
securities laws of the several states of the United
States. If a holder of Old Notes does not exchange such
Old Notes for New Notes pursuant to the Exchange Offer,
such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or
sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. See "Risk Factors--Consequences of
Failure to Exchange."
Expiration Date................... 5:00 p.m. Eastern Standard Time, on , 1998,
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer--Conditions." Except for the requirements
of applicable Federal and state securities laws, there
are no Federal or state regulatory requirements to be
complied with or obtained by the Company in connection
with the Exchange Offer. NO VOTE OF THE SECURITY HOLDERS
OF MSC OR MGI IS REQUIRED TO EFFECT THE EXCHANGE OFFER
AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING REQUESTED
BY MEANS OF THIS PROSPECTUS OR OTHERWISE.
Procedures for Tendering Old
Notes........................... Each holder of Old Notes who wishes to accept the
Exchange Offer must complete, sign and date the Letter
of Transmittal (the "Letter of Transmittal"), or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile
together with the Old Notes to be exchanged and any
other required documentation to the Exchange Agent (as
defined) at the address set forth herein and therein.
See "The Exchange Offer--Procedures for Tendering."
Withdrawal Rights................. Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., Eastern Standard Time, on the Expiration
Date. To withdraw a tender of Old Notes, a written or
facsimile transmission notice of withdrawal must be
received by the Exchange Agent (as defined) at its
address set forth below under "Exchange Agent" prior to
5:00 p.m., Eastern Standard Time, on the Expiration
Date.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Acceptance of Old Notes and
Delivery of New Notes........... Subject to certain conditions, the Company will accept
for exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m., on
the Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Exchange Agent.................... Bank One, N.A., the Trustee under the Indenture, is also
serving as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. The Exchange Agent
can be contacted by telephone at: (800) 346-5153; by
facsimile at: (614) 248-5088, or by mail at: Bank One,
N.A., 235 West Schrock Road, Westerville, OH 43081,
Attn: Corporate Trust Operations.
Use of Proceeds................... There will be no proceeds to the Company from the
Exchange Offer. The net proceeds to the Company from the
Private Placement were approximately $144 million (after
deduction of discounts and estimated offering expenses).
The Company has applied such proceeds to the repayment
of existing indebtedness.
</TABLE>
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of Old Notes for an equal
principal amount at maturity of New Notes. The New Notes will be obligations of
the Company evidencing the same indebtedness as the Old Notes and will be
entitled to the benefits of the same Indenture (as defined), which governs both
the Old Notes and the New Notes. In addition, the New Notes will be subject to
the benefits of the Guarantee. The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes except that the
offer of the New Notes will have been registered under the Securities Act and,
therefore, the New Notes will not bear legends restricting the transfer thereof.
Generally, the New Notes will be freely transferable under the Securities Act by
holders who are not affiliates of the Company. The New Notes otherwise will be
substantially identical in all material respects to the old Notes, as summarized
below.
<TABLE>
<S> <C>
Securities Offered................ $150.0 million in aggregate principal amount of 9 7/8%
Series B Senior Subordinated Notes due 2008.
Maturity Date..................... March 15, 2008.
Interest Rate..................... The Notes will bear interest at the rate of 9 7/8% per
annum, payable semi-annually on March 15 and September
15 of each year, commencing September 15, 1998.
Subordination..................... The Notes will be general unsecured obligations of MGI,
will rank subordinate in right of payment to all Senior
Debt and will rank senior or PARI PASSU in right of
payment to all existing and future subordinated
indebtedness of MGI. The Notes will be unconditionally
guaranteed on a senior subordinated basis by MSC. The
Guarantee will be a general unsecured obligation of MSC,
will rank subordinate in right of payment to all Senior
Debt of the Guarantor and will rank senior or PARI PASSU
in right of payment to all existing and future
subordinated indebtedness of MSC. As of March 1, 1998,
on a pro forma basis, after giving
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
effect to the issuance of the Notes and the application
of the net proceeds therefrom, the Notes would have been
subordinated to $83.0 million of Senior Debt of MGI. In
addition, on such date and pro forma basis, MGI could
have borrowed up to an additional $99.0 million under
the Revolver Agreement (as defined below) which would
also have constituted Senior Debt. See "Risk
Factors--Subordination" and "Description of Existing
Financing Arrangements."
Optional Redemption............... The Notes will be redeemable at the option of MGI, in
whole or in part, at any time on or after March 15, 2003
in cash, at the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages, if
any, thereon to the date of redemption. In addition, at
any time prior to March 15, 2001, MGI may redeem up to
40% of the initially outstanding aggregate principal
amount of Notes at a redemption price equal to 109.875%
of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the
redemption date, with the net proceeds of a Public
Equity Offering; PROVIDED that, in each case, at least
60% of the initially outstanding aggregate principal
amount of Notes remains outstanding immediately after
the occurrence of any such redemption. See "Description
of Notes--Optional Redemption."
Change of Control................. Upon the occurrence of a Change of Control, each holder
of Notes will have the right to require MGI to
repurchase all or any part of such holder's Notes at an
offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid
interest thereon to the date of repurchase. See
"Description of Notes--Repurchase at the Option of
Holders-- Change of Control." There can be no assurance
that, in the event of a Change of Control, MGI would
have sufficient funds to repurchase all New Notes
tendered. See "Risk Factors-- Possible Inability to
Repurchase Notes Upon a Change of Control."
Guarantee......................... The New Notes will be unconditionally guaranteed on a
senior subordinated basis by MSC, the Guarantor.
Certain Covenants................. The Indenture contains certain covenants that limit,
among other things, the ability of MGI to: (i) pay
dividends, redeem capital stock or make certain other
restricted payments or investments; (ii) incur
additional indebtedness or issue preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of its assets; (iv) create liens on
assets; and (v) enter into certain transactions with
affiliates or related persons. See "Description of
Notes--Certain Covenants."
Use of Proceeds................... The Company will not receive any proceeds from the
issuance of the New Notes. See "Use of Proceeds."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Book-Entry; Delivery.............. The New Notes will not be certificated but will be
book-entry securities, and transfers will be effected
through the facilities of The Depository Trust Company
("DTC"). See "Description of Notes--Book-Entry; Delivery
and Form."
</TABLE>
EFFECT UPON OLD NOTES
The holders of Old Notes currently are entitled to certain registration
rights pursuant to the Registration Rights Agreement among the Issuer, the
Guarantor, and the Initial Purchasers. However, upon consummation of the
Exchange Offer, subject to certain exceptions, holders of Old Notes who do not
exchange their Old Notes for New Notes in the Exchange Offer will no longer be
entitled to registration rights and will not be able to offer or sell their Old
Notes, unless such Old Notes are subsequently registered under the Securities
Act (which, subject to certain limited exceptions, the Company will have no
obligation to do), except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. See "Risk
Factors--Consequences of Failure to Exchange" and "The Exchange
Offer--Continuing Registration Rights." Old Notes which are not exchanged and
which remain outstanding will continue to be obligations of the Company and will
be entitled to the benefits of the Indenture and the Guarantee.
RISK FACTORS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS."
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial data and
operating data for the years and dates indicated. The data presented below under
the captions "Pro Forma Data," "Operating Data" and "Store Data" for all years
presented, are unaudited. The unaudited summary pro forma financial and
operating data of the Company for the year ended December 31, 1997 do not
necessarily reflect the results of operations or financial position of the
Company that would have actually resulted had the events referred to in the
notes to the unaudited pro forma financial information been consummated as of
the dates indicated and are not intended to project the Company's financial
position or results of operations for any future period. This information should
be read in conjunction with the Consolidated Financial Statements and related
notes appearing elsewhere herein and "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $1,181,658 $1,478,842 $1,722,572 $1,821,594 $1,768,312
Gross profit.................. 470,951 542,199 606,070 611,759 614,829
Selling, general and
administrative expenses..... 365,311 450,919 525,213 576,658 529,427
Depreciation and
amortization................ 29,057 37,243 45,531 44,819 39,411
Goodwill write-down(1)........ -- -- 138,000 95,253 --
Restructuring charges(2)...... -- -- -- 75,000 --
Operating income (loss)....... 76,583 54,037 (102,674) (179,971) 45,991
Interest expense.............. 19,831 19,555 27,881 32,967 31,720
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
-----------------------
<S> <C>
PRO FORMA DATA(3):
EBITDA(4)(5)....................... $86,520
Cash interest expense(6)........... 35,134
Ratio of net debt to EBITDA........ 2.2x
Ratio of EBITDA to cash interest
expense.......................... 2.5x
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
EBITDA(4)..................... $ 105,640 $ 91,280 $ 80,857 $ 35,101 $ 85,402
EBITDA margin................. 8.9% 6.2% 4.7% 1.9% 4.8%
Comparable store sales
increase (decrease)(7):
Mall Stores................. 4.5% 3.1% (4.9)% (1.7)% 4.7%
Superstores................. 27.6 33.3 4.8 2.0 4.1
Total(8).................. 4.6 4.6 (3.2) (0.6) 4.5
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STORE DATA:
Total store square footage (in
millions)............................. 4.9 7.2 9.9 9.5 8.3
Store count:
Music stores.......................... 875 869 820 777 713
Suncoast stores....................... 320 378 412 422 409
Media Play stores..................... 13 46 89 87 68
On Cue stores......................... 32 77 153 158 157
United Kingdom and other stores....... 11 16 22 22 16
----- ----- ----- ----- -----
Total............................... 1,251 1,386 1,496 1,466 1,363
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(9)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(10)..................... $ 3,942 $115,326
Total assets(10).................................. 733,895 849,625
Long-term debt, including current maturities...... 193,087 308,817
Stockholders' equity.............................. 18,770 18,770
</TABLE>
- - ------------------------------
(1) The goodwill write-downs were taken following evaluations of goodwill for
impairment because of sales declines experienced by the music stores during
1995 and 1996. See Note 2 of Notes to Consolidated Financial Statements.
(2) The restructuring charges were recorded during 1996 for the estimated cost
of closing the Company's distribution facility in Minneapolis, Minnesota
and 114 underperforming stores. See Note 3 of Notes to Consolidated
Statements.
(3) Gives pro forma effect to the sale of the Notes offered hereby and the
anticipated application of the net proceeds therefrom as described under
the caption "Use of Proceeds" as of the first date of the stated period.
(4) EBITDA represents earnings (loss) before extraordinary charge plus interest
expense, income taxes, depreciation and amortization, goodwill write-down
and restructuring charges. While EBITDA should not be construed as a
substitute for income from operations, net earnings or cash flows from
operating activities (as defined by generally accepted accounting
principles) in analyzing the Company's operating performance, financial
position or cash flows, the Company has included EBITDA because it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity and
to determine a company's ability to service debt. In addition, the method
of calculating EBITDA set forth above may be different from calculations of
EBITDA employed by other companies and, accordingly, may not be directly
comparable to such other calculations.
(5) Pro forma EBITDA represents EBITDA plus $1.1 million of rent expense
related to the financing agreements for the Company's distribution facility
prior to the recording of the mortgage notes payable on the Company's
Consolidated Balance Sheet in June 1997. See Note 15 of Notes to
Consolidated Financial Statements.
(6) For the purposes of Pro Forma Data, cash interest expense represents total
interest expense minus (i) amortization of debt issuance costs and (ii)
original issue discount on the Notes and plus deferred financing credits.
(7) Comparable store sales percentages are computed for stores open for a full
year during each year.
(8) The totals include United Kingdom and other stores.
(9) As Adjusted information gives pro forma effect to the sale of the Notes
offered hereby and the anticipated application of the net proceeds
therefrom as described under the caption "Use of Proceeds" as if they had
occurred on December 31, 1997. See "Capitalization."
(10) At December 31, 1997, outstanding checks in excess of cash balances of
$12.1 million were included in accounts payable. Cash and cash equivalents
and total assets, as adjusted to give effect to the Offering and the
application of the net proceeds therefrom, do not reflect the reduction of
$12.1 million for the outstanding checks in excess of cash balances that
would not have been included in accounts payable had the actual net amount
of cash and cash equivalents at December 31, 1997 exceeded this amount.
11
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR
TO PURCHASING THE NOTES OFFERED HEREBY. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission, as set forth in no-action
letters to third parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by the holders thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders are not engaged in, and do not intend to engage in, a distribution of
such New Notes and have no arrangement or understanding with any person to
participate in the distribution of such New Notes. The staff of the Commission
has not considered the Exchange Offer in the context of a no-action letter and
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning or the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of one year after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." However, to comply with the securities laws
of certain jurisdictions, if applicable, the New Notes may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption for registration or qualification is available and
is complied with. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for the untendered and the tendered but
unaccepted Old Notes could be adversely affected.
RISK ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS AND LIQUIDITY
The Company is highly leveraged. On a pro forma basis after giving effect to
the issuance of the Notes, the Company's long-term debt, including current
maturities, at December 31, 1997 was $308.8 million. In addition, on a pro forma
basis after giving effect to the issuance of the Notes, the Company's
consolidated ratio of long-term debt (including current maturities) to
stockholders' equity would have been 16.5:1 at December 31, 1997. At December
31, 1997, there were no borrowings outstanding under the Revolver Agreement, and
at March 1, 1998, the Company had borrowings of $146.0 million under the
Revolver Agreement. The highest balance outstanding under the Revolver Agreement
during the year ended December 31, 1997 was $273.0 million, and the average
daily balance was $238.5 million. However, in 1997 the Company maintained an
average month-end cash balance of $45.8 million and did not borrow the $50
million under the Term Loan until September 15, 1997. The net proceeds from the
sale of the
12
<PAGE>
Notes will be used to pay amounts outstanding under the Credit Facility and the
Mortgage Notes Payable. See "Use of Proceeds." The Company's indebtedness and
related financial covenants could significantly limit its ability to withstand
competitive pressures or adverse economic conditions, make acquisitions, obtain
future financing, or take advantage of business opportunities that may arise.
The indebtedness under the Revolver Agreement and the Term Loan Agreement bears
interest at floating rates, causing the Company to be sensitive to changes in
prevailing interest rates.
The Revolver Agreement will expire, and all amounts must be repaid
thereunder, on October 7, 1999. The Term Loan Agreement must be repaid in
installments of $25.0 million on each of December 14, 1998 and February 15,
1999. There is no assurance that the Company will be able to enter into new
credit arrangements or, if able to do so, that such arrangements will be on
favorable terms.
Beginning in 1995, the Company's financial results began to deteriorate as a
result of: (i) aggressive expansion of product offerings and new store openings
by most of the Company's non-mall competitors; (ii) severe price discounting;
(iii) a lack of strong selling hits in the music industry, which depressed sales
throughout the industry; and (iv) the Company's own rapid expansion of Media
Play stores in response to encouraging initial results. In 1996 the Company
initiated restructuring programs designed to improve the Company's cash flow and
profitability. The major components of the restructuring programs included: (i)
closing 114 underperforming stores; (ii) closing one of the Company's two
distribution centers; and (iii) improving inventory management techniques, which
increased the Company's inventory turnover. Because of the deterioration of the
Company's financial results and the incurrence of restructuring charges, the
Company would not have been in compliance with the financial covenants in the
Revolver Agreement without certain amendments and waivers to the Revolver
Agreement which were received throughout 1996 and in the first quarter of 1997.
In June 1997, the Company completed agreements with the Banks to amend the
Revolver Agreement and to provide additional financing under the Term Loan
Agreement. Also during the first quarter of 1997, the Company's largest vendors
and a substantial majority of its remaining vendors agreed to temporarily defer
existing trade payables and provide continued product supply, subject to payment
terms reduced to ten days or less on new purchases. During the third quarter of
1997, the Company completed individual agreements or understandings with most of
these vendors, including the ten largest, for the repayment of the deferred
trade payables balance and return to normal credit terms. The Company completed
repayment of deferred trade payables during the fourth quarter of 1997.
In addition to its obligations under the Notes, the Company is obligated to
make substantial principal and interest payments on indebtedness under the
Revolver Agreement and Term Loan Agreement and under the 9% Senior Subordinated
Notes due 2003 (the "2003 Notes"). See "Description of Existing Financing
Arrangements." The ability of the Company to make payments of principal and
interest on its indebtedness will be largely dependent upon its future
performance, which will be subject to factors affecting its business and
operations, many of which are beyond its control. There will be no sinking fund
established in connection with the Notes. There can be no assurance that the
Company will be able to generate sufficient cash flow, or that future borrowings
will be available in an amount sufficient to cover all required interest and
principal payments. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources."
SUBORDINATION
The right of holders to receive payment of principal and interest on the
Notes will be subordinate to the prior payment in full of all Senior Debt, which
consists of, among other things, amounts owing under the Revolver Agreement, the
Term Loan Agreement and any other debt of the Company not by its terms
subordinate to, or PARI PASSU with, the Notes. At December 31, 1997, on a pro
forma basis after giving effect to the Offering, the amount of Senior Debt was
$50.0 million, and at March 1, 1998, it was $83.0 million. At March 1, 1998, on
a pro forma basis after giving effect to the Offering and the application of the
net proceeds therefrom, the Company could have borrowed up to an additional
$99.0 million under the Revolver Agreement. No payment of principal or interest
on the Notes may be made during the
13
<PAGE>
continuance of a payment default under any Senior Debt. Further, the holders of
certain Senior Debt will be able to block payments on the Notes for up to 179
days during any 360-day period upon the occurrence of certain nonpayment events
of default under such Senior Debt. In addition, in the event of dissolution,
liquidation or the winding-up of the business of the Company, or upon
acceleration of the Notes prior to their stated maturity, all obligations with
respect to Senior Debt must first be paid in full before any payment may be made
with respect to the Notes, and the holders of the 2003 Notes would be entitled
to share ratably with the holders of the Notes. As a result, sufficient assets
may not exist to pay amounts due under the Notes. Subject to certain
restrictions contained in the Revolver Agreement and the Indentures related to
the 2003 Notes and the Notes, the Company is permitted to incur additional
Senior Debt. See "Description of Notes" and "Description of Existing Financing
Arrangements."
The principal asset of MSC is all of the outstanding stock of MGI and
substantially all MSC's operations are conducted through MGI. MSC is, and will
be, guaranteeing MGI's obligations under the Revolver Agreement, the Term Loan
Agreement, the 2003 Notes and the Notes. MSC's guarantee of the Notes is
subordinated in right of payment to MSC's guarantee of the Issuer's obligations
under the Revolver Agreement and Term Loan Agreement. MSC is restricted under
the terms of the Revolver Agreement from engaging in activities other than
ownership of MGI's stock and providing management and services to MGI.
MGI's indebtedness under the Revolver Agreement and the Term Loan Agreement
is secured by a pledge of the stock of MGI's consolidated wholly-owned
subsidiaries. Additionally, the Term Loan Agreement is secured by a
first-priority lien on all inventory of MGI and its consolidated wholly-owned
subsidiaries. In the event of defaults under the Revolver Agreement and Term
Loan Agreement, such lenders will have secured claims against such assets.
RECENT NET LOSSES
During the years ended December 31, 1995 and 1996, the Company incurred net
losses of $135.8 million and $193.7 million, respectively. These losses were the
result of many factors, primarily the write-down of goodwill and also included
restructuring charges, changes in the competitive environment, lack of hit music
product and the Company's rapid expansion of its Media Play concept. As a result
of these losses and the Company's liquidity problems, the Company's independent
auditors included a going concern qualification in their report for fiscal 1996.
During the years ended December 31, 1996 and December 31, 1997, the Company
implemented the restructuring programs described above under "--Risk Associated
with Substantial Indebtedness and Liquidity." In fiscal 1997, the Company had
net earnings of $14.0 million. This improvement was aided by the recent positive
trends in the music retailing industry, including a retreat from severe price
discounting and an increase in unit sales. There can be no assurance that the
restructuring programs will continue to result in positive financial results,
that the positive trend in the music industry will continue, that the negative
trend in the video industry will not worsen, or that the current competitive
environment will be sustained.
RISK OF COMPETITION
The Company operates in highly competitive markets, which are generally
local or individual in nature. The Company competes on the basis of service,
selection and price, with a broad range of specialty, discount and other
retailers, and certain national chains, some of whom have greater financial and
marketing resources than the Company. The number of stores and types of
competitors have increased significantly over recent years, including non-mall
discount stores, consumer electronic superstores, and mall based music, video
and book specialty retailers expanding into non-mall multimedia stores. The low
prices offered by these non-mall stores have created intense price competition
and adversely impacted the performance of both the Company's Superstores and
Mall Stores. Although deep discount pricing by many retailers of entertainment
products abated somewhat in 1997, there can be no assurance that if such
practice returns the Company will continue to achieve satisfactory gross margins
while remaining competitive.
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In addition, the Company competes for consumer time and spending with all
leisure time activities, such as movie theaters, television, home computing and
internet use, live theater, sporting facilities and spectator events, travel,
amusement parks, and other family entertainment centers. The Company's ability
to compete successfully depends on its ability to secure and maintain attractive
and convenient locations, market and manage merchandise attractively and
efficiently, offer an extensive product selection and knowledgeable customer
service and provide effective management. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Results of
Operations--Gross Profit" and "Business--Competition."
RISK OF RESTRICTIONS IMPOSED BY LENDERS
The Company's Revolver Agreement and, to a lesser extent, the Term Loan
Agreement and the indenture covering the 2003 Notes (the "2003 Indenture")
contain certain financial covenants which, among other things, limit the ability
of the Company to incur indebtedness, make investments, create or permit liens,
make capital expenditures, make guarantees and pay dividends. Additionally, the
Company is required to meet certain financial covenants under the Revolver
Agreement and Term Loan Agreement. Because of the highly competitive environment
and the decline in the Company's financial results, the Company experienced
difficulty meeting the financial covenants throughout 1996. As a result, the
Company obtained a series of amendments and waivers beginning in April 1996 and
ending with the amendment completed in June 1997. There can be no assurance
that, despite its recent improved results, the Company may not experience such
difficulty in the future and/or may require additional financing. If the Company
were unable to comply with the covenants under the Credit Facility or under the
2003 Notes, such indebtedness could be declared immediately due and payable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Existing
Financing Arrangements."
RISK OF AVAILABILITY OF HIT PRODUCTS
Entertainment product sales are dependent to some extent upon the
availability of hit products, which can create cyclical trends that do not
necessarily follow trends in the general economy. It is not possible to
determine the timing of these cycles or the future availability of hit products.
The availability of hit product is important for generating customer traffic in
the Company's stores. During recent years, industry growth and sales of music
and video products slowed due to the lack of strong new releases. Although the
situation in the music industry improved in fiscal 1997, the Company has no
control over the availability and strength of hit products and is dependent upon
the major music and movie producers continuing to produce a minimal number of
current hits. To the extent that current hits are not available, or not
available at prices attractive to consumers, the Company's business may be
adversely affected.
RISK FROM NEW TECHNOLOGIES
The Company believes that the introduction of new home entertainment
products, such as DVD, can help increase sales. This benefit, however, is
dependent upon acceptance by consumers of the new technology and availability of
product for consumer purchase. The switch of consumers from one format to
another, such as the shift from records to audio cassettes, and the later shift
from cassettes to compact discs, may also reduce sales of the existing format.
The Company intends to monitor carefully such technology shifts and to adjust as
necessary to respond to customer demand. Sales may be adversely affected and
product returns may be increased if the Company does not carry the right balance
of old and new formats. There can be no assurance that the Company will be
successful in interpreting the desires of consumers or predicting which of any
new technologies or formats will be accepted by consumers. Although the Company
believes DVD products may contribute to sales growth, there can be no assurance
that DVD will gain significant consumer acceptance generally or among the
Company's customers. Even if DVD is successful, any significant impact on sales
may not be seen for several years.
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In addition to the emergence of new technologies affecting product
offerings, emerging technologies are facilitating the offering by the internet,
cable companies, direct broadcast satellite companies, telephone companies and
other telecommunications companies of a wide selection of music and video
services to consumers. The Company expects this trend to continue. There is no
assurance that these new technologies will not have an adverse impact on sales.
UNCERTAINTY OF LEASE RENEWALS
All but three of the Company's stores are under operating leases with terms
ranging from 3 to 25 years. A total of 168 leases without renewal options will
expire in fiscal 1998 and 1999. Although the Company has historically been
successful in renewing most of its store leases when they have expired, there
can be no assurance that the Company will continue to be able to do so on
favorable terms or at all, particularly in light of the recent restructuring
programs. If the Company is unable to renew leases for its stores as they
expire, or find acceptable locations on favorable terms, there can be no
assurance that such failures will not have a material adverse effect on the
Company's financial condition or results of operations. See
"Business--Properties."
RELATIONSHIPS WITH VENDORS
The Company obtains approximately 68% of its product from the ten largest
vendors. Continued delivery of product to the Company by its vendors is critical
to the Company's operating results. During 1996, the Company experienced some
problems with delivery of product by vendors who were concerned about the
Company's financial viability. During the first quarter of 1997, the Company's
largest vendors and a substantial majority of the remaining vendors agreed to
temporarily defer existing trade payables and provide continued product supply,
subject to payment terms reduced to ten days or less on new purchases. During
the third quarter of 1997, the Company completed individual agreements or
understandings with most of its vendors, including the ten largest, for the
repayment of trade payables balances and the return to normal credit terms. The
Company completed repayment of the deferred trade payables during the fourth
quarter of 1997. There can be no assurance that the Company may not experience
similar financial difficulties in the future or that the vendors would in such
case provide the Company with deferred or other favorable payment terms to allow
the Company to receive product.
SEASONALITY RISK
The Company's business is highly seasonal. During the years ended December
31, 1997 and 1996, nearly 40% of the Company's annual revenues and all of its
net income, if any, were generated during the fourth quarter. Quarterly results
are affected by the timing and strength of new releases, the timing of holidays,
new store openings and sales performance of existing stores. There can be no
assurance that economic conditions will not adversely affect the Company's sales
and earnings, particularly during the fourth quarter of the year. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Seasonality."
RISKS ASSOCIATED WITH FUTURE GROWTH
SALES AND EARNINGS GROWTH
The Company's sales and earnings growth is primarily dependent upon
increasing revenues in existing stores, which will be affected by various
industry and competitive factors discussed herein. In addition, the Company's
profitability is dependent on the economic environment in general and the level
of consumer spending. Many mall based specialty retailers have experienced weak
comparable store sales in recent periods. The Company experienced negative
comparable store sales in fiscal 1996. Comparable store sales of music product
were slightly up in fiscal 1996 and strongly up in fiscal 1997. However,
comparable store sales of video product were slightly negative in fiscal 1996
and increased only negligibly in fiscal 1997. There can be no assurance that
comparable sales of video product will improve or that they will not deteriorate
further. During fiscal 1995 and 1996, the Company's operating results were
affected by the high fixed cost of poorly performing stores, both mall stores
and non-mall stores. These results have been
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attributed in part to the growth of non-mall superstores and power shopping
centers that have attracted the mall customer base. In an effort to improve
results, the Company closed 114 stores, including 30 Media Play stores, and, in
fiscal 1996, reported restructuring charges totaling $75 million to reflect the
cost of these closings and other steps taken. During 1997, the Company initiated
certain changes in the size, design, and merchandise offerings of Media Play in
an attempt to improve the operating results of this concept. In 1997, after
implementing the restructuring programs, the Media Play concept became
profitable, on an operating contribution basis, for the first time. The
improvement efforts are continuing during 1998. There can be no assurance that
these efforts will be successful. Although the Company's operating results
improved in fiscal 1997, there can be no assurance that such results will
continue. There can also be no assurance that a deterioration in economic
conditions would not adversely affect the Company's business.
GROWTH THROUGH NEW STORES OPENINGS; AVAILABILITY OF CAPITAL FOR STORE
EXPANSION
The Company may also increase revenues by opening or acquiring stores. The
opening of new stores is contingent upon the availability of desirable locations
and the negotiation of suitable lease terms, and the acquisition of stores is
dependent upon the availability of desirable stores at acceptable prices. Any
expansion will depend on business conditions, the availability of desirable
sites obtainable on an acceptable economic basis, the ability to attract and
retain qualified managers and sales associates and the availability of
sufficient capital. There can be no assurance that the Company will be able to
open any new stores, or open them on a timely basis, or that they can be
operated profitably. To the extent the Company's rate of expansion is slower
than historical levels, the Company's sales growth may be adversely affected. In
addition, the success of new stores is dependent upon acceptance by customers.
During 1997, the Company initiated certain changes in the size, design, and
merchandise offerings of Media Play in an attempt to improve operating results.
These efforts are continuing during 1998. There can be no assurance that these
efforts will be successful.
In 1998, the Company anticipates spending approximately $20 million to
remodel and expand existing stores. The Company expects that substantially all
future capital expenditures will be funded by net cash provided by operating
activities. The amount of any additional capital needed will depend upon the
profitability of the Company's existing stores. There can be no assurance that
any needed capital will be available on terms acceptable to the Company. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
RISK OF DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the active participation of certain key
personnel, the loss of whom could have a material adverse effect on the Company.
The Company has taken certain steps to minimize these risks by executing
employment agreements with Messrs. Eugster, Benson, Wachsman and Ross.
CORPORATE STRUCTURE
MSC is a holding company and does not have any material operations or assets
other than its ownership of 100% of the outstanding stock of MGI. MGI holds 100%
of the outstanding stock of its subsidiaries. MSC and MGI are dependent on the
cash flow of MGI's subsidiaries and distributions from such subsidiaries in
order to meet their debt service obligations.
Any right of MSC and MGI to participate in any distribution of the assets of
any of MGI's subsidiaries upon liquidation, reorganization or insolvency of any
such subsidiary (and the consequent right of the holders of the Notes to
participate in distribution of those assets) will be subject to the prior claims
of such subsidiary's creditors.
RISK OF FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE
The Company has assessed its systems and equipment with respect to Year 2000
compliance and has developed a project plan. Many of the Year 2000 issues,
including the processing of credit card transactions, have been addressed. The
remaining Year 2000 issues will either be addressed with scheduled system
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upgrades or through the Company's internal systems development staff. The
incremental costs will be charged to expense as incurred and are not expected to
have a material impact on the financial position or results of operations of the
Company. However, the Company could be adversely impacted if Year 2000
modifications are not properly completed by either the Company or its vendors,
banks or any other entity with whom the Company conducts business.
FRAUDULENT TRANSFER CONSIDERATIONS
Various laws enacted for the protection of creditors may apply to the
Company's incurrence of indebtedness in connection with the issuance of the
Notes. If a court were to find in a lawsuit by an unpaid creditor or
representative of unpaid creditors of the Company that the Company did not
receive fair consideration or reasonably equivalent value for incurring such
indebtedness or obligation and, at the time of such incurrence, the Company (i)
was insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii)
was engaged in a business or transaction for which the assets remaining in the
Company constituted unreasonably small capital, or (iv) intended to incur or
believed it would incur debts beyond its ability to pay such debts as they
mature, such court, subject to applicable statutes of limitation, could
determine to invalidate, in whole or in part, such indebtedness and obligations
as fraudulent conveyances or subordinate such indebtedness and obligations to
existing or future creditors of the Company. If a court were to find that the
Company satisfied the measures of insolvency described in (i) through (iv)
above, such court could avoid a distribution and order that it be returned to
the Company or to a fund for the benefit of the Company's creditors. Further, if
a court were to find that, at the time the Company granted security interests to
or for the benefit of the Banks, the Company did not receive fair consideration
or reasonably equivalent value for the grant of such security interests and came
within any of the foregoing clauses (i) through (iv), a creditor or
representative of creditors could seek to avoid the grant of such security
interests. This could result in an event of default with respect to the Revolver
Agreement that, under the terms thereof (subject to applicable law), would allow
the lenders thereunder to accelerate such debt.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, either MSC or
MGI would be considered insolvent at a particular time if the sum of its debts
was then greater than all of its property at a fair valuation or if the present
fair salable value of its assets was then less than the amount that would be
required to pay its probable liabilities on its existing debts as they become
absolute and matured. On the basis of its financial information, its recent
operating history as discussed in "Management's Discussion and Analysis of
Results of Operations and Financial Condition," and other factors, the Company
believes that, after giving effect to the issuance of the Notes, it is not
rendered insolvent, it has sufficient capital for the businesses in which it is
engaged and it is able to pay its debts as they mature. There can be no
assurance, however, as to what standard a court would apply in making any such
determinations.
ABSENCE OF PUBLIC MARKET
The Notes have no established trading market and may not be widely
distributed. The Initial Purchasers have informed the Company that they
currently intend to make a market in the Notes to the extent permitted by
applicable laws and regulations; however, the Initial Purchasers are not
obligated do so and the Initial Purchasers may discontinue market making at any
time without notice. In addition, any such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act and may
be limited during the pendency of the Exchange Offer or any Shelf Registration
Statement.
Although the Old Notes have been accepted for trading on the PORTAL market,
the Company does not intend to list the Old Notes or the New Notes on any
national securities exchange or stock market. Accordingly, there can be no
assurance as to the development of any market or the liquidity of any market
that may develop for the Notes. If a market for the Notes does not develop,
holders may be unable to resell such securities for an extended period of time,
if at all. If a market for the Notes does develop, the price of the Notes may
fluctuate and liquidity may be limited. If such a market for the Notes were to
exist, the
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Notes could trade at prices lower than the initial offering price thereof
depending on many factors, including, among others, prevailing interest rates,
the market for similar securities, the ability to locate a willing buyer,
general economic conditions and the financial condition and performance of, and
prospects for, the Company.
Historically, the market for non-investment grade debt, such as the Notes,
has been subject to disruptions that have caused substantial volatility in the
prices of such securities. There can be no assurance that the market for the
Notes will not be subject to similar disruptions. Any such disruption may have
an adverse effect on holders of the Notes.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
In the event of a Change of Control (as defined in the Indenture), the
Company will be required to offer to purchase the Notes at 101% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of repurchase. However, the Revolver Agreement prohibits the
Company from repurchasing the Notes and also provides that certain change of
control events with respect to the Company will constitute a default thereunder.
Any future credit agreements or other agreements relating to Senior Debt to
which the Company becomes a party may contain similar restrictions and
provisions. In the event that a Change of Control occurs at a time when the
Company is prohibited from purchasing the Notes, the Company could seek the
consent of lenders to the purchase of the Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such consent or repay such borrowings, the Company will remain prohibited from
purchasing the Notes by the relevant Senior Debt. In such case, the Company's
failure to purchase the tendered Notes would constitute an event of default
under the Indenture which would, in turn, constitute a default under the
Revolver Agreement and could constitute a default under other Senior Debt. In
such circumstances, the subordination provisions in the Indenture would likely
restrict payments to the holders of the Notes. Further, no assurance can be
given that the Company will have sufficient resources to satisfy its repurchase
obligations with respect to the Notes following a Change of Control.
FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the competitive environment in the entertainment
industry, especially for music and video product, inflation, changes in costs of
goods and services, economic conditions in general and in the Company's
business, demographic changes, changes in prevailing interest rates and the
availability of and terms of financing to fund the anticipated growth of the
Company's business, the ability to attract and retain qualified personnel, the
significant indebtedness of the Company, changes in the Company's acquisition
and capital expenditure plans, and other factors referenced herein and in the
Company's filings with the Commission. In addition, such forward-looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks, uncertainties
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," "intends" or the
negative of any thereof, or other variations thereon or comparable terminology,
or by discussions of strategy or intentions. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to announce publicly the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
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THE EXCHANGE OFFER
GENERAL
Under the Registration Rights Agreement, the Company is obligated (i) to
file the Registration Statement of which this Prospectus is a part for a
registered exchange offer with respect to an issue of New Notes with terms
identical in all material respects to the Old Notes (except that such New Notes
will not contain transfer restrictions) within 60 days after the Issue Date and
(ii) to use its best efforts to cause the Registration Statement to be declared
effective within 150 days after the Issue Date. For each Old Note surrendered
pursuant to the Exchange Offer, the holder of such Old Note will receive a New
Note having a principal amount at maturity equal to that of the surrendered Old
Note. The Exchange Offer being made hereby if commenced and consummated within
such applicable time periods will satisfy those requirements under the
Registration Rights Agreement. See "Description of the New Notes--Exchange
Offer, Registration Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
the Company will accept for exchange all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. The
Company will issue New Notes in exchange for an equal principal amount at
maturity of outstanding Old Notes accepted in the Exchange Offer. As of the date
of this Prospectus, there was outstanding $150,000,000 aggregate principal
amount at maturity of Old Notes. This Prospectus, together with the Letters of
Transmittal, is being sent to all registered holders as of , 1998.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Notes. In such
event, holders of Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the U.S. securities laws.
See "Risk Factors--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 1998, unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
'Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
Eastern Standard Time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
shall have occurred and shall not have been waived by the Company (see the
subcaption "Conditions for Exchange", below), by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner deemed by it to be advantageous to
the holders of the Old Notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof. If the Exchange Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of the Old Notes of such amendment and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the amendment and the manner of
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disclosure to holders of the Old Notes, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW TO EFFECT THE
EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING REQUESTED BY MEANS
OF THIS PROSPECTUS OR OTHERWISE.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the Delaware General Corporation Law,
the law of the state of incorporation of the Issuer and the Guarantor.
CONTINUING REGISTRATION RIGHTS
If (a) the Exchange Offer is not consummated before [30 business days from
effectiveness] (the "Completion Deadline") or (b) a holder of Old Notes advises
the Company within twenty (20) business days following the Completion Deadline
that (i) such holder was prohibited by law from participating in the Exchange
Offer, (ii) such holder may not resell New Notes acquired in the Exchange Offer
without delivery of a prospectus other than this Prospectus, or (iii) such
holder is an Initial Purchaser or otherwise acquired Old Notes directly from the
Company or an affiliate of the Company, then the Company will, at its expense,
(x) within 60 days, file a shelf registration statement covering resales of the
Old Notes (a "Shelf Registration Statement"), (y) use its best efforts to cause
a Shelf Registration Statement to be declared effective under the Securities Act
within 90 days after filing and (z) keep the Shelf Registration Statement
effective until the earlier of 24 months following the Issue Date or such time
as all of the Old Notes have been sold thereunder, or otherwise can be sold
pursuant to Rule 144 without any limitations under clauses (c), (e), (f) and (h)
of Rule 144. In the event a Shelf Registration Statement is filed, the Company
will (i) provide to each holder for whom such Shelf Registration Statement was
filed, copies of the prospectus which is a part of such Shelf Registration
Statement, (ii) notify each such holder when such Shelf Registration Statement
has become effective, and (iii) take certain other actions as are required to
permit unrestricted resales of the Old Notes. A holder selling Old Notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales, and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal or a facsimile thereof, have the signatures thereon
guaranteed if required by such Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m. Eastern Standard
Time, on the Expiration Date. In addition, either (i) certificates for such
tendered Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at the Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY
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MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE COMPANY. To be tendered effectively, the Old Notes, the Letter of
Transmittal and all other required documents must be received by the appropriate
Exchange Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration
Date. Delivery of all documents must be made to the appropriate Exchange Agent
at the addresses set forth herein. Holders may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect such
tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth therein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
shall contact such registered holder promptly and instruct such registered
holder to tender on his behalf. If such beneficial owner wishes to tender on his
own behalf, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by bond powers, and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case as the name of
the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal of any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as the validity, form, eligibility (including time of receipt)
and withdrawal of the tendered Old Notes will be determined by the Company in
its sole discretion, which determination will be final and binding. The Company
reserves the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes which, if accepted by the Company, would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letters of Transmittal) will be final
and binding on all
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parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine. None
of the Company, the Exchange Agent, or any other person shall be under any duty
to give notification of defects or irregularities with respect to tenders of Old
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent to the tendering holders of such Old Notes,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, (see the
subcaption "Conditions for Exchange", below), to terminate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement and (ii) to the
extent permitted by applicable law and the Indenture, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise, before, during,
and after the Exchange Offer. The terms of any such purchase or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act),
(ii) any New Notes to be received by it were acquired in the ordinary course of
its business and (iii) at the time of commencement of the Exchange Offer, it was
not engaged in, and did not intend to engage in, a distribution of such New
Notes and had no arrangement or understanding with any person to participate in
a distribution (within the meaning of the Securities Act) of the New Notes. If a
holder of Old Notes is an affiliate of the Company, and is engaged in or intends
to engage in a distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange offer, such holder cannot rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and prospectus delivery requirement of the Securities Act in
connection with any secondary resale transaction. Each broker or dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker or dealer as a result of market-making
activities, or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to
have accepted validly tendered Old Notes for exchange when, as and if the
Company has given oral or written notice thereof to the Exchange Agent.
For each Old Note for exchanged, the holder of such Old Note will receive a
New Note having a principal amount at maturity equal to that of the surrendered
Old Note.
If (i) by , 1998 (60 days after the Issue Date), neither the
Exchange Offer Registration Statement nor the Shelf Registration Statement has
been filed with the SEC, or (ii) by , 1998 (the Completion Deadline),
the Exchange Offer is not consummated, or (iii) a Shelf Registration Statement
is not filed and declared effective within the time frame required, if a Shelf
Registration Statement is required to be filed, or (iv) after either the
Exchange Offer Registration Statement or the Shelf Registration Statement is
declared effective, such Registration Statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with resales
of Old Notes or New Notes, as applicable, in accordance with and during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses (i) through (iv) a "Registration Default"), Liquidated Damages
will
23
<PAGE>
accrue or accumulate on the applicable Old Notes and New Notes, from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured, at the
rate of $.05 per week per $1,000 in principal amount of New Notes or Old Notes
affected by such Registration Default for the first 90-day period immediately
following the occurrence of such Registration Default. The amount of Liquidated
Damages shall increase by an additional $.05 per week per $1,000 for each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum of $.50 per week per $1,000. Such Liquidated Damages will be payable
in cash and will be in addition to any other interest payable with respect to
the Old Notes and the New Notes. No holder of New Notes or Old Notes shall be
entitled to any Liquidated Damages if such holder has failed to provide the
Company with the information required by applicable regulations of the
Commission to be included with respect to such holder in the Registration
Statement and Prospectus pursuant to which the holder seeks to sell his Old
Notes or New Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such Book-
Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes,
respectively, at the Book-Entry Transfer facility for purposes of the Exchange
Offer within two business days after the date of the Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Old Notes by causing the Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. Although delivery of Old Notes may be
effected through book-entry transfer at the Book-Entry Transfer Facility, the
Letter of Transmittal or facsimile thereof with any required signature
guarantees and any other required documents must, in any case, be transmitted to
and received by the Exchange Agent on or prior to the Expiration Date, or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
but the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of such Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five (5) business days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form to transfer,
or a Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
24
<PAGE>
Institution with the appropriate Exchange Agent and (iii) the certificate for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five (5) business days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. Eastern
Standard Time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent prior to
5:00 p.m. Eastern Standard Time on the Expiration Date. Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for the Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution,
unless such holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures of book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and must otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the subcaption "Procedures for Tendering" above at
any time on or prior to the Expiration Date.
CONDITIONS FOR EXCHANGE
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any changes in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer. In addition, the Company
has no obligation to, and will not knowingly, accept tenders of Old Notes from
affiliates of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the Securities Act and the Exchange Act and without
material restriction under the "blue sky" or securities law of substantially all
of the states.
EXCHANGE AGENT
Bank One, N.A. has been appointed as Exchange Agent in connection with the
Exchange Offer. Questions and requests for assistance in connection with the
Exchange Offer and requests for additional
25
<PAGE>
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent addressed as follows:
By Registered or Certified Mail;
By Overnight Courier; or By Hand:
235 West Schrock Road
Westerville, Ohio 43081
Attention: Corporate Trust Operations
By Facsimile: (614) 248-5088
Telephone: (800) 346-5153
FEES AND EXPENSES
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of each Exchange Agent, the
Trustee (as hereinafter defined), the Transfer Agent (as hereinafter defined)
and accounting, legal printing and related fees and expenses.
The expenses of soliciting tenders pursuant to the Exchange Offer will also
be borne by the Company. The principal solicitation for tender pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay
each Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents to
the beneficial owners of the Old Notes, and in handling or forwarding tenders
for exchange.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New will be recorded in the Company's accounting records at the same
carrying values as the old Notes, respectively, as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized upon the consummation of the Exchange
Offer. The expense of the Exchange Offer will be amortized by the Company over
the term of the New Notes in accordance with generally accepted accounting
principles.
26
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
offered hereby. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the term and form of which are identical in all material
respects to the New Notes. The Old Notes surrendered in exchange for New Notes
will be retired and cancelled and cannot be reissued. Accordingly, issuance of
the New Notes will not result in any increase in the indebtedness of the
Company. The net proceeds to the Company from the sale of the Old Notes (after
deducting discounts and commissions and estimated expenses of the Offering) were
approximately $144.3 million. The Company used such net proceeds to repay (i)
$112.2 million under the Credit Facility; and (ii) $32.1 million of mortgage
notes payable pertaining to the financing of the Franklin distribution center
and three Media Play stores (the "Mortgage Notes Payable"). After the paydown on
the Credit Facility, the combined aggregate available commitments under the
Credit Facility were reduced from $295.0 million to $182.0 million. As long as
indebtedness of $50.0 million is outstanding under the Term Loan Agreement, the
aggregate borrowings available under the Revolver Agreement will be $132.0
million. If the indebtedness under the Term Loan Agreement is paid when due, or
prepaid, the aggregate borrowings available under the Revolver Agreement will be
$182.0 million. The weighted average interest rate under the Revolver Agreement
for 1997 was 8.0%. As of December 31, 1997, the interest rate under the Term
Loan Agreement was 8.13%. See "Description of Existing Financing Arrangements."
The interest rates on the Mortgage Notes Payable as of December 31, 1997 ranged
from 8.24% to 8.37%. The Mortgage Notes Payable matured in March 1999 and May
2000. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources--Financing Activities."
27
<PAGE>
CAPITALIZATION
The following table, which should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes included
elsewhere in this Prospectus, sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to reflect the issuance of the Notes. See "Use
of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(1)(2).......................................................... $ 3,942 $ 115,326
---------- -----------
---------- -----------
Long-term debt (including current maturities):
Revolver............................................................................... $ -- $ -- (1)
Term Loan.............................................................................. 50,000 50,000
Mortgage Notes Payable................................................................. 33,087 --
9% Senior Subordinated Notes due 2003.................................................. 110,000 110,000
9 7/8% Senior Subordinated Notes due 2008.............................................. -- 148,817(3)
---------- -----------
Total long-term debt................................................................. 193,087 308,817
---------- -----------
Stockholders' equity:
Preferred stock........................................................................ -- --
Common stock........................................................................... 344 344
Additional paid-in capital............................................................. 255,075 255,075
Accumulated deficit.................................................................... (224,678) (224,678)
Deferred compensation.................................................................. (6,998) (6,998)
Common stock subscriptions............................................................. (4,973) (4,973)
---------- -----------
Total stockholders' equity........................................................... 18,770 18,770
---------- -----------
Total capitalization............................................................... $ 211,857 $ 327,587
---------- -----------
---------- -----------
</TABLE>
- - ------------------------
(1) At December 31, 1997, there were no borrowings under the Revolver Agreement.
Borrowings under the Revolver Agreement at March 1, 1998 were $146.0
million. Assuming the Offering of the Old Notes had closed on March 1, 1998,
the Company would have used $112.2 million of net proceeds from such
Offering and $0.8 million of cash to repay borrowings under the Revolver
Agreement.
(2) At December 31, 1997, outstanding checks in excess of cash balances of $12.1
million were included in accounts payable. Cash and cash equivalents, as
adjusted to give effect to the Offering of the Old Notes and the application
of the net proceeds therefrom, do not reflect the reduction of $12.1 million
for the outstanding checks in excess of cash balances that would not have
been included in accounts payable had the actual net amount of cash and cash
equivalents at December 31, 1997 exceeded this amount.
(3) The Old Notes were issued with original issue discount of $1.2 million which
will be amortized as noncash interest expense over the term of the Notes.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for the
years indicated. This information should be read in conjunction with the
Consolidated Financial Statements and related notes appearing elsewhere herein
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................... $ 1,181,658 $ 1,478,842 $ 1,722,572 $ 1,821,594 $ 1,768,312
Cost of sales........................... 710,707 936,643 1,116,502 1,209,835 1,153,483
Gross profit............................ 470,951 542,199 606,070 611,759 614,829
Selling, general and administrative
expenses.............................. 365,311 450,919 525,213 576,658 529,427
Depreciation and amortization........... 29,057 37,243 45,531 44,819 39,411
Goodwill write-down(1).................. -- -- 138,000 95,253 --
Restructuring charges(2)................ -- -- -- 75,000 --
Operating income (loss)................. 76,583 54,037 (102,674) (179,971) 45,991
Interest expense........................ 19,831 19,555 27,881 32,967 31,720
Earnings (loss) before income taxes and
extraordinary charge.................. 56,752 34,482 (130,555) (212,938) 14,271
Income taxes............................ 25,400 17,100 5,195 (19,200) 300
Earnings (loss) before extraordinary
charge(3)............................. 31,352 17,382 (135,750) (193,738) 13,971
Ratio of earnings to fixed charges(4)... 2.05x 1.56x -- -- 1.17x
Pro forma ratio of earnings to fixed
charges(5)............................ 1.11
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in) operating
activities............................ $ 61,662 $ 71,462 $ (56,227) $ 16,689 $ 74,613
Net cash used in investing activities... (77,139) (109,608) (87,014) (6,376) (10,940)
Net cash provided by (used in) financing
activities............................ 95,159 (19,042) 106,634 149,692 (221,707)
OPERATING DATA:
EBITDA(6)............................... $ 105,640 $ 91,280 $ 80,857 $ 35,101 $ 85,402
EBITDA as a percentage of sales......... 8.9% 6.2% 4.7% 1.9% 4.8%
Comparable store sales increase
(decrease)(7):
Mall Stores........................... 4.5% 3.1% (4.9)% (1.7)% 4.7%
Superstores........................... 27.6 33.3 4.8 2.0 4.1
Total(8)............................ 4.6 4.6 (3.2) (0.6) 4.5
BALANCE SHEET DATA (AT END OF YEAR):
Cash and cash equivalents(9)............ $ 95,766 $ 38,578 $ 1,971 $ 161,976 $ 3,942
Total assets............................ 905,682 1,079,632 996,957 996,915 733,895
Long-term debt, including current
maturities............................ 135,000 110,000 163,000 396,599 193,087
Stockholders' equity(1)(2).............. 322,594 340,276 195,811 2,619 18,770
STORE DATA (AT END OF YEAR):
Total store square footage (in
millions)............................. 4.9 7.2 9.9 9.5 8.3
Store count:
Music stores.......................... 875 869 820 777 713
Suncoast stores....................... 320 378 412 422 409
Media Play stores..................... 13 46 89 87 68
On Cue stores......................... 32 77 153 158 157
United Kingdom and other stores....... 11 16 22 22 16
----------- ----------- ------------ ------------ -----------
Total............................... 1,251 1,386 1,496 1,466 1,363
----------- ----------- ------------ ------------ -----------
----------- ----------- ------------ ------------ -----------
</TABLE>
- - --------------------------
(1) The goodwill write-downs were taken following evaluations of goodwill for
impairment because of sales declines experienced by the music stores during
1995 and 1996. See Note 2 of Notes to Consolidated Financial Statements.
(2) The restructuring charges were recorded during 1996 for the estimated cost
of closing the Company's distribution facility in Minneapolis, Minnesota and
114 underperforming stores. See Note 3 of Notes to Consolidated Statements.
(3) Amounts for the year ended December 31, 1993 are before an extraordinary
charge from early redemption of debt, net of income tax benefit, of $3.9
million. Net earnings for the year ended December 31, 1993 were $27.5
million.
29
<PAGE>
(4) Ratio of earnings to fixed charges is computed by dividing (x) pre-tax
earnings before extraordinary charge and before fixed charges by (y) fixed
charges (consisting of cash interest expense on debt, amortization of debt
issuance costs and deferred financing credits plus one-third of total rent
expense exclusive of contingent rentals, the portion considered to be
representative of the interest factor). For the years ended December 31,
1995 and 1996, earnings (loss) before fixed charges were insufficient to
cover fixed charges by $130.6 million and $212.9 million, respectively.
(5) On a pro forma basis, after giving effect to the Offering.
(6) EBITDA represents earnings (loss) before extraordinary charge plus, interest
expense, income taxes, depreciation and amortization, goodwill write-down
and restructuring charges. While EBITDA should not be construed as a
substitute for income from operations, net earnings or cash flows from
operating activities (as defined by generally accepted accounting
principles) in analyzing the Company's operating performance, financial
position or cash flows, the Company has included EBITDA because it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity and
to determine a company's ability to service debt. In addition, the method of
calculating EBITDA set forth above may be different from calculations of
EBITDA employed by other companies and, accordingly, may not be directly
comparable to such other calculations.
(7) Comparable store sales percentages are computed for stores open for a full
year during each year.
(8) The totals include United Kingdom and other stores.
(9) At December 31, 1994, 1995 and 1997, outstanding checks in excess of cash
balances of $5.9 million, $69.3 million and $12.1 million, respectively,
were included in current liabilities.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
Beginning in 1995, the Company's financial results began to deteriorate as a
result of: (i) aggressive expansion of product offerings and new store openings
by most of the Company's non-mall competitors; (ii) severe price discounting of
music products by certain non-mall competitors; (iii) a lack of strong selling
hits in the music industry, which depressed sales throughout the industry; and
(iv) the Company's own rapid expansion of Media Play stores in response to
encouraging initial results. In 1996 management initiated restructuring programs
designed to improve the Company's cash flow and profitability. The major
components of the restructuring programs included: (i) closing 114
underperforming stores, which in the last full year of their operations lost an
aggregate of $17.7 million on an operating contribution basis; (ii) closing one
of the Company's two distribution centers, which reduced the Company's working
capital investment by approximately $20 million and contributed to a $6.9
million reduction in distribution costs in 1997; and (iii) improving inventory
management techniques, which increased the Company's inventory turnover from 1.8
times during 1996 to 2.1 times during 1997. Inventory levels at year-end 1997
were $55.8 million below those of the prior year with approximately $30 million
of the reduction due to store closings and the remainder attributable to
distribution efficiencies and improved inventory management. The Company reduced
Media Play advertising expense by $7.9 million in 1997 from the prior year as a
result of closing stores in entire markets and the introduction of a less
costly, but more targeted, program of newspaper advertising inserts. In
addition, in 1997 the Company began to benefit from positive trends in the music
retailing industry, including a retreat from severe price discounting and an
increase in unit sales. As a result, the Company's EBITDA increased from $35.1
million in 1996 to $85.4 million in 1997, and comparable store sales improved
from a decrease of 0.6% in 1996 to an increase of 4.5% in 1997.
In the first quarter of 1997, the Company's largest vendors and a
substantial majority of its remaining vendors agreed to temporarily defer
existing trade payables and provide continued product supply, subject to payment
terms reduced to ten days or less on new purchases. The Company completed
repayment of the deferred trade payables during the fourth quarter of 1997. The
Company also obtained an amendment to its Revolver Agreement in June 1997 that
modified and provided additional flexibility in financial covenants and allowed
the $50 million Term Loan. The Company previously obtained waivers of certain
financial covenants and technical defaults under the Revolver Agreement that had
been extended to allow for adequate time to complete all of the necessary
financing agreements and related amendments. See "--Liquidity and Capital
Resources."
31
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain sales and store data for Mall Stores,
Superstores and in total for the Company for the last three years. Because both
Mall Stores and Superstores are supported by centralized corporate services and
have similar economic characteristics, products, customers and retail
distribution methods, the stores are reported as one industry segment.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C>
SALES:
Mall Stores................................ $ 1,187.0 $ 1,160.0 $ 1,165.0
Superstores................................ 516.7 643.8 589.5
Total(1)................................. 1,722.6 1,821.6 1,768.3
PERCENTAGE CHANGE FROM PRIOR YEAR:
Mall Stores................................ (2.5)% (2.3)% 0.4%
Superstores................................ 108.5 24.6 (8.4)
Total(1)................................. 16.5 5.7 (2.9)
COMPARABLE STORE SALES CHANGE FROM PRIOR
YEAR:
Mall Stores................................ (4.9)% (1.7)% 4.7%
Superstores................................ 4.8 2.0 4.1
Total(1)................................. (3.2) (0.6) 4.5
NUMBER OF STORES OPEN AT YEAR END:
Mall Stores................................ 1,232 1,199 1,122
Superstores................................ 242 245 225
Total(1)................................. 1,496 1,466 1,363
TOTAL STORE SQUARE FOOTAGE AT YEAR END:
Mall Stores................................ 4.5 4.3 4.0
Superstores................................ 5.3 5.2 4.2
Total(1)................................. 9.9 9.5 8.3
</TABLE>
- - ------------------------
(1) The totals include United Kingdom and other stores.
SALES. Comparable store sales in 1996 were adversely impacted by the lack
of strong product releases in music and video and the challenging retail sales
environment. Sales from new Superstores and comparable store sales increases in
Superstores open for one year or more accounted for most of the increases in
total sales in 1996.
Comparable store sales growth in 1997 was led by significant gains in music,
driven by strong sales of new releases. Gains were also achieved in educational
toys, apparel and video games. These gains were partially offset by flat
comparable store sales in video and a decline in book sales, due in part to a
reduction in the number of book titles offered by the Superstores. Comparable
store sales in video were slowed by the lack of depth in new releases other than
strong sales of the Star Wars Trilogy Special Edition video set released during
the third quarter of 1997. The Company benefited from a less competitive
environment due to the closing of stores by certain mall competitors and less
near or below cost pricing of music product by certain non-mall competitors. The
reductions in total sales in 1997 resulted from the decreased store count and
square footage from closing stores.
32
<PAGE>
The following table shows the comparable store sales percentage increase
(decrease) attributable to the Company's two principal product categories for
the last three years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Music................................... (6.9)% 0.9% 7.5%
Video................................... 4.7 (0.8) 0.2
</TABLE>
The Company's DVD sales in 1997, the year of DVD introduction, were 1.8% of
total video sales. DVD sales accelerated in the months of December 1997 and
January 1998 to 3.4% and 8.2%, respectively, of total video sales. Sales of DVD
are expected to continue to build during 1998. See "Risk Factors--Risk from New
Technologies" and "Business--Products--Video."
COMPONENTS OF EARNINGS. The following table sets forth certain operating
results as a percentage of sales for the last three years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales............................................................. 100.0% 100.0% 100.0%
Gross profit...................................................... 35.2 33.6 34.8
Selling, general and administrative expenses...................... 30.5 31.7 29.9
Operating income before depreciation, amortization and
restructuring charges........................................... 4.7 1.9 4.8
Operating income (loss)........................................... (6.0) (9.9) 2.6
</TABLE>
GROSS PROFIT. In 1996, the increase in sales from the lower margin
Superstores relative to total Company sales lowered total Company gross margin
by 0.5%. An increase in inventory shrinkage negatively impacted gross margin by
0.4%. The balance of the gross margin decrease in 1996 was primarily
attributable to increased promotional pricing in both Mall Stores and
Superstores and lower prices in Mall Stores in 1996 as compared to 1995.
Approximately 1.3% of the gross margin improvement in 1997 was attributable
to price increases and less promotional pricing. The proportion of sales from
the lower margin Superstores relative to total sales decreased during 1997 due
to store closings and resulted in an improvement in total Company gross margin
of 0.3%. An increase in inventory shrinkage reduced gross margin by 0.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The decrease in selling,
general and administrative expenses in 1997 compared with 1996 was primarily due
to store closings, a reduction in advertising and efficiencies gained from the
consolidation of the Company's distribution facilities into a single facility in
1997. The Company's distribution facility in Franklin, Indiana has more than
double the combined capacity of the Company's former facilities in Minneapolis,
Minnesota and Edison, New Jersey. The Minneapolis facility closed in January
1997 while the Edison facility closed in May 1995. The Company incurred expenses
related to the consolidation of approximately $1.6 million and $1.5 million in
1995 and 1996, respectively. Because of the Company's limited store expansion in
1996 and 1997, costs incurred related to store openings were approximately $4
million in 1996 and were minimal in 1997 compared with $13 million in 1995.
Financial and legal advisory services and related expenses, most of which
were incurred in conjunction with obtaining amendments to the Company's Revolver
Agreement, totaled approximately $3.8 million in 1996 and $2.9 million in 1997.
Selling, general and administrative expenses in 1995 are net of nonrecurring
items consisting of income of $8.8 million from the termination of certain
service and business development agreements and a charge of $5.4 million for the
closing of 35 mall based Sam Goody stores.
33
<PAGE>
The higher expense rate in 1996 compared with 1997 and 1995 was attributable
to the effect of the unusual items previously discussed and the negative impact
of fixed costs, principally occupancy costs, in both underperforming existing
stores and new Media Play stores opened in 1995 and 1996. Many of these
underperforming stores were closed under the Company's restructuring programs.
See "--Restructuring Charges." The decrease in selling, general and
administrative expenses as a percentage of sales in 1997 was mainly due to the
cost savings discussed above. The comparable store sales gains in 1997 also
contributed to the rate improvements.
DEPRECIATION AND AMORTIZATION. The goodwill write-downs in 1995 and 1996
eliminated goodwill amortization in 1997 while goodwill amortization was $5.8
million, or $0.17 per share, in 1995 and $3.0 million, or $0.09 per share, in
1996. Other depreciation and amortization was $39.7 million, $41.8 million and
$39.4 million in 1995, 1996 and 1997, respectively, and primarily related to
stores. The increases over the prior years in 1996 and 1997 were attributable to
store expansion, net of the decreases related to store closings.
GOODWILL WRITE-DOWN. In August 1995, the Company recorded a goodwill
write-down of $138.0 million, or $4.07 per share, for the year ended December
31, 1995. An additional goodwill write-down of $95.3 million, or $2.85 per
share, was recorded in December 1996, eliminating the remaining goodwill balance
and goodwill amortization for years after 1996.
Most of the goodwill was established in conjunction with the 1988 leveraged
buyout of MGI by MSC. At that time, nearly all of the Company's stores were mall
based music stores. The carrying values of long-lived assets, primarily goodwill
and property, of the music stores were reviewed for recoverability and possible
impairment in both 1995 and 1996 because of sales declines that began in 1995
and continued during 1996. These sales declines resulted from a general decrease
in customer traffic in malls, an increase in high-volume, low-price non-mall
superstores and a lack of strong music product releases. See Note 2 of Notes to
Consolidated Financial Statements.
RESTRUCTURING CHARGES. During 1996, the Company recorded pretax
restructuring charges of $75.0 million for the estimated cost of programs
designed to improve profitability and increase inventory turnover. The
restructuring programs included the closing of the Company's distribution
facility in Minneapolis, Minnesota and 115 underperforming stores, including 79
Mall Stores and 36 Superstores. The Company closed 53 of these stores in 1996
and completed the restructuring programs in 1997 with the closing of the
distribution facility and another 61 stores. The Company removed one Superstore
from the closing list after exercising an option in the termination agreement
for that store to reinstate the lease. The restructuring charges included $36.3
million of cash payments, primarily related to payments to landlords for the
early termination of operating leases and estimated legal and consulting fees,
and $38.7 million for non-cash charges related to write-downs of leasehold
improvements and certain equipment, net of unamortized lease credits. See
"--Liquidity and Capital Resources--Investing Activities."
INTEREST EXPENSE. Interest expense consists primarily of interest on
Revolver borrowings and the 2003 Notes. Other interest consists primarily of
amortization of debt issuance costs. Components of interest expense for the last
three years are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Interest on Revolver.............................................. $ 17.0 $ 21.9 $ 19.0
Interest on Term Loan............................................. -- -- 1.2
Interest on 2003 Notes............................................ 9.9 9.9 9.9
Other interest, net............................................... 1.0 1.2 1.6
--------- --------- ---------
$ 27.9 $ 33.0 $ 31.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
34
<PAGE>
Interest expense on Revolver borrowings is impacted by the level of
outstanding borrowings during the year, interest rates, the Company's credit
rating and the number of days borrowings are outstanding during the year.
Average daily Revolver borrowings outstanding, weighted average interest rates
on the Revolver, based on the average daily borrowings, and the highest balances
outstanding under the Revolver were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Average daily Revolver borrowings................................ $ 254.0 $ 289.7 $ 238.5
Highest level of Revolver borrowings............................. 350.0 333.0 273.0
Weighted average interest rate................................... 7.1% 7.6% 8.0%
</TABLE>
Higher outstanding Revolver borrowings increased interest expense by $2.4
million in 1996. Lower outstanding borrowings on the Revolver decreased interest
expense by $3.9 million in 1997, or $2.7 million when netted with interest
expense on the Term Loan. The Term Loan proceeds received in September 1997,
used to reduce outstanding Revolver borrowings, lowered the average daily
Revolver borrowings for the year by $13 million. Increases in the weighted
average interest rates increased Revolver interest by $1.2 million in 1996 and
$1.1 million in 1997. Most of the increase in interest rates in 1996 and 1997
was the result of amendments to the Company's Revolver Agreement. An amendment
in June 1997 increased the margin added to variable interest rates on Revolver
borrowings by 0.25% through April 1998 and by 0.50% thereafter. A previous
amendment in April 1996 and lower credit ratings had increased the interest rate
margin by 0.93% and the annual facility fee rate by 0.2%.
INCOME TAXES. The effective income tax rates of (4.0)% in 1995, 9.0% in
1996 and 2.1% in 1997 vary from the federal statutory rate as a result of
deferred tax valuation allowances in 1996 and 1997, goodwill amortization and
write-downs in 1995 and 1996, which are nondeductible, and state income taxes.
Deferred tax valuation allowances of $24.5 million were established in 1996
because of the uncertainty of future earnings and reduced the deferred income
tax balances at December 31, 1996 to the approximate amount of remaining
recoverable income taxes after carryback of the 1996 taxable loss. The valuation
allowances were reduced by $7.5 million in 1997 based on revised estimates of
future earnings. See Note 5 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are Revolver borrowings pursuant to
the terms of the Revolver Agreement and internally generated cash. Because of
the seasonality of the retail industry, the Company's cash needs fluctuate
throughout the year and typically peak in November as inventory levels build in
anticipation of the Christmas selling season. The Company's cash position is
generally highest at the end of December because of the higher sales volume
during the Christmas season and extended payment terms typically provided by
most vendors for seasonal inventory purchases. The Company's cash needs build
during the first quarter as inventories are replenished following the Christmas
season and payments for seasonal inventory purchases become due. The Company's
practice has generally been to use the excess cash generated from operations in
the fourth quarter to repay all or a portion of the outstanding Revolver
borrowings. The amount of Revolver borrowings, if any, outstanding at year end
depends upon the sales performance during the Christmas season, the timing of
vendor payments and other cash flow requirements. Following the Offering and the
use of proceeds therefrom, the Company believes that, based on current levels of
operations and anticipated growth, cash flow from operating activities, together
with cash flow from financing activities, including borrowings under the
Revolver, as amended, will be adequate for at least the next two years to make
required payments of principal and interest on the Company's indebtedness
(including the Notes), to fund anticipated capital expenditures and working
capital requirements and to comply with the terms of its debt agreements.
35
<PAGE>
In June 1997, the Company completed agreements with its banks to amend the
Revolver Agreement and to allow the Term Loan Agreement. Pursuant to the
amendment, the maximum available Revolver borrowings are the lesser of: (i) 60%
of eligible inventory or (ii) $245.0 million through the expiration of the
Revolver Agreement in October 1999. However, for any Revolver borrowings which
result in a net increase in total outstanding Revolver borrowings, total trade
accounts payable must be equal to or greater than the total outstanding Revolver
borrowings. Outstanding Revolver borrowings in excess of $245.0 million and the
Term Loan are secured by inventory. The Company had no outstanding Revolver
borrowings at December 31, 1997. See "--Financing Activities" and Note 4 of
Notes to Consolidated Financial Statements. The Company has received approval
for an amendment to the Revolver Agreement from the Banks which permits the
issuance of the Notes, reduces the combined aggregate commitments, under the
Revolver Agreement and Term Loan Agreement, to $182.0 million, and amends
certain other items in the Revolver Agreement. See "Description of Existing
Financing Arrangements--Credit Facility."
The Revolver Agreement contains financial covenants and covenants that limit
additional indebtedness, liens, capital expenditures and cash dividends. The
amendment to the Revolver Agreement in June 1997 modified and provided
additional flexibility in financial covenants related to fixed charge coverage,
consolidated tangible net worth and debt to total capitalization and removed
financial covenants related to the maximum debt and trade payables to eligible
inventory ratio and the annual one day clean-down requirement of revolver
borrowings. The Company had previously obtained waivers of certain financial
covenants and technical defaults under the Revolver Agreement that had been
extended through June 30, 1997 to allow for adequate time to complete all of the
necessary financing agreements and related amendments. Covenants of the Term
Loan Agreement require a minimum inventory of $150 million and a minimum
operating cash flow and limit additional liens. The agreements related to the
Mortgage Notes Payable and 2003 Notes, as amended, also contain certain
financial covenants. The Company was in compliance with all covenants at
December 31, 1997.
The Company used the net proceeds from the Offering of the Old Notes to
repay indebtedness. See "Use of Proceeds."
OPERATING ACTIVITIES. Net cash provided by (used in) operating activities
(including the increase (decrease) in outstanding checks in excess of cash
balances which relate to vendor payments) was $7.2 million in 1995, $(52.6)
million in 1996 and $86.7 million in 1997. Cash used for inventory purchases, as
reflected by the aggregate net changes in inventories, accounts payable and
outstanding checks in excess of cash balances, was $31.8 million in 1995 and
$38.9 million in 1996. In 1997, the aggregate net changes in these inventory
related items contributed $6.4 million to net cash provided by operating
activities. Although inventories at December 31, 1996 of $506.1 million
decreased $27.6 million from December 31, 1995, the amount of cash used for
inventory purchases increased because of early payments made to certain vendors
to obtain discounts and to ensure continued availability of product. The
significant positive cash flow in 1997 compared with prior years was achieved
primarily through a reduced investment in inventory and improvements in
operating performance. The consolidation of distribution centers into a single
facility, store closings and initiatives designed by management to increase
inventory turnover, including better in-stock positions and more frequent
purchases closer to the time of sale, enabled the Company to maintain lower
inventory levels during 1997, which decreased inventories at December 31, 1997
to $450.3 million from $506.1 million at December 31, 1996.
The Company made tax payments of $17.9 million and $9.0 million in 1995 and
1996, respectively, while income tax refunds, net of payments, of $22.9 million
were received in 1997 from the carryback of the 1996 taxable loss. Cash
expenditures related to store closings under the Company's restructuring
programs were $24.1 million and $12.2 million in 1996 and 1997, respectively.
36
<PAGE>
INVESTING ACTIVITIES. Capital expenditures and store data for the last
three years are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Capital expenditures, net of sale/leasebacks and other property sales (in millions)...... $ 87.0 $ 6.4 $ 10.9
Store openings:
Mall Stores............................................................................ 49 14 2
Superstores............................................................................ 119 19 1
Total(1)............................................................................. 175 35 3
Store closings:
Mall Stores............................................................................ (64) (47) (79)
Superstores............................................................................ -- (16) (21)
Total(1)............................................................................. (65) (65) (106)
Net increase (decrease) in store count:
Mall Stores............................................................................ (15) (33) (77)
Superstores............................................................................ 119 3 (20)
Total(1)............................................................................. 110 (30) (103)
</TABLE>
- - ------------------------
(1) The totals include United Kingdom and other stores.
In 1995 and 1996, capital expenditures were primarily for store expansion,
the majority of which were new Media Play stores, while in 1997, most of the
Company's capital expenditures consisted of improvements to existing stores.
Capital expenditures since 1995 have been significantly lower than in previous
years as the Company has shifted its focus to improving profitability in
existing stores. The number of stores closed under the restructuring programs
were 53 stores and 61 stores in 1996 and 1997, respectively. See "--Results of
Operations--Restructuring Charges."
Financing of capital expenditures has generally been provided by borrowings
under the Revolver Agreement and internally generated cash. The Company
typically receives financing from landlords in the form of contributions and
rent abatements for a portion of the capital expenditures, primarily related to
new stores and relocations of existing stores. In the third quarter of 1996, net
proceeds of $11.6 million were received from the sale of the building containing
the Company's distribution facilities and certain corporate office facilities in
Minneapolis, Minnesota. The Company leased back the entire building through
January 1997 and since then leases a portion of the office facilities. A portion
of the Media Play capital expenditures in 1995 were financed with proceeds from
sale/leaseback transactions totaling $26.2 million.
Capital expenditures of approximately $14 million for three new Media Play
stores opened in 1996 and $30.0 million for the new Franklin distribution
facility and most of the related equipment were financed through special purpose
entities. The property and related Mortgage Notes Payable were recorded on the
Company's Consolidated Balance Sheet after terms of amendments to the operating
leases required consolidation of the special purpose entities as of October 1996
and June 1997, the dates of the respective amendments. See Note 15 of Notes to
Consolidated Financial Statements.
While management does not currently intend to significantly expand its store
base, the Company plans to open selected new stores in order to fill out
existing markets or capitalize on attractive leasing opportunities. The Company
anticipates capital expenditures in 1998 of approximately $20 million,
consisting primarily of improvements to existing stores. The Company anticipates
that these capital expenditures will be financed by borrowings under the
Revolver and internally generated cash. The Company will continue to assess the
profitability of its stores and will close a limited number of underperforming
stores in the coming years, if the closings can be accomplished economically.
37
<PAGE>
FINANCING ACTIVITIES. The Company's financing activities principally
consist of borrowings and repayments under its Revolver. Cash provided by (used
in) financing activities (excluding the increase (decrease) in outstanding
checks in excess of cash balances which relate to vendor payments) was $43.2
million, $219.0 million and $(233.8) million during the years ended December 31,
1995, 1996 and 1997, respectively. At December 31, 1996, the Company had
Revolver borrowings of $272.0 million, or $110.0 million when netted with $162.0
million of cash and cash equivalents. The higher level of Revolver borrowings in
1996 as compared to 1995 was primarily due to diminished liquidity that had
resulted from the challenging retail sales environment experienced by the
Company and the negative impact of underperforming stores. The $49.5 million of
net Term Loan proceeds received in September 1997 were used to reduce Revolver
borrowings. Excess cash generated from strong Christmas season sales in 1997 was
used to repay all outstanding Revolver borrowings by year end.
During the third quarter of 1995, the Company loaned $10.0 million to its
401(k) trust to finance the purchase of 1,042,900 shares of common stock of the
Company in the open market. The stock is used for a "KSOP" plan, which combines
features of a 401(k) plan and an employee stock ownership plan. See Note 6 of
Notes to Consolidated Financial Statements.
The Revolver expires in October 1999. The Company expects to enter into a
new financing arrangement on or before the expiration date of the Revolver.
Maturities of other long-term debt are $26.7 million in 1998, $46.0 million in
1999, $10.3 million in 2000 and $110.0 million in 2003. The Company may, at its
option, redeem the 2003 Notes prior to maturity at 103.375% of par on and after
June 15, 1998 and thereafter at prices declining annually to 100% of par on and
after June 15, 2001. The Mortgage Notes Payable agreements contain one year
renewal options which would extend maturities of $21.0 million and $10.3 million
to March 2000 and May 2001, respectively.
OTHER MATTERS
INFLATION, ECONOMIC TRENDS AND SEASONALITY. Although its operations are
affected by general economic trends, the Company does not believe that inflation
has had a material effect on the results of its operations during the past three
fiscal years. The Company's business is highly seasonal, with nearly 40% of the
annual revenues and all of the net earnings generated in the fourth quarter. See
Note 16 of Notes to Consolidated Financial Statements for quarterly financial
data.
YEAR 2000 COMPLIANCE. The Company has assessed its systems and equipment
with respect to Year 2000 compliance and has developed a project plan. Many of
the Year 2000 issues, including the processing of credit card transactions, have
been addressed. The remaining Year 2000 issues will either be addressed with
scheduled system upgrades or through the Company's internal systems development
staff. The incremental costs will be charged to expense as incurred and are not
expected to have a material impact on the financial position or results of
operations of the Company. However, the Company could be adversely impacted if
Year 2000 modifications are not properly completed by either the Company or its
vendors, banks or any other entity with whom the Company conducts business.
Accordingly, the Company plans to devote the necessary resources to resolve all
significant Year 2000 issues in a timely manner.
38
<PAGE>
BUSINESS
GENERAL
The Company is the leading specialty retailer of prerecorded music in the
United States and is one of the largest national full-media retailers of music,
video sell-through, books, computer software and related products. The Company's
stores operate under two principal strategies: (i) mall based music and video
sell-through stores (the "Mall Stores"), operating under the principal trade
names Sam Goody and Suncoast Motion Picture Company ("Suncoast"), and (ii)
non-mall based full-media superstores (the "Superstores"), operating under the
trade names Media Play and On Cue. At December 31, 1997, the Company operated
1,363 stores in 49 states, the District of Columbia, the Commonwealth of Puerto
Rico, the Virgin Islands and the United Kingdom. For the year ended December 31,
1997, the Company had consolidated revenues of $1.8 billion, including $1.2
billion from the Mall stores and $0.6 billion from the Superstores, and EBITDA
of $85.4 million.
MALL STORES
SAM GOODY. Sam Goody is a well established music retailer that provides a
broad selection in an exciting, customer friendly shopping environment. Sam
Goody stores offer a full line of music, along with video and related products.
The music stores are predominantly found in mall locations and range in size
from 1,000 to 30,000 square feet, averaging 4,300 square feet. The larger music
stores are in more prominent mall or downtown locations and carry a broader
inventory of catalog product, including substantial classical offerings and
video sell-through, to appeal to the high volume purchaser. Many of the music
stores previously operated under the Musicland name have been converted to the
Sam Goody name.
More than 400,000 Sam Goody store customers participate in the REPLAY
program, a frequent shopper program designed to promote customer loyalty and
enable targeted marketing. An increased emphasis has been placed on Latin music
and other niche music categories as part of efforts to broaden the music store
customer base.
During 1997, the Company opened two new stores and closed 66 stores,
including 33 closings under the Company's restructuring programs and 33 other
underperforming stores, most of which were near the end of their lease terms. At
December 31, 1997, the Company operated 713 music stores in 49 states, the
District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands.
The total square footage of music stores was approximately three million square
feet, or 37% of the Company's total store square footage at December 31, 1997.
SUNCOAST. Suncoast is the dominant mall based video sell-through retailer
in the United States, offering a broad selection and excellent customer service
in an entertaining atmosphere. Suncoast stores average 2,400 square feet in size
and typically feature 8,000 to 10,000 video titles along with movie and video
related apparel, DVDs, special order video and other related products. The video
categories include adventure, comedy, drama, family, animated, musicals, music
video, instructional and other special interest. Most of the movies are priced
at less than $20 and more than half sell for less than $15. Each store also
offers a wide selection of feature films and videos for less than $10.
Management plans to establish Suncoast stores as a primary retailer of DVD by
offering a broad assortment of titles and developing marketing programs to
encourage repeat visits. Suncoast stores currently carry an average of 500
titles on the new DVD format, which will be increased as more titles become
available and as the number of homes with DVD players increases. Most of the DVD
titles are priced at $20 to $30.
Suncoast's marketing programs include sweepstakes, instant rebates and
exclusive merchandise events promoting recent video releases. Suncoast stores
utilize theme and cross-promotional merchandising that coordinates the display
and sale of licensed merchandise with the related movie or genre to maximize
total sales. Niche marketing, such as product offerings related to Japanese
animation, or "Anime," was recently
39
<PAGE>
added in Suncoast stores. Beginning in 1998, new audiences will also be targeted
through the expansion of advertising to radio and cable television.
At December 31, 1997, there were 409 Suncoast stores in 46 states, the
District of Columbia and the Commonwealth of Puerto Rico. The Company opened no
new Suncoast stores during 1997 and closed a total of 13 stores, including nine
closings under the Company's restructuring programs and four other
underperforming stores. The total square footage of Suncoast stores was
approximately one million square feet, or 12% of the Company's total store
square footage at December 31, 1997.
SUPERSTORES
MEDIA PLAY STORES. Media Play is a full-media superstore retailer of
entertainment software products providing a superior assortment at competitive
prices. Media Play stores average 48,000 square feet in size and are in
freestanding and strip mall locations primarily in urban and suburban areas. The
extensive merchandise assortment of compact discs, books, video and computer
software, complemented by other media and related products including magazines,
video games, educational toys, greeting cards and apparel appeals to customers
of all ages. Media Play stores provide a family oriented and exciting shopping
environment featuring easy access to all merchandise categories, lounge areas
for relaxed browsing, convenient customer service areas, live performances and
other entertainment activities, children's play areas, coffee carts and popcorn
stands. A variety of in-store events, such as musician appearances, book clubs
and drawing events, are held throughout the year to attract customers. The
non-mall locations and largely self-service environment lower operating costs
and enable Media Play stores to offer products at competitive prices. See
"Business Strategy--Improve Media Play Profitability."
The first Media Play store opened in Rockford, Illinois in November 1992.
During 1997, 19 Media Play stores were closed under the Company's restructuring
programs. At December 31, 1997, the Company operated 68 Media Play stores in 19
states with total square footage of approximately three million square feet, or
39% of the Company's total store square footage.
ON CUE STORES. On Cue is a full-media retailer in small towns, generally
with populations between 8,000 and 20,000 people, providing a wide assortment of
entertainment software products at competitive prices. On Cue stores average
6,200 square feet in size and offer customers a convenient local store to shop
for music, books, video, computer software and related products with superior
customer service to encourage repeat business. On Cue customers also have access
to over 100,000 home entertainment titles through the Company's special order
program. Customer loyalty is rewarded through such programs as in-store
sweepstakes and unadvertised in-store specials. On Cue stores are promoted
through highway billboards, direct mail, cable television and local print and
radio.
The first On Cue store opened in February 1992. The Company opened one On
Cue store and closed two stores in 1997. At December 31, 1997, the Company
operated 157 On Cue stores in 28 states with total square footage of
approximately one million square feet, or 12% of the Company's total store
square footage.
INTERNATIONAL STORES
The Company operates music stores in the United Kingdom under the name Sam
Goody. During 1997, the Company focused on improving the profitability of its
United Kingdom stores, closing six underperforming stores while opening no new
stores. At December 31, 1997, the Company had 16 stores in operation averaging
approximately 2,800 square feet in size. The United Kingdom stores provide for
their own corporate services, including purchasing and distribution.
Beginning in 1995, the Company's financial results began to deteriorate as a
result of: (i) aggressive expansion of product offerings and new store openings
by most of the Company's non-mall competitors; (ii) severe price discounting of
music products by certain non-mall competitors; (iii) a lack of strong selling
40
<PAGE>
hits in the music industry, which depressed sales throughout the industry; and
(iv) the Company's own rapid expansion of Media Play stores in response to
encouraging initial results. In 1996 management initiated restructuring programs
designed to improve the Company's cash flow and profitability. The major
components of the restructuring programs included: (i) closing 114
underperforming stores, which in the last full year of their operations lost an
aggregate of $17.7 million on an operating contribution basis; (ii) closing one
of the Company's two distribution centers, which reduced the Company's working
capital investment by approximately $20 million and contributed to a $6.9
million reduction in distribution costs in 1997; and (iii) improving inventory
management techniques, which increased the Company's inventory turnover from 1.8
times during 1996 to 2.1 times during 1997. Inventory levels at year-end 1997
were $55.8 million below those of the prior year with approximately $30 million
of the reduction due to store closings and the remainder attributable to
distribution efficiencies and improved inventory management. The Company reduced
Media Play advertising expense by $7.9 million in 1997 from the prior year as a
result of closing stores in entire markets and the introduction of a less
costly, but more targeted, program of newspaper advertising inserts. In
addition, in 1997 the Company began to benefit from positive trends in the music
retailing industry, including a retreat from severe price discounting and an
increase in unit sales. As a result, the Company's EBITDA increased from $35.1
million in 1996 to $85.4 million in 1997, and comparable store sales improved
from a decrease of 0.6% in 1996 to an increase of 4.5% in 1997.
COMPETITIVE STRENGTHS
The Company believes that it benefits from the following competitive
advantages:
LARGEST NATIONAL MUSIC RETAILER. The Company is the largest specialty
retailer of music in the United States, with music available in all 1,363
stores. The Company's leading market presence allows the Company to: (i) spread
its fixed operating costs over a large revenue base; (ii) realize distribution
savings through freight consolidation; (iii) take advantage of vendor discounts
and cooperative advertising programs; (iv) negotiate more effectively with
national landlords; (v) use national advertising media; and (vi) benefit from
market clustering. A national distribution of stores also minimizes the impact
on the Company of regional business trends. In recent years, as a result of
adverse industry conditions, a number of mall based music chains have closed
hundreds of stores. Although the Company has also closed underperforming stores,
the Company was the single music retailer in 285 malls at the end of 1997
compared to 274 malls at the end of 1996.
SOPHISTICATED INVENTORY MANAGEMENT AND DISTRIBUTION SYSTEMS. Management
believes that the Company's proprietary retail inventory management ("RIM") and
distribution systems are the most sophisticated in the industry, allowing the
Company to manage its inventory more effectively than its competitors. The RIM
system performs comprehensive merchandise control functions on both an
individual store and a company wide basis. It maintains an inventory profile for
every store, incorporates an "intelligent" new release allocation system and
adjusts and monitors store inventory on a daily basis. The RIM system allows the
Company to meet demand for fast selling titles and carry a broad range of
current hits and catalog titles while avoiding excess inventory and substantial
returns. In January 1997, the Company consolidated its distribution operations
into its state-of-the-art, centrally located facility in Franklin, Indiana, that
contains 715,000 square feet. This facility incorporates computerized processing
and laser technology for receiving, storing, sorting and shipping new product
and returns. This technology has enabled the Company to implement "just-in-time"
inventory management with certain vendors, which reduces working capital.
STRONG BRAND NAME RECOGNITION. The Company benefits from strong national
brand name recognition and continually markets to strengthen the brand images
for each of its retail concepts. Strong brand name recognition offers advantages
in advertising, in-store events and marketing partnerships. A 1997 national
survey by Strategic Record Research determined that more music consumers
preferred shopping at the Company's stores than at other music stores. The
Company is able to attract large corporate
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partners such as Pepsi-Cola, Sears, VISA, MasterCard and L'Oreal for cross
promotions, events and sweepstakes that the Company believes are attractive to
shoppers. The Company's monthly REQUEST magazine, with an annual audited
circulation of 6 million copies, is an award winning, cutting edge music
publication. REQUEST offers numerous cross marketing opportunities with Sam
Goody and the Company's other concepts and reinforces the Company's brand names
with consumers.
LONG-STANDING VENDOR RELATIONSHIPS. The Company believes its relationships
with major music and video vendors are among the best in the industry. Strong
vendor relations allow the Company to be creative in its marketing programs and
business operations. The Company's long-standing relationships with vendors are
further enhanced because: (i) the Company's large selection of products provides
vendors with a needed outlet for their catalog product, which is generally more
profitable than hit product; and (ii) the Company's RIM system allows the
Company to manage product returns at rates below the industry average, which is
an economic benefit to the vendors. Management believes that the continued
support of its vendors in 1996 and 1997 is a testament to the strength of its
vendor relationships.
BUSINESS STRATEGY
The Company's objective is to continue to increase revenue, cash flow and
profitability. Management believes that the Company's recent operating results
have begun to reflect the successful implementation of its business strategy.
The key elements of the Company's business strategy are as follows:
STRENGTHEN STORE BASE. After closing 236 underperforming stores over the
past three years, management believes that its current store base is well
positioned for future growth. Management intends to improve sales by enhancing
brand name awareness and increasing store traffic through creative advertising
and marketing programs. Management also intends to remodel certain stores in
order to enhance their appeal to customers. While management does not currently
intend to significantly expand its store base, the Company will open selected
new stores in order to fill out existing markets or capitalize on attractive
leasing opportunities. The Company will continue to assess the profitability of
its stores and will close a limited number of underperforming stores in the
coming years, if the closings can be accomplished economically.
CAPITALIZE ON FAVORABLE INDUSTRY DYNAMICS. The Company expects sales of its
products to increase due to: (i) increased consumer spending; (ii) favorable
demographic trends; and (iii) the advent of new technologies. Through 2001,
consumer spending on pre-recorded music, video sell-through and trade books is
projected to grow at compounded annual growth rates of 5.6%, 11.2% and 5.8%,
respectively (according to Veronis, Suhler & Associates). Demographic shifts
over the next few years are expected to contribute to sales growth. The 15 to 24
age group, whose members are known to be mall-shoppers and strong music buyers,
is projected to be 4.1% larger in the year 2000 than its size in 1995. The
principal book buying population, between 35 and 54 years of age, is projected
to grow in the same period by 12.3%. Children's music, video, books and toys
should benefit by a growth of 6.4% in the 5 to 14 age group in the same period
(source: U.S. Bureau of Census 1996). Historically, the introduction of new
technology, such as compact discs, has had a positive impact on the Company's
business, and the most encouraging new technology today is DVD. Veronis, Suhler
& Associates projects that by 2001 annual consumer spending on DVDs will be
approximately $1.2 billion. Most of the Company's stores carry DVD, and Suncoast
in particular is pursuing the early adopters of this new format.
INCREASE GROSS MARGIN. The Company believes the following initiatives will
benefit gross margin: (i) selective price decisions in response to the
competitive environment in various markets; (ii) adjustments to merchandise
assortment to include more higher margin products; and (iii) cross promotions on
product lines to increase sales of high margin ancillary products, such as
apparel.
REDUCE WORKING CAPITAL. The Company plans to continue reducing working
capital by: (i) expanding the "just in time" inventory program, which completely
eliminates backup inventory, to include more
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products and selective additional vendors; (ii) implementing more precise buying
rules to reduce returns; and (iii) eliminating less profitable product lines.
IMPROVE MEDIA PLAY PROFITABILITY. The Company will concentrate on improving
profitability in all concepts, but particularly in Media Play. The Company's
efforts to increase sales, improve gross margin, increase customer traffic and
reduce operating costs in its Media Play stores includes the following
initiatives: (i) introducing new merchandise assortments; (ii) altering
departmental and store layouts; and (iii) reducing operating costs through
improved store management, expense control and inventory management. Of the
Company's four concepts, Media Play showed the most significant profitability
improvement in 1997.
PRODUCTS
The following table shows the sales and percentage of total sales
attributable to each product group.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
SALES % SALES % SALES %
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Music................................................ $ 895.0 51.9% $ 931.1 51.1% $ 930.0 52.6%
Video................................................ 505.9 29.4 531.2 29.2 509.1 28.8
Books, computer software and other products.......... 321.9 18.7 359.3 19.7 329.2 18.6
--------- --------- --------- --------- --------- ---------
Total.............................................. $ 1,722.8 100.0% $ 1,821.6 100.0% $ 1,768.3 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
MUSIC. Sales of compact discs are expected to continue to grow and become a
larger portion of total music sales while sales of audio cassettes are expected
to continue to decline, although at a slower rate than in recent years. Sam
Goody stores typically carry 4,500 to 8,500 compact disc titles, depending upon
store size and location, while the largest Sam Goody stores carry up to 45,000
compact disc titles. Media Play and On Cue stores carry up to 50,000 and 5,000
compact disc titles, respectively. These titles include "hits," which are the
best selling newer releases, and "catalog" items, which are older but still
popular releases that customers purchase to build their collections. The Company
also produces and sells music under its "Excelsior" label, which include
compilations of public domain classical, jazz, big band and reggae music.
VIDEO. Video cassettes are for sale at all of the Company's stores.
Suncoast stores feature up to 15,000 video titles. Media Play stores carry up to
16,000 titles. Sam Goody stores typically carry 2,000 titles, while the largest
Sam Goody stores carry up to 14,000 titles. On Cue stores carry up to 4,500
titles.
Merchandising of DVD, a new video technology, began in 1997. DVD offers the
consumer laser technology in a smaller disc format with superior picture quality
and audio fidelity. The Company believes that in the next few years, sales of
DVD players will begin to replace sales of laserdisc players and video cassette
recorders as the new technology becomes widely available. DVD is currently
available in Sam Goody, Suncoast and Media Play stores and selected On Cue
stores. The Company's DVD sales in 1997 were 1.8% of total video sales, but
accelerated in the months of December 1997 and January 1998 to 3.4% and 8.2%,
respectively, of total video sales. DVD is expected to grow rapidly and, if
successful, to become an important part of the video industry by the year 2000.
However, DVD demand could accelerate faster or slower depending upon how
consumers react to its technical superiority over the VHS format and the
introductory price points of the hardware and software. See "Risk Factors--Risk
from New Technologies."
BOOKS, COMPUTER SOFTWARE AND OTHER PRODUCTS. Media Play and On Cue stores
carry up to 50,000 and 6,500 titles of books, respectively. Computer software is
available primarily in Media Play stores, which offer 2,000 computer software
programs. "Other Products" refers to video games, brand name blank audio and
video tapes, storage containers, carrying cases and sheet music, as well as
entertainment related
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apparel, posters and various other items. Movie and artist related accessories
and apparel are highly influenced by the trends and fads surrounding popular
movies, actors and artists. The Company's stores also carry a limited variety of
portable electronic equipment such as audio cassette players, radios and stereo
audio cassette/radios, generally sold at retail prices of approximately $200 or
less.
SUPPLIERS
Substantially all of the home entertainment products (other than computer
software) sold by the Company are purchased directly from manufacturers. The
Company purchases inventory for its stores from approximately 2,400 suppliers.
Approximately 68% of purchases in 1997 were made from the ten largest suppliers.
The Company has no long-term contracts with its suppliers and transacts business
principally on an order-by-order basis as is typical throughout the industry.
See "Risk Factors--Relationships with Vendors."
MARKETING
The Company uses a high level of advertising and promotions in marketing its
products. Marketing and advertising programs include special events, advertising
partnerships with vendors and corporate partnerships with nationally known
names. Additionally, frequent buyer programs in the Company's mall stores and
certain product specific programs in On Cue stores are designed to build
customer loyalty and encourage repeat visits. The Company has been sponsoring
nationally televised/advertised events such as ESPN's Xtreme Games and the
"UnVailed" battle of the bands, which appeal to its target customers. Other
advertising programs which are being created in conjunction with vendors include
television and billboard ads featuring specific albums or movies. In addition,
the Company publishes REQUEST, a cutting-edge music and video entertainment news
magazine for younger customers. REQUEST is distributed in the music stores as
well as Media Play and On Cue stores and also at limited magazine stand outlets.
The magazine has an annual audited circulation of six million copies and an
estimated readership in the millions.
The Company's major suppliers offer cooperative advertising support and
provide funds for the placement and position of product. A significant portion
of the Company's total advertising costs have been funded by suppliers through
these programs. The Company advertises principally through newspaper inserts.
Because of the high concentration of its mall stores in major metropolitan areas
such as New York, Chicago and Los Angeles, the Company has been able to expand
its radio and local television advertising in those areas. The national
distribution of the Company's mall stores has made it practical to advertise in
certain national magazines and on nationally syndicated radio programs and cable
television, including MTV.
STORE OPERATIONS
Sam Goody, Suncoast and On Cue stores are typically managed by a store
manager and an assistant manager. Media Play stores typically are managed by a
general manager, an assistant general manager and three to five department
managers. Most stores are open up to 80 hours per week, seven days a week. The
Company does not extend credit to customers, but most major credit cards are
accepted.
COMPETITION
The Company operates in highly competitive markets which are generally local
or individual in nature. The Company competes on the basis of service, selection
and price, with a broad range of specialty, discount and other retailers, and
certain national chains, some of whom have greater financial and marketing
resources than the Company. The number of stores and types of competitors have
increased significantly over recent years, including non-mall discount stores,
consumer electronic superstores, and mall based music, video and book specialty
retailers expanding into non-mall multimedia stores. The low
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<PAGE>
prices offered by these non-mall stores have created intense price competition
and adversely impacted the performance of both the Company's non-mall and mall
stores. Although deep discount pricing by many retailers of entertainment
products abated somewhat in 1997, there can be no assurance that if such
practice returns the Company will continue to achieve satisfactory gross margins
while remaining competitive.
In addition, the Company competes for consumer time and spending with all
leisure time activities, such as movie theaters, television, home computing and
internet use, live theater, sporting facilities and spectator events, travel,
amusement parks and other family entertainment centers. The Company's ability to
compete successfully depends on its ability to secure and maintain attractive
and convenient locations, market and manage merchandise attractively and
efficiently, offer an extensive product selection and knowledgeable customer
service and provide effective management. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Results of
Operations--Gross Profits."
SEASONALITY
The Company's business is highly seasonal, with nearly 40% of the annual
revenues and all of the net earnings generated in the fourth quarter. Quarterly
results are affected by, among other things, the timing of holidays, new product
offerings and new store openings and sales performance of existing stores. See
Note 16 of Notes to Consolidated Financial Statements.
TRADEMARKS AND SERVICE MARKS
The Company operates its stores under various names, including "Sam Goody,"
"Musicland," "Suncoast Motion Picture Company," "Media Play" and "On Cue," which
have become important to the Company's business as a result of its advertising
and promotional activities. These names, along with a number of others,
including "REQUEST," "REPLAY," "Excelsior" and "Channel 1000," have been
registered with the U.S. Patent and Trademark Office. The Company intends to
continue to use these names and marks and may use new names for specific stores
depending on the type of store and its location.
PERSONNEL
As of January 26, 1998, the Company employed approximately 5,800 full-time
employees, 9,600 part-time employees and 1,000 temporary employees. Hourly
employees at 15 of the Company's stores are represented by unions. All other
facilities are non-union and the Company believes that its employee relations
are good.
PROPERTIES
CORPORATE HEADQUARTERS AND DISTRIBUTION FACILITIES. The Company owns its
corporate headquarters facility in Minneapolis, Minnesota, consisting of an
office building with approximately 94,000 square feet of space on approximately
5.4 acres of land. Approximately 73,000 square feet of office and storage space
in Minneapolis, Minnesota is under an operating lease that expires in January
2002. The Company's distribution facilities are located in Franklin, Indiana and
consist of a 715,000 square foot building on approximately 66.6 acres of land,
with options on approximately 33.4 acres of land. See Note 4 and Note 15 of
Notes to Consolidated Financial Statements.
STORE LEASES. Most of the Company's stores are under operating leases with
various remaining terms through the year 2017. The Company owns three Media Play
stores. The leases have terms ranging from 3 to 25 years. Certain store leases
contain provisions restricting assignment, merger, change of control or
transfer. In most instances, the Company pays, in addition to minimum rent, real
estate taxes, utilities, common area maintenance costs and percentage rents
which are based upon sales volume. Certain store leases provide the Company with
an early cancellation option if sales for a designated period do not reach
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<PAGE>
a specified level as defined in the lease. The following table lists the number
of leases due to expire or terminate in each fiscal year based on the fixed
lease term, giving effect to early cancellation options and excluding renewal
options.
<TABLE>
<S> <C> <C> <C>
1998......................... 157 2003......................... 141
1999......................... 203 2004......................... 127
2000......................... 208 2005......................... 107
2001......................... 185 2006......................... 43
2002......................... 117 2007 and thereafter.......... 72
</TABLE>
A total of 168 leases without renewal options will expire in the years 1998
and 1999. Although the Company has historically been successful in renewing most
of its store leases when they have expired, there can be no assurance that the
Company will continue to be able to do so on acceptable terms or at all in light
of the recent restructuring programs. If the Company is unable to renew leases
for its stores as they expire, or find favorable locations on acceptable terms,
there can be no assurance that such failures will not have a material adverse
effect on the Company's financial condition or results of operations.
LEGAL PROCEEDINGS
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. It is the opinion of management that
the ultimate resolution of these matters will not have a material adverse effect
on the financial position or results of operations of the Company.
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<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to each
person who is an executive officer or director of the Company. All directors and
executive officers serve in the same capacities for both MSC and MGI:
<TABLE>
<CAPTION>
NAME AGE TITLE
- - --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Jack W. Eugster.............................. 52 Chairman of the Board, President and Chief Executive Officer
Keith A. Benson.............................. 53 Vice Chairman, Chief Financial Officer and Director
Gilbert L. Wachsman.......................... 50 Vice Chairman and Director
Gary A. Ross................................. 51 President, Superstores Division
Douglas M. Tracey............................ 44 Senior Vice President of Distribution
Marcia F. Appel.............................. 47 Senior Vice President of Corporate Advertising, Partnership
Marketing and Communications
Richard J. Odette............................ 54 Senior Vice President of Prerecorded Audio
Kenneth F. Gorman............................ 58 Director
William A. Hodder............................ 66 Director
Josiah O. Low, III........................... 58 Director
Terry T. Saario.............................. 56 Director
Thomas F. Weyl............................... 54 Director
Michael W. Wright............................ 59 Director
</TABLE>
JACK W. EUGSTER. Mr. Eugster has been Chairman of the Board of the Company
since August 1988. He has been the Chairman of the Board, President and Chief
Executive Officer of MGI since August 1986 and has served MSC in the same
capacity since its acquisition of MGI in August 1988. Mr. Eugster joined MGI in
1980 as Executive Vice President and has held the positions of General Manager,
President and Chairman of the Retail Division. Previously, he was with The Gap
Stores and Target Stores. Mr. Eugster is also a director of Damark
International, Inc., Donaldson Company, Inc., MidAmerican Energy Company, ShopKo
Stores, Inc. and Jostens, Inc. He is a director and past president of the
National Association of Recording Merchandisers and a past chairman of the
Country Music Association.
KEITH A. BENSON. Mr. Benson has been a director of the Company since
January 1992 and served a prior term as a director from August 1988 until
December 1989. Mr. Benson was elected Vice Chairman and Chief Financial Officer
on August 4, 1997. Mr. Benson has been an executive officer of the Company since
1988. For the year prior, since August 1996, Mr. Benson was President of the
Mall Stores Division. Previously, Mr. Benson had served as President of the
Music Stores Division since August 1994. From May 1992 through July 1994, he
filled the position of Vice Chairman and Chief Financial Officer for both the
Company and MGI. Prior to that he was Executive Vice President and Chief
Financial Officer from 1988 through April 1992. Mr. Benson joined MGI in 1980 as
its Controller and also served successively as its Senior Vice President and
Chief Financial Officer, Senior Vice President and Chief Financial Officer for
the Retail Division and Senior Vice President of Finance and Administration for
the Retail Division. Previously he was with The May Company and Dayton Hudson
Corporation. Mr. Benson is also a director of Premium Wear, Inc.
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<PAGE>
GILBERT L. WACHSMAN. Mr. Wachsman has been a director of the Company since
May 1997. He became the Vice Chairman of the Company on July 17, 1996. Prior to
joining the Company, Mr. Wachsman held the position of Senior Vice President
Hardlines at Kmart Corporation from 1995 to 1996. From 1990 to 1995 Mr. Wachsman
was a management consultant for major retail, distribution and manufacturing
companies. Prior to that he was Chief Executive Officer at Lieberman
Enterprises, Inc., President and Chief Executive Officer for Child World Inc.
and Senior Vice President of Marketing/ Merchandising for Target Stores.
GARY A. ROSS. Mr. Ross has been President, Superstores Division since
August 1996. Prior to that he served in the position of President of the
Suncoast Division since 1990. Since joining MGI in 1984, he has served in the
positions of Executive Vice President of Marketing and Merchandising, Senior
Vice President of Marketing and Merchandising, Senior Vice President of
Marketing and Merchandising of the Retail Division and Senior Vice President of
Planning and Administration of the Retail Division. Mr. Ross served as a
director of the Company from January 1, 1990 to December 31, 1990. Mr. Ross is a
past chairman and currently a director of the Video Software Dealers
Association. Prior to joining MGI, he was with The Gap Stores and Target Stores.
DOUGLAS M. TRACEY. Mr. Ross has been Senior Vice President of Distribution
since August 1994. He was first appointed a senior vice president in April 1992
and has served in the positions of General Manager of the On Cue Division,
Senior Vice President of Marketing Services and Senior Vice President of
Administration and Distribution. Previously, from 1986 through April 1992, he
served as Vice President, Distribution. Mr. Tracey joined MGI in 1971 and has
held the positions of Managing Director of National Distribution, General
Manager Minneapolis Distribution Center, Manager of Policies and Procedures,
National Store Operations Manager, District Supervisor and Store Manager.
MARCIA F. APPEL. Ms. Appel has been Senior Vice President of Corporate
Advertising, Partnership Marketing and Communications since October 1996.
Previously, she had served as Vice President, Communications and Music Stores
Marketing since February 1996. Ms. Appel joined the Company in April of 1993 as
Vice President, Communications and Publications. Prior to joining MGI, Ms. Appel
was Executive Director of the National Association of Area Business
Publications, and she has also worked for Control Data Corporation and Dorn
Communications. Ms. Appel is deputy to the Chief Executive Officer of the
Minnesota Business Partnership and sits on the Minnesota Women's Press Advisory
Board.
RICHARD J. ODETTE. Mr. Odette was elected Senior Vice President,
Prerecorded Audio on January 4, 1998. Previously, Mr. Odette had served as Vice
President, Prerecorded Audio since 1988. Mr. Odette joined MGI in 1982 and has
held the positions of Managing Director of Software, Director of Software
Merchandising, National Merchandising Manager of Software, and Zone
Merchandising Manager for the Retail Division. Prior to joining MGI, Mr. Odette
was with Richard's Inc. and Target Stores, Inc.
KENNETH F. GORMAN. Mr. Gorman has been a director of the Company since
November 1988. He has been in the merchant banking and private investment fields
since 1987 as an owner and Managing Director of Apollo Partners L.L.C. From 1970
until 1987 he was in the communications/entertainment business as a director and
Executive Vice President of Viacom International Inc. Mr. Gorman is also a
director of Dove Audio, Doane Farm Management Co., and IDC Services, Inc.
48
<PAGE>
WILLIAM A. HODDER. Mr. Hodder has been a director of the Company since July
1995. He is the retired Chairman and Chief Executive Officer of Donaldson
Company, Inc., a manufacturer of filtration devices. Mr. Hodder joined Donaldson
Company in 1973 as its President. Previously, he spent seven years in retailing
with Dayton Hudson Corporation including such positions as Senior Vice President
and Corporate Group Executive, President of Target Stores and Vice President of
Organization Planning and Development. Mr. Hodder is a director of Norwest
Corporation, ReliaStar Financial, SUPERVALU INC., and Tennant Company.
JOSIAH O. LOW, III. Mr. Low has been a director of the Company since July
1995. He has been an investment banker with Donaldson, Lufkin & Jenrette
Securities Corporation since 1985, where he is currently a Managing Director.
Previously he spent 24 years with Merrill Lynch, Pierce, Fenner and Smith. Mr.
Low is also a director of Centex Development Corporation and St. Laurent
Paperboard Inc.
TERRY T. SAARIO. Dr. Saario was elected a director of the Company on
February 3, 1998. From 1984 to 1996 Dr. Saario served as President of the
Northwest Area Foundation, an eight state regional organization. Previously she
held the positions of Vice President of Community Relations at the Pillsbury
Company, Deputy Assistant Secretary in the Department of Education and Program
Officer at the Ford Foundation. Dr. Saario was a director of Cowles Media
Company until its recent sale and is a current director of Minnesota Mutual
Insurance Company.
TOM F. WEYL. Mr. Weyl has been a director of the Company since December
1992. He is the President/ Chief Creative Officer at Martin/Williams
Advertising, Minneapolis and has been with that company since 1973. Mr. Weyl is
a past Chairman of the Board of Directors of the Twin Cities Council of the
American Association of Advertising Agencies.
MICHAEL W. WRIGHT. Mr. Wright has been a director of the Company since
January 1989. He has been in the food distribution and retail business since
1977 when he joined SUPERVALU INC. as Senior Vice President. He was elected
President and Chief Operating Officer of SUPERVALU INC. in 1978 and became its
Chief Executive Officer in June 1981. He assumed the additional responsibilities
of Chairman of the Board in October 1982. In addition to SUPERVALU INC., Mr.
Wright is a director of Cargill, Incorporated, Honeywell Inc., and Norwest
Corporation. He also serves as Chairman of the Food Marketing Institute.
49
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Old Notes have been, and the New Notes will be issued pursuant to an
indenture (the "Indenture") among the Issuer, the Issuer's parent corporation,
Musicland Stores Corporation (the "Guarantor" or "MSC") and Bank One, NA, as
trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. Copies of the Indenture and
Registration Rights Agreement are available as set forth below under
"--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes will be general unsecured obligations of the Issuer, subordinated
in right of payment to all existing and future Senior Debt of the Issuer,
including Indebtedness pursuant to the Credit Facility. The Issuer's obligations
under the Notes will be guaranteed (the "Guarantee") on a senior subordinated
basis by the Guarantor. See "--Guarantee." As of March 1, 1998, on a pro forma
basis giving effect to the issuance of the Notes and the application of the
proceeds therefrom, the Issuer would have had $83.0 million of Senior Debt. In
addition, on such date and pro forma basis, the Issuer could have borrowed up to
an additional $99.0 million under the Revolver Agreement which would also have
constituted Senior Debt. In addition, all existing and future liabilities of the
Subsidiaries of the Issuer will be effectively senior to the Notes. See "Risk
Factors--Subordination" and "Description of Existing Financing Arrangements."
The operations of the Issuer are conducted in part through its Subsidiaries,
and the Issuer may, therefore, be dependent upon the cash flow of its
Subsidiaries to meet its debt obligations, including its obligations under the
Notes. See "Risk Factors--Corporate Structure." As of the date of the Indenture,
all of the Issuer's Subsidiaries will be Restricted Subsidiaries. However, under
certain circumstances, the Issuer will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $150 million and
will mature on March 15, 2008. Interest on the Notes will accrue at the rate of
9 7/8% per annum and will be payable semi-annually in arrears on March 15 and
September 15 of each year, commencing on September 15, 1998, to holders of
record on the immediately preceding March 1 and September 1. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium and Liquidated Damages, if any, and interest on the Notes
will be payable at the office or agency of the Issuer maintained for such
purpose within the City and State of New York or, at the option of the Issuer,
payment of interest and Liquidated Damages, if any, may be made by check mailed
to the holders of the Notes at their respective addresses set forth in the
register of holders of Notes; provided that all payments of principal, premium
and Liquidated Damages, if any, and interest with respect to Notes the holders
of which have given wire transfer instructions to the Issuer will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the holders thereof. Until otherwise designated by the Issuer, the
Issuer's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
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<PAGE>
SUBORDINATION
The payment of principal of, premium and Liquidated Damages, if any, and
interest on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full of all Senior Debt in cash, whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed and all permissible renewals, extensions, refundings or refinancings
thereof. Except to the extent set forth under "--Repurchase at the Option of the
Holders--Asset Sales", the Notes will be PARI PASSU in right of payment with the
2003 Notes.
The Indenture will provide that, upon any payment or distribution of assets
of the Issuer of any kind or character, whether in cash, property or securities,
to creditors in any Insolvency or Liquidation Proceeding with respect to the
Issuer all amounts due or to become due under or with respect to all Senior Debt
will first be paid in full in cash before any payment is made on account of the
Notes. Upon any such Insolvency or Liquidation Proceeding, any payment or
distribution of assets of the Issuer of any kind or character, whether in cash,
property or securities, to which the holders of the Notes or the Trustee would
be entitled will be paid by the Issuer or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by the holders of the Notes or by the Trustee if received by
them, directly to the holders of Senior Debt (pro rata to such holders on the
basis of the amounts of Senior Debt held by such holders) or their
Representative or Representatives, as their interests may appear, for
application to the payment of the Senior Debt remaining unpaid until all such
Senior Debt has been paid in full in cash, after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of Senior
Debt.
The Indenture will provide that (a) in the event of and during the
continuation of any default in the payment of principal of, interest or premium,
if any, on any Senior Debt, or any Obligation owing from time to time under or
in respect of Senior Debt, or in the event that any event of default (other than
a payment default) with respect to any Senior Debt will have occurred and be
continuing and will have resulted in such Senior Debt becoming or being declared
due and payable prior to the date on which it would otherwise have become due
and payable, or (b) if any event of default other than as described in clause
(a) above with respect to any Designated Senior Debt will have occurred and be
continuing permitting the holders of such Designated Senior Debt (or their
Representative or Representatives) to declare such Designated Senior Debt due
and payable prior to the date on which it would otherwise have become due and
payable, then no payment will be made by or on behalf of the Issuer on account
of the Notes (x) in case of any payment or nonpayment default specified in (a),
unless and until such default will have been cured or waived in writing in
accordance with the instruments governing such Senior Debt or such acceleration
will have been rescinded or annulled, or (y) in case of any nonpayment event of
default specified in (b), during the period (a "Payment Blockage Period")
commencing on the date the Issuer or the Trustee receives written notice (a
"Payment Notice") of such event of default (which notice will be binding on the
Trustee and the holders of Notes as to the occurrence of such nonpayment event
of default) from the Credit Agent (or other holders of Designated Senior Debt or
their Representative or Representatives) and ending on the earliest of (A) 179
days after such date, (B) the date, if any, on which such Designated Senior Debt
to which such default relates is paid in full in cash or such default is cured
or waived in writing in accordance with the instruments governing such
Designated Senior Debt by the holders of such Designated Senior Debt and (C) the
date on which the Trustee receives written notice from the Credit Agent (or
other holders of Designated Senior Debt or their Representative or
Representatives), as the case may be, terminating the Payment Blockage Period.
During any consecutive 360-day period, the aggregate of all Payment Blockage
Periods shall not exceed 179 days and there shall be a period of at least 181
consecutive days in each consecutive 360-day period when no Payment Blockage
Period is in effect. No event of default which existed or was continuing with
respect to the Senior Debt for which notice commencing a Payment Blockage Period
was given on the date such Payment Blockage Period commenced shall be or be made
the basis for the commencement of any subsequent Payment Blockage Period unless
such event of default is cured or waived for a period of not less than 90
consecutive days.
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As a result of the subordination provisions described above, in the event of
the Issuer's liquidation, dissolution, bankruptcy, reorganization, insolvency,
receivership or similar proceeding or in an assignment for the benefit of the
creditors or a marshaling of the assets and liabilities of the Issuer, holders
of Notes may recover less ratably than creditors of the Issuer who are holders
of Senior Debt. See "Risk Factors-- Subordination." The Indenture will limit,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Debt, that the Issuer and its Subsidiaries can incur. See
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
GUARANTEE
MSC will unconditionally guarantee the due and punctual payment of the
principal of, premium, and Liquidated Damages, if any, and interest on the
Notes, when and as the same shall become due and payable, whether at maturity,
upon redemption or by declaration or otherwise. The guarantee will represent an
unsecured general obligation of MSC, subordinate in right of payment to all
Guarantor Senior Debt (as defined in the Indenture), including MSC's obligations
under its guarantee of the Issuer's obligations under the Credit Facility. The
guarantee will be subordinate to the same extent and on the same terms and
conditions as set forth above. See "Subordination." The guarantee will be PARI
PASSU in right of payment to MSC's guarantee of the 2003 Notes. The obligations
of MSC under its guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable law.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Issuer's option prior to March 15,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Issuer, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the applicable redemption date, if redeemed during the
twelve-month period beginning on March 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 104.938%
2004.............................................................................. 103.292
2005.............................................................................. 101.646
2006 and thereafter............................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to March 15, 2001, the
Issuer may redeem up to 40% of the original aggregate principal amount of Notes
at a redemption price of 109.875% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the redemption
date, with the net cash proceeds of a Public Equity Offering; provided that at
least 60% of the original aggregate principal amount of Notes remains
outstanding immediately after the occurrence of each such redemption; and
provided, further, that such redemption shall occur within 45 days of the date
of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis or by
lot; provided that no Notes of $1,000 or less shall be redeemed in part. Notices
of redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note is
to be redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the holder thereof upon cancellation of the original Note.
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Notes called for redemption become due on the date fixed for redemption. On and
after the redemption date, interest ceases to accrue on Notes or portions of
them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Issuer is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Issuer to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Issuer will mail a notice to each holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Issuer will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Issuer will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Issuer. The Paying Agent will promptly mail to each holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 30 days following a Change of Control, the Issuer will either repay all
outstanding Indebtedness under the Credit Facility and terminate the commitments
thereunder or obtain the requisite consents under the Credit Facility to permit
the repurchase of Notes required by this covenant. The Issuer will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require that
the Issuer repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
Any future credit agreements or other agreements relating to Senior Debt to
which the Issuer becomes a party may contain certain change of control
restrictions and provisions. In the event a Change of Control occurs at a time
when the Issuer is prohibited from purchasing Notes, the Issuer could seek the
consent of its lenders to purchase the Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Issuer does not obtain such
consent or repay such borrowings, the Issuer will remain prohibited from
purchasing Notes. In such case, the Issuer's failure to purchase tendered Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict
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payments to the holders of Notes. See "Risk Factors--Change of Control" and
"--Description of Existing Financing Arrangements."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Issuer and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Notes to require the Issuer to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Issuer and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
The Indenture will provide that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Issuer (or the Restricted Subsidiary, as the case may be) receives consideration
at the time of such Asset Sale at least equal to the fair market value
(evidenced by a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 80% of the consideration
therefor received by the Issuer or such Restricted Subsidiary is in the form of
cash; provided that the amount of (x) any liabilities (as shown on the Issuer's
or such Restricted Subsidiary's most recent balance sheet) of the Issuer or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any Guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Issuer or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by the
Issuer or any such Restricted Subsidiary from such transferee that are converted
by the Issuer or such Restricted Subsidiary into cash within 90 days (to the
extent of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer may apply such Net Proceeds, at its option, (a) to permanently repay
Senior Debt (and to correspondingly reduce commitments with respect thereto in
the case of revolving borrowings) or existing 2003 Notes or (b) to the
acquisition of a controlling interest in another business, the making of a
capital expenditure or the acquisition of other long-term assets, in each case,
in a Permitted Business. Pending the final application of any such Net Proceeds,
the Issuer may temporarily reduce the revolving Indebtedness under the Credit
Facility or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Issuer will be required to make an offer to
all holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture. To
the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Issuer may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that from and after the date of the Indenture the
Issuer will not, and will not permit any of its Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any
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other payment or distribution on account of the Issuer's or any of its
Restricted Subsidiaries' Equity Interests or to the direct or indirect holders
of the Issuer's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Issuer); (ii) purchase, redeem
or otherwise acquire or retire for value any Equity Interests of the Issuer or
any direct or indirect parent of the Issuer; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is PARI PASSU with or subordinated to the Notes
(other than the Notes and the 2003 Notes), except a payment of interest or
principal at Stated Maturity; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow
Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuer and its Subsidiaries after the
date of the Indenture (excluding Restricted Payments permitted by clauses
(ii) and (iii) of the next succeeding paragraph), is less than the sum of
(i) 50% of the Consolidated Net Income of the Issuer for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Issuer's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer from the
issue or sale since the date of the Indenture of Equity Interests of the
Issuer or MSC (other than Disqualified Stock) or of Disqualified Stock or
debt securities of the Issuer or MSC that have been converted into such
Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Issuer and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (B) the initial amount of such Restricted
Investment plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a
Restricted Subsidiary, the fair market value of such redesignated Subsidiary
(as determined in good faith by the Board of Directors) as of the date of
its redesignation or (B) pays any cash dividends or cash distributions to
the Issuer or any of its Restricted Subsidiaries, 50% of any such cash
dividends or cash distributions made after the date of the Indenture.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests
of the Issuer or MSC in exchange for, or out of the net cash proceeds of the
substantially concurrent sale or issuance (other than to a Restricted Subsidiary
of the Issuer) of, other Equity Interests of the Issuer or MSC (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of
PARI PASSU or subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Restricted Subsidiary of the Issuer to the holders of its
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Equity Interests on a pro rata basis; (v) any repurchase of Equity Interests of
the Issuer or MSC from present and former employees and directors of the Issuer
or its Subsidiaries or MSC in an aggregate amount not to exceed $5 million; (vi)
Permitted Investments; or (vii) other Restricted Payments in an aggregate amount
not to exceed $5 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the Issuer
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the fair market
value of such Investments at the time of such designation (as determined in good
faith by the Board of Directors). Such designation will only be permitted if
such Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Issuer or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined in good faith by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Issuer shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Issuer will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Issuer will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Issuer may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Cash Flow Coverage Ratio for
the Issuer's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 2.0 to 1, determined on a Pro Forma Basis.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(i) the incurrence by the Issuer of Indebtedness under the Credit
Facility in an aggregate principal amount not to exceed $182.0 million
outstanding at any time;
(ii) the incurrence by the Issuer and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Issuer of Indebtedness represented by the
Notes;
(iv) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings, purchase money obligations and Attributable Debt in an aggregate
principal amount not to exceed $15 million in any one year;
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of assets or a new
Restricted Subsidiary; provided that such Indebtedness was incurred by the
prior owner of such assets or such Restricted Subsidiary prior to such
acquisition by the Issuer or one of its Subsidiaries and was not incurred in
connection with, or in
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contemplation of, such acquisition by the Issuer or one of its Subsidiaries;
provided further that the principal amount (or accreted value, as
applicable) of such Indebtedness, together with any other outstanding
Indebtedness incurred pursuant to this clause (v), does not exceed $5
million;
(vi) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness that was
permitted by the Indenture to be incurred;
(vii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Issuer and any of its
Wholly Owned Restricted Subsidiaries; provided, however, that (i) if the
Issuer is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than the Issuer or a Wholly Owned Restricted Subsidiary and (B)
any sale or other transfer of any such Indebtedness to a Person that is not
either the Issuer or a Wholly Owned Restricted Subsidiary shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by the Issuer
or such Restricted Subsidiary, as the case may be;
(viii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging currency risk or interest rate risk with respect to any floating
rate Indebtedness that is permitted by the terms of this Indenture to be
outstanding;
(ix) the guarantee by the Issuer or any of its Restricted Subsidiaries
of Indebtedness of a Restricted Subsidiary of the Issuer that was permitted
to be incurred by another provision of this covenant and the guarantee by
Subsidiaries of Senior Debt of the Issuer;
(x) the incurrence by the Issuer's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Issuer;
(xi) Indebtedness incurred by the Issuer or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect to workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Issuer or any Restricted Subsidiary in
the ordinary course of business; and
(xiii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of additional Indebtedness, including Attributable Debt incurred after the
date of the Indenture, in an aggregate principal amount (or accreted value,
as applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (xiii), not to exceed $5 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xiii) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Issuer shall,
in its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. The amount of Indebtedness issued at a price which is
less than the principal amount thereof shall be equal to the amount of the
liability in respect thereof determined in
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accordance with GAAP. Neither the accrual of interest nor the issuance of
additional Indebtedness in the form of additional promissory notes or otherwise
in lieu of the payment of interest nor the accretion of accreted value will be
deemed to be an incurrence of Indebtedness for purposes of this covenant.
LIENS
The Indenture will provide that the Issuer will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien that secures obligations under any PARI PASSU Indebtedness or
subordinated Indebtedness on any asset or property now owned or hereafter
acquired by the Issuer or any of its Subsidiaries, or any income or profits
therefrom or assign or convey any right to receive income therefrom, unless the
Notes are equally and ratably secured with the obligations so secured until such
time as such obligations are no longer secured by a Lien; provided, that in any
case involving a Lien securing subordinated Indebtedness, such Lien is
subordinated to the Lien securing the Notes to the same extent that such
subordinated Indebtedness is subordinated to the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture will provide that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Issuer or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Issuer or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Issuer or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Issuer or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Credit Facility
as in effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive in the aggregate (as determined by the
Board of Directors in good faith) with respect to such dividend and other
payment restrictions than those contained in the Credit Facility as in effect on
the date of the Indenture, (c) the Indenture and the Notes and the 2003
Indenture and the 2003 Notes, (d) any applicable law, rule, regulation or order,
(e) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Issuer or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (g) Capital Lease
Obligations, mortgage financings and purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h)
Permitted Refinancing Indebtedness, provided that the material restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (i) contracts for the sale of assets, including
without limitation customary restrictions with respect to a Subsidiary pursuant
to an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary, and (j) any
other agreement or instrument evidencing or relating to secured Indebtedness of
the Issuer or any Restricted Subsidiary otherwise permitted to be issued
pursuant to the provisions of the covenants described under the captions
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" and "--Certain Covenants--Liens" that limit the right of the debtor to
dispose of the property or assets securing such Indebtedness.
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MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture will provide that the Issuer may not consolidate or merge with
or into (whether or not the Issuer is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Issuer is the surviving corporation
or the entity or the Person formed by or surviving any such consolidation or
merger (if other than the Issuer) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the entity or Person formed by or surviving any
such consolidation or merger (if other than the Issuer) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Issuer under the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; and (iv) except in the case of a merger of the
Issuer with or into MSC or a Wholly Owned Restricted Subsidiary of the Issuer,
the Issuer or the entity or Person formed by or surviving any such consolidation
or merger (if other than the Issuer), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made will, at
the time of such transaction and determined on a Pro Forma Basis, be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Issuer will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction")
unless (i) such Affiliate Transaction is entered into in good faith and on terms
that are no less favorable to the Issuer or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person and (ii) the
Issuer delivers to the Trustee (a) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $10 million, an opinion as to the
fairness to the holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing; provided that the following shall not be deemed Affiliate
Transactions: (q) any employment agreement entered into by the Issuer or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of the Issuer or such Restricted Subsidiary, (r)
transactions between or among the Issuer and/or its Restricted Subsidiaries, (s)
Permitted Investments and Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption "--Restricted
Payments," (t) customary loans, advances, fees and compensation paid to, and
indemnity provided on behalf of, officers, directors, employees or consultants
of the Issuer or any of its Restricted Subsidiaries, (u) consulting and other
advisory fees paid to MSC not to exceed $250,000 in any one year and (v)
transactions pursuant to any contract or agreement in effect on the date of the
Indenture as the same may be amended, modified or replaced from time to time so
long as any such amendment, modification or replacement is no less favorable to
the Issuer and its Restricted Subsidiaries than the contract or agreement as in
effect on the date of the original issuance of the Notes or is approved by a
majority of the disinterested directors of the Issuer.
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ANTI-LAYERING
The Indenture will provide that (i) the Issuer will not, and the Issuer will
not permit any of its Subsidiaries to, incur, create, issue, assume, guarantee
or otherwise become liable for any Indebtedness that is both (a) subordinate or
junior in right of payment to any Senior Debt and (b) senior in any respect in
right of payment to the Notes; and (ii) the Guarantor will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that is
both (a) subordinate or junior in right of payment to its Guarantor Senior Debt
and (b) senior in right of payment to its Guarantee of the Notes.
SALE AND LEASEBACK TRANSACTIONS
The Indenture will provide that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Issuer may enter into a sale and leaseback
transaction if (i) the Issuer could have (a) incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure
such Indebtedness pursuant to the covenant described above under the caption
"--Liens," (ii) the gross cash proceeds of such sale and leaseback transaction
are at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to the
Trustee) of the property that is the subject of such sale and leaseback
transaction and (iii) the transfer of assets in such sale and leaseback
transaction is permitted by, and the Issuer applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"--Asset Sales."
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES
The Indenture will provide that the Issuer (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Issuer to, transfer, convey, sell,
lease or otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary
of the Issuer to any Person (other than the Issuer or a Wholly Owned Restricted
Subsidiary of the Issuer), unless (a) such transfer, conveyance, sale, lease or
other disposition is of all the Capital Stock of such Wholly Owned Restricted
Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale,
lease or other disposition are applied in accordance with the covenant described
above under the caption "Repurchase at the Option of Holders--Asset Sales," and
(ii) will not permit any Wholly Owned Restricted Subsidiary of the Issuer to
issue any of its Equity Interests (other than, if necessary, shares of its
Capital Stock constituting directors' qualifying shares) to any Person other
than to the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer except
that a Wholly Owned Restricted Subsidiary of the Issuer may issue shares of
common stock with no preferences or special rights or privileges and with no
redemption or prepayment provisions provided the cash Net Proceeds from such
issuance of such common stock are applied in accordance with the covenant
described under the caption "Repurchase at the Option of Holders--Asset Sales."
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Issuer will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Issuer which is PARI PASSU with
or subordinate in right of payment to the Notes ("Guaranteed Indebtedness"),
unless (i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a "Subsidiary
Guarantee") of payment of the Notes by such Restricted Subsidiary and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Issuer or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided that this paragraph shall not be applicable to
any Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not incurred in connection with, or in
contemplation
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of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness
is (A) PARI PASSU with the Notes, then the Guarantee of such Guaranteed
Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated to the Notes, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Issuer, of all of the Issuer's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
BUSINESS ACTIVITIES
The Issuer will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Issuer and its Restricted Subsidiaries taken as a
whole.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Issuer
(or MSC, as the case may be) will furnish to the holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Issuer
(or MSC, as the case may be) were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
from certified independent accountants and (ii) all current reports that would
be required to be filed with the Commission on Form 8-K if the Issuer (or MSC,
as the case may be) were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Issuer (or MSC,
as the case may be) will file a copy of all such information and reports with
the Commission for public availability (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Issuer and MSC have agreed
that, for so long as any Notes remain outstanding, they will furnish to the
holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
RESTRICTIVE COVENANT OF MSC
MSC will covenant and agree that it will not engage in any activities other
than holding 100% of the capital stock of the Issuer and providing services to
and management of the Issuer and it will not incur any liabilities other than
any liabilities relating to the Guarantee of the Issuer's obligations pursuant
to the Credit Facility, the Guarantee of the Notes, the Guarantee of the 2003
Notes, the Guarantee of any Indebtedness permitted by the covenant "--Incurrence
of Indebtedness and Issuance of Preferred Stock" and any other obligations or
liabilities incidental to holding 100% of the capital stock of the Issuer.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination
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provisions of the Indenture); (iii) failure by the Issuer to comply with the
provisions described under the captions "--Change of Control," "--Asset Sales,"
or "Merger, Consolidation, or Sale of Assets;" (iv) failure by the Issuer for 30
days after notice from the Trustee or at least 25% in principal amount of the
Notes then outstanding to comply with the provisions described under the
captions "--Restricted Payments" or "--Incurrence of Indebtedness and Issuance
of Preferred Stock;" (v) failure by the Issuer for 60 days after notice from the
Trustee or at least 25% in principal amount of the Notes then outstanding to
comply with any of its other agreements in the Indenture or the Notes; (vi)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Issuer or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by the Issuer or any of its Restricted Subsidiaries) whether
such Indebtedness or Guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $15.0 million or more; (vii) failure by the Issuer or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $15.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days; and (viii) certain events of bankruptcy or insolvency with
respect to the Issuer or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately; provided, however, that if any
Indebtedness or Obligation is outstanding pursuant to the Credit Facility, upon
a declaration of acceleration by the holders of the Notes or the Trustee, all
principal and interest under the Indenture shall be due and payable upon the
earlier of (x) the day which is five Business Days after the provision to the
Issuer, the Credit Agent and the Trustee of such written notice of acceleration
or (y) the date of acceleration of any Indebtedness under the Credit Facility;
and provided, further, that in the event of an acceleration based upon an Event
of Default set forth in clause (vi) above, such declaration of acceleration
shall be automatically annulled if the holders of Indebtedness which is the
subject of such acceleration have rescinded their declaration of acceleration in
respect of such Indebtedness or such Payment Default shall have been cured or
waived within 30 days thereof and no other Event of Default has occurred during
such 30-day period which has not been cured, paid or waived. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Issuer or any of its Significant
Subsidiaries all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuer with the
intention of avoiding payment of the premium that the Issuer would have had to
pay if the Issuer then had elected to redeem the Notes pursuant to the optional
redemption provisions of the Indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the Notes. If an Event of Default occurs prior to March 15, 2003
by reason of any willful action (or inaction) taken (or not taken) by or on
behalf of the Issuer with the intention of avoiding the prohibition on
redemption of the Notes prior to March 15, 2003, then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
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The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Issuer
(other than the Guarantor) or the Guarantor, as such, shall have any liability
for any obligations of the Issuer or the Guarantor under the Notes, the
Indenture, the Guarantee or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes and all obligations
of the Guarantor under the Guarantee ("Legal Defeasance") except for (i) the
rights of holders of outstanding Notes to receive payments in respect of the
principal of, premium and Liquidated Damages, if any, and interest on such Notes
when such payments are due from the trust referred to below, (ii) the Issuer's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Issuer's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Issuer may, at its
option and at any time, elect to have the obligations of the Issuer and the
Guarantor released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium and Liquidated Damages, if any, and interest on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Issuer must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Issuer shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Issuer has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Issuer shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that
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the holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Issuer or any of its Subsidiaries is a party or
by which the Issuer or any of its Subsidiaries is bound; (vi) the Issuer must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Issuer must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Issuer with the intent of preferring the holders of Notes over the other
creditors of the Issuer with the intent of defeating, hindering, delaying or
defrauding creditors of the Issuer or others; and (viii) the Issuer must deliver
to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuer may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuer is not required to transfer or exchange any Note selected
for redemption. Also, the Issuer is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing Default or Event of
Default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the holders of a majority in principal amount of the
then outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (i) reduce the
principal amount of Notes whose holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption
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"--Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of holders of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Issuer, the Guarantor and the Trustee may amend or supplement the Indenture
or the Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Issuer's and the Guarantor's obligations to
holders of Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the holders of Notes or
that does not adversely affect the legal rights under the Indenture of any such
holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Notes, unless such holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to The Musicland Group,
Inc., 10400 Yellow Circle Drive, Minnetonka, Minnesota 55343-9143; Attention:
General Counsel.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes initially will be represented by one or more New Notes in
registered, global form without interest coupons (collectively, the "Global
Notes") and will be deposited upon issuance with the Trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant as described below. Except in the limited
circumstances described below, under "Exchange of Book-Entry Notes for
Certificated Notes," owners of beneficial interests in a Global Note will not be
entitled to receive delivery of certificated Notes.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below. See
"Exchange of Book-Entry Notes for Certificated Notes."
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
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DEPOSITORY PROCEDURES
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organization. Access to DTC's
system is also available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and Indirect Participants.
DTC has also advised the Issuer that pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of Global Notes and (ii) ownership of such interests in the Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through records maintained by DTC (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations (including Euroclear and Cedel Bank) that are Participants in such
system. Euroclear and Cedel Bank will hold interests in the Global Notes on
behalf of their Participants through customers' securities accounts in their
respective names on the books of their respective depositaries, which are Morgan
Guaranty Trust Company of New York, Brussels office, as operator of Euroclear,
and Citibank, N.A. as operator of Cedel. The depositaries, in turn, will hold
such interests in the Global Notes in customers' securities accounts in the
depositaries' names on the books of DTC. All interests in a Global Note,
including those held through Euroclear or Cedel Bank, may be subject to the
procedures and requirements of DTC. Those interests held by Euroclear or Cedel
Bank may be also be subject to the procedures and requirements of such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a Global Note to such persons may be limited to
that extent. Because DTC can act only on behalf of Participants, which in turn
act on behalf of Indirect Participants and certain banks, the ability of a
person having a beneficial interest in a Global Note to pledge such interest to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interest, may be affected by the lack of physical
certificate evidencing such interest. For certain other restrictions on the
transferability of the Notes, see "Exchange of Book-Entry Notes for Certificated
Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium and Liquidated Damages, if
any, and interest on a Global Note registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee in its capacity as the
registered holder under the Indenture. Under the terms of the Indenture, the
Issuer and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Issuer, the Trustee nor any agent of the Issuer or the
Trustee has or will have any responsibility or liability for (i) any aspect of
DTC's records or any Participant's or Indirect Participant's records relating to
or payments made on account of beneficial ownership interests in the Global
Notes, or for maintaining, supervising or reviewing any of DTC's records
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or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants.
DTC has advised the Issuer that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Notes as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or the Issuer. Neither the Issuer nor
the Trustee will be liable for any delay by DTC or its Participants in
identifying the beneficial owners of the Notes, and the Issuer and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes. Except
for trades involving only Euroclear and Cedel Bank participants, interests in
the Global Notes will trade in DTC's Same-Day Funds Settlement System and
secondary market trading activity in such interests will therefore settle in
immediately available funds, subject in all cases to the rules and procedures of
DTC and its participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and Cedel Bank will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between Participants in DTC, on the one
hand, and Euroclear or Cedel Bank participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel Bank, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Cedel Bank, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedel Bank, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day fund
settlement applicable to DTC. Euroclear participants and Cedel Bank participants
may not deliver instructions directly to the depositaries for Euroclear or Cedel
Bank.
Because of time zone differences, the securities accounts of a Euroclear or
Cedel Bank participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Cedel Bank participant, during the securities
settlement processing day (which must be a business day for Euroclear or Cedel
Bank) immediately following the settlement date of DTC. Cash received in
Euroclear or Cedel Bank as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel Bank participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel Bank cash account only as of the business day for
Euroclear or Cedel Bank following DTC's settlement date.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants to
whose account DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
Participant or Participants has or have given direction. However, if there is an
Event of Default under the Notes, DTC reserves the right to exchange Global
Notes for legended Notes in certificated form, and to distribute such Notes to
its Participants.
The information in this section concerning DTC, Euroclear and Cedel Bank and
their book-entry systems has been obtained from sources that the Issuer believes
to be reliable, but the Issuer takes no responsibility for the accuracy thereof.
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Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in DTC,
Euroclear and Cedel Bank, they are under no obligation to perform or to continue
to perform such procedures, and such procedures may be discontinued at any time.
Neither the Issuer or the Trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel Bank or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Issuer that it is unwilling or
unable to continue as depositary for the Global Note and the Issuer thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Issuer, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be continuing
to occur a Default or an Event of Default with respect to the Notes. In
addition, beneficial interests in a Global Note may be exchanged for
certificated Notes upon request but only upon at least 20 days prior written
notice given to the Trustee by or on behalf of DTC in accordance with customary
procedures. In all cases, certificated Notes delivered in exchange for any
Global Note or beneficial interest therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
next day funds to the accounts specified by the Global Note Holder. With respect
to Certificated Notes, the Issuer will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. The Issuer expects that secondary trading in the Certificated Notes
will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary
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course of business consistent with past practices (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the assets
of the Issuer and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "--Change
of Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Issuer or any of its Restricted
Subsidiaries of Equity Interests of any of the Issuer's Restricted Subsidiaries,
in the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess of
$2.0 million or (b) for net proceeds in excess of $2.0 million. Notwithstanding
the foregoing, the following will not be deemed to be Asset Sales: (i) a
transfer of assets by the Issuer to a Wholly Owned Restricted Subsidiary or by a
Wholly Owned Restricted Subsidiary to the Issuer or to another Wholly Owned
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned
Restricted Subsidiary to the Issuer or to another Wholly Owned Restricted
Subsidiary, and (iii) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments."
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such sale and leaseback transaction (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH FLOW COVERAGE RATIO" means, for any given period and person, the ratio
of (i) Consolidated Cash Flow divided by (ii) Consolidated Interest Expense
(except dividends paid or payable in additional shares of Capital Stock (other
than Disqualified Stock)) in each case, without duplication; provided, however,
that if an acquisition or sale of a person, business or asset or the issuance or
repayment of Indebtedness occurred during the given period or subsequent to such
period on or prior to the date of calculation, then such calculation for such
period shall be made on a Pro Forma Basis.
"CASH EQUIVALENTS" means (a) United States dollars, (b) securities issued or
directly and fully guaranteed or insured by the United States government or any
agency or instrumentality thereof having maturities of not more than six months
from the date of acquisition, (c) certificates of deposit and eurodollar time
deposits with maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million, (d) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (b) and (c) above entered into with any financial institution meeting
the qualifications specified in clause (c) above, (e) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Ratings Group and in each case maturing within six months after the date
of acquisition and (f) any fund investing exclusively in investments of the
types described in clauses (a) through (e) above.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of MSC taken as a whole to any "person" (as
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such term is used in Section 13(d)(3) of the Exchange Act) other than the
Principals or their Related Parties (as defined below), (ii) the adoption of a
plan relating to the liquidation or dissolution of MSC, (iii) the consummation
of any transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of MSC
(measured by voting power rather than number of shares), (iv) the first day on
which a majority of the members of the Board of Directors of MSC are not
Continuing Directors or (v) MSC consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, MSC, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of MSC is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of MSC outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance).
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) Consolidated Interest Expense of such Person and its Subsidiaries for
such period, to the extent deducted in computing such Consolidated Net Income,
plus (iv) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period; provided, however, that
if an acquisition or sale of a person, business or asset or the incurrence or
repayment of Indebtedness occurred during the given period or subsequent to such
period and on or prior to the date of calculation, then such calculation shall
be made on a Pro Forma Basis. Notwithstanding the foregoing, the provision for
taxes on the income or profits of, and the depreciation and amortization and
other non-cash charges of, a Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
that a corresponding amount would be permitted at the date of determination to
be dividended to the Issuer by such Subsidiary without prior governmental
approval (that has not been obtained), and without direct or indirect
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED INTEREST EXPENSE" means, for any given period and Person, the
aggregate of (i) the interest expense in respect of all Indebtedness of such
person and its Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including, without duplication, amortization
of original issue discount on any such Indebtedness, all non-cash interest
payments, the interest portion of any deferred payment obligation, the interest
component of Capital Lease Obligations, and amortization of deferred financing
fees) and (ii) the product of (a) all cash dividend payments (and, in the case
of a Person that is a Restricted Subsidiary, dividends paid or payable in
additional shares of Disqualified Stock) on any series of preferred stock of
such Person and its Restricted Subsidiaries payable
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to a party other than the Issuer or a wholly owned Subsidiary, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, on a consolidated basis and in accordance
with GAAP; provided, however, that for the purpose of the Cash Flow Coverage
Ratio, Consolidated Interest Expense shall be calculated on a Pro Forma Basis.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles shall
be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Issuer or one of its Restricted
Subsidiaries for purposes of the covenant described under the covenant
"Incurrence of Indebtedness and Issuance of Preferred Stock."
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of MSC who (i) was a member of such Board of Directors on
the date of the original issuance of the Notes or (ii) was nominated for
election to such Board of Directors with the approval of, or whose election to
the Board of Directors of MSC was ratified by, at least a majority of the
Continuing Directors who were members of such Board of Directors at the time of
such nomination or election.
"CREDIT AGENT" means Morgan Guaranty Trust Company of New York, in its
capacity as Agent for the lenders party to the Credit Facility or any successor
thereto or any person otherwise appointed.
"CREDIT FACILITY" means (i) the Credit Agreement dated October 7, 1994 among
the Issuer, MSC, the various lenders party thereto from time to time and Morgan
Guaranty Trust Company of New York, as Agent, as amended by an Amendment No. 1
dated as of February 24, 1995, an Amendment No. 2 dated as of April 9, 1996, an
Amendment No. 3 dated as of October 18, 1996, an Amendment No. 4 dated as of
June 16, 1997 and an Amendment No. 5 effective as of the Closing of the
Offering, together with the related documents thereto (including any guarantee
agreement and securing documents), and (ii) the Term Loan Agreement dated as of
June 16, 1997 among the Issuer, MSC, various financial institutions and Morgan
Guaranty Trust Company of New York, as agent, together with the related
documents thereto (including any guarantee agreement and securing documents), in
each case, as such agreements may be amended (including any amendment and
restatement thereof), supplemented or otherwise modified or replaced (including
with other lenders) from time to time and including any agreement extending the
maturity of, refinancing, modifying, increasing, substituting for or otherwise
restructuring (including, but not limited to, the inclusion of additional or
different or substitute lenders or bank agents thereunder) all or any portion of
the Indebtedness, including changing the borrowing limits, under such agreement
or any successor or replacement agreement, regardless of whether the Credit
Facility or any portion thereof was outstanding or in effect at the time of such
replacement, refinancing, increase, substitution, extension, restructuring,
supplement or modification.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
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"DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under the
Credit Facility and (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is $25 million or more and that has been designated by
the Issuer as "Designated Senior Debt".
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature; provided, however,
that any Capital Stock that would not qualify as Disqualified Stock but for
change of control provisions shall not constitute Disqualified Stock if the
provisions are not more favorable to the holders of such Capital Stock than the
provisions described under "--Change of Control" applicable to the holders of
the Notes.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Issuer and its
Subsidiaries (other than Indebtedness under the Credit Facility) in existence on
the date of the Indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board, or in such other statements by such other
entity as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances as of the date of
determination; provided, however, that except as otherwise provided, all
calculations made for purposes of determining compliance with the terms of the
covenants set forth in "--Certain Covenants" and other provisions of the
Indenture shall utilize GAAP in effect at the date of the Indenture.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable or
obligations with respect to consigned inventory, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is assumed by such
Person) and, to the extent not otherwise included, the Guarantee by such Person
of any indebtedness of any other Person. The amount of any Indebtedness
outstanding as of any date shall be (i) the accreted value thereof, in the case
of any Indebtedness that does not require current payments of interest, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
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"INSOLVENCY OR LIQUIDATION PROCEEDING" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding, relative to the Issuer or to the creditors
of the Issuer, as such, or to the assets of the Issuer, or (ii) any liquidation,
dissolution, reorganization or winding up of the Issuer, whether voluntary or
involuntary and involving insolvency or bankruptcy, or (iii) any assignment for
the benefit of creditors or any other marshaling of assets and liabilities of
the Issuer.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Issuer or any Restricted Subsidiary of the Issuer sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Issuer such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Issuer, the Issuer shall
be deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Restricted
Payments."
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Issuer
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than holders of the
Notes being offered hereby and lenders under the Credit Facility) of the Issuer
or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable
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prior to its stated maturity; and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or assets
of the Issuer or any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED BUSINESS" means any of the businesses and any other businesses
related to the businesses engaged in by the Issuer and its respective Restricted
Subsidiaries on the date of the Indenture.
"PERMITTED INVESTMENTS" means (a) any Investment in the Issuer or in a
Wholly Owned Restricted Subsidiary of the Issuer that is engaged in a Permitted
Business; (b) any Investment in Cash Equivalents; (c) any Investment by the
Issuer or any Restricted Subsidiary of the Issuer in a Person, if as a result of
such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of
the Issuer that is engaged in a Permitted Business or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Issuer or a
Wholly Owned Restricted Subsidiary of the Issuer that is engaged in a Permitted
Business; (d) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
the Issuer or MSC; (f) stock, obligations or securities received in satisfaction
of judgment and (g) Hedging Obligations entered into in the ordinary course of
business and otherwise permitted under the Indenture.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Issuer or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Issuer or any of its Restricted Subsidiaries; provided that:
(i) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded or by the Issuer.
"PRINCIPALS" means Messrs. Eugster, Benson, Wachsman and Ross.
"PRO FORMA BASIS" means, for purposes of determining Consolidated Net Income
in connection with the Cash Flow Coverage Ratio (including in connection with
the covenants described above under the captions "--Certain
Covenants--Restricted Payments" and "--Merger, Consolation, or Sale of Assets"
and the incurrence of Indebtedness pursuant to the first sentence of the
covenant described above under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"), giving pro forma effect to (x)
any acquisition, by way of merger, consolidation or otherwise, or sale of a
person, business or asset, related incurrence, repayment or financing of
Indebtedness or other related transactions, including any Restructuring Charges
which would otherwise be accounted for as an adjustment permitted by Regulation
S-X under the Securities Act or on a pro forma basis under GAAP, or (y) any
incurrence, repayment or refinancing of any Indebtedness and the application of
the proceeds therefrom; in each case, which occurred during the relevant period
or subsequent to such period and on or prior to the date of
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calculation, as if such acquisition or sale and related transactions and any
Restructuring Charges, incurrence, repayment or refinancing were realized on the
first day of the relevant period permitted by Regulation S-X under the
Securities Act or on a pro forma basis under GAAP. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of a
person, business or asset, the amount of income or earnings relating thereto,
and the amount of Consolidated Interest Expense associated with any Indebtedness
issued in connection therewith, the pro forma calculations will be determined in
good faith by the chief financial officer of the Issuer as specified in an
Officers' Certificate of the Issuer delivered to the Trustee. Furthermore, in
calculating the Cash Flow Coverage Ratio, (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the determination date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the determination date; (2) if interest on any
Indebtedness actually incurred on the determination date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the determination date will be deemed to have been in effect during
the relevant period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to interest rate swaps or similar interest rate
protection Hedging Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"PUBLIC EQUITY OFFERING" means a public offering of Equity Interests (other
than Disqualified Stock) of (i) the Issuer; or (ii) MSC to the extent the net
proceeds thereof are contributed to the Issuer as a capital contribution, that,
in each case, results in the net proceeds to the Issuer of at least $25.0
million.
"RELATED PARTY" with respect to any Principal means any spouse or immediate
family member or any controlled Affiliate of any such Principal, any trusts for
the benefit of any such Principal or such Principal's spouse or immediate family
or, in the event of the incompetence or death of any such Principal, such
Principal's estate, executor, administrator, committee or other personal
representative, in each case who will beneficially own or have the right to
acquire, directly or indirectly, Voting Stock of MSC.
"REPRESENTATIVE" means the trustee, agent or representative for any Senior
Debt.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"RESTRUCTURING CHARGES" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with the Issuer or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act;
provided that any cost savings of less than $10.0 million, shall be evidenced by
an Officers' Certificate delivered to the Trustee and any cost savings of $10.0
million or more shall be evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee.
"SENIOR DEBT" means (i) all Indebtedness outstanding under the Credit
Facility, including any Guarantee thereof and all Hedging Obligations with
respect thereto, (ii) any other Indebtedness permitted to be incurred by the
Issuer under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes, (iii) all Obligations with
respect to the foregoing, and (iv) all interest with respect to the foregoing
clauses (i) and (ii) accruing during the pendency of an Insolvency or
Liquidation Proceeding, whether or not allowed or allowable thereunder.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will not
include (w) any liability for federal, state, local or other taxes owed or owing
by the Issuer, (x) any Indebtedness of the Issuer to any of its Subsidiaries or
other Affiliates, (y) any trade payables or liability to trade creditors or
obligations with respect to consigned inventory arising in the
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ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities) or (z) any Indebtedness that is incurred in
violation of the Indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the
Board of Directors; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Issuer or any Restricted
Subsidiary of the Issuer unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Issuer or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Issuer; (c) is a Person with respect to which
neither the Issuer nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (d) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
the Issuer or any of its Restricted Subsidiaries; and (e) has at least one
director on its board of directors that is not a director or executive officer
of the Issuer or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of the Issuer or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under the
caption "Certain Covenants-- Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Issuer as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Issuer shall be in default of such
covenant). The Board of Directors of the Issuer may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Issuer of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," and (ii)
no Default or Event of Default would be in existence following such designation.
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"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person and/or by one or more Wholly Owned Subsidiaries of such Person.
"2003 INDENTURE" means the Indenture dated as of June 17, 1993, among the
Issuer, MSC and Harris Trust Savings Bank, as Trustee, relating to the 2003
Notes, as amended from time to time.
"2003 NOTES" means the 9% Senior Subordinated Notes due 2003 of the Issuer
issued pursuant to the 2003 Indenture.
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DESCRIPTION OF EXISTING FINANCING ARRANGEMENTS
The following is a summary of certain indebtedness incurred by the Company,
as such indebtedness exists on the date hereof. This summary is qualified in its
entirety by reference to the definitive agreements and instruments governing the
indebtedness.
CREDIT FACILITY
REVOLVER AGREEMENT
The Revolver Agreement Amendment, which became effective upon the closing of
the sale of the Old Notes and is reduces the combined aggregate commitments
available under the Credit Facility from $295.0 million to $182.0 million
(assuming net proceeds from the Offering of $144.3 million). As long as
indebtedness of $50.0 million is outstanding under the Term Loan Agreement, the
aggregate borrowings available under the Revolver Agreement, as amended, will be
$132.0 million or, if less, 60% of the eligible inventory as of the last day of
the most recent fiscal month. If the indebtedness under the Term Loan Agreement
is paid when due, or prepaid, the aggregate borrowings available under the
Revolver Agreement, as amended, increases to $182.0 million or, if less, 60% of
the eligible inventory. "Eligible Inventory" is defined to include readily
marketable assets of MGI of the type sold in the ordinary course of its
business, provided that the Banks may exclude certain types of inventory that
are determined not to be readily marketable or returnable to a vendor. If at any
time the amount outstanding under the Revolver Agreement exceeds the amount
available under the Eligible Inventory limit, MGI must repay the amount of such
excess. Up to $50.0 million of the aggregate available commitments may be
borrowed in the form of letters of credit. MGI had no borrowings under the
Revolver Agreement at December 31, 1997 and had borrowings of $146.0 million at
March 1, 1998. The highest balance outstanding under the Revolver Agreement
during the year ended December 31, 1997 was $273.0 million and the average daily
balance was $238.5 million. However, in 1997 the Company maintained an average
month-end cash balance of $45.8 million and did not borrow the $50 million under
the Term Loan Agreement until September 15, 1997. The weighted average interest
rate of the Revolver, based on the average daily balance, was 8.0%. The Revolver
Agreement will expire, and all amounts outstanding thereunder must be repaid, on
October 7, 1999. MGI may borrow and repay amounts under the Revolver Agreement
from time to time before such date.
Interest is payable monthly on borrowings under the Revolver Agreement at
rates based on, at the option of MGI, (i) Morgan's prime lending rate or (ii)
the one, two or three months London Interbank Offered Rate for U.S. dollar
deposits ("LIBOR"). In each case, MGI has a specified additional margin that is
currently 0.25% for loans based on Morgan's prime rate, increasing to 0.5% on
April 30, 1998, and 1.75% for loans based on LIBOR, increasing to 2.0% on April
30, 1998. The default interest rate is Morgan's prime rate plus 2.25%,
increasing to 2.5% on April 30, 1998.
The Revolver Agreement contains covenants that, subject to certain
exceptions, restrict the Company's ability to: (i) make investments and capital
expenditures; (ii) incur debt and issue guarantees; (iii) pay dividends on or
make other distributions with respect to its capital stock or redeem or purchase
any capital stock; (iv) make any principal payments on or redeem or purchase any
subordinated debt; (v) sell assets; (vi) create, assume or suffer to exist liens
on its assets; (vii) engage in transactions with affiliates; (viii) amend the
Company's certificates of incorporation; and (ix) engage in mergers or sell,
lease or otherwise transfer all or any substantial part of its assets to any
other person. The Revolver Agreement Amendment does permit use of proceeds of
the Offering to repay the Mortgage Notes Payable and redeem the 2003 Notes in
certain circumstances. The Revolver Agreement prohibits MSC from engaging in any
activity other than owning MGI and providing services to and management of MGI
and prohibits MGI from primarily engaging in any business other than a business
of the same general type conducted on the date of the Revolver Agreement.
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The Revolver Agreement also requires that the Company satisfy certain
financial tests and maintain certain financial ratios. In addition, for any
borrowings which result in a net increase in total outstanding borrowings, total
trade accounts payable must be equal to or greater than the total outstanding
borrowings. The Company would not have been in compliance with the financial
covenants in the Revolver Agreement without certain amendments and waivers which
were received throughout 1996 and 1997, with the last such amendment completed
in June 1997 concurrent with entering into the Term Loan Agreement. As amended
or waived, all covenants and financial tests were complied with for all quarters
through December 31, 1997.
Upon the occurrence of an event of default under the Revolver Agreement, the
Banks may cease making loans and terminate the Revolver Agreement and declare
all amounts outstanding under the Revolver Agreement immediately due and
payable. The Revolver Agreement specifies a number of "events of default"
including, among others, the failure to make timely principal and interest
payments or to perform the covenants or to meet the financial tests or maintain
the financial ratios contained therein.
MGI's obligations under the Revolver Agreement are guaranteed by MSC and the
wholly-owned subsidiaries of MGI and secured by a pledge by MGI of all the
capital stock of its wholly-owned consolidated subsidiaries.
TERM LOAN AGREEMENT
The Term Loan Agreement provides for a loan of $50 million, which amount was
borrowed on September 15, 1997 and must be repaid in installments of $25 million
on each of December 14, 1998 and February 15, 1999. Interest is payable monthly
at rates equal to, at the option of MGI, (i) Morgan's prime lending rate plus
1.0% or (ii) one month LIBOR plus 2.0%. The default interest rate is Morgan's
prime rate plus 3.0%. All obligations under the Term Loan are guaranteed by MSC
and MGI's wholly-owned consolidated subsidiaries and are secured by a
first-priority lien on all inventory of MGI and its wholly-owned consolidated
subsidiaries.
The Term Loan Agreement contains a trailing four quarters EBITDA test of $25
million and requires that the aggregate value of all inventory of MGI and its
wholly-owned consolidated subsidiaries be at all times equal to or greater than
$150 million. The Term Loan Agreement prohibits MSC from engaging in any
activity other than owning MGI and providing services to and management of MGI
and prohibits MGI from primarily engaging in any business other than a business
of the same general type conducted on the date of the Term Loan Agreement. In
addition, the Term Loan Agreement contains a covenant that, subject to certain
exceptions, restricts the Company's ability to create, assume or suffer to exist
liens on its assets. All covenants and financial tests have been complied with
for all quarters through December 31, 1997.
Upon the occurrence of an event of default under the Term Loan Agreement,
the Banks may terminate the Term Loan Agreement and declare all amounts
outstanding immediately due and payable. The Term Loan Agreement specifies a
number of "events of default" including, among others, an acceleration of the
Revolver Agreement (but not an event of default under the Revolver Agreement
without acceleration) and the failure to make timely principal and interest
payments or to perform the covenants or to meet the financial tests contained
therein.
9% SENIOR SUBORDINATED NOTES DUE 2003
In 1993 MGI issued $110 million principal amount of 2003 Notes. The 2003
Notes bear interest at the rate of 9%, payable semi-annually. The 2003 Notes
beginning on June 15, 1998 may be redeemed, at the option of MSC, at a
redemption price of 103.375% of their principal amount. The indenture for the
2003 Notes (the "2003 Indenture") specifies that the redemption price declines
annually at June 15th, from 103.375% at June 15, 1998, to 102.250% at June 15,
1999, to 101.125% at June 15, 2000 and to 100% of the principal amount on or
after June 15, 2001. The payment of the principal of, and premium, if any, and
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interest on, the 2003 Notes (other than credit for previously acquired or
redeemed 2003 Notes) is subordinated in right of payment as set forth in the
2003 Indenture, to the payment when due of all Senior Debt (as defined in the
2003 Indenture) of the Company.
The 2003 Indenture contains certain restrictions with respect to the conduct
of the Company's business and certain restrictive covenants, including among
others, limitations on the Company's ability to incur additional indebtedness,
pay dividends or make other distributions on MSC's capital stock, make
investments in, or loans to, any person, dispose of assets, create liens or
incur any indebtedness which is subordinate in right of payment to Senior Debt,
unless such indebtedness is subordinate in right of payment to, or ranks PARI
PASSU with, the 2003 Notes. In addition, MSC may not effect a merger or
consolidation unless certain financial tests are met.
The 2003 Indenture specifies a number of "events of default" including,
among others, a failure to make timely principal or interest payments or to
perform the covenants contained therein. If an event of default occurs and is
continuing, the Trustee under the 2003 Indenture or the holders of a specified
principal amount of the outstanding 2003 Notes may declare the principal of and
accrued but unpaid interest on all the 2003 Notes to be due and payable on the
date provided for in accordance with the 2003 Indenture. An acceleration of the
2003 Notes may, under certain circumstances, be rescinded by the holders of a
majority of the aggregate principal amount of the then outstanding 2003 Notes.
In June 1997, the holders of a majority of the aggregate principal amount of
the 2003 Notes approved an amendment to the 2003 Indenture which allowed the
lien on the Company's inventory required by the Revolver Agreement and the Term
Loan Agreement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material United States federal
income tax considerations applicable to the initial holders of the Notes. This
summary is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), regulations, rulings and decisions currently in effect,
all of which are subject to change (possibly with retroactive effect). The
discussion does not purport to deal with all aspects of the United States
federal taxation that may be relevant to particular investors in light of their
particular circumstances (for example, to persons holding Notes as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes), nor does it discuss the United States
federal income tax considerations applicable to certain types of investors
subject to special treatment under the federal income tax laws (for example,
insurance companies, tax-exempt organizations, financial institutions and
persons who are not United States Holders or United States Alien Holders (each
as defined below)). In addition, the discussion does not consider the effect of
any foreign, state, local or other tax laws that may be applicable to a
particular investor. The discussion assumes that investors hold the Notes as
"capital assets" within the meaning of Section 1221 of the Code.
The Issuer intends to treat the Notes as indebtedness and not as equity for
United States federal income tax purposes, and the United States federal income
tax considerations described below are based on that characterization. Such
treatment, however, is not binding on the Internal Revenue Service ("IRS") (or
the Courts), and there can be no assurance that the IRS would not argue (or that
a court would not hold) that the Notes should be treated as equity for federal
income tax purposes.
HOLDERS OF THE NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION.
As used herein, the term "United States Holder" means an owner of a Note
that is, for United States federal income tax purposes, (i) a citizen or
resident of the United States, (ii) a corporation created or organized in or
under the laws of the United States or of any political subdivision thereof, or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of its source. The term also includes certain former
citizens and certain former long-term residents of the United States.
As used herein, the term "United States Alien Holder" means an owner of a
Note that is, for United States federal income tax purposes, (i) a nonresident
alien individual, (ii) a foreign corporation, (iii) a nonresident alien
fiduciary of a foreign estate or trust or (iv) a foreign partnership one or more
of the members of which is, for United States federal income tax purposes, a
nonresident alien individual, a foreign corporation or a nonresident alien
fiduciary of a foreign estate or trust.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
INTEREST ON A NOTE
The Notes were not issued with original issue discount for United States
federal income tax purposes. Accordingly, interest and Liquidated Damages, if
any, on a Note will generally be taxable to a United States Holder as ordinary
interest income at the time it accrues or is received in accordance with the
United States Holder's method of accounting for United States federal income tax
purposes.
SALE OR RETIREMENT OF A NOTE
Upon the sale or retirement of a Note, a United States Holder will recognize
taxable gain or loss equal to the difference between the amount realized on the
sale or retirement and such Holders adjusted tax basis in the Note.
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EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not result in any United States federal income tax consequences to the United
States Holders. When a United States Holder exchanges an Old Note for a New Note
pursuant to the Exchange Offer, the Holder will have the same adjusted tax basis
and holding period in the New Note as in the Old Note immediately before the
exchange.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate United States Holders may be subject to backup
withholding at a rate of 31% on payments of principal, premium and interest
(including Liquidated Damages and/or original issue discount, if any) on, and
the proceeds of disposition of, a Note. Backup withholding will apply only if
the United States Holder (i) fails to furnish its Taxpayer Identification Number
("TIN") which, for an individual, would be his Social Security number, (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed to
properly report payments of interest or dividends or (iv) under certain
circumstances, fails to certify, under penalties of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is subject
to backup withholding for failure to report interest and dividend payments.
United States Holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a United States
Holder will be allowed as a credit against such Holders United States federal
income tax liability and may entitle such Holder to a refund, provided that the
required information is furnished to the IRS.
TAX CONSEQUENCES TO UNITED STATES ALIEN HOLDERS
Under present United States federal law, and subject to the discussion below
concerning backup withholding, payments of principal, interest (including
Liquidated Damages, if any) and premium on the Notes by the Issuer or any paying
agent to any United States Alien Holder, and gain realized on the sale, exchange
or other disposition of such Note, will not be subject to United States federal
income or withholding tax, provided that: (i) such Holder does not own, actually
or constructively, 10 percent or more of the total combined voting power of all
classes of stock of the Issuer entitled to vote, is not a controlled foreign
corporation related, directly or indirectly, to the Issuer through stock
ownership, and is not a bank receiving interest described in Section
881(c)(3)(A) of the Code; (ii) the statement requirement set forth in Section
871(h) or Section 881(c) of the Code has been fulfilled with respect to the
beneficial owner, as discussed below; (iii) such Holder is not an individual who
is present in the United States for 183 days or more in the taxable year of
disposition, or such individual does not have a "tax home" (as defined in
Section 911(d)(3) of the Code) or an office or other fixed place of business in
the United States; and (iv) such payments and gain are not effectively connected
with the conduct by such Holder of a trade or business in the United States.
As noted above, the Issuer intends to treat the Notes as indebtedness for
United States federal income tax purposes. No assurance can be given, however,
that the Issuer's treatment will not be challenged by the IRS. If the Notes were
ultimately treated as equity rather than debt for United States federal income
tax purposes, the portfolio interest exception would not apply and withholding
tax at a flat rate of 30% (or a lower rate under an applicable income tax
treaty) would be imposed on the payments of interest and Liquidated Damages, if
any, on Notes to the extent of the Issuer's current or accumulated earnings and
profits or on the entire amounts of such payments if the withholding agent does
not know or cannot reasonably estimate the amount of such earnings and profits.
Further, any such withholding could commence when the IRS first asserted that
the Notes constituted equity; in such event, if the IRS did not ultimately
prevail, the United States Alien Holders would be able to recover the tax
withheld by filing a claim for refund with the IRS.
82
<PAGE>
CERTAIN CERTIFICATION REQUIREMENTS
Sections 871(h) and 881(c) of the Code require that, in order to obtain the
portfolio interest exemption from the withholding tax described in the
paragraphs above, either the beneficial owner of the Note, or a securities
clearing organization, bank or other financial institution that holds customers
securities in the ordinary course of its trade or business (a "Financial
Institution") and that is holding the Note on behalf of such beneficial owner,
file a statement with the withholding agent to the effect that the beneficial
owner of the Note is not a United States Holder. Under current United States
Treasury Regulations, such requirement will be fulfilled if the beneficial owner
of a Note certifies on IRS Form W-8, under penalties of perjury, that it is not
a United States Holder and provides its name and address, and any Financial
Institution holding the Note on behalf of the beneficial owner files a statement
with the withholding agent to the effect that it has received such a statement
from the Holder (and furnishes the withholding agent with a copy thereof). Under
recently finalized United States Treasury Regulations, which are generally
applicable to payments made after December 31, 1998, certain United States Alien
Holders would also need to provide their United States taxpayer identification
numbers on such forms in order to fulfill such requirement.
If a United States Alien Holder of a Note is engaged in a trade or business
in the United States, and if interest on the Note is effectively connected with
the conduct of such trade or business, the United States Alien Holder, although
exempt from the withholding tax discussed in the preceding paragraphs, will
generally be subject to regular United States income tax on interest and on any
gain realized on the sale, exchange or other disposition of a Note in the same
manner as if it were a United States Holder. In lieu of the certificate
described in the preceding paragraph, such a Holder will be required to provide
to the withholding agent a properly executed IRS Form 4224 (or the successor W-8
Form), in order to claim an exemption from withholding tax. Under recently
finalized United States Treasury Regulations, a United States Alien Holder may
also need to provide a United States taxpayer identification number on such form
in order to fulfill such requirement. In addition, if such United States Alien
Holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% (or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments. For purposes of the branch profits tax, interest on and any gain
recognized on the sale, exchange or other disposition of a Note will be included
in the effectively connected earnings and profits of such United States Alien
Holder if such interest or gain, as the case may be, is effectively connected
with the conduct by the United States Alien Holder of a trade or business in the
United States.
ESTATE TAXES
Under Section 2105(b) of the Code, a Note held by an individual who is not a
citizen or resident of the United States at the time of his death will not be
subject to United States federal estate tax as a result of such individual's
death, provided that the individual does not own, actually or constructively, 10
percent or more of the total combined voting power of all classes of stock of
the Issuer entitled to vote and, at the time of such individual's death,
payments with respect to such Note would not have been effectively connected to
the conduct by such individual of a trade or business in the United States.
As noted above, the Issuer intends to treat the Notes as indebtedness for
United States federal income tax purposes. No assurance can be given, however,
that the Issuer's treatment will not be challenged by the IRS. If the Notes were
ultimately treated as equity rather than debt for United States federal income
tax purposes, a United States Alien Holder who is treated as the owner of, or
has made certain lifetime transfers of, an interest in the Notes will be
required to include the value thereof in his or her gross estate for United
States federal estate tax purposes, and may be subject to United States federal
estate tax unless an applicable estate tax treaty provides otherwise.
83
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current Treasury Regulations, backup withholding (31%) will not apply
to payments by the Issuer made on a Note if the certifications required by
Sections 871(h) and 881(c) of the Code are received, provided in each case that
the Issuer or such paying agent, as the case may be, does not have actual
knowledge that the payee is a United States person.
Under current Treasury Regulations, payments on the sale, exchange or other
disposition of a Note made to or through a foreign office of a broker generally
will not be subject to backup withholding. However, if such broker is a United
States person, a controlled foreign corporation for United States tax purposes,
a foreign person 50 percent or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period or another United States related person described in Section
1.6049-5(c)(5) of the Treasury Regulations, information reporting will be
required unless the broker has in its records documentary evidence that the
beneficial owner is not a United States person and certain other conditions are
met or the beneficial owner otherwise establishes an exemption. Under recently
finalized Treasury Regulations, backup withholding may apply to any payment made
after December 31, 1998 which such broker is required to report if such broker
has actual knowledge that the payee is a United States person. Payments to or
through the United States office of a broker will be subject to backup
withholding and information reporting unless the Holder certifies, under
penalties of perjury, that it is not a United States person or otherwise
establishes an exemption.
United States Alien Holders of Notes should consult their tax advisors
regarding the application of information reporting and backup withholding in
their particular situations, the availability of an exemption therefrom, and the
procedure for obtaining such an exemption, if available. Any amounts withheld
from a payment to a United States Alien Holder under the backup withholding
rules will be allowed as a credit against such Holder's United States federal
income tax liability and may entitle such Holder to a refund, provided that the
required information is furnished to the IRS.
84
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with the resale of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until ( ,
1998) (90 days after the date of this Prospectus), all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in a Letter of Transmittal. The Company has agreed to pay all expenses incident
to the Exchange Offer (including the reasonable fees and expenses, if any, of
one counsel for the Initial Purchasers of the Old Notes) other than commissions
or concessions of any brokers or dealers and will indemnify the Holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes being offered hereby and certain other legal
matters relating to the Exchange Offer will be passed upon for the Company by
Moss & Barnett, a Professional Association, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for each of the three years ended December 31, 1997, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included here in reliance upon the
authority of said firm as experts in giving said report.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates into this Prospectus and the related
Registration Statement the following documents:
(a) Annual Report on Form 10-K for the year ended December 31, 1997
filed with the Commission (File No. 1-11014); and
85
<PAGE>
(b) The Company's Proxy Statement for the Annual Meeting of Shareholders
held on May 11, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 subsequent to the date of this
Offering Memorandum and prior to the termination of the Exchange Offer shall be
deemed to be incorporated by reference into this Prospectus from the date of
filing such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Copies of these documents may be obtained from the Company upon request.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-4
(including all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, with respect to the New Notes offered in connection with
the Exchange Offer. As permitted by the rules and regulations of the Commission,
this Prospectus omits certain information contained in the Registration
Statement. For further information with respect to the Company and the New Notes
offered in connection with the Exchange Offer, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the contents of any contract
or any other document referred to are not necessarily complete; reference is
made in each instance to the copy of such contract or document filed as an
exhibit to the Registration Statement. Each such statement is qualified in all
respects by such reference to such exhibits. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission. The Commission also maintains a Web site that contains reports,
proxy statements and other information regarding registrants, including the
Company, that file such information electronically with the Commission. The
address of the Commission's Web site is http://www.sec.gov.
86
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF MUSICLAND STORES CORPORATION
AND THE MUSICLAND GROUP, INC. AND SUBSIDIARIES
Separate financial statements of Musicland Stores Corporation ("MSC") and
The Musicland Group, Inc. and Subsidiaries ("MGI") have not been presented.
Since its formation, MSC has engaged in no independent business operations from
MGI. The separate financial statements of MGI would be substantially the same as
the consolidated financial statements of MSC, as all of the debt of MSC is
guaranteed by MGI and would be "pushed down" to the financial statements of MGI.
CONSOLIDATED FINANCIAL STATEMENTS
OF MUSICLAND STORES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Statements of Operations...................................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Cash Flows...................................................................... F-5
Consolidated Statements of Stockholders' Equity............................................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have audited the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware Corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Musicland Stores Corporation
and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 21, 1998
F-2
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales................................................................... $ 1,722,572 $ 1,821,594 $ 1,768,312
Cost of sales........................................................... 1,116,502 1,209,835 1,153,483
------------ ------------ ------------
Gross profit.......................................................... 606,070 611,759 614,829
Selling, general and administrative expenses............................ 525,213 576,658 529,427
Depreciation and amortization........................................... 45,531 44,819 39,411
Goodwill write-down..................................................... 138,000 95,253 --
Restructuring charges................................................... -- 75,000 --
------------ ------------ ------------
Operating income (loss)............................................... (102,674) (179,971) 45,991
Interest expense........................................................ 27,881 32,967 31,720
------------ ------------ ------------
Earnings (loss) before income taxes................................... (130,555) (212,938) 14,271
Income taxes............................................................ 5,195 (19,200) 300
------------ ------------ ------------
Net earnings (loss)................................................... $ (135,750) $ (193,738) $ 13,971
------------ ------------ ------------
------------ ------------ ------------
Basic earnings (loss) per common share.................................. $ (4.00) $ (5.80) $ 0.42
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings (loss) per common share................................ $ (4.00) $ (5.80) $ 0.41
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 161,976 $ 3,942
Inventories........................................................................... 506,093 450,258
Deferred income taxes................................................................. 11,800 10,600
Other current assets.................................................................. 31,492 8,768
----------- -----------
Total current assets................................................................ 711,361 473,568
Property, net......................................................................... 277,996 250,021
Deferred income taxes................................................................. 1,200 2,400
Other assets.......................................................................... 6,358 7,906
----------- -----------
Total Assets........................................................................ $ 996,915 $ 733,895
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................. $ 2,060 $ 26,657
Accounts payable...................................................................... 406,642 357,183
Restructuring reserve................................................................. 33,963 --
Other current liabilities............................................................. 100,866 115,660
----------- -----------
Total current liabilities........................................................... 543,531 499,500
Long-term debt........................................................................ 394,539 166,430
Other long-term liabilities........................................................... 56,226 49,195
Commitments and contingent liabilities................................................
Stockholders' equity:
Preferred stock ($.01 par value; shares authorized: 5,000,000; shares issued and
outstanding: none).................................................................. -- --
Common stock ($.01 par value; shares authorized: 75,000,000; shares issued and
outstanding: December 31, 1996, 34,301,956; December 31, 1997, 34,372,592).......... 343 344
Additional paid-in capital............................................................ 253,896 255,075
Accumulated deficit................................................................... (238,649) (224,678)
Deferred compensation................................................................. (7,998) (6,998)
Common stock subscriptions............................................................ (4,973) (4,973)
----------- -----------
Total stockholders' equity.......................................................... 2,619 18,770
----------- -----------
Total Liabilities and Stockholders' Equity.......................................... $ 996,915 $ 733,895
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss)...................................................... $ (135,750) $ (193,738) $ 13,971
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 45,531 44,819 39,411
Disposal of property................................................... 7,587 1,733 4,112
Goodwill write-down.................................................... 138,000 95,253 --
Amortization of debt issuance costs and other.......................... 516 658 1,234
Other amortization..................................................... 364 234 1,022
Restructuring charges.................................................. -- 75,000 --
Deferred income taxes.................................................. (3,400) 500 --
Changes in operating assets and liabilities:
Inventories............................................................ (41,866) 27,601 55,835
Other current assets................................................... (11,172) (10,353) 22,724
Accounts payable....................................................... (53,388) 2,794 (61,520)
Restructuring reserve.................................................. -- (24,092) (12,231)
Other current liabilities.............................................. (11,445) (6,767) 14,843
Other assets........................................................... (1,079) (590) (1,483)
Other long-term liabilities............................................ 9,875 3,637 (3,305)
----------- ----------- -----------
Net cash provided by (used in) operating activities.................. (56,227) 16,689 74,613
----------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures..................................................... (113,983) (17,970) (10,940)
Sale/leasebacks and other property sales................................. 26,969 11,594 --
----------- ----------- -----------
Net cash used in investing activities................................ (87,014) (6,376) (10,940)
----------- ----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in outstanding checks in excess of cash balances..... 63,435 (69,321) 12,061
Borrowings (repayments) under revolver................................... 53,000 219,000 (272,000)
Net proceeds from issuance of long-term debt............................. -- -- 49,500
Principal payments on long-term debt..................................... -- -- (11,487)
Loan to KSOP............................................................. (9,997) -- --
Proceeds from sale of common stock....................................... 196 13 219
----------- ----------- -----------
Net cash provided by (used in) financing activities.................. 106,634 149,692 (221,707)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (36,607) 160,005 (158,034)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 38,578 1,971 161,976
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 1,971 $ 161,976 $ 3,942
----------- ----------- -----------
----------- ----------- -----------
CASH PAID (RECEIVED) DURING THE YEAR FOR:..................................
Interest................................................................. $ 27,268 $ 31,677 $ 33,035
Income taxes, net........................................................ 17,884 9,010 (22,908)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------------- PAID-IN (ACCUMULATED DEFERRED COMMON STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION SUBSCRIPTIONS EQUITY
--------- ----------- ---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995.................... 34,247 $ 342 $ 254,068 $ 90,839 $ $ (4,973) $ 340,276
Net loss........................... (135,750) (135,750)
Other, including exercise of stock
options and related tax
benefit.......................... 50 1 670 671
Loan to KSOP....................... (9,997) (9,997)
Amortization of deferred
compensation and adjustment to
fair market value of KSOP shares,
net of tax benefit............... (388) 999 611
--------- ----- ---------- ------------ ------------- ------------- ------------
December 31, 1995.................. 34,297 343 254,350 (44,911) (8,998) (4,973) 195,811
Net loss........................... (193,738) (193,738)
Other, including exercise of stock
options and related tax
benefit.......................... 5 -- 13 13
Amortization of deferred
compensation and adjustment to
fair market value of KSOP shares,
net of tax benefit............... (467) 1,000 533
--------- ----- ---------- ------------ ------------- ------------- ------------
December 31, 1996.................. 34,302 343 253,896 (238,649) (7,998) (4,973) 2,619
Net earnings....................... 13,971 13,971
Other, including exercise of stock
options and related tax
benefit.......................... 71 1 275 276
Issuance of warrants............... 890 890
Amortization of deferred
compensation and adjustment to
fair market value of KSOP shares,
net of tax....................... 14 1,000 1,014
--------- ----- ---------- ------------ ------------- ------------- ------------
December 31, 1997.................. 34,373 $ 344 $ 255,075 $ (224,678) $ (6,998) $ (4,973) $ 18,770
--------- ----- ---------- ------------ ------------- ------------- ------------
--------- ----- ---------- ------------ ------------- ------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Musicland Stores Corporation ("MSC") and its wholly-owned
subsidiary, The Musicland Group, Inc. ("MGI") and MGI's wholly-owned
subsidiaries, after elimination of all material intercompany balances and
transactions. MSC and MGI are collectively referred to as the "Company." The
Company's foreign operations in the United Kingdom and resulting foreign
currency translation adjustments have not been material. The preparation of the
accompanying consolidated financial statements required management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
BUSINESS. The Company operates principally in the United States as a
specialty retailer of home entertainment products, including prerecorded music,
video sell-through, books, computer software and related products. The Company's
stores operate under two principal strategies: (i) mall based music and video
sell-through stores (the "Mall Stores"), operating under the principal trade
names Sam Goody and Suncoast Motion Picture Company, and (ii) non-mall based
full-media superstores ("Superstores"), operating under the trade names Media
Play and On Cue. Because both Mall Stores and Superstores are supported by
centralized corporate services and have similar economic characteristics,
products, customers and retail distribution methods, the stores are reported as
one industry segment. At December 31, 1997, the store count included 1,122 Mall
Stores and 225 Superstores, with 4.0 million total store square footage in Mall
Stores and 4.2 million total store square footage in Superstores. The Company
operated 1,363 stores in 49 states, the District of Columbia, the Commonwealth
of Puerto Rico, the Virgin Islands and the United Kingdom at December 31, 1997.
SUMMARY OF SIGNIFICANT RISKS AND UNCERTAINTIES. Over the past few years,
the number of stores and types of competitors faced by the Company's stores
increased significantly, including non-mall discount stores, consumer
electronics superstores and other mall based music, video and book specialty
retailers expanding into non-mall multimedia superstores of their own. The
intense competitive environment and pricing pressure created by the high-volume
low-price superstores eased in 1997 as a result of the closing of stores by
certain mall competitors as well as the narrowing of entertainment software
product offerings, downsizing of store selling space devoted to media products
and less near or below cost pricing by certain non-mall competitors. The
Company's stores operate in a retail environment in which many factors that are
difficult to predict and outside the Company's control can have a significant
impact on store and Company sales and profits. These factors include the timing
and strength of new product offerings and technology, pricing strategies of
competitors, openings and closings of competitors' stores, the Company's ability
to continue to receive adequate product from its vendors on acceptable credit
terms and to obtain sufficient financing to meet its liquidity needs, effects of
weather and overall economic conditions, including inflation, consumer
confidence, spending habits and disposable income.
The Company has assessed its systems and equipment with respect to Year 2000
compliance and has developed a project plan. Many of the Year 2000 issues,
including the processing of credit card transactions, have been addressed. The
remaining Year 2000 issues will either be addressed with scheduled system
upgrades or through the Company's internal systems development staff. The
incremental costs will be charged to expense as incurred and are not expected to
have a material impact on the financial position or results of operations of the
Company. However, the Company could be adversely impacted if the Year 2000
modifications are not properly completed by either the Company or its vendors,
banks or any other
F-7
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
entity with whom the Company conducts business. The Company is devoting and
plans to continue to devote the necessary resources to resolve all significant
Year 2000 issues in a timely manner.
CASH AND CASH EQUIVALENTS. Cash equivalents consist principally of
short-term investments with original maturities of three months or less and are
recorded at cost, which approximates market value. Restricted cash amounts are
not material. The Company uses controlled disbursement banking arrangements
under its cash management program which provide for the reimbursement of major
bank disbursement accounts on a daily basis. At December 31, 1997, outstanding
checks in excess of cash balances of $12,061 were included in accounts payable.
INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
determined using the retail inventory method, on the first-in, first-out (FIFO)
basis.
PROPERTY. Buildings and improvements, store fixtures and other property are
depreciated using the straight-line method over the estimated useful lives of
the respective assets. Leasehold improvements are amortized on a straight-line
basis over an estimated useful life of ten years, which is generally equal to or
less than the lease term. Accelerated depreciation methods are used for income
tax purposes. When assets are sold or retired, the costs and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in operations. Depreciation and amortization expense for property was
$39,653, $41,763 and $39,370 for the years ended December 31, 1995, 1996 and
1997, respectively. In the event that facts and circumstances indicate that the
carrying amount of property may not be recoverable, an evaluation would be
performed using such factors as recent operating results, projected cash flows
and management's plans for future operations.
DEBT ISSUANCE COSTS. Debt issuance costs are amortized over the terms of
the related financing using the interest method.
STORE OPENING AND ADVERTISING COSTS. Store opening and advertising costs
are charged to expense as they are incurred.
STOCK-BASED COMPENSATION. Compensation expense for employee and director
stock options is measured based on the excess, if any, of the quoted market
price of the Company's stock on the date of grant over the amount that must be
paid to acquire the stock.
INCOME TAXES. Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis of assets and liabilities at
currently enacted tax rates. A valuation allowance for deferred income tax
assets is recorded when it is more likely than not that some portion or all of
the deferred income tax assets will not be realized.
OTHER COMPREHENSIVE INCOME. The Company has no significant items of other
comprehensive income.
EARNINGS (LOSS) PER COMMON SHARE. Basic earnings (loss) per common share is
computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding during each year of 33,898,000, 33,414,000 and
33,528,000 in 1995, 1996 and 1997, respectively. Diluted earnings (loss) per
common share is computed by dividing net earnings (loss) by the weighted average
number of common shares outstanding during each year, adjusted in 1997 for
641,000 of incremental shares assumed issued on
F-8
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the exercise of stock options and warrants. Stock options were excluded from
diluted computations for the net losses for the years ended December 31, 1995
and 1996 as the effect would be anti-dilutive. For purposes of earnings (loss)
per share computations, shares of common stock under the Company's employee
stock ownership plan, established in the third quarter of 1995, are not
considered outstanding until they are committed to be released.
2. WRITE-DOWN OF GOODWILL
In connection with the Company's adoption of Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("Statement No. 121"), in 1995, the
carrying values of long-lived assets, primarily goodwill and property, of the
music stores were reviewed for recoverability and possible impairment in light
of recent developments. Goodwill primarily resulted from the acquisition of MGI
by MSC in a leveraged buyout in 1988, when nearly all of the Company's stores
were mall based music stores. During 1995 and 1996, the music stores experienced
sales declines which were a result of a general decrease in customer traffic in
malls, an increase in high-volume, low-price non-mall superstores and a lack of
strong music product releases.
The Company updated its operating projections for the music stores in the
third quarter of 1995 and again in the fourth quarter of 1996 to reflect the
continued weak retail environment and competitive pricing. An analysis of the
projected undiscounted future cash flows indicated impairment had occurred. A
goodwill write-down of $138,000 was recorded in August 1995 and a write-down of
the remaining goodwill of $95,253 was recorded in December 1996 based on
estimates of fair value of the music stores determined primarily from operating
projections, future discounted cash flows and other significant market factors
related to the Company. Goodwill amortization for the years ended December 31,
1995 and 1996 was $5,793 and $3,005, respectively.
3. RESTRUCTURING CHARGES
During 1996, the Company recorded pretax restructuring charges of $75,000
for the estimated cost of programs designed to improve profitability and
increase inventory turnover. The restructuring programs included the closing of
the Company's distribution facility in Minneapolis, Minnesota and 115
underperforming stores, including 79 Mall Stores and 36 Superstores. The Company
closed 53 of these stores in 1996 and completed the restructuring programs in
1997 with the closing of the distribution facility and another 61 stores. The
Company removed one Superstore from the closing list after exercising an option
in the termination agreement for that store to reinstate the lease. The
restructuring charges included $36,300 of cash payments, primarily related to
payments to landlords for the early termination of operating leases and
estimated legal and consulting fees, and $38,700 for non-cash charges related to
write-downs of leasehold improvements and certain equipment, net of unamortized
lease credits.
F-9
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
Revolver borrowings, variable rates............................... $ 272,000 $ --
Term loan, variable rate, 8.13% at December 31, 1997.............. -- 50,000
Mortgage notes payable, variable rates, 8.24% to 8.37% at December
31, 1997........................................................ 14,599 33,087
9% senior subordinated notes, unsecured, due 2003................. 110,000 110,000
---------- ----------
Total........................................................... 396,599 193,087
Less current maturities........................................... 2,060 26,657
---------- ----------
Total long-term debt.............................................. $ 394,539 $ 166,430
---------- ----------
---------- ----------
</TABLE>
The Company's bank credit agreement, as amended in June 1997, provides for a
revolving credit facility and expires in October 1999. Borrowings under the
revolving credit facility are available up to a maximum of the lesser of 60% of
eligible inventory or $255,000 through February 15, 1998 and $245,000
thereafter. However, for any borrowings which result in a net increase in total
outstanding revolver borrowings, total trade accounts payable must be equal to
or greater than the total outstanding revolver borrowings. Facility fees at an
annual rate of up to 0.50% are assessed on the maximum credit amount available.
Revolver borrowings at December 31, 1996 have been reclassified to long-term
debt because of the waiver and subsequent removal in 1997 of the annual one day
clean-down requirement of revolver borrowings.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVOLVER DATA IS AS FOLLOWS:
Average daily outstanding revolver borrowings........ $ 254,000 $ 289,700 $ 238,500
Highest outstanding revolver borrowings.............. 350,000 333,000 273,000
Weighted average interest rates:
Based on average daily borrowings.................. 7.13% 7.56% 8.03%
At year end, excluding facility fee rate........... 7.12 7.26 N/A
</TABLE>
The Company has pledged the common stock of certain of its wholly owned
subsidiaries as collateral for borrowings under the revolving credit facility.
Outstanding revolver borrowings in excess of $245,000 and the term loan are
secured by the Company's inventory. The mortgage notes payable are
collateralized by land, buildings and certain fixtures and equipment of three of
the Company's Media Play stores and the Franklin, Indiana distribution facility
with an aggregate carrying value, including additional building improvements, of
$43,965 at December 31, 1997.
The credit agreement contains financial covenants and covenants that limit
additional indebtedness, liens, capital expenditures and cash dividends. The
amendment to the credit agreement in June 1997 modified and provided additional
flexibility in financial covenants related to fixed charge coverage,
F-10
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. LONG-TERM DEBT (CONTINUED)
consolidated tangible net worth and debt to total capitalization and removed
financial covenants related to the maximum debt and trade payables to eligible
inventory ratio and the annual one day clean-down requirement of revolver
borrowings. Covenants of the term loan agreement require a minimum inventory of
$150,000 and a minimum operating cash flow and limit additional liens. The
agreements related to the mortgage notes payable and senior subordinated notes,
as amended, also contain certain financial covenants. The Company was in
compliance with all covenants at December 31, 1997.
Maturities of long-term debt are: 1998, $26,657; 1999, $46,000; 2000,
$10,276; and 2003, $110,000. The Company may, at its option, redeem the senior
subordinated notes prior to maturity at 103.375% of par on and after June 15,
1998 and thereafter at prices declining annually to 100% of par on and after
June 15, 2001. The mortgage notes payable agreements contain one year renewal
options which would extend maturities of $21,000 and $10,276 to March 2000 and
May 2001, respectively. The mortgage notes payable balance at December 31, 1997
includes deferred financing credits of $154 that are being amortized over the
term of the related debt.
5. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
INCOME TAXES CONSIST OF:
Current:
Federal............................... $ 7,395 $ (18,300) $ 100
State, local and other................ 1,200 (1,400) 200
----------- ----------- -----------
8,595 (19,700) 300
----------- ----------- -----------
Deferred:
Federal............................... (3,200) (1,000) 1,400
State, local and other................ (200) 1,500 (1,400)
----------- ----------- -----------
(3,400) 500 --
----------- ----------- -----------
Total................................. $ 5,195 $ (19,200) $ 300
----------- ----------- -----------
----------- ----------- -----------
THE COMPANY'S EFFECTIVE INCOME TAX RATES
DIFFER FROM THE FEDERAL STATUTORY RATE
AS FOLLOWS:
Federal statutory tax rate.............. (35.0)% (35.0)% 35.0%
Goodwill amortization and write-down and
other permanent differences........... 38.5 16.7 5.2
State and local income taxes, net of
federal benefit....................... 0.5 -- (5.5)
Valuation allowance..................... -- 9.3 (32.6)
----------- ----------- -----------
Effective income tax rate............. 4.0% (9.0)% 2.1%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-11
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
COMPONENTS OF DEFERRED INCOME TAXES ARE AS FOLLOWS:
Net current deferred tax asset:
Capitalized inventory costs....................................... $ 5,880 $ 5,360
Inventory valuation............................................... 5,564 8,266
Compensation related.............................................. 2,601 2,504
Restructuring charges............................................. 14,388 --
Store closings.................................................... 1,883 2,586
Other accruals.................................................... 2,103 2,303
Other, net........................................................ 581 681
---------- ----------
Total current deferred income taxes............................. 33,000 21,700
Valuation allowance............................................... (21,200) (11,100)
---------- ----------
Net current deferred income taxes............................... $ 11,800 $ 10,600
---------- ----------
---------- ----------
Net noncurrent deferred tax asset:
Depreciation...................................................... $ (20,901) $ (15,263)
Rent expense...................................................... 17,651 18,279
Amortization of intangible assets................................. (2,011) (2,011)
Net pension liability............................................. 881 960
Other, net........................................................ (49) 489
Alternative minimum tax credits................................... 8,929 5,846
---------- ----------
Total noncurrent deferred income taxes.......................... 4,500 8,300
Valuation allowance............................................... (3,300) (5,900)
---------- ----------
Net noncurrent deferred income taxes.............................. $ 1,200 $ 2,400
---------- ----------
---------- ----------
</TABLE>
The Company's management believes it is more likely than not that the
deferred income tax assets, net of valuation allowances, will be realized based
on current income tax laws and estimates of future earnings. However, the amount
of deferred tax assets considered realizable could be adjusted in the future if
estimates of taxable income are revised.
6. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory, defined benefit pension plan covering
certain employees. Retirement benefits are a function of both years of service
and the level of compensation. The Company's funding policy is to make an annual
contribution equal to or exceeding the minimum required by the Employee
Retirement Income Security Act of 1974. Effective December 31, 1991,
participation in the pension plan was frozen for employees hired on or after
July 1, 1990. The Company has been evaluating on
F-12
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
a year to year basis the continuation of benefit accruals under the pension
plan. Accordingly, the projected benefit obligation approximated the accumulated
benefit obligation at December 31, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
THE FUNDED STATUS OF THE PENSION PLAN AND THE RELATED ACCRUED PENSION
COST ARE AS FOLLOWS:
Change in benefit obligation:
Benefit obligation at beginning of year.............................. $ 9,330 $ 9,604
Service cost......................................................... 446 411
Interest cost........................................................ 715 748
Effect of assumption change.......................................... (456) 448
Actuarial loss (gain)................................................ (13) 257
Benefits paid........................................................ (418) (1,011)
--------- ---------
Benefit obligation at end of year.................................... 9,604 10,457
--------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year....................... 9,289 9,468
Actual return on plan assets......................................... 597 2,468
Benefits paid........................................................ (418) (1,011)
--------- ---------
Fair value of plan assets at end of year............................. 9,468 10,925
--------- ---------
Funded status........................................................ (136) 468
Unrecognized gains................................................... (2,273) (3,277)
--------- ---------
Accrued pension cost................................................. $ (2,409) $ (2,809)
--------- ---------
--------- ---------
ASSUMPTIONS USED IN COMPUTING PENSION DATA ARE AS FOLLOWS:
Discount rate for benefit obligations................................ 7.75% 7.50%
Expected long-term rate of return on plan assets..................... 8.50 8.50
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
THE COMPONENTS OF NET PENSION EXPENSE ARE AS FOLLOWS:
Service cost.................................................... $ 260 $ 446 $ 411
Interest cost................................................... 631 715 748
Expected return on plan assets.................................. (672) (771) (754)
Amortization of prior service cost and gain..................... (12) (5) (5)
--------- --------- ---------
Net pension expense........................................... $ 207 $ 385 $ 400
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company established a defined contribution plan in 1992 for employees
not covered by the pension plan. The Company has a 401(k) plan, which is based
on contributions made through payroll deductions and partially matched by the
Company, covering substantially all employees. The Company's matching
contribution to the 401(k) plan is paid in stock of MSC under an employee stock
ownership plan ("KSOP"). The Company may also, at its discretion, make a
supplemental cash matching contribution. In 1995, to establish the KSOP, the
Company made a loan to the KSOP trust for the purchase of 1,042,900 shares of
the Company's common stock in the open market. In exchange, the Company received
a note, the balance of which is recorded as deferred compensation and is
reflected as a reduction of stockholders' equity. The Company recognizes
compensation expense during the period the match is earned equal to the expected
market value of the shares to be released to settle the match liability. The
number of KSOP shares committed to be released was 104,290 at December 31, 1996
and 1997. At December 31, 1996 and 1997, the number of shares held in suspense
was 834,320 and 730,030, respectively, and the market value of the shares held
in suspense was $1,251 and $5,338, respectively.
Expenses for the defined contribution and 401(k) plans for the years ended
December 31, 1995, 1996 and 1997 totaled $570, $354 and $1,749, respectively.
Expenses for postemployment benefits were not material. The Company does not
offer or provide postretirement benefits other than pensions to its employees.
7. STOCK PLANS
The Company's 1994, 1992 and 1988 Stock Option Plans authorize the grant of
stock options and stock appreciation rights to officers and other key employees.
The Company's Directors Stock Option Plan authorizes the grant of stock options
to its directors who are not employees of the Company or its affiliates. The
number of shares of common stock that may be issued to employees and directors
under each of these plans is 950,000 shares, 1,500,000 shares, 1,000,000 shares
and 200,000 shares, respectively. The stock options become exercisable over a
period not to exceed ten years after the date they are granted. Stock options
are granted at option prices not less than the fair market value of the
Company's common stock on the date of the grant. Accordingly, no compensation
expense has been recognized for stock options granted. The Company has not
granted any stock appreciation rights.
PRO FORMA DISCLOSURES OF NET EARNINGS (LOSS) AND NET EARNINGS (LOSS) PER
COMMON SHARE AS IF THE FAIR VALUE BASED METHOD OF ACCOUNTING FOR STOCK OPTIONS
HAD BEEN APPLIED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ---------
<S> <C> <C> <C> <C>
Net earnings (loss): As reported........ $ (135,750) $ (193,738) $ 13,971
Pro forma.......... $ (135,850) $ (194,394) $ 13,168
Net earnings (loss) per common share: As reported
Basic............ $ (4.00) $ (5.80) $ .42
Diluted.......... $ (4.00) $ (5.80) $ .41
Pro forma
Basic............ $ (4.01) $ (5.82) $ .39
Diluted.......... $ (4.01) $ (5.82) $ .39
</TABLE>
The fair value of each employee and director stock option has been estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1995, 1996
F-14
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. STOCK PLANS (CONTINUED)
and 1997, respectively: risk-free interest rates of 6.31%, 6.17% and 6.27%;
expected volatility of 45%, 49% and 56%; expected life of seven years; and no
dividend yields. The pro forma disclosures may not be representative of the
effects on net earnings in future years because they do not take into
consideration pro forma compensation expense related to grants made prior to
1996, the vesting of stock options over several years and the possible grant of
additional stock options in the future.
STOCK OPTION ACTIVITY FOR THE LAST THREE YEARS WAS AS FOLLOWS:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 1,748,916 $ 11.90 1,892,984 $ 10.52 2,681,294 $ 7.33
Granted.................................... 398,350 7.84 1,023,973 2.30 734,650 3.16
Exercised.................................. (50,100) 3.93 (5,000) 2.50 (70,636) 3.10
Canceled................................... (204,182) 18.73 (230,663) 11.26 (409,400) 8.67
---------- ---------- ----------
Outstanding at end of year................. 1,892,984 10.52 2,681,294 7.33 2,935,908 6.20
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at year end............ 840,838 1,003,916 1,084,642
---------- ---------- ----------
---------- ---------- ----------
Options available for future grant......... 1,460,060 666,750 341,500
---------- ---------- ----------
---------- ---------- ----------
Weighted average fair value of options
granted during the year.................. $ 4.38 $ 1.32 $ 2.00
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE FOLLOWING TABLE SUMMARIZES INFORMATION CONCERNING OUTSTANDING AND
EXERCISABLE STOCK OPTIONS AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ---------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- - ---------------------------------------------------- ----------- --------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.5000 to $ 2.5625................................ 1,171,459 7.59 $ 2.000 271,503 $ 2.465
3.0000 to 4.5000................................ 592,016 6.42 3.485 228,600 4.500
6.0625 to 6.7500................................ 422,883 8.98 6.402 28,739 6.625
9.3750 to 14.5000................................ 594,700 5.35 12.992 452,567 13.462
21.7500 to 21.7500................................ 154,850 5.83 21.750 103,233 21.750
----------- ----------
2,935,908 1,084,642
----------- ----------
----------- ----------
</TABLE>
8. COMMON STOCK
Certain members of current and former management of the Company own
1,991,308 shares of common stock with restrictions ("Restricted Stock") at
$0.0025 per share. Although holders of Restricted
F-15
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. COMMON STOCK (CONTINUED)
Stock have voting and dividend rights, no Restricted Stock is transferable until
the Company is paid the balance of the subscription price of $2.4975 or $4.4975
per share. After August 25, 2003, the Company may, at its option, buy back the
Restricted Shares for $0.0025 per share. The amount of subscriptions due from
the holders of Restricted Stock upon transfer is reflected as a reduction of
stockholders' equity.
In connection with the term loan agreement completed in June 1997, the
Company issued warrants for the purchase of 1,822,087.16 shares of common stock
at $1.5625 per share. The warrants can be traded, are exercisable over a period
of five years and expire in 2002. The fair value of the warrants at the time of
issuance of $890 was recorded as additional debt issuance costs and an increase
to additional paid-in capital.
9. PREFERRED STOCK PURCHASE RIGHTS
In March 1995, the Company's Board of Directors adopted a stockholder rights
plan and declared a dividend of one preferred share purchase right ("Right") per
share for each outstanding share of common stock. The Rights will be distributed
20 days after a person or group (an "Acquiring Person") either acquires
beneficial ownership of, or commences a tender or exchange offer for, 17.5% or
more of the Company's outstanding common stock.
Each Right then may be exercised to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock, $0.01 par value (the "Preferred
Shares"), at an exercise price of $70.00 per one-hundredth Preferred Share.
Thereafter, upon the occurrence of certain events, the Rights entitle holders
other than the Acquiring Person to acquire common stock having a value of twice
the exercise price of the Rights. Alternatively, upon the occurrence of certain
other events, the rights would entitle holders other than the Acquiring Person
to acquire common stock of the Acquiring Person having a value of twice the
exercise price of the Rights.
The Rights may be redeemed by the Company at a redemption price of $.001 per
Right at any time until the 20th day after a public announcement of an
acquisition of 17.5% or more of the common stock of the Company. The Rights
expire on March 20, 2005.
10. COMMITMENTS
The Company leases most of its retail stores and certain office and storage
facilities under operating leases for terms that typically range from three to
twenty-five years. Certain store leases provide the Company with an early
cancellation option if sales for a designated period do not reach a specified
level as defined in the lease. In most instances, the Company pays, in addition
to minimum rent, real estate taxes, utilities, common area maintenance costs and
percentage rents which are based upon sales volume. Certain store leases contain
provisions restricting assignment, merger, change of control or transfer. The
Company also leases certain store fixtures and equipment, computers and
automobiles under operating leases.
F-16
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. COMMITMENTS (CONTINUED)
Minimum payments under operating leases with noncancelable terms in excess
of one year at December 31, 1997 are: 1998, $137,183; 1999, $131,751; 2000,
$111,399; 2001, $85,060; 2002, $70,527; and thereafter, $268,219.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
TOTAL RENT EXPENSE CONSISTS OF THE FOLLOWING:
Minimum cash rents................................... $ 148,736 $ 166,308 $ 152,343
Straight-line recognition of leases with scheduled
rent increases..................................... 7,304 3,152 (910)
Percentage rents..................................... 2,000 1,733 2,143
---------- ---------- ----------
Total rent expense................................. $ 158,040 $ 171,193 $ 153,576
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
11. LITIGATION
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. It is the opinion of management that
the ultimate resolution of these matters will not have a material adverse effect
on the financial position or results of operations of the Company.
12. RELATED PARTY TRANSACTIONS
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), a wholly
owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), acts as a market
maker in the Company's senior subordinated notes. A Managing Director of DLJSC
is a member of the Company's board of directors. DLJ and certain of its
affiliates, excluding DLJ employees, owned approximately 6.9% of the Company's
common stock at December 31, 1996. During 1997, DLJ sold its ownership in the
Company's common stock.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets at December
31, 1996 and 1997 for cash and cash equivalents, other current assets, accounts
payable and other current liabilities approximate fair value because of the
immediate or short-term maturity of these financial instruments. The fair value
of the outstanding revolver borrowings at December 31, 1996, based on current
market rates, was $217,600. As the interest rates on the term loan and mortgage
notes payable are reset monthly based on current market rates and the debt is
secured, the carrying values approximate fair value. The fair value of the
senior subordinated notes at December 31, 1996 and 1997, based on the last
quoted price on those dates, was $50,600 and $101,750, respectively.
F-17
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
PROPERTY CONSISTS OF THE FOLLOWING, AT COST:
Land and land improvements........................................ $ 9,283 $ 10,003
Buildings......................................................... 10,408 32,055
Leasehold improvements............................................ 248,077 231,831
Store fixtures and other property................................. 162,348 149,973
---------- ----------
430,116 423,862
Less accumulated depreciation and amortization.................... (152,120) (173,841)
---------- ----------
Property, net..................................................... $ 277,996 $ 250,021
---------- ----------
---------- ----------
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
OTHER CURRENT LIABILITIES CONSIST OF THE FOLLOWING:
Payroll and related taxes and benefits............................ $ 19,598 $ 24,963
Gift certificates payable......................................... 32,792 38,224
Sales taxes payable............................................... 19,924 18,764
Accrued store expenses and other.................................. 28,552 33,709
---------- ----------
Total............................................................. $ 100,866 $ 115,660
---------- ----------
---------- ----------
OTHER LONG-TERM LIABILITIES CONSIST OF THE FOLLOWING:
Straight-line recognition of leases with scheduled rent
increases....................................................... $ 36,442 $ 32,457
Deferred rent credits............................................. 14,651 12,508
Other............................................................. 5,133 4,230
---------- ----------
Total............................................................. $ 56,226 $ 49,195
---------- ----------
---------- ----------
</TABLE>
15. SUPPLEMENTAL CASH FLOW INFORMATION
The land, buildings and certain fixtures related to three of the Company's
Media Play stores and the land, building and certain equipment related to the
Company's distribution facility in Franklin, Indiana were financed under
operating leases with special purpose entities that had been formed for the
purpose of purchasing the land, fixtures and equipment and constructing the
facilities using secured financing. The three Media Play stores, which had an
aggregate cost of $14,395, together with the related mortgage note payable and
deferred financing credits totaling $14,599, were recorded on the Company's
Consolidated Balance Sheet after the terms of an amendment to the operating
lease required consolidation of the special purpose entity as of October 1996,
the date of the amendment. The financed distribution facility property, which
had an original cost of approximately $30,000, and the mortgage note payable
were recorded on the Company's Consolidated Balance Sheet after the terms of an
amendment to the operating lease required consolidation of the special purpose
entity as of June 1997, the date of the amendment.
F-18
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
(LOSS) (LOSS) COMMON STOCK PRICE
NET PER PER
GROSS EARNINGS COMMON COMMON ---------------------
SALES PROFIT (LOSS) SHARE SHARE HIGH LOW
------------ ---------- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996:
First......................... $ 383,570 $ 129,833 $ (52,636) $ (1.58) $ (1.58) $ 4 3/4 $ 2
Second........................ 372,410 126,582 (24,080) (0.72) (0.72) 5 1/4 3 1/8
Third......................... 366,634 127,702 (24,201) (0.72) (0.72) 3 5/8 1 3/8
Fourth........................ 698,980 227,642 (92,821) (2.77) (2.77) 2 1 1/4
------------ ---------- ----------- -------- --------
Total....................... $ 1,821,594 $ 611,759 $ (193,738) $ (5.80) $ (5.80)
------------ ---------- ----------- -------- --------
------------ ---------- ----------- -------- --------
1997:
First......................... $ 376,080 $ 126,463 $ (20,983) $ (0.63) $ (0.63) $ 1 3/4 $ 11/16
Second........................ 342,746 120,428 (18,325) (0.55) (0.55) 2 7/8 15/16
Third......................... 373,283 129,070 (12,384) (0.37) (0.37) 8 1/4 2 1/4
Fourth........................ 676,203 238,868 65,663 1.95 1.89 8 1/2 4 5/8
------------ ---------- ----------- -------- --------
Total....................... $ 1,768,312 $ 614,829 $ 13,971 $ .42 $ .41
------------ ---------- ----------- -------- --------
------------ ---------- ----------- -------- --------
</TABLE>
The three months ended December 31, 1996 include a goodwill write-down of
$95,253, or $2.85 per share.
The three months ended March 31, 1996 and December 31, 1996 include pretax
restructuring charges of $35,000 and $40,000, respectively.
The totals of basic and diluted earnings (loss) per common share by quarter
may not equal the totals for the year as there are changes in the weighted
average number of common shares outstanding each quarter and basic and diluted
earnings (loss) per common share are calculated independently for each quarter.
F-19
<PAGE>
- - -------------------------------------------
-------------------------------------------
- - -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OTHER PERSON. NEITHER THE DELIVER OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 12
The Exchange Offer........................................................ 20
Use of Proceeds........................................................... 27
Capitalization............................................................ 28
Selected Consolidated Financial and Operating Data........................ 29
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 31
Business.................................................................. 39
Management................................................................ 47
Description of Notes...................................................... 50
Description of Other Financing Arrangements............................... 78
Certain Federal Income Tax Considerations................................. 81
Plan of Distribution...................................................... 85
Legal Matters............................................................. 85
Experts................................................................... 85
Incorporation of Certain Documents by Reference........................... 85
Additional Information.................................................... 86
Index to Consolidated Financial Statements................................ F-1
</TABLE>
$150,000,000
[LOGO]
9 7/8% SENIOR SUBORDINATED
NOTES DUE 2008
--------------
PROSPECTUS
--------------
, 1998
- - -------------------------------------------
-------------------------------------------
- - -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IV of the Registrant's Restated Certificate of Incorporation
provides that, to the extent permitted by the General Corporation Law of the
State of Delaware, as now in effect and as from time to time amended, or any
successor provisions thereto, the Registrant shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether or not such action is an action by or in the right of
the Registrant to procure a judgment in its favor, by reason of the fact that he
is or was a director, officer, employee or agent of the Registrant or is or was
serving at the request of the Registrant as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise.
The Registrant's Restated Certificate of Incorporation also provides that
the Registrant shall, to the full extent permitted by the General Corporation
Law of the State of Delaware, as amended from time to time, indemnify each
person whom it may indemnify pursuant thereto.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NO. DOCUMENT NO.
- - ------ -------------------------------------------------------------------------- -----------------
<C> <S> <C>
1.1 Purchase Agreement dated as of April 1, 1998 by and among the Company and [xviii]
Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and
NationsBanc Montgomery Securities LLC
3.1 Restated Certificate of Incorporation of MSC, as amended [i]
3.2 Bylaws of MSC, as amended [ii]
4.1 Senior Subordinated Note Indenture, including form of Note, dated as of [iii]
June 15, 1993 among MGI, MSC and Bank One Columbus, N.A. as Successor
Trustee to Harris Trust and Savings Bank
4.1(a) First Supplemental Indenture dated as of June 13, 1997 to the Senior [xv]
Subordinated Note Indenture
4.2(a) Credit Agreement dated as of October 7, 1994 (the "Credit Agreement") [iv]
among MGI, MSC, the banks listed therein and Morgan Guaranty Trust
Company of New York, as agent
4.2(b) Amendment No. 1 dated as of February 28, 1995 to the Credit Agreement [viii]
4.2(c) Amendment No. 2 dated as of April 9, 1996 to the Credit Agreement [xi]
4.2(d) Amendment No. 3 dated as of October 18, 1996 to the Credit Agreement [xii]
4.2(e) Waivers and Agreements under Credit Agreement dated as of March 7, 1997 to [xiii]
the Credit Agreement
4.2(f) Waivers and Agreements under Credit Agreement dated as of May 19, 1997 to [xv]
the Credit Agreement
4.2(g) Amendment No. 4 and Waiver dated as of June 16, 1997 to the Credit [xv]
Agreement
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NO. DOCUMENT NO.
- - ------ -------------------------------------------------------------------------- -----------------
<C> <S> <C>
4.3 Term Loan Agreement dated as of June 16, 1997 (the "Term Loan") among MGI, [xv]
MSC, the banks listed therein and Morgan Guaranty Trust Company of New
York, as agent
4.3(a) Security Agreement dated as of June 16, 1997 among MGI and the [xv]
subsidiaries listed therein, the Debtors listed therein, and Morgan
Guaranty Trust Company of New York, as agent
4.3(b) Warrant and Registration Rights Agreement dated as of June 16, 1997 among [xv]
MSC and the Investors listed therein
4.4 Rights Agreement dated as of March 14, 1995, between MSC and Norwest Bank [v]
Minnesota, National Association, as Rights Agent
4.5 Indenture dated April 6, 1998 among the MGI, MSC and Bank One, N.A., as [xviii]
Trustee, with respect to the 9 7/8% Senior Subordinated Notes Due 2008
4.6 Form of the 9 7/8% Senior Subordinated Notes Due 2008 (included as an [xviii]
exhibit to the Indenture, filed herewith as Exhibit 4.5)
4.7 Form of MSC Guarantee of the 9 7/8% Senior Subordinated Notes Due 2008
(included as an exhibit to the Indenture filed herewith as Exhibit 4.5)
4.8 Registration Rights Agreement dated as of April 6, 1998 by and among the [xviii]
Company and Donaldson, Lufkin & Jenrette Securities Corporation, BT
Alex. Brown, and NationsBanc Montgomery Securities LLC, as Initial
Purchasers
4.9 Exchange Agent Agreement dated as of April 21, 1998 by and among MGI, MSC [xviii]
and Bank One, NA as Exchange Agent for the Exchange Offer
5 Opinion of Moss & Barnett, A Professional Association [xviii]
9 Voting Trust Agreement among DLJ, certain of its affiliates, the Equitable [i]
Investors and Meridian Trust Company
10.1(a) Lease Agreement dated as of March 31, 1994 between Shawmut Bank [viii]
Connecticut, N.A. as Owner Trustee and Musicland Retail, Inc., as Lessee
10.1(b) Participation Agreement dated as of March 31, 1994 among Musicland Retail, [viii]
Inc., as Lessee, Shawmut Bank Connecticut, N.A. as Owner Trustee,
Kleinwort Benson Limited, as Owner Participant, Lender and Agent and The
Long-Term Credit Bank of Japan, Ltd. Chicago Branch, Credit Lyonnais
Cayman Island Branch, The Fuji Bank, Limited, as Lenders
10.1(c) Guaranty of MGI dated March 31, 1994 [viii]
10.1(d) Amendment No. 1 dated as of June 16, 1997 to the Lease Agreement [xv]
10.1(e) Amendment No. 1 dated as of June 16, 1997 to the Participation Agreement [xv]
10.1(f) Amendment No. 1 dated as of June 16, 1997 to the Guaranty [xv]
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NO. DOCUMENT NO.
- - ------ -------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.2(a) Master Lease dated as of May 12, 1995 between Media Play Trust, as [xv]
Landlord, and Media Play, Inc., as Tenant
10.2(b) Participation Agreement dated as of May 12, 1995 among Natwest Leasing [ix]
Corporation, as Owner Participant, Media Play Trust, as Trust, Yasuda
Bank and Trust Company (U.S.A.), as Owner Trustee, National Westminster
Bank PLC, as Agent and Lender, Media Play, Inc., as Tenant, and the
Long-Term Credit Bank of Japan, Ltd. Chicago Branch and The Yasuda Trust
& Banking Company, Ltd., Chicago Branch, as Other Lenders
10.2(c) Amendment No. 1 dated as of April 9, 1996 to the Participation Agreement [xi]
10.2(d) Lease Guaranty dated as of May 12, 1995 between MGI, as Guarantor, and [ix]
Media Play Trust, as Landlord
10.2(e) Amendment No. 1 dated as of April 9, 1996 to the Lease Guaranty [xi]
10.2(f) Second Limited Waiver and Amendment dated as of June 16, 1997 of Certain [xv]
Loan Documents and Key Agreements
10.3(a) Subscription Agreement among MSC and the Management Investors [vi]
10.3(b) Form of Amendment to Management Subscription Agreement [i]
10.4 Form of Registration Rights Agreement among MSC, DLJ and the Management [vii]
Investors
10.5(a) Employment Agreement with Mr. Eugster [vi]
10.5(b) Form of Amendment to Employment Agreement with Mr. Eugster [i]
10.5(c) Amendment No. 2 to Employment Agreement with Mr. Eugster [x]
10.6(a) Form of Employment Agreement with Messrs. Benson and Ross [vi]
10.6(b) Amendment to Employment Agreement with Mr. Benson [xiii]
10.6(c) Amendment to Employment Agreement with Mr. Ross [xiii]
10.7(a) Form of Employment Agreement with Messrs. Bausman and Henderson [vi]
10.7(b) Form of Amendment to Employment Agreements with Messrs. Bausman and [i]
Henderson
10.7(c) Amendment No. 2 to Employment Agreement with Mr. Bausman [x]
10.7(d) Amendment No. 2 to Employment Agreement with Mr. Henderson [x]
10.8(a) Change of Control Agreement with Mr. Eugster [vi]
10.8(b) Form of Amendment to Change of Control Agreement with Mr. Eugster [i]
10.8(c) Amendment No. 2 to Change of Control Agreement with Mr. Eugster [x]
10.8(d) Amendment No. 3 to Change of Control Agreement with Mr. Eugster [xiii]
10.9 Management Incentive Plan dated as of January 1, 1997 [xvii]
10.10 1988 Stock Option Plan, as amended [i]
10.11 Stock Option Plan for Unaffiliated Directors of MSC, as amended on June [xv]
12, 1997
10.12 1992 Stock Option Plan [i]
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NO. DOCUMENT NO.
- - ------ -------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.13 Musicland Stores Corporation 1994 Employee Stock Option Plan [viii]
10.14 Employment Letter Agreement with Mr. Johnson [viii]
10.15(a) Change of Control Agreement with Mr. Johnson [x]
10.15(b) Amendment No. 1 to Change of Control Agreement with Mr. Johnson [xiii]
10.16(a) Change of Control Agreement with Messrs. Benson and Ross [vi]
10.16(b) Amendment No. 1 to Change of Control Agreement with Mr. Benson [xiii]
10.16(c) Amendment No. 1 to Change of Control Agreement with Mr. Ross [xiii]
10.17 Form of Executive Severance Agreement with Mr. Wachsman [xiii]
10.18 Change of Control Agreement with Mr. Wachsman [xiv]
10.19 Long Term Incentive Plan dated as of January 1, 1996 [xiii]
10.20 Executive Officer Short Term Incentive Plan dated as of November 15, 1996 [xiii]
10.21 Executive Officer Salary Continuation Plan dated as of March 10, 1997 [xiv]
11 Statement re: computation of per share earnings [xvi]
12.1 Statement regarding Computation of Earnings Ratio to Fixed Charges [xvii]
21 Subsidiaries of MSC [ii]
23.1 Consent of Arthur Andersen LLP [xviii]
23.2 Consent of Moss & Barnett, A Professional Association (incorporated by [xviii]
reference to Exhibit 5)
24 Power of Attorney (included on the signature page of this Registration
Statement)
25 Statement of Eligibility of Bank One, as Trustee [xviii]
27 Financial Data Schedules [xvii]
99.1 Form of Letter of Transmittal for 9 7/8% Senior Subordinated Notes Due [xviii]
2008 of the Company
99.2 Form of Notice of Guaranteed Delivery for 9 7/8% Senior Subordinated Notes [xviii]
Due 2008
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and [xviii]
Other Nominees for 9 7/8% Senior Subordinated Notes Due 2008
99.4 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust [xviii]
Companies and Other Nominees for 9 7/8% Senior Subordinated Notes Due
2008
99.5 Form of Instruction from Owner of 9 7/8% Senior Subordinated Notes Due [xviii]
2008 of the Company
</TABLE>
- - ------------------------
[i] Incorporated by reference to MSC's Form S-1 Registration Statement
covering common stock initially filed with the Commission on July 6, 1990
(Commission File No. 33-35774).
[ii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1992 filed with the Commission on March 2, 1993
(Commission File No. 1-11014).
II-4
<PAGE>
[iii] Incorporated by reference to MGI's Registration Statement covering 9%
Senior Subordinated Notes initially filed with the Commission on May 19,
1993 (Commission File No. 33-62928).
[iv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994 filed with the Commission on
November 11, 1994 (Commission File No. 1-11014).
[v] Incorporated by reference to MSC's Form 8-A Exchange Act Registration
Statement covering Preferred Share Purchase Rights filed with the
Commission on March 16, 1995.
[vi] Incorporated by reference to MSC's Form S-1 Registration Statement
covering Senior Subordinated Notes initially filed with the Commission on
May 20, 1988 (Commission File No. 33-22058).
[vii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1993 filed with the Commission on March 25, 1994
(Commission file No. 1-11014).
[viii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1994 filed with the Commission on March 27, 1995
(Commission File No. 1-11014).
[ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarter period ended June 30, 1995 filed with the Commission on August
11, 1995 (Commission File No. 1-11014).
[x] Incorporated by reference to MSC's Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Commission on April 12, 1996
(Commission file No. 1-11014).
[xi] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarter period ended March 31, 1996 filed with the Commission on May 10,
1996 (Commission File No. 1-11014).
[xii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarter period ended September 30, 1996 filed with the Commission on
November 13, 1996 (Commission File No. 1-11014).
[xiii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Commission on April 11, 1997
(Commission File No. 1-11014).
[xiv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarter period ended March 31, 1997 filed with the Commission on May 14,
1997 (Commission File No. 1-11014).
[xv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarter period ended June 30, 1997 filed with the Commission on August 13,
1997 (Commission File No. 1-11014).
[xvi] Earnings (loss) per common share amounts are computed by dividing net
earnings (loss) by the weighted average number of common shares
outstanding. For purposes of earnings (loss) per share computations,
shares of common stock under the Company's employee stock ownership plan,
established in the third quarter of 1995, are not considered outstanding
until they are committed to be released. Common stock equivalents related
to stock options are anti-dilutive in 1996 and 1995 due to the net
losses. Common stock equivalents related to stock options which would
have a dilutive effect based upon current market prices had no material
effect on net earnings per common share in 1994. Accordingly, this
exhibit is not applicable to the Company.
[xvii] Incorporated by reference to MSC's Report on Form 10-K for the year
ended December 31, 1997 filed with the Commission on March 13, 1998
(Commission File No. 1-11014).
[xviii] Filed herewith.
[xix] To be filed by amendment.
II-5
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 12 and 13 of Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
and the Additional Registrant have duly caused this Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on the 23rd day of
April, 1998.
<TABLE>
<S> <C> <C> <C>
THE MUSICLAND GROUP, INC. MUSICLAND STORES CORPORATION
Registrant Additional Registrant
By: By:
/s/ JACK W. EUGSTER /s/ JACK W. EUGSTER
---------------------------------------- ----------------------------------------
Jack W. Eugster Jack W. Eugster
CHAIRMAN AND C.E.O. CHAIRMAN AND C.E.O.
</TABLE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Jack W. Eugster, Keith A. Benson, and Linda
Alsid Ruehle, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement on Form S-4
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting upon
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 23rd day of April, 1998 by
the following persons in the capacities indicated, who serve in such capacities
for both the Registrant and the Additional Registrant:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- - ------------------------------ --------------------------
<C> <S>
Chairman of the Board,
/s/ JACK W. EUGSTER President, Chief
- - ------------------------------ Executive Officer and
Jack W. Eugster Director (principal
executive officer)
Vice Chairman and Chief
/s/ KEITH A. BENSON Financial Officer and
- - ------------------------------ Director (principal
Keith A. Benson financial and accounting
officer)
/s/ GILBERT L. WACHSMAN
- - ------------------------------ Director
Gilbert L. Wachsman
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- - ------------------------------ --------------------------
<C> <S>
/s/ KENNETH F. GORMAN
- - ------------------------------ Director
Kenneth F. Gorman
/s/ WILLIAM A. HODDER
- - ------------------------------ Director
William A. Hodder
/s/ JOSIAH O. LOW, III
- - ------------------------------ Director
Josiah O. Low, III
/s/ TERRY T. SAARIO
- - ------------------------------ Director
Terry T. Saario
/s/ THOMAS F. WEYL
- - ------------------------------ Director
Thomas F. Weyl
/s/ MICHAEL W. WRIGHT
- - ------------------------------ Director
Michael W. Wright
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S> <C>
1.1 Purchase Agreement dated as of April 1, 1998 by and among the Company and
Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and
NationsBanc Montgomery Securities LLC
4.5 Indenture dated April 6, 1998 among the MGI, MSC and Bank One, N.A., as
Trustee, with respect to the 9 7/8% Senior Subordinated Notes Due 2008
4.6 Form of the 9 7/8% Senior Subordinated Notes Due 2008 (included as an
exhibit to the Indenture, filed herewith as Exhibit 4.5)
4.7 Form of MSC Guarantee of the 9 7/8% Senior Subordinated Notes Due 2008
(included as an exhibit to the Indenture filed herewith as Exhibit 4.5)
4.8 Registration Rights Agreement dated as of April 6, 1998 by and among the
Company and Donaldson, Lufkin & Jenrette Securities Corporation, BT
Alex. Brown, and NationsBanc Montgomery Securities LLC, as Initial
Purchasers
4.9 Exchange Agent Agreement dated as of April 21, 1998 by and among MGI, MSC
and Bank One, NA as Exchange Agent for the Exchange Offer
5 Opinion of Moss & Barnett, A Professional Association
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Moss & Barnett, A Professional Association (incorporated by
reference to Exhibit 5)
24 Power of Attorney (included on the signature page of this Registration
Statement)
25 Statement of Eligibility of Bank One, as Trustee
99.1 Form of Letter of Transmittal for 9 7/8% Senior Subordinated Notes Due
2008 of the Company
99.2 Form of Notice of Guaranteed Delivery for 9 7/8% Senior Subordinated Notes
Due 2008
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees for 9 7/8% Senior Subordinated Notes Due 2008
99.4 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees for 9 7/8% Senior Subordinated Notes Due
2008
99.5 Form of Instruction from Owner of 9 7/8% Senior Subordinated Notes Due
2008 of the Company
</TABLE>
<PAGE>
THE MUSICLAND GROUP, INC.
MUSICLAND STORES CORPORATION
$150,000,000
9_% Series A Senior Subordinated Notes Due 2008
Purchase Agreement
April 1, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
NATIONSBANC MONTGOMERY
SECURITIES LLC
<PAGE>
$150,000,000
9_% Series A Senior Subordinated Notes Due 2008
of THE MUSICLAND GROUP, INC.
PURCHASE AGREEMENT
April 1, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
NATIONSBANC MONTGOMERY
SECURITIES LLC
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
The Musicland Group, Inc, a Delaware corporation (the "COMPANY"), proposes
to issue and sell to Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), BT Alex. Brown Incorporated ("BT"), and NationsBanc Montgomery
Securities LLC ("NBMS") (each, an "INITIAL PURCHASER" and collectively, the
"INITIAL PURCHASERS") an aggregate of $150,000,000 in principal amount of its
9_% Series A Senior Subordinated Notes due 2008 (the "SERIES A NOTES"), subject
to the terms and conditions set forth herein. The Series A Notes are to be
issued pursuant to the provisions of an indenture (the "INDENTURE"), to be dated
as of the Closing Date (as defined below), among the Company, the Guarantor (as
defined below) and Bank One, NA, as trustee (the "TRUSTEE"). The Series A Notes
and the Series B Notes (as defined below) issuable in exchange therefor are
collectively referred to herein as the "NOTES." The Notes will be guaranteed
(the "GUARANTEES") by Musicland Stores Corporation (the "GUARANTOR").
Capitalized terms used but not defined herein shall have the meanings given to
such terms in the Indenture.
1. OFFERING MEMORANDUM. The Series A Notes will be offered and sold to
the Initial Purchasers pursuant to one or more exemptions from the registration
requirements under the Securities Act of 1933, as amended (the "ACT"). The
2
<PAGE>
Company and the Guarantor have prepared a preliminary offering memorandum, dated
March 13, 1998 (the "PRELIMINARY OFFERING MEMORANDUM") and a final offering
memorandum, dated April 1, 1998 (the "OFFERING MEMORANDUM"), relating to the
Series A Notes and the Guarantees.
Upon original issuance thereof, and until such time as the same is no longer
required pursuant to the Indenture, the Series A Notes (and all securities
issued in exchange therefor, in substitution thereof or upon conversion thereof)
shall bear the following legend:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (the "ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE NEXT
SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN,
THE HOLDER:
(1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (as
defined in Rule 144A under the Act)(a "QIB") OR IT HAS ACQUIRED THIS
NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER
THE ACT,
(2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS
NOTE EXCEPT (i) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (ii) TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (iii) IN AN OFFSHORE TRANSACTION MEETING
THE REQUIREMENTS OF RULE 903 OR 904 OF THE ACT, (iv) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE ACT, (v) IN ACCORDANCE
WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT
(AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR
(vi) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH
CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY
3
<PAGE>
STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND
(3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE
OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND.
AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED
STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S
UNDER THE ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE
TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION
OF THE FOREGOING."
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations,
warranties and covenants contained in this Agreement, and subject to the terms
and conditions contained herein, the Company agrees to issue and sell to the
Initial Purchasers, and each Initial Purchaser agrees severally and not jointly
to purchase from the Company, the principal amounts of Series A Notes set forth
opposite the name of such Initial Purchaser on Schedule A at a purchase price
equal to 96.631514% of the principal amount thereof (the "PURCHASE PRICE").
3. TERMS OF OFFERING. The Initial Purchasers have advised the Company
that the Initial Purchasers will make offers (the "EXEMPT RESALES") of the
Series A Notes purchased hereunder on the terms set forth in the Offering
Memorandum, as amended or supplemented, solely to (i) persons whom the Initial
Purchasers reasonably believe to be "qualified institutional buyers" as defined
in Rule 144A under the Act ("QIBS"), and (ii) persons permitted to purchase the
Series A Notes in offshore transactions in reliance upon Regulation S under the
Act (each, a "REGULATION S PURCHASER") (such persons specified in clauses (i)
and (ii) being referred to herein as the "ELIGIBLE PURCHASERS"). The Initial
Purchasers will offer the Series A Notes to Eligible Purchasers initially at a
price equal to 99.211% of the principal amount thereof. Such price may be
changed at any time without notice.
Holders (including subsequent transferees) of the Series A Notes will have
the registration rights set forth in the registration rights agreement (the
"REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date, in substantially
the form of Exhibit A hereto, for so long as such Series A Notes constitute
"Transfer Restricted Securities" (as defined in the Registration Rights
4
<PAGE>
Agreement). Pursuant to the Registration Rights Agreement, the Company and the
Guarantors will agree to file with the Securities and Exchange Commission (the
"COMMISSION") under the circumstances set forth therein, (i) a registration
statement under the Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating
to the Company's 9_% Series B Senior Subordinated Notes due 2008 (the "SERIES B
NOTES"), to be offered in exchange for the Series A Notes (such offer to
exchange being referred to as the "EXCHANGE OFFER") and the Guarantees thereof
and (ii) a shelf registration statement pursuant to Rule 415 under the Act (the
"SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer
Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by
certain holders of the Series A Notes and to use its best efforts to cause such
Registration Statements to be declared and remain effective and usable for the
periods specified in the Registration Rights Agreement and to consummate the
Exchange Offer. This Agreement, the Indenture, the Notes, the Guarantees and
the Registration Rights Agreement are hereinafter sometimes referred to
collectively as the "OPERATIVE DOCUMENTS."
4. DELIVERY AND PAYMENT.
(a) Delivery of, and payment of the Purchase Price for, the Series
A Notes shall be made at the offices of the Company or such other location
as may be mutually acceptable. Such delivery and payment shall be made at
9:00 a.m. Minneapolis, Minnesota time, on April 6, 1998 or at such other
time on the same date or such other date as shall be agreed upon by the
Initial Purchasers and the Company in writing. The time and date of such
delivery and the payment for the Series A Notes are herein called the
"CLOSING DATE."
(b) One or more of the Series A Notes in definitive global form,
registered in the name of Cede & Co., as nominee of the Depository Trust
Company ("DTC"), having an aggregate principal amount corresponding to the
aggregate principal amount of the Series A Notes (collectively, the "GLOBAL
NOTE"), shall be delivered by the Company to the Initial Purchasers (or as
the Initial Purchasers direct) in each case with any transfer taxes thereon
duly paid by the Company against payment by the Initial Purchasers of the
Purchase Price thereof by wire transfer in same day funds to the order of
the Company. The Global Note shall be made available to the Initial
Purchasers for inspection not later than 9:30 a.m., New York City time, on
the business day immediately preceding the Closing Date.
5. AGREEMENTS OF THE COMPANY AND THE GUARANTOR. Each of the Company and
the Guarantor hereby agrees with the Initial Purchasers as follows:
5
<PAGE>
(a) To advise the Initial Purchasers promptly and, if requested by
the Initial Purchasers, confirm such advice in writing, (i) of the issuance
by any state securities commission of any stop order suspending the
qualification or exemption from qualification of any Series A Notes for
offering or sale in any jurisdiction designated by the Initial Purchasers
pursuant to Section 5(e) hereof, or the initiation of any proceeding by any
state securities commission or any other federal or state regulatory
authority for such purpose and (ii) of the happening of any event during
the period referred to in Section 5(c) below that makes any statement of a
material fact made in the Preliminary Offering Memorandum or the Offering
Memorandum untrue or that requires any additions to or changes in the
Preliminary Offering Memorandum or the Offering Memorandum in order to make
the statements therein not misleading. The Company and the Guarantor shall
use their best efforts to prevent the issuance of any stop order or order
suspending the qualification or exemption of any Series A Notes under any
state securities or Blue Sky laws and, if at any time any state securities
commission or other federal or state regulatory authority shall issue an
order suspending the qualification or exemption of any Series A Notes under
any state securities or Blue Sky laws, the Company and the Guarantor shall
use their best efforts to obtain the withdrawal or lifting of such order at
the earliest possible time.
(b) To furnish the Initial Purchasers and those persons identified
by the Initial Purchasers to the Company as many copies of the Preliminary
Offering Memorandum and the Offering Memorandum, and any amendments or
supplements thereto, as the Initial Purchasers may reasonably request for
the time period specified in Section 5(c). Subject to each Initial
Purchaser's compliance with its representations and warranties and
agreements set forth in Section 7 hereof, the Company consents to the use
of the Preliminary Offering Memorandum and the Offering Memorandum, and any
amendments and supplements thereto required pursuant hereto, by the Initial
Purchasers in connection with Exempt Resales.
(c) During such period as in the opinion of counsel for the Initial
Purchasers an Offering Memorandum is required by law to be delivered in
connection with Exempt Resales by the Initial Purchasers and in connection
with market-making activities of the Initial Purchasers for so long as any
Series A Notes are outstanding, (i) not to make any amendment or supplement
to the Offering Memorandum of which the Initial Purchasers shall not
previously have been advised or to which the Initial Purchasers shall
reasonably object after being so advised and (ii) to
6
<PAGE>
prepare promptly upon the Initial Purchasers' reasonable request, any
amendment or supplement to the Offering Memorandum which may be necessary
or advisable in connection with such Exempt Resales or such market-making
activities.
(d) If, during the period referred to in Section 5(c) above, any
event shall occur or condition shall exist as a result of which, in the
opinion of counsel to the Initial Purchaser, it becomes necessary to amend
or supplement the Offering Memorandum in order to make the statements
therein, in the light of the circumstances when such Offering Memorandum is
delivered to an Eligible Purchaser, not misleading, or if, in the opinion
of counsel to the Initial Purchasers, it is necessary to amend or
supplement the Offering Memorandum to comply with any applicable law,
forthwith to prepare an appropriate amendment or supplement to such
Offering Memorandum so that the statements therein, as so amended or
supplemented, will not, in the light of the circumstances when it is so
delivered, be misleading, or so that such Offering Memorandum will comply
with applicable law, and to furnish to the Initial Purchasers and such
other persons as the Initial Purchasers may designate such number of copies
thereof as the Initial Purchasers may reasonably request.
(e) Prior to the sale of all Series A Notes pursuant to Exempt
Resales as contemplated hereby, to cooperate with the Initial Purchasers
and counsel to the Initial Purchasers in connection with the registration
or qualification of the Series A Notes for offer and sale to the Initial
Purchasers and pursuant to Exempt Resales under the securities or Blue Sky
laws of such jurisdictions as the Initial Purchasers may request and to
continue such registration or qualification in effect so long as required
for Exempt Resales and to file such consents to service of process or other
documents as may be necessary in order to effect such registration or
qualification; PROVIDED, HOWEVER, that neither the Company nor the
Guarantor shall be required in connection therewith to qualify as a foreign
corporation in any jurisdiction in which it is not now so qualified or to
take any action that would subject it to general consent to service of
process or taxation other than as to matters and transactions relating to
the Preliminary Offering Memorandum, the Offering Memorandum or Exempt
Resales, in any jurisdiction in which it is not now so subject.
(f) During the period as and to the extent the Company or the
Guarantor, as the case may be, may be required by applicable law or by the
rules of any exchange or securities association upon which any of the
Company's or the Guarantor's securities are listed or quoted, to mail to
the record holders of the Securities (i) within 90 days after the end of
each
7
<PAGE>
fiscal year of the Company or the Guarantor, as the case may be, a
financial report of the Company or the Guarantor, as the case may be, and
its subsidiaries on a consolidated basis, and a similar financial report of
all unconsolidated subsidiaries, if any, all such financial reports to
include a consolidated balance sheet as at the end of the preceding fiscal
year, a consolidated statement of operations, a consolidated statement of
cash flows and a consolidated statement of shareholders' equity covering
such fiscal year, together with comparable information as of the end of and
for the preceding fiscal year, and all to be in reasonable detail and
examined and reported on by independent certified public accountants for
the Company or the Guarantor, as the case may be, and (ii) within 45 days
after the end of each quarterly fiscal period of the Company or the
Guarantor, as the case may be, (except for the last quarterly period of
each fiscal year) copies of the consolidated statement of operations and
statement of cash flows for that period, and the consolidated balance sheet
as of the end of that period, of the Company or the Guarantor, as the case
may be, and its subsidiaries, and the income statement, statement of
changes in financial condition and balance sheet of each unconsolidated
subsidiary, if any, of the Company or the Guarantor, as the case may be, as
at the end of and for that period, together with comparable information as
at the end of and for the same quarterly fiscal period of the preceding
fiscal year.
(g) During the periods referred to in paragraph (f), to furnish to
you as soon as available a copy of each report of the Company or the
Guarantor, as the case may be, or other publicly available information
which the Company or the Guarantor, as the case may be, shall mail or
otherwise make available to the security holders of the Company or the
Guarantor, as the case may be, or shall file with the Commission and such
other publicly available information concerning the Company or the
Guarantor, as the case may be, and its subsidiaries as you may reasonably
request.
(h) So long as any of the Series A Notes remain outstanding and
during any period in which the Company and the Guarantor are not subject to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), to make available to any holder of Series A Notes in
connection with any sale thereof and any prospective purchaser of such
Series A Notes from such holder, the information ("RULE 144A INFORMATION")
required by Rule 144A(d)(4) under the Act.
(i) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or
8
<PAGE>
cause to be paid all expenses incident to the performance of the
obligations of the Company and the Guarantor under this Agreement,
including: (i) the fees, disbursements and expenses of counsel to the
Company and the Guarantor and accountants of the Company and the Guarantor
in connection with the sale and delivery of the Series A Notes to the
Initial Purchasers and pursuant to Exempt Resales, and all other fees and
expenses in connection with the preparation, printing, filing and
distribution of the Preliminary Offering Memorandum, the Offering
Memorandum and all amendments and supplements to any of the foregoing
(including financial statements), including the mailing and delivering of
copies thereof to the Initial Purchasers and persons designated by it in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Series A Notes to the Initial Purchasers and
pursuant to Exempt Resales, including any transfer or other taxes payable
thereon, (iii) all costs of printing or producing this Agreement, the other
Operative Documents and any other agreements or documents in connection
with the offering, purchase, sale or delivery of the Series A Notes, (iv)
all expenses in connection with the registration or qualification of the
Series A Notes and the Guarantees for offer and sale under the securities
or Blue Sky laws of the several states and all costs of printing or
producing any preliminary and supplemental Blue Sky memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel
for the Initial Purchasers in connection with such registration or
qualification and memoranda relating thereto,) (v) the cost of printing
certificates representing the Series A Notes and the Guarantees, (vi) all
expenses and listing fees in connection with the application for quotation
of the Series A Notes in the National Association of Securities Dealers,
Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"), (vii) the
fees and expenses of the Trustee and the Trustee's counsel in connection
with the Indenture, the Notes and the Guarantees, (viii) the costs and
charges of any transfer agent, registrar and/or depositary (including DTC),
(ix) any fees charged by rating agencies for the rating of the Notes, (x)
all costs and expenses of the Exchange Offer and any Registration
Statement, as set forth in the Registration Rights Agreement, and (xi) and
all other costs and expenses incident to the performance of the obligations
of the Company and the Guarantor hereunder for which provision is not
otherwise made in this Section. It is understood that, except as set forth
herein, the Initial Purchasers shall pay their own expenses in connection
with the Initial Purchase and Exempt Resales of the Series A Notes.
9
<PAGE>
(j) To use its best efforts to effect the inclusion of the Series A
Notes in PORTAL and to maintain the listing of the Series A Notes on PORTAL
for so long as the Series A Notes are outstanding.
(k) To obtain the approval of DTC for "book-entry" transfer of the
Notes, and to comply with all of its agreements set forth in the
representation letters of the Company and the Guarantor to DTC relating to
the approval of the Notes by DTC for "book-entry" transfer.
(l) During the period beginning on the date hereof and continuing
to and including the Closing Date, not to offer, sell, contract to sell or
otherwise transfer or dispose of any debt securities of the Company or the
Guarantor or any warrants, rights or options to purchase or otherwise
acquire debt securities of the Company or the Guarantor substantially
similar to the Notes and the Guarantees (other than (i) the Notes and the
Guarantees and (ii) commercial paper issued in the ordinary course of
business), without the prior written consent of the Initial Purchasers.
(m) Not to sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the Act) that
would be integrated with the sale of the Series A Notes to the Initial
Purchaser or pursuant to Exempt Resales in a manner that would require the
registration of any such sale of the Series A Notes under the Act.
(n) Not to voluntarily claim, and to actively resist any attempts
to claim, the benefit of any usury laws against the holders of any Notes
and the related Guarantees.
(o) To cause the Exchange Offer to be made in the appropriate form
to permit Series B Notes and guarantees thereof by the Guarantor registered
pursuant to the Act to be offered in exchange for the Series A Notes and
the Guarantees and to comply with all applicable federal and state
securities laws in connection with the Exchange Offer.
(p) To comply with all of its agreements set forth in the
Registration Rights Agreement.
(q) To use its best efforts to do and perform all things required
or necessary to be done and performed under this Agreement by it prior to
the Closing Date and to satisfy all conditions precedent to the delivery of
the Series A Notes and the Guarantees.
10
<PAGE>
(r) To use the net proceeds from the offering in the manner set
forth under "Use of Proceeds" in the Offering Memorandum.
6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
GUARANTOR. As of the date hereof, each of the Company and the Guarantor
represents and warrants to, and agrees with, the Initial Purchasers that:
(a) The Preliminary Offering Memorandum and the Offering Memorandum
do not, and any supplement or amendment to them will not, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties contained in
this Section 6(a), 6(b), 6(c) shall not apply to statements in or omissions
from the Preliminary Offering Memorandum or the Offering Memorandum (or any
supplement or amendment thereto) based upon information relating to the
Initial Purchasers furnished to the Company in writing by the Initial
Purchasers expressly for use therein. No stop order preventing the use of
the Preliminary Offering Memorandum or the Offering Memorandum, or any
amendment or supplement thereto, or any order asserting that any of the
transactions contemplated by this Agreement are subject to the registration
requirements of the Act, has been issued.
(b) The Guarantor, the Company and each of their respective
subsidiaries are corporations duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation,
with corporate power and authority to carry on their respective businesses
and to own or lease and operate their respective properties as described in
the Offering Memorandum, and each of the Guarantor, the Company and their
respective subsidiaries owns or possesses all licenses and permits
necessary for the conduct of its respective business and the ownership,
leasing and operation of its properties, except such licenses and permits
as to which the failure to own or possess such licenses and permits will
not in the aggregate have a material adverse effect on the financial
condition, earnings or business of the Company; and each is duly qualified
and in good standing as a foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified will not have a material adverse effect on the financial
condition, earnings or business of the Company. All the outstanding shares
of capital stock or other securities evidencing equity ownership of each
subsidiary of the Guarantor have been duly and validly authorized and
issued and are
11
<PAGE>
fully paid and non-assessable, and are owned by the Guarantor free and
clear of any security interest, claim, lien, encumbrance or adverse
interest of any nature other than those created relating to the shares of
capital stock of the Company pursuant to the Loan Documents (as defined in
the Credit Agreement dated as of October 7, 1994, as amended, among the
Company, the Guarantor, the various lenders party thereto from time to time
and Morgan Guaranty Trust Company of New York, as Agent (the "Credit
Agreement")). There are no outstanding rights, warrants or options to
acquire, or instruments convertible into or exchangeable for, any shares of
cpital stock or other equity interest in any such subsidiary except for the
warrants issued pursuant to the Warrant and Registration Rights Agreement
dated as of June 16, 1997 among the Guarantor and the Investors listed
therein, and options issued pursuant to the Guarantor's stock option plans.
(c) The Series A Notes have been duly authorized and, when executed
and authenticated in accordance with the provisions of the Indenture and
delivered to the Initial Purchasers against payment therefor as provided by
this Agreement, will be entitled to the benefits of the Indenture, and will
be valid and binding obligations of the Company or the Guarantor, as the
case may be, enforceable in accordance with their terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (ii) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability.
(d) On the Closing Date, the Series B Notes will have been duly
authorized by the Company. When the Series B Notes are issued, executed
and authenticated in accordance with the terms of the Exchange Offer and
the Indenture, the Series B Notes will be entitled to the benefits of the
Indenture and will be the valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
(e) The Guarantee to be endorsed on the Series A Notes by the
Guarantor has been duly authorized by such Guarantor and, on the Closing
Date, will have been duly executed and delivered by such Guarantor. When
the Series A Notes have been issued, executed and authenticated in
accordance with the Indenture and delivered to and paid for by the Initial
Purchasers in accordance with the terms of this Agreement, the Guarantee
12
<PAGE>
of the Guarantor endorsed thereon will be entitled to the benefits of the
Indenture and will be the valid and binding obligation of such Guarantor,
enforceable against such Guarantor in accordance with its terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability. On the Closing Date, the
Guarantees to be endorsed on the Series A Notes will conform as to legal
matters to the description thereof contained in the Offering Memorandum.
(f) The Guarantee to be endorsed on the Series B Notes by the
Guarantor has been duly authorized by such Guarantor and, when issued, will
have been duly executed and delivered by such Guarantor. When the Series B
Notes have been issued, executed and authenticated in accordance with the
terms of the Exchange Offer and the Indenture, the Guarantee of the
Guarantor endorsed thereon will be entitled to the benefits of the
Indenture and will be the valid and binding obligation of such Guarantor,
enforceable against such Guarantor in accordance with its terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability. When the Series B Notes are
issued, authenticated and delivered, the Guarantees to be endorsed on the
Series B Notes will conform as to legal matters to the description thereof
in the Offering Memorandum.
(g) The Indenture has been duly authorized, executed and delivered
by the Company and the Guarantor and is a valid and binding agreement of
the Company and the Guarantor, enforceable in accordance with its terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (ii)
rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability. On the Closing
Date, the Indenture will conform in all material respects to the
requirements of the Trust Indenture Act of 1939, as amended (the "TIA" or
"TRUST INDENTURE ACT"), and the rules and regulations of the Commission
applicable to an indenture which is qualified thereunder.
(h) The Registration Rights Agreement has been duly authorized by
the Company and the Guarantor and, on the Closing Date, will have been duly
executed and delivered by the Company and the Guarantor. When the
Registration Rights Agreement has been duly executed and delivered, the
Registration Rights Agreement will be a valid and binding
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agreement of the Company and the Guarantor, enforceable against the Company
and the Guarantor in accordance with its terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (ii) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability. On the Closing Date, the Registration
Rights Agreement will conform as to legal matters to the description
thereof in the Offering Memorandum.
(i) Neither the Guarantor, the Company nor any of their respective
subsidiaries is in violation of its charter documents or by-laws or in
default in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of
indebtedness or in any other material indenture, instrument or agreement to
which the Guarantor, the Company or any of their respective subsidiaries is
a party or which binds the Guarantor, the Company or any of their
respective subsidiaries or any of their respective property. Neither the
Guarantor, the Company nor any of their respective subsidiaries is in
material violation of any law, ordinance, governmental rule or regulation
or court decree to which it is subject. The execution, delivery and
performance of this Agreement, the Indenture, the Notes and the Guarantees,
compliance by the Guarantor and the Company with all provisions hereof and
thereof, and the consummation of the transactions contemplated hereby and
thereby will not violate or conflict with or constitute a breach of any of
the terms or provisions of, or constitute a default under (i) the charter
documents or by-laws of the Guarantor, the Company or any of their
respective subsidiaries, or (ii) any bond, debenture, note or other
evidence of indebtedness or any other material indenture, instrument or
agreement to which the Guarantor, the Company or any of their respective
subsidiaries is a party or which binds the Guarantor, the Company or any of
their respective subsidiaries or any of their respective property, or (iii)
(assuming compliance with all applicable state securities or Blue Sky laws
in the several states in which the Notes will be offered or sold) any law,
regulation or ruling or any order, judgment or decree to which the
Guarantor, the Company or any of their respective subsidiaries or any of
their respective property may be subject.
(j) Except for permits and similar authorizations required under
the securities or Blue Sky laws of the several states in which the Notes
and Guarantee will be offered or sold, no authorization, consent, approval,
license or other order of any regulatory body, administrative agency or
other governmental body is required for the valid issuance, sale and
delivery of the Notes to the Initial Purchasers as contemplated by this
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Agreement; no consents or waivers from the holders of the Guarantor's or
the Company's capital stock or debt securities are required to consummate
the transactions contemplated hereby other than such consents and waivers
as have been obtained.
(k) Each contract, lease or document of a character described in
the Offering Memorandum is so described; the descriptions thereof or
references thereto are accurate in all material respects; and each
contract, lease or document so described is in full force and effect in
accordance with its respective terms.
(l) Each of the Guarantor, the Company and their respective
subsidiaries has good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions except liens for taxes not yet due
and payable, to all property and assets described in the Offering
Memorandum as being owned by it. All leases to which the Guarantor, the
Company or any of their respective subsidiaries is a party are valid and
binding and no default has occurred or is continuing thereunder, which
might result in any material adverse change in the business, prospects,
financial condition or results of operation of the Guarantor and its
subsidiaries taken as a whole, and the Guarantor and its subsidiaries enjoy
peaceful and undisturbed possession under all such leases to which any of
them is a party as lessee with such exceptions as do not materially
interfere with the use made by the Guarantor or such subsidiary. Each of
the Guarantor, the Company and their respective subsidiaries has all
governmental licenses, certificates, permits, authorizations, approvals,
franchises or other rights necessary to engage in the business currently
conducted by it, and neither the Guarantor, the Company nor any of their
respective subsidiaries has any reason to believe that any governmental
body or agency is considering limiting, suspending or revoking any such
license, certificate, permit, authorization, approval, franchise or right
which might result in any material adverse change in the business,
prospects, financial condition or results of operation of the Guarantor and
its subsidiaries, taken as a whole.
(m) The accountants who have certified the financial statements of
the Guarantor and its subsidiaries as a part of (or incorporated by
reference in) the Offering Memorandum are independent accountants as
required by the Act. The consolidated financial statements of the
Guarantor and its subsidiaries included in the Offering Memorandum comply
in all material respects with the requirements of the Act and present
fairly the financial position and results of operation of the Guarantor and
its consolidated subsidiaries at the respective dates and for
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<PAGE>
the respective periods specified. All such financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout such periods (except as otherwise
noted).
(n) Since the dates as of which information is given in the
Offering Memorandum, except as otherwise stated or contemplated therein (i)
there has been no material adverse change in the financial condition of the
Guarantor or any of its subsidiaries, or in their earnings or business
affairs, whether or not arising in the ordinary course of business, (ii)
there have been no material transactions entered into by the Guarantor or
any of its subsidiaries, other than the transactions in the ordinary course
of business, that are material to the Guarantor, (iii) neither the
Guarantor nor any of its subsidiaries has incurred any obligation,
contingent or otherwise, that is material to the Guarantor, (iv) there has
been no change in the capital stock or debt of the Guarantor or any of its
subsidiaries and (v) there has been no dividend or distribution of any kind
declared, paid or made by the Company on its capital stock.
(o) Each of the Guarantor and the Company has corporate power and
authority to enter into and perform this Agreement and to issue, sell and
deliver the Notes and the Guarantees to be sold by the Company and the
Guarantor, respectively, hereunder; this Agreement has been duly
authorized, executed and delivered by the Guarantor and the Company and is
a valid and binding agreement of the Guarantor and the Company except as
rights to indemnity and contribution hereunder may be limited under
applicable federal and state securities laws.
(p) Each of the Guarantor, the Company and their respective
subsidiaries owns or possesses adequate licenses or other rights to use all
patents, trademarks, service marks, trade names, copyrights and know-how
(including trade secrets, and other proprietary and confidential
information, systems or procedures) necessary to conduct the businesses now
operated by it as described in the Offering Memorandum; and neither the
Guarantor, the Company nor any of their respective subsidiaries has
received any notice of infringement of or conflict with (and no officer or
director of the Guarantor knows of any such infringement of or conflict
with) asserted rights of others with respect to any patents, trademarks,
service marks, trade names, copyrights or know-how, which might result in
any material adverse change in the business, prospects, financial condition
or results of operation of the Company and its subsidiaries, taken as a
whole.
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<PAGE>
(q) Each of the Guarantor, the Company and their respective
subsidiaries maintains reasonably adequate insurance.
(r) There is not now pending or, to the knowledge of the
Guarantor's officers, threatened, any litigation, action, suite or
proceeding, including any such litigation, action, suit or proceeding
related to environmental matters or related to discrimination on the basis
of age, sex, religion or race, to which the Guarantor or any of its
subsidiaries is or will be a party before or by any court or governmental
agency or body, which might result in any material adverse charge in the
business, prospects, financial condition or results of operation of the
Guarantor and its subsidiaries, taken as a whole, or might materially and
adversely affect the property or assets of the Guarantor and its
subsidiaries, taken as a whole, and no labor disturbance by the employees
of the Guarantor or any of its subsidiaries exists or is imminent which
might be expected to adversely affect the conduct of the business,
financial condition or results of operation of the Guarantor and the
officers of the Guarantor are not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers, contractors or customers wich may be expected to result in
any material adverse change in the condition, financial or otherwise, or
the earnings, affairs or business prospects of the Guarantor and its
subsidiaries, taken as a whole.
(s) To the knowledge of the officers of the Guarantor neither the
Guarantor nor any of its subsidiaries has violated any environmental,
safety or similar law applicable to its business, nor any federal or state
law relating to discrimination in the hiring, promotion or pay of employees
nor any applicable federal or state wages and hours laws, nor any
provisions of the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which in each case might result in any
material adverse change in the business, prospects, financial condition or
results of operation of the Guarantor and its subsidiaries, taken as a
whole.
(t) All federal, state and other tax returns of the Guarantor
required by law to be filed have been duly filed. The Guarantor and its
subsidiaries have properly expended or paid all necessary federal, state,
local and foreign income taxes and franchise taxes and, except as disclosed
in the Offering Memorandum, there is no tax deficiency that has been
asserted or is threatened against the Guarantor or any of its subsidiaries.
The provisions and reserves on the books of the Guarantor in respect of
federal, state and other taxes are, in the opinion of the Guarantor,
adequate.
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<PAGE>
(u) Neither the Guarantor nor the Company is or, after giving
effect to the offering and sale of the Series A Notes and the application
of the net proceeds thereof as described in the Offering Memorandum, will
be, an "investment company," as such term is defined in the Investment
Company Act of 1940, as amended.
(v) No holder of any security of the Guarantor has any right to
require registration of shares of common stock or any other security of the
Company in connection with the Offering Memorandum with respect to the
Notes except for rights pursuant to the Warrant and Registration Rights
Agreement dated as of June 16, 1997 among the Guarantor and the Investors
listed therein.
(w) All indebtedness of the Company and the Guarantor that will be
repaid with the proceeds of the issuance and sale of the Series A Notes was
incurred, and the indebtedness represented by the Series A Notes is being
incurred for proper purposes and in good faith and each of the Company and
the Guarantor was, at the time of the incurrence of such indebtedness that
will be repaid with the proceeds of the issuance and sale of the Series A
Notes, solvent, and had at the time of the incurrence of such indebtedness
that will be repaid with the proceeds of the issuance and the sale of the
Series A Notes) sufficient capital for carrying on their respective
business and were, at the time of the incurrence of such indebtedness that
will be repaid with the proceeds of the issuance and sale of the Series A
Notes, and will be on the Closing Date (after giving effect to the
application of the proceeds from the issuance of the Series A Notes) able
to pay their respective debts as they mature.
(x) Except for publicly disclosed ratings downgrades prior to the
date hereof, no "nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the Act (i) has
imposed (or has informed the Company or the Guarantor that it is
considering imposing) any condition (financial or otherwise) on the
Company's or the Guarantor's retaining any rating assigned to the Company
or the Guarantor, any securities of the Company or any Guarantor or (ii)
has indicated to the Company or the Guarantor that it is considering (A)
the downgrading, suspension, or withdrawal of, or any review for a possible
change that does not indicate the direction of the possible change in, any
rating so assigned or (B) any negative change in the outlook for any rating
of the Company, the Guarantor or any securities of the Company or the
Guarantor.
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<PAGE>
(y) Each of the Preliminary Offering Memorandum and the Offering
Memorandum, as of its date, contains all the information specified in, and
meeting the requirements of, Rule 144A(d)(4) under the Act.
(z) When the Series A Notes and the Guarantees are issued and
delivered pursuant to this Agreement, neither the Series A Notes nor the
Guarantees will be of the same class (within the meaning of Rule 144A under
the Act) as any security of the Company or the Guarantor that is listed on
a national securities exchange registered under Section 6 of the Exchange
Act or that is quoted in a United States automated inter-dealer quotation
system.
(aa) No form of general solicitation or general advertising (as
defined in Regulation D under the Act) was used by the Company, the
Guarantor or any of their respective representatives (other than the
Initial Purchasers, as to whom the Company and the Guarantor make no
representation) in connection with the offer and sale of the Series A Notes
contemplated hereby, including, but not limited to, articles, notices or
other communications published in any newspaper, magazine, or similar
medium or broadcast over television or radio, or any seminar or meeting
whose attendees have been invited by any general solicitation or general
advertising. No securities of the same class as the Series A Notes have
been issued and sold by the Company within the six-month period immediately
prior to the date hereof.
(bb) Prior to the effectiveness of any Registration Statement, the
Indenture is not required to be qualified under the TIA.
(cc) None of the Company, the Guarantor nor any of their respective
affiliates or any person acting on its or their behalf (other than the
Initial Purchasers, as to whom the Company and the Guarantor make no
representation) has engaged or will engage in any directed selling efforts
within the meaning of Regulation S under the Act ("REGULATION S") with
respect to the Series A Notes or the Guarantees.
(dd) The sale of the Series A Notes pursuant to Regulation S is not
part of a plan or scheme to evade the registration provisions of the Act.
(ee) No registration under the Act of the Series A Notes or the
Guarantee is required for the sale of the Series A Notes and the Guarantees
to the Initial Purchasers as contemplated hereby or for the Exempt Resales
assuming the accuracy of the Initial Purchasers' representations and
warranties and agreements set forth in Section 7 hereof.
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<PAGE>
(ff) Each certificate signed by any officer of the Company or the
Guarantor and delivered to the Initial Purchasers or counsel for the
Initial Purchasers shall be deemed to be a representation and warranty by
the Company or the Guarantor to the Initial Purchasers as to the matters
covered thereby.
(gg) The Company, the Guarantor and their respective affiliates and
all persons acting on their behalf (other than the Initial Purchasers, as
to whom the Company and the Guarantor make no representation) have complied
with and will comply with the offering restrictions requirements of
Regulation S in connection with the offering of the Series A Notes outside
the United States and, in connection therewith, the Offering Memorandum
will contain the disclosure required by Rule 902(h).
(hh) The Series A Notes sold in reliance on Regulation S will be
represented upon issuance by a temporary global security that may not be
exchanged for definitive securities until the expiration of the 40-day
restricted period referred to in Rule 903(c)(3) of the Act and only upon
certification of beneficial ownership of such Series A Notes by non-U.S.
persons or U.S. persons who purchased such Series A Notes in transactions
that were exempt from the registration requirements of the Act.
The Company acknowledges that the Initial Purchasers and, for purposes of
the opinions to be delivered to the Initial Purchasers pursuant to Section 9
hereof, counsel to the Company and the Guarantor and counsel to the Initial
Purchasers will rely upon the accuracy and truth of the foregoing
representations and hereby consents to such reliance.
7. INITIAL PURCHASERS' REPRESENTATIONS AND WARRANTIES. Each of the
Initial Purchasers, severally and not jointly, represents and warrants the
Company and the Guarantor:
(a) Such Initial Purchaser is either a QIB or an Accredited
Institution, in either case, with such knowledge and experience in
financial and business matters as is necessary in order to evaluate the
merits and risks of an investment in the Series A Notes.
(b) Such Initial Purchaser (i) is not acquiring the Series A Notes
with a view to any distribution thereof or with any present intention of
offering or selling any of the Series A Notes in a transaction that would
violate the Act or the securities laws of any state of the United States or
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<PAGE>
any other applicable jurisdiction and (ii) will be reoffering and reselling
the Series A Notes only to (x) QIBs in reliance on the exemption from the
registration requirements of the Act provided by Rule 144A, and (y) in
offshore transactions in reliance upon Regulation S under the Act.
(c) Such Initial Purchaser agrees that no form of general
solicitation or general advertising (within the meaning of Regulation D
under the Act) has been or will be used by such Initial Purchaser or any of
its representatives in connection with the offer and sale of the Series A
Notes pursuant hereto, including, but not limited to, articles, notices or
other communications published in any newspaper, magazine or similar medium
or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising.
(d) Such Initial Purchaser agrees that, in connection with Exempt
Resales, such Initial Purchaser will solicit offers to buy the Series A
Notes only from, and will offer to sell the Series A Notes only to,
Eligible Purchasers. Each Initial Purchaser further agrees that it will
offer to sell the Series A Notes only to, and will solicit offers to buy
the Series A Notes only from (i) Eligible Purchasers that the Initial
Purchaser reasonably believes are QIBs, and (ii) Regulation S Purchasers,
in each case, that agree that (x) the Series A Notes purchased by them may
be resold, pledged or otherwise transferred within the time period referred
to under Rule 144(k) (taking into account the provisions of Rule 144(d)
under the Act, if applicable) under the Act, as in effect on the date of
the transfer of such Series A Notes, only (A) to the Guarantor, the Company
or any of its subsidiaries, (B) to a person whom the seller reasonably
believes is a QIB purchasing for its own account or for the account of a
QIB in a transaction meeting the requirements of Rule 144A under the Act,
(C) in an offshore transaction (as defined in Rule 902 under the Act)
meeting the requirements of Rule 904 of the Act, (D) in a transaction
meeting the requirements of Rule 144 under the Act, (E) in accordance with
another exemption from the registration requirements of the Act (and based
upon an opinion of counsel acceptable to the Company) or (F) pursuant to an
effective registration statement and, in each case, in accordance with the
applicable securities laws of any state of the United States or any other
applicable jurisdiction and (y) they will deliver to each person to whom
such Series A Notes or an interest therein is transferred a notice
substantially to the effect of the foregoing.
(e) Such Initial Purchaser and its affiliates or any person acting on
its or their behalf have not engaged or will not engage in any directed
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<PAGE>
selling efforts within the meaning of Regulation S with respect to the
Series A Notes or the Guarantees.
(f) The sale of the Series A Notes offered and sold by such Initial
Purchaser pursuant hereto in reliance on Regulation S is not part of a plan
or scheme to evade the registration provisions of the Act.
(g) Such Initial Purchaser agrees that it has not offered or sold and
will not offer or sell the Series A Notes in the United States or to, or
for the benefit or account of, a U.S. Person (other than a distributor), in
each case, as defined in Rule 902 under the Act (i) as part of its
distribution at any time and (ii) otherwise until 40 days after the later
of the commencement of the offering of the Series A Notes pursuant hereto
and the Closing Date, other than in accordance with Regulation S of the Act
or another exemption from the registration requirements of the Act. Such
Initial Purchaser agrees that, during such 40-day restricted period, it
will not cause any advertisement with respect to the Series A Notes
(including any "tombstone" advertisement) to be published in any newspaper
or periodical or posted in any public place and will not issue any circular
relating to the Series A Notes, except such advertisements as permitted by
and include the statements required by Regulation S.
(h) Such Initial Purchaser agrees that, at or prior to confirmation
of a sale of Series A Notes by it to any distributor, dealer or person
receiving a selling concession, fee or other remuneration during the 40-day
restricted period referred to in Rule 903(c)(3) under the Act, it will send
to such distributor, dealer or person receiving a selling concession, fee
or other remuneration a confirmation or notice to substantially the
following effect:
"The Series A Notes covered hereby have not been registered under the
U.S. Securities Act of 1933, as amended (the "SECURITIES ACT"), and
may not be offered and sold within the United State or to, or for the
account or benefit of, U.S. persons (i) as part of your distribution
at any time or (ii) otherwise until 40 days after the later of the
commencement of the Offering and the Closing Date, except in either
case in accordance with Regulation S under the Securities Act (or Rule
144A or to Accredited Institutions in transactions that are exempt
from the registration requirements of the Securities Act), and in
connection with any subsequent sale by you of the Series A Notes
covered hereby in reliance on Regulation S during the period referred
to above to any distributor, dealer or person receiving a selling
concession, fee or other remuneration, you must
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<PAGE>
deliver a notice to substantially the foregoing effect. Terms used
above have the meaning assigned to them in Regulation S."
(i) Such Initial Purchaser agrees that the Series A Notes offered and
sold in reliance on Regulation S will be represented upon issuance by a
global security that may not be exchanged for definitive securities until
the expiration of the 40-day restricted period referred to in Rule
903(c)(3) of the Act and only upon certification of beneficial ownership of
such Series A Notes by non-U.S. persons or U.S. persons who purchased such
Series A Notes in transactions that were exempt from the registration
requirements of the Act.
Such Initial Purchaser acknowledges that the Company and the
Guarantor and, for purposes of the opinions to be delivered to each
Initial Purchaser pursuant to Section 9 hereof, counsel to the Company
and the Guarantor and counsel to the Initial Purchaser will rely upon
the accuracy and truth of the foregoing representations and such
Initial Purchaser hereby consents to such reliance.
8. INDEMNIFICATION.
(a) The Company and the Guarantor agree, jointly and severally, to
indemnify and hold harmless each Initial Purchaser, its directors, its
officers and each person, if any, who controls such Initial Purchaser
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses
incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Offering
Memorandum (or any amendment or supplement thereto), the Preliminary
Offering Memorandum or any Rule 144A Information provided by the Company or
the Guarantor to any holder or prospective purchaser of Series A Notes
pursuant to Section 5(h) or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or judgments are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to such Initial Purchaser furnished in writing to the
Company by such Initial Purchaser; PROVIDED, HOWEVER, that the foregoing
indemnity agreement with respect to the
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Preliminary Offering Memorandum shall not inure to the benefit of any
Initial Purchaser who failed to deliver the Offering Memorandum, as then
amended or supplemented (so long as the Offering Memorandum and any such
amendment or supplement was provided by the Company to the several Initial
Purchasers in the requisite quantity and on a timely basis to permit proper
delivery on or prior to the Closing Date) to the person asserting any
losses, claims, damages, liabilities or judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Preliminary Offering Memorandum, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such material
misstatement or omission or alleged material misstatement or omission was
cured in the Offering Memorandum, as so amended or supplemented.
(b) Each Initial Purchaser, severally and not jointly, agrees to
indemnify and hold harmless the Company and the Guarantor, and their
respective directors and officers and each person, if any, who controls
(within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act) the Company or the Guarantor, to the same extent as the foregoing
indemnity from the Company and the Guarantor to each Initial Purchaser but
only with reference to information relating to such Initial Purchaser
furnished in writing to the Company by such Initial Purchaser expressly for
use in the Preliminary Offering Memorandum or the Offering Memorandum.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b)
(the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "INDEMNIFYING PARTY")
in writing and the indemnifying party shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all fees and expenses of such counsel,
as incurred (except that in the case of any action in respect of which
indemnity may be sought pursuant to both Sections 8(a) and 8(b), the
Initial Purchasers shall not be required to assume the defense of such
action pursuant to this Section 8(c), but may employ separate counsel and
participate in the defense thereof, but the fees and expenses of such
counsel, except as provided below, shall be at the expense of the Initial
Purchasers). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the
indemnified party unless (i) the employment of such
24
<PAGE>
counsel shall have been specifically authorized in writing by the
indemnifying party, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including
any impleaded parties) include both the indemnified party and the
indemnifying party, and the indemnified party shall have been advised by
such counsel that there may be one or more legal defenses available to it
which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified
party). In any such case, the indemnifying party shall not, in connection
with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed
as they are incurred. Such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation, in the case of the
parties indemnified pursuant to Section 8(a), and by the Company, in the
case of parties indemnified pursuant to Section 8(b). The indemnifying
party shall indemnify and hold harmless the indemnified party from and
against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with the indemnifying
party's written consent or (ii) effected without the indemnifying party's
written consent if the settlement is entered into more than twenty business
days after the indemnifying party shall have received a request from the
indemnified party for reimbursement for the fees and expenses of counsel
(in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the
indemnifying party shall have failed to comply with such reimbursement
request. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement or compromise of, or consent
to the entry of judgment with respect to, any pending or threatened action
in respect of which the indemnified party is or could have been a party and
indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of the indemnified
party.
(d) To the extent the indemnification provided for in this Section 8
is unavailable to an indemnified party or insufficient in respect of any
25
<PAGE>
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as
a result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Guarantor, on the one hand, and the Initial
Purchasers on the other hand from the offering of the Series A Notes or
(ii) if the allocation provided by clause 8(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Company and the Guarantor, on the one hand, and the
Initial Purchasers, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Guarantor, on the one
hand and the Initial Purchasers, on the other hand, shall be deemed to be
in the same proportion as the total net proceeds from the offering of the
Series A Notes (after underwriting discounts and commissions, but before
deducting expenses) received by the Company, and the total discounts and
commissions received by the Initial Purchasers bear to the total price to
investors of the Series A Notes, in each case as set forth in the table on
the cover page of the Offering Memorandum. The relative fault of the
Company and the Guarantor, on the one hand, and the Initial Purchasers, on
the other hand, shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Guarantor, on the one hand, or
the Initial Purchasers, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Guarantor, and the Initial Purchasers agree
that it would not be just and equitable if contribution pursuant to
this Section 8(d) were determined by pro rata allocation (even if the
Initial Purchasers were treated as one entity for such purpose) or by
any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or
other expenses incurred by such indemnified party in connection with
investigating or defending
26
<PAGE>
any matter, including any action, that could have given rise to such
losses, claims, damages, liabilities or judgments. Notwithstanding
the provisions of this Section 8, the Initial Purchasers shall not be
required to contribute any amount in excess of the amount by which the
total discounts and commissions received by such Initial Purchasers
exceeds the amount of any damages which the Initial Purchasers have
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Initial
Purchasers' obligations to contribute pursuant to this Section 8(d)
are several in proportion to the respective principal amount of Series
A Notes purchased by each of the Initial Purchasers hereunder and not
joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
9. CONDITIONS OF INITIAL PURCHASER'S OBLIGATIONS. The obligations of the
Initial Purchasers to purchase the Series A Notes under this Agreement are
subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company and the
Guarantor contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of the
Closing Date.
(b) On or after the date hereof, (i) there shall not have occurred
any downgrading, suspension or withdrawal of, nor shall any notice have
been given of any potential or intended downgrading, suspension or
withdrawal of, or of any review (or of any potential or intended review)
for a possible change that does not indicate the direction of the possible
change in, any rating of the Company or the Guarantor or any securities of
the Company or the Guarantor (including, without limitation, the placing of
any of the foregoing ratings on credit watch with negative or developing
implications or under review with an uncertain direction) by any
"nationally recognized statistical rating organization" as such term is
defined for purposes of Rule 436(g)(2) under the Act, (ii) there shall not
have occurred any change, nor shall any notice have been given of any
potential or intended change, in the outlook for any rating of the Company
or the Guarantor or any securities of the Company or any Guarantor by
27
<PAGE>
any such rating organization and (iii) no such rating organization shall
have given notice that it has assigned (or is considering assigning) a
lower rating to the Notes than that on which the Notes were marketed.
(c) Since the respective dates as of which information is given in
the Offering Memorandum other than as set forth in the Offering Memorandum
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement), (i) there shall not have occurred any change or any
development involving a prospective change in the condition, financial or
otherwise, or the earnings, business, management or operations of the
Company and its subsidiaries, taken as a whole, (ii) there shall not have
been any change or any development involving a prospective change in the
capital stock or in the long-term debt of the Company or any of its
subsidiaries and (iii) neither the Guarantor, the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause
9(c)(i), 9(c)(ii) or 9(c)(iii), in your judgment, is material and adverse
and, in your judgment, makes it impracticable to market the Series A Notes
on the terms and in the manner contemplated in the Offering Memorandum.
(d) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by the President and the Chief Financial Officer
of the Company and the Guarantor, confirming the matters set forth in
Sections 9(a), 9(b) and 9(c) and stating that each of the Company and the
Guarantor has complied with all the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied
on or prior to the Closing Date.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Initial Purchaser), dated the
Closing Date, of Moss & Barnett, a professional association ("MOSS &
BARNETT"), counsel for the Company and the Guarantor substantially as set
forth in Exhibit B. With respect to the opinions to be set forth in
Exhibit B, Moss & Barnett may state that their opinion and belief are based
upon their participation in the preparation of the Offering Memorandum and
any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except
as specified. In giving the opinions referred to in Exhibit B, Moss &
Barnett may (x) assume, as to any matters governed by the laws of New York,
that the laws of Minnesota are substantially comparable to the laws of New
York (provided such counsel has no reason to believe that such laws are not
substantially comparable) and (y) rely on the opinion of the
28
<PAGE>
Vice President and General Counsel of the Company and Guarantor or of
Faegre & Benson, L.L.P., ("Faegre & Benson") counsel to the Company and
Guarantor, as to certain specified matters. In lieu of reliance on such
opinion of the Vice President and General Counsel, such opinion of the Vice
President and General Counsel or of Faegre & Benson may be delivered
directly to the Initial Purchasers.
(f) The Initial Purchasers shall have received on the Closing Date an
opinion, dated the Closing Date, of Davis Polk & Wardwell, counsel for the
Initial Purchasers, in form and substance reasonably satisfactory to the
Initial Purchasers.
(g) The Initial Purchasers shall have received, at the time this
Agreement is executed and at the Closing Date, letters dated the date
hereof or the Closing Date, as the case may be, in form and substance
satisfactory to the Initial Purchasers from Arthur Andersen LLP,
independent public accountants, containing the information and statements
of the type ordinarily included in accountants' "comfort letters" to the
Initial Purchasers with respect to the financial statements and certain
financial information contained in the Offering Memorandum.
(h) The Series A Notes shall have been approved by the NASD for
trading and duly listed in PORTAL.
(i) The Initial Purchasers shall have received a counterpart,
conformed as executed, of the Indenture which shall have been entered into
by the Company, the Guarantor and the Trustee.
(j) The Company and the Guarantor shall have executed the
Registration Rights Agreement and the Initial Purchasers shall have
received an original copy thereof, duly executed by the Company and the
Guarantor.
(k) Neither the Company nor the Guarantor shall have failed at or
prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the
Company or the Guarantor, as the case may be, at or prior to the Closing
Date.
(l) The Amendment to the Credit Agreement substantially in the form
attached hereto as Exhibit C will have been executed by the Company and the
Required Banks as defined therein.
29
<PAGE>
10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement shall
become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by the Initial Purchasers by written notice to the Company if any of the
following has occurred: (i) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions or
in the financial markets of the United States or elsewhere that, in the Initial
Purchasers' judgment, is material and adverse and, in the Initial Purchasers'
judgment, makes it impracticable to market the Series A Notes on the terms and
in the manner contemplated in the Offering Memorandum, (ii) the suspension or
material limitation of trading in securities or other instruments on the New
York Stock Exchange, the American Stock Exchange, the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the
Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company or the Guarantor on any
exchange or in the over-the-counter market, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in your opinion
materially and adversely affects, or will materially and adversely affect, the
business, prospects, financial condition or results of operations of the
Guarantor, the Company and its subsidiaries, taken as a whole, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date any one or more of the initial Purchasers shall fail
or refuse to purchase the Series A Notes which it or they have agreed to
purchase hereunder on such date and the aggregate principal amount of the Series
A Notes which such defaulting Initial Purchase or Initial Purchasers, as the
case may be, agreed but failed or refused to purchase is not more than one-tenth
of the aggregate principal amount of the Series A Notes to be purchased on such
date by all Initial Purchasers, each non-defaulting Initial Purchaser shall be
obligated severally, in the proportion which the principal amount of the Series
A Notes set forth opposite its name in Schedule B bears to the aggregate
principal amount of the Series A Notes which all the non-defaulting Initial
Purchasers, as the case may be, have agreed to purchase, or in such other
proportion as you may specify, to purchase the Series A Notes which such
defaulting Initial Purchaser or Initial Purchasers, as the case may be, agreed
but failed or refused to purchase on such date; PROVIDED that in no event shall
the aggregate principal amount of the Series
30
<PAGE>
A Notes which any Initial Purchaser has agreed to purchase pursuant to Section 2
hereof be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such principal amount of the Series A Notes without the written
consent of such Initial Purchaser. If on the Closing Date any Initial Purchaser
or Initial Purchasers shall fail or refuse to purchase the Series A Notes with
respect to which such default occurs is more than one-tenth of the aggregate
principal amount of the Series A Notes to be purchased by all Initial Purchasers
and arrangements satisfactory to the Initial Purchasers and the Company for
purchase of such the Series A Notes are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Initial Purchaser, the Company and the Guarantor. If any such
case which does not result in termination of this Agreement, either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Offering Memorandum or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Initial
Purchaser from liability in respect of any default of any such Initial Purchaser
under this Agreement.
11. MISCELLANEOUS. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company or the
Guarantor, to Musicland Group Inc., 10400 Yellow Circle Drive, Minnetonka, MN
55343, Fax: (612) 931-8047, Attention: General Counsel and (ii) if to the
Initial Purchasers, Donaldson, Lufkin & Jenrette Securities Corporation, 277
Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in
any case to such other address as the person to be notified may have requested
in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Guarantor and the Initial
Purchasers set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Series A Notes, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of the Initial Purchasers, the
officers or directors of the Initial Purchasers, any person controlling the
Initial Purchasers, the Company, the Guarantor, the officers or directors of the
Company or the Guarantor, or any person controlling the Company or the
Guarantor, (ii) acceptance of the Series A Notes and payment for them hereunder
and (iii) termination of this Agreement.
If for any reason the Series A Notes are not delivered by or on behalf of
the Company as provided herein (other than as a result of any termination of
this Agreement pursuant to Section 10), the Company and the Guarantor, jointly
and severally, agree to reimburse the Initial Purchasers for all reasonable
out-of-pocket expenses (including the fees and disbursements of counsel)
incurred
31
<PAGE>
by them. Notwithstanding any termination of this Agreement, the Company shall
be liable for all expenses which it has agreed to pay pursuant to Section 5(i)
hereof. The Company and the Guarantor also agree, jointly and severally, to
reimburse each Initial Purchaser and its officers, directors and each person, if
any, who controls such Initial Purchaser within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act for any and all fees and expenses
(including without limitation the fees and expenses of counsel) incurred by them
in connection with enforcing their rights under this Agreement (including
without limitation its rights under Section 8).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Guarantor, the
Initial Purchasers, the Initial Purchasers' directors and officers, any
controlling persons referred to herein, the directors of the Company and the
Guarantor and their respective successors and assigns, all as and to the extent
provided in this Agreement, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include a purchaser of any of the Series A Notes from the Initial Purchasers
merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
32
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Guarantor and the Initial Purchasers.
Very truly yours,
THE MUSICLAND GROUP, INC.
By: /s/ Jack W. Eugster
------------------------------------
Name: Jack W. Eugster
Title: CEO, Chairman, and President
MUSICLAND STORES CORPORATION
By: /s/ Jack W. Eugster
------------------------------------
Name: Jack W. Eugster
Title: CEO, Chairman, and President
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
NATIONSBANC MONTGOMERY
SECURITIES LLC
By: DONALDSON, LUFKIN &
JENRETTE SECURITIES
CORPORATION, on behalf of
the Initial Purchaser
By: /s/ Ephraim Fields
--------------------------------
Name: Ephraim Fields
Title: Vice President
33
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
INITIAL PURCHASERS PRINCIPAL AMOUNT OF NOTES
------------------ -------------------------
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation $ 90,000,000
BT Alex. Brown Incorporated $ 30,000,000
NationsBanc Montgomery
Securities LLC $ 30,000,000
Total $
</TABLE>
34
<PAGE>
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT B
FORM OF OPINIONS TO BE DELIVERED BY COMPANY COUNSEL
(i) each of the Guarantor, the Company and its subsidiaries has
been duly incorporated, is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in the
Offering Memorandum and to own, lease and operate its properties;
(ii) each of the Guarantor, the Company and its subsidiaries is
duly qualified and is in good standing as a foreign corporation authorized
to do business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Guarantor and its subsidiaries, taken as a whole;
(iii) this Agreement has been duly and validly authorized, executed
and delivered by the Guarantor and the Company and (assuming the due
authorization, execution and delivery of this Agreement by the Initial
Purchasers) is a valid and binding agreement of the Guarantor and the
Company, except as rights to indemnity and contribution hereunder may be
limited by applicable law;
(iv) all the outstanding shares of capital stock or other
securities evidencing equity ownership of the Company by the Guarantor have
been duly and validly authorized and issued and are fully paid and
non-assessable, and are owned by the Guarantor, free and clear of any
security interest, claim, lien or encumbrance other than those created
pursuant to the Loan Documents (as defined in the Credit Agreement); to the
knowledge of such counsel after due inquiry, there are no outstanding
rights, warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock or other equity interest in
the Guarantor except for rights issued pursuant to the Warrant and
Registration Rights Agreement dated as of June 16, 1997 among the Guarantor
and the Investors listed therein, and options issued pursuant to the
Guarantor's stock option plans;
B-2
<PAGE>
(v) the Series A Notes have been duly authorized and, when
executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Initial Purchasers in
accordance with the terms of this Agreement, will be entitled to the
benefits of the Indenture and will be valid and binding obligations of the
Company, enforceable in accordance with their terms except as (x) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (y) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability;
(vi) the Guarantees have been duly authorized and, when the Series
A Notes are executed and authenticated in accordance with the provisions of
the Indenture and delivered to and paid for by the Initial Purchasers in
accordance with the terms of this Agreement, the Guarantees endorsed
thereon will be entitled to the benefits of the Indenture and will be valid
and binding obligations of the Guarantor, enforceable in accordance with
their terms except as (x) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (y) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability;
(vii) the Indenture has been duly authorized, executed and
delivered by the Company and the Guarantor and is a valid and binding
agreement of the Company and the Guarantor, enforceable against the Company
and the Guarantor in accordance with its terms except as (x) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (y) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability;
(viii) such counsel does not know of any legal or governmental
proceeding pending or threatened against the Guarantor or the Company or to
which the Guarantor or the Company is a party or to which any of the
properties of the Guarantor or the Company is subject which is required to
be described in the Offering Memorandum and is not so described, or any
contract, lease or other document which is required to be described in the
Offering Memorandum which is not described as
B-3
<PAGE>
required; the descriptions thereof or references thereto are accurate in
all material respects; and each contract, lease or document so described is
in full force and effect in accordance with its terms;
(ix) neither the Guarantor nor the Company is in violation of
their respective charter documents or by-laws or, to such counsel's
knowledge, in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note or any other
evidence of indebtedness or in any material indenture, instrument or other
agreement material to the conduct of the business of either the Guarantor
or the Company to which either the Guarantor or the Company is a party or
which binds either the Guarantor or the Company or any of their property;
(x) the execution, delivery and performance of this Agreement,
the Indenture, the Notes and the Guarantees and compliance by the Guarantor
or the Company with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will not
violate or conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter documents or by-laws of
either the Guarantor or the Company or, to the knowledge of such counsel,
after due inquiry, any agreement, indenture or other instrument material to
either the Guarantor or the Company to which either the Guarantor or the
Company is a party or which binds either the Guarantor or the Company or
any of their property, or to the knowledge of such counsel after due
inquiry, (assuming compliance with all applicable state securities and Blue
Sky laws in those several states in which the Notes will be offered or
sold), violate or conflict with any laws, administrative regulations or
rulings or court decrees applicable to either the Guarantor or the Company
or to any of their property;
(xi) all proceedings required in connection with the authorization
of the Indenture and the authorization and issuance of the Notes and the
Guarantees and the sale of the Notes by the Company and the Guarantor in
accordance with the terms of this Agreement have been taken and all
authorizations, consents, approvals, licenses or other orders of any
regulatory body, administrative agency or other governmental body required
for the valid issuance, sale and delivery of the Notes hereunder have been
obtained (assuming compliance with all applicable Blue Sky or
B-4
<PAGE>
state securities laws in the several states in which the Notes will be
offered or sold);
(xii) no consents or waivers from the holders of the Guarantor's
capital stock or debt securities are required under any agreement,
indenture or other instrument to which either the Company or the Guarantor
is a party to consummate the transactions contemplated hereby other than
such consents and waivers as have been obtained;
(xiii) The Registration Rights Agreement has been duly authorized,
executed and delivered by the Company and the Guarantor and is a valid and
binding agreement of the Company and the Guarantor, enforceable against the
Company and the Guarantor in accordance with its terms, except as (x) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (y) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability;
(xiv) the Series B Notes have been duly authorized;
(xv) the statements under the captions "Certain Federal Income Tax
Considerations," "Description of Existing Financing Arrangements,"
"Description of Notes" and "Plan of Distribution" in the Offering
Memorandum, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present in
all material respects such legal matters, documents and proceedings;
(xvi) neither the Guarantor, nor the Company is or, after giving
effect to the offering and sale of the Series A Notes and the application
of the net proceeds thereof as described in the Offering Memorandum, will
be, an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(xvii) the Indenture complies as to form in all material respects
with the requirements of the TIA, and the rules and regulations of the
Commission applicable to an indenture which is qualified thereunder. It is
not necessary in connection with the offer, sale and delivery of the Series
A Notes to the Initial Purchaser in the manner contemplated by this
Agreement or in
B-5
<PAGE>
connection with the Exempt Resales to qualify the Indenture under the TIA.
(xviii) no registration under the Act of the Series A Notes is
required for the sale of the Series A Notes to the Initial Purchasers as
contemplated by this Agreement or for the Exempt Resales assuming that (A)
each Initial Purchaser is a QIB, or a Regulation S Purchaser, (B) the
accuracy of, and compliance with, the Initial Purchasers' representations
and agreements contained in Section 7 of this Agreement, (C) the accuracy
of the representations of the Company and the Guarantor set forth in
Sections 6(cc), 6(dd), 6(gg) and 6(hh) of this Agreement.
(xix) (i) each of the Incorporated Documents (except for financial
statements and schedules as to which no opinion need be expressed) complied
when so filed as to form in all material respects with the Exchange Act and
the applicable rules and regulations of the Commission thereunder and (ii)
such counsel has no reason to believe that, as of the date of the Offering
Memorandum or as of the Closing Date, the Offering Memorandum, as amended
or supplemented, if applicable (except for the financial statements and
other financial data included therein, as to which such counsel need not
express any belief) contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
B-6
<PAGE>
CROSS-REFERENCE TARGET LIST
NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE
TARGET PULL-DOWN LIST.
(This list is for the use of the wordprocessor only,
is not a part of this document and may be discarded.)
<TABLE>
<CAPTION>
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
- - ---------------------------- ---------------------------- ---------------------------- ----------------------------
- - ---------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
5(c) . . . . . .off.memo.del
5(e) . . . . .exempt.resales
5(h) . . . . . .series.a.out
5(i) . . . . . .pay.expenses
6(a), 6(b), 6(c) . no.untrue
?. . . . . . .no.mat.adv.chg
6(cc). . . . . . no.dir.sell
?. . . . . . . only.offshore
6(dd). . series.a.not.scheme
7. . . . . ini.purch.rep.war
8. . . . . . . . . . . indem
8(a) . . . . . co.guar.agree
8(b) . . . . ini.purch.agree
8(c) . . . . . . indem.party
8(d) . . . . . indem.unavail
8(d)(i). . . . .appro.propor
9. . . .cond.ini.purch.oblig
9(a) . . . . . .rep.war.true
9(b) . . . . .no.downgrading
9(c) . . . . . . no.pros.chg
9(c)(i). . . . . no.chg.earn
9(c)(ii) . . .no.chg.cap.stk
9(c)(iii). . . . . . no.liab
9(e) . . . . . .co.coun.opin
11(a)(xx). . . .coun.believe
10 . . . . . effect.agt.term
</TABLE>
<PAGE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
The Musicland Group, Inc.
and
Musicland Stores Corporation
--------------------------------------
$150,000,000
9_% SENIOR SUBORDINATED NOTES DUE 2008
--------------------------------------
-------------------
INDENTURE
DATED AS OF APRIL 6, 1998
-------------------
BANK ONE, NA
Trustee
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE
<S> <C>
SECTION 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.02. OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . 20
SECTION 1.04. RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 2 THE NOTES
SECTION 2.01. FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.02. EXECUTION AND AUTHENTICATION. . . . . . . . . . . . . . . . . . . 24
SECTION 2.03. REGISTRAR AND PAYING AGENT. . . . . . . . . . . . . . . . . . . . 25
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . 25
SECTION 2.05. HOLDER LISTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 2.06. TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 2.07. REPLACEMENT NOTES . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.08. OUTSTANDING NOTES . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.09. TREASURY NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.10. TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.11. CANCELLATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.12. DEFAULTED INTEREST. . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 2.13. RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 2.14. COMPUTATION OF INTEREST . . . . . . . . . . . . . . . . . . . . . 38
SECTION 2.15. CUSIP NUMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 3 REDEMPTION AND PREPAYMENT
SECTION 3.01. NOTICES TO TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED . . . . . . . . . . . . . . . . 39
SECTION 3.03. NOTICE OF REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. . . . . . . . . . . . . . . . . . 41
SECTION 3.05. DEPOSIT OF REDEMPTION OR PURCHASE PRICE . . . . . . . . . . . . . 41
SECTION 3.06. NOTES REDEEMED IN PART. . . . . . . . . . . . . . . . . . . . . . 42
SECTION 3.07. OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 3.08. MANDATORY REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 3.09. REPURCHASE OFFERS . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE 4 COVENANTS
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SECTION 4.01. PAYMENT OF NOTES. . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . 46
SECTION 4.03. COMMISSION REPORTS. . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.04. COMPLIANCE CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . 47
SECTION 4.05. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 4.06. STAY, EXTENSION AND USURY LAWS. . . . . . . . . . . . . . . . . . 48
SECTION 4.07. RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 4.08. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 4.10. ASSET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 4.11. TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . . . 56
SECTION 4.12. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 4.13. SALE AND LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . . . 57
SECTION 4.14. OFFER TO PURCHASE UPON CHANGE OF CONTROL. . . . . . . . . . . . . 58
SECTION 4.15. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 4.16. LIMITATION ON ISSUANCES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 4.17. LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. . . . . . 60
SECTION 4.18. BUSINESS ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 4.19. PAYMENT FOR CONSENTS. . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 4.20. ANTI-LAYERING . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 4.21. RESTRICTIVE COVENANT OF MSC . . . . . . . . . . . . . . . . . . . 61
ARTICLE 5 SUCCESSORS
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS . . . . . . . . . . . . . 61
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . . . . . . . 62
ARTICLE 6 DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 6.02. ACCELERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 6.03. OTHER REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 6.04. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . 66
SECTION 6.05. CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 6.06. LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT . . . . . . . . . . 68
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. . . . . . . . . . . . . . . . . . . . 68
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. . . . . . . . . . . . . . . . . 68
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SECTION 6.10. PRIORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 6.11. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . 69
ARTICLE 7 TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 7.02. RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. . . . . . . . . . . . . . . . . . . 72
SECTION 7.04. TRUSTEE'S DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 7.05. NOTICE OF DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. . . . . . . . . . . . 73
SECTION 7.07. COMPENSATION AND INDEMNITY. . . . . . . . . . . . . . . . . . . . 73
SECTION 7.08. REPLACEMENT OF TRUSTEE. . . . . . . . . . . . . . . . . . . . . . 74
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . 75
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . 75
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY . . . . . . 76
ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. . . . . 76
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. . . . . . . . . . . . . . . . . . 76
SECTION 8.03. COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. . . . . . . . . . . . 77
SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . 79
SECTION 8.06. REPAYMENT TO THE COMPANY. . . . . . . . . . . . . . . . . . . . . 80
SECTION 8.07. REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF THE NOTES . . . . . . . . . . . . . 81
SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. . . . . . . . . . . . . . . . . 81
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . 83
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . 83
SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. . . . . . . . . . . . . . . . . 84
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC . . . . . . . . . . . . . . . . . 84
ARTICLE 10 SUBORDINATION
SECTION 10.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . . . . . . 84
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SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . . . . . . 85
SECTION 10.03. DEFAULT ON DESIGNATED SENIOR DEBT. . . . . . . . . . . . . . . . 85
SECTION 10.04. ACCELERATION OF NOTES. . . . . . . . . . . . . . . . . . . . . . 86
SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . . . . . . 86
SECTION 10.06. NOTICE BY THE COMPANY. . . . . . . . . . . . . . . . . . . . . . 87
SECTION 10.07. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 10.08. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY THE COMPANY . . . . . . . . 88
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . . . . . . 89
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . . . . . . 89
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . . . . . . 90
SECTION 10.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
ARTICLE 11 GUARANTEE OF NOTES
SECTION 11.01. NOTE GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . . 90
SECTION 11.02. EXECUTION AND DELIVERY OF NOTE GUARANTEE . . . . . . . . . . . . 92
SECTION 11.03. LIMITATION ON GUARANTOR LIABILITY. . . . . . . . . . . . . . . . 92
SECTION 11.04. "TRUSTEE" TO INCLUDE PAYING AGENT. . . . . . . . . . . . . . . . 93
ARTICLE 12 SUBORDINATION OF NOTE GUARANTEE
SECTION 12.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . . . . . . 93
SECTION 12.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . . . . . . 93
SECTION 12.03. DEFAULT ON DESIGNATED GUARANTOR SENIOR DEBT. . . . . . . . . . . 94
SECTION 12.04. ACCELERATION OF NOTE GUARANTEE . . . . . . . . . . . . . . . . . 95
SECTION 12.05. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . . . . . . 95
SECTION 12.06. NOTICE BY GUARANTOR. . . . . . . . . . . . . . . . . . . . . . . 95
SECTION 12.07. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 96
SECTION 12.08. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 96
SECTION 12.09. SUBORDINATION MAY NOT BE IMPAIRED BY GUARANTOR . . . . . . . . . 96
SECTION 12.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . . . . . . 98
SECTION 12.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . . . . . . 98
SECTION 12.12. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . . . . . . 98
SECTION 12.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
ARTICLE 13 MISCELLANEOUS
SECTION 13.01. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . 99
SECTION 13.02. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
SECTION 13.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF
NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
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SECTION 13.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . .101
SECTION 13.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. . . . . . . . . .102
SECTION 13.06. RULES BY TRUSTEE AND AGENTS. . . . . . . . . . . . . . . . . . .102
SECTION 13.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES
AND STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
SECTION 13.08. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . .103
SECTION 13.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. . . . . . . . . .103
SECTION 13.10. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . .103
SECTION 13.11. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . .103
SECTION 13.12. COUNTERPART ORIGINALS. . . . . . . . . . . . . . . . . . . . . .103
SECTION 13.13. TABLE OF CONTENTS, HEADINGS, ETC . . . . . . . . . . . . . . . .103
</TABLE>
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<TABLE>
<CAPTION>
PAGE
EXHIBITS
<S> <C>
Exhibit A FORM OF NOTE
Exhibit B FORM OF CERTIFICATE OF TRANSFEROR
Exhibit C FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL
ACCREDITED INVESTOR
Exhibit D FORM OF NOTE GUARANTEE
</TABLE>
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Indenture, dated as of April 6, 1998 among The Musicland Group, Inc., a
Delaware corporation (the "COMPANY"), Musicland Stores Corporation, a
Delaware corporation (the "GUARANTOR" or "MSC") and Bank One, NA, as trustee
(the "TRUSTEE").
The Company, the Guarantor and the Trustee agree as follows for the
benefit of each other and for the equal and ratable benefit of the holders of
the Company's 9_% Senior Subordinated Notes due 2008 (the "SENIOR
SUBORDINATED NOTES") and the new 9_% Senior Subordinated Notes due 2008 (the
"NEW SENIOR SUBORDINATED NOTES" and, together with the Senior Subordinated
Notes, the "NOTES"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. DEFINITIONS.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"CONTROL" (including, with correlative meanings, the terms "CONTROLLING,"
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; PROVIDED that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"AGENT" means any Registrar, Paying Agent or co-registrar.
"APPLICABLE PROCEDURES" means, with respect to any transfer or exchange
of beneficial interests in a Global Note, the rules and procedures of the
Depositary that apply to such transfer and exchange.
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"ASSET SALE" means (i) the sale, lease, conveyance or other disposition
of any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (PROVIDED that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company
and its Restricted Subsidiaries taken as a whole will be governed by Section
4.14 and/or Article 5 hereof and not by the provisions of Section 4.10
hereof), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $2.0 million or (b) for net proceeds in excess of $2.0
million. Notwithstanding the foregoing, the following will not be deemed to
be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment
that is permitted by Section 4.07 hereof.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance with
GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"BANKRUPTCY LAW" means Title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"BOARD OF DIRECTORS" means the board of directors of the Company or any
authorized committee of such board of directors.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or
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participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not
exceeding six months and overnight bank deposits, in each case with any
domestic commercial bank having capital and surplus in excess of $500
million, (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Ratings Group and in each case maturing within six months after the date of
acquisition and (vi) any fund investing exclusively in investments of the
types described in clauses (i) through (v) above.
"CASH FLOW COVERAGE RATIO" means, for any given period and person, the
ratio of (i) Consolidated Cash Flow divided by (ii) Consolidated Interest
Expense (except dividends paid or payable in additional shares of Capital
Stock (other than Disqualified Stock)) in each case, without duplication;
provided, however, that if an acquisition or sale of a person, business or
asset or the issuance or repayment of Indebtedness occurred during the given
period or subsequent to such period on or prior to the date of calculation,
then such calculation for such period shall be made on a Pro Forma Basis.
"CEDEL" means Cedel Bank, societe anonyme.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related transactions,
of all or substantially all of the assets of MSC taken as a whole to any
"PERSON" (as such term is used in Section 13(d)(3) of the Exchange Act) other
than the Principals or their Related Parties (as defined below), (ii) the
adoption of a plan relating to the liquidation or dissolution of MSC,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "PERSON" (as defined
above), other than the Principals and their Related Parties, becomes the
"BENEFICIAL OWNER" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act, except that a person shall be deemed to have
"BENEFICIAL OWNERSHIP" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition), directly or indirectly, of
more than 50% of
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the Voting Stock of MSC (measured by voting power rather than number of
shares), (iv) the first day on which a majority of the members of the Board
of Directors of MSC are not Continuing Directors or (v) MSC consolidates
with, or merges with or into, any Person or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, or any Person consolidates with, or merges with or
into, MSC, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of MSC is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of MSC outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock)
of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance).
"COMMISSION" means the Securities and Exchange Commission.
"COMPANY" means The Musicland Group, Inc.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i)
an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale (to the extent such losses were deducted in
computing such Consolidated Net Income), plus (ii) provision for taxes based
on income or profits of such Person and its Subsidiaries for such period, to
the extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) Consolidated Interest Expense of such
Person and its Subsidiaries for such period, to the extent deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent
that it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Subsidiaries for such period to the extent
that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period; provided, however,
that if an acquisition or sale of a person, business or asset or the
incurrence or repayment of Indebtedness occurred during the given period or
subsequent to such period and on or prior to the date of calculation, then
such calculation shall be made on a Pro Forma Basis. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would
be permitted at the date of determination to be
4
<PAGE>
dividended to the Company by such Subsidiary without prior governmental
approval (that has not been obtained), and without direct or indirect
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED INTEREST EXPENSE" means, for any given period and Person,
the aggregate of (i) the interest expense in respect of all Indebtedness of
such person and its Restricted Subsidiaries for such period, on a
consolidated basis, determined in accordance with GAAP (including, without
duplication, amortization of original issue discount on any such
Indebtedness, all non-cash interest payments, the interest portion of any
deferred payment obligation, the interest component of Capital Lease
Obligations, and amortization of deferred financing fees) and (ii) the
product of (a) all cash dividend payments (and, in the case of a Person that
is a Restricted Subsidiary, dividends paid or payable in additional shares of
Disqualified Stock) on any series of preferred stock of such Person and its
Restricted Subsidiaries payable to a party other than the Company or a wholly
owned Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, on a
consolidated basis and in accordance with GAAP; provided, however, that for
the purpose of the Cash Flow Coverage Ratio, Consolidated Interest Expense
shall be calculated on a Pro Forma Basis.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; PROVIDED that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the
amount of dividends or distributions paid in cash to the referent Person or a
Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders, (iii) the Net Income of
any Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition shall be excluded, (iv) the cumulative
effect of a change in accounting principles shall be excluded and (v) the Net
Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Restricted Subsidiaries for purposes
of Section 4.09 hereof.
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"CONTINUING DIRECTORS" means, as of any date of determination, any
member of the Board of Directors of MSC who (i) was a member of such Board of
Directors on the date of the original issuance of the Senior Subordinated
Notes, or (ii) was nominated for election to such Board of Directors with the
approval of, or whose election to the Board of Directors of MSC was ratified
by, at least a majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election.
"CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the
Trustee specified in Section 13.02 hereof or such other address as to which
the Trustee may give notice to the Company.
"CREDIT AGENT" means Morgan Guaranty Trust Company of New York, in its
capacity as Agent for the lenders party to the Credit Facility or any
successor thereto or any person otherwise appointed.
"CREDIT FACILITY" means (i) the Credit Agreement dated October 7, 1994
among the Company, MSC, the various lenders party thereto from time to time
and Morgan Guaranty Trust Company of New York, as Agent, as amended by an
Amendment No. 1 dated as of February 24, 1995, an Amendment No. 2 dated as of
April 9, 1996, an Amendment No. 3 dated as of October 18, 1996, an Amendment
No. 4 dated as of June 16, 1997 and an Amendment No. 5 effective as of the
closing of the Offering, together with the related documents thereto
(including any guarantee agreement and securing documents), and (ii) the Term
Loan Agreement dated as of June 16, 1997 among the Company, MSC, various
financial institutions and Morgan Guaranty Trust Company of New York, as
agent, together with the related documents thereto (including any guarantee
agreement and securing documents), in each case, as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified or replaced (including with other lenders) from time to
time and including any agreement extending the maturity of, refinancing,
modifying, increasing, substituting for or otherwise restructuring
(including, but not limited to, the inclusion of additional or different or
substitute lenders or bank agents thereunder) all or any portion of the
Indebtedness, including changing the borrowing limits, under such agreement
or any successor or replacement agreement, regardless of whether the Credit
Facility or any portion thereof was outstanding or in effect at the time of
such replacement, refinancing, increase, substitution, extension,
restructuring, supplement or modification.
"DEFAULT" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"DEFINITIVE NOTES" means Notes that are in the form of EXHIBIT A-1
attached hereto (but without including the text referred to in footnotes 1
and 3 thereto).
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"DEPOSITARY" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.03 hereof
as the Depositary with respect to the Notes, until a successor shall have
been appointed and become such pursuant to Section 2.06 of this Indenture,
and, thereafter, "DEPOSITARY" shall mean or include such successor.
"DESIGNATED GUARANTOR SENIOR DEBT" means (i) any Indebtedness of the
Guarantor outstanding under the Credit Facility, including any Guarantee
thereof, and (ii) any other Guarantor Senior Debt permitted under the
Indenture the principal amount of which is $25.0 million or more and that has
been designated by the Guarantor as "DESIGNATED GUARANTOR SENIOR DEBT".
"DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under
the Credit Facility and (ii) any other Senior Debt permitted under the
Indenture the principal amount of which is $25.0 million or more and that has
been designated by the Company as "DESIGNATED SENIOR DEBT".
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Notes mature; PROVIDED,
HOWEVER, that any Capital Stock that would not qualify as Disqualified Stock
but for change of control provisions shall not constitute Disqualified Stock
if the provisions are not more favorable to the holders of such Capital Stock
than the provisions described under Section 4.14 hereof.
"DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that
is convertible into, or exchangeable for, Capital Stock).
"EUROCLEAR" means Morgan Guaranty Trust Company of New York, the
Brussels office, as operator of the Euroclear system.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE OFFER" means the offer by the Company to Holders to exchange
Senior Subordinated Notes for New Senior Subordinated Notes.
"EXCHANGE OFFER REGISTRATION STATEMENT" has the meaning set forth in the
Registration Rights Agreement.
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Facility) in existence
on the date of the Indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time set forth in the opinions
and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Board, or in such other
statements by such other entity as may be in general use by significant
segments of the accounting profession, which are applicable to the
circumstances as of the date of determination; provided, however, that except
as otherwise provided, all calculations made for purposes of determining
compliance with the terms of the covenants set forth in Articles 4 and 5 and
other provisions of the Indenture shall utilize GAAP in effect at the date of
the Indenture.
"GLOBAL NOTES" means the Rule 144A Global Notes, the Regulation S
Temporary Global Notes and the Regulation S Permanent Global Notes.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States is
pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR SENIOR DEBT" means (i) all Indebtedness of the Guarantor
outstanding under the Credit Facility, including any Guarantee thereof and
all Hedging Obligations with respect thereto, (ii) any other Indebtedness
permitted to be incurred by the Guarantor under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to
the Note Guarantee, (iii) all Obligations with respect to the foregoing, and
(iv) all interest with respect to the foregoing clauses (i) and (ii) accruing
during the pendency of an Insolvency or Liquidation Proceeding, whether or
not allowed or allowable thereunder. Notwithstanding anything to the
contrary in the foregoing, Guarantor Senior Debt will not include (w) any
liability for federal, state, local or other taxes owed or owing by the
Guarantor, (x) any Indebtedness of the Guarantor to any of its Subsidiaries
or other Affiliates, (y) any trade payables or liability to trade creditors
or obligations with respect to consigned inventory arising in the ordinary
course of business (including guarantees thereof or instruments evidencing
such liabilities) or (z) any Indebtedness that is incurred in violation of
the Indenture.
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"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"HOLDER" means a Person in whose name a Note is registered.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable or obligations with respect to consigned inventory, if and to
the extent any of the foregoing indebtedness (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, as well as all indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person. The amount of any Indebtedness outstanding as of any date shall be
(i) the accreted value thereof, in the case of any Indebtedness that does not
require current payments of interest, and (ii) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
"INDENTURE" means this Indenture, as amended or supplemented from time
to time.
"INDIRECT PARTICIPANT" means a Person who holds an interest through a
Participant.
"INITIAL PURCHASERS" means Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery
Securities LLC.
"INSOLVENCY OR LIQUIDATION PROCEEDING" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding, relative to the Company
or to the creditors of the Company, as such, or to the assets of the Company,
or (ii) any liquidation, dissolution, reorganization or winding up of the
Company, whether voluntary or involuntary and involving insolvency or
bankruptcy, or (iii) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company.
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<PAGE>
"INSTITUTIONAL ACCREDITED INVESTOR" means an "ACCREDITED INVESTOR" as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with
GAAP. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Company such that, after giving effect to any
such sale or disposition, such Person is no longer a Restricted Subsidiary of
the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant
described under Section 4.07 hereof.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York, the city in which the principal
Corporate Trust Office of the Trustee is located or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a
payment date is a Legal Holiday at a place of payment, payment shall be made
at that place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to
Section 5 of the Registration Rights Agreement.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the disposition of
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any securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), and any reserve for adjustment
in respect of the sale price of such asset or assets established in
accordance with GAAP.
"NEW SENIOR SUBORDINATED NOTES" means the Company's 9_% Senior
Subordinated Notes due 2008, which will be issued in exchange for the
Company's Senior Subordinated Notes.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender; (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than Holders of the Notes being offered hereby and lenders under the
Credit Facility) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity; and (iii) as to which
the lenders have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"NOTE CUSTODIAN" means the Trustee, when serving as custodian for the
Depositary with respect to the Notes in global form, or any successor entity
thereto.
"NOTE GUARANTEE" means any guarantee of the Guarantor under Article 11
and any guarantee of the Guarantor endorsed on a Note authenticated and
delivered pursuant to this Indenture.
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"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING" means the offer and sale of the Senior Subordinated Notes as
contemplated by the Offering Memorandum.
"OFFERING MEMORANDUM" means the Offering Memorandum, dated April 1,
1998, relating to the Company's offering and placement of the Senior
Subordinated Notes.
"OFFICER" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Vice-President of such Person.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the
Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 13.05 hereof.
"OPINION OF COUNSEL" means an opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
13.05 hereof. The counsel may be an employee of or counsel to the Company,
any Subsidiary of the Company or the Trustee.
"PARTICIPANT" means, with respect to DTC, Euroclear or Cedel, a Person
who has an account with DTC, Euroclear or Cedel, respectively (and, with
respect to DTC, shall include Euroclear and Cedel).
"PAYMENT IN FULL" (together with any correlative phrases E.G. "PAID IN
FULL" and "PAY IN FULL") means (i) with respect to any Senior Debt other
than Senior Debt under or in respect of the Credit Facility, payment in full
thereof or due provision for payment thereof (x) in accordance with the terms
of the agreement or instrument pursuant to which such Senior Debt was issued
or is governed or (y) otherwise to the reasonable satisfaction of the holders
of such Senior Debt, which shall include, in any Insolvency or Liquidation
Proceeding, approval by such holders individually or as a class, of the
provision for payment thereof, and (ii) with respect to Senior Debt under or
in respect of the Credit Facility, payment in full thereof in cash or Cash
Equivalents.
"PERMITTED BUSINESS" means any of the businesses and any other
businesses related to the businesses engaged in by the Company and its
respective Restricted Subsidiaries on the date of the Indenture.
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"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is engaged in a
Permitted Business; (b) any Investment in Cash Equivalents; (c) any
Investment by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of such Investment (i) such Person becomes a Wholly
Owned Restricted Subsidiary of the Company that is engaged in a Permitted
Business or (ii) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the
Company that is engaged in a Permitted Business; (d) any Restricted
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with Section 4.10
hereof; (e) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company or MSC; (f)
stock, obligations or securities received in satisfaction of judgement and
(g) Hedging Obligations entered into in the ordinary course of business and
otherwise permitted under the Indenture.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease
or refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; PROVIDED that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the Holders of Notes
as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded or by the Company.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other
entity.
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"PRINCIPALS" means Messrs. Eugster, Benson, Wachsman and Ross.
"PRIVATE PLACEMENT LEGEND" means the legend initially set forth on the
Senior Subordinated Notes in the form set forth in Section 2.06(g) hereof.
"PRO FORMA BASIS" means, for purposes of determining Consolidated Net
Income in connection with the Cash Flow Coverage Ratio (including in
connection with the covenants described under Section 4.07 and Article 5 and
the incurrence of Indebtedness pursuant to the first sentence of the covenant
described under Section 4.09), giving pro forma effect to (x) any
acquisition, by way of merger, consolidation or otherwise, or sale of a
person, business or asset, related incurrence, repayment or financing of
Indebtedness or other related transactions, including any Restructuring
Charges which would otherwise be accounted for as an adjustment permitted by
Regulation S-X under the Securities Act or on a pro forma basis under GAAP,
or (y) any incurrence, repayment or refinancing of any Indebtedness and the
application of the proceeds therefrom; in each case, which occurred during
the relevant period or subsequent to such period and on or prior to the date
of calculation, as if such acquisition or sale and related transactions and
any Restructuring Charges, incurrence, repayment or refinancing were realized
on the first day of the relevant period permitted by Regulation S-X under the
Securities Act or on a pro forma basis under GAAP. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of a
person, business or asset, the amount of income or earnings relating thereto,
and the amount of Consolidated Interest Expense associated with any
Indebtedness issued in connection therewith, the pro forma calculations will
be determined in good faith by the chief financial officer of the Company as
specified in an Officers' Certificate of the Company delivered to the
Trustee. Furthermore, in calculating the Cash Flow Coverage Ratio,
(1) interest on outstanding Indebtedness determined on a fluctuating basis as
of the determination date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the determination
date; (2) if interest on any Indebtedness actually incurred on the
determination date may optionally be determined at an interest rate based
upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the determination
date will be deemed to have been in effect during the relevant period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined on
a fluctuating basis, to the extent such interest is covered by agreements
relating to interest rate swaps or similar interest rate protection Hedging
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"PUBLIC EQUITY OFFERING" means a public offering of Equity Interests
(other than Disqualified Stock) of (i) the Company; or (ii) MSC to the extent
the net proceeds thereof are contributed to the Company as a capital
contribution,
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that, in each case, results in the net proceeds to the Company of at least
$25.0 million.
"QIB" means a "QUALIFIED INSTITUTIONAL BUYER" as defined in Rule 144A
under the Securities Act.
"REGISTRATION RIGHTS AGREEMENT" means the A/B Exchange Registration
Rights Agreement, dated as of the date hereof, by and among the Company, the
Guarantor and the Initial Purchasers.
"REGULATION S" means Regulation S promulgated under the Securities Act.
"REGULATION S GLOBAL NOTES" means the Regulation S Temporary Global
Notes or the Regulation S Permanent Global Notes as applicable.
"REGULATION S PERMANENT GLOBAL NOTES" means the permanent global notes
that do not contain the paragraphs referred to in footnote 1 to the form of
the Note attached hereto as Exhibit A-2, and that are deposited with and
registered in the name of the Depositary or its nominee, representing a
series of Notes sold in reliance on Regulation S.
"REGULATION S TEMPORARY GLOBAL NOTES" means the temporary global notes
that contain the paragraphs referred to in footnote 1 to the form of the Note
attached hereto as Exhibit A-2, and that are deposited with and registered in
the name of the Depositary or its nominee, representing a series of Notes
sold in reliance on Regulation S.
"RELATED PARTY" with respect to any Principal means any spouse or
immediate family member or any controlled Affiliate of any such Principal,
any trusts for the benefit of any such Principal or such Principal's spouse
or immediate family or, in the event of the incompetence or death of any such
Principal, such Principal's estate, executor, administrator, committee or
other personal representative, in each case who will beneficially own or have
the right to acquire, directly or indirectly, Voting Stock of MSC.
"REPRESENTATIVE" means the trustee, agent or representative for any
Senior Debt.
"RESPONSIBLE OFFICER" when used with respect to the Trustee, means any
officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the trustee
customarily performing functions similar to those performed by any of the
above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to
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whom such matter is referred because of his knowledge of and familiarity with
the particular subject.
"RESTRICTED BENEFICIAL INTEREST" means any beneficial interest of a
Participant or Indirect Participant in the Rule 144A Global Note or the
Regulation S Global Note.
"RESTRICTED BROKER DEALER" has the meaning set forth in the Registration
Rights Agreement.
"RESTRICTED GLOBAL NOTES" means the Rule 144A Global Notes and the
Regulation S Global Notes, all of which shall bear the Private Placement
Legend.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"RESTRUCTURING CHARGES" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any
persons or businesses either alone or together with the Company or any
Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the
Securities Act; provided that any cost savings of less than $10.0 million,
shall be evidenced by an Officers' Certificate delivered to the Trustee and
any cost savings of $10.0 million or more shall be evidenced by a resolution
of the Board of Directors set forth in an Officers' Certificate delivered to
the Trustee.
"RULE 144A" means Rule 144A promulgated under the Securities Act.
"RULE 144A GLOBAL NOTES" means the permanent global notes that contain
the paragraph referred to in footnote 1 and the additional schedule referred
to in footnote 3 to the form of the Note attached hereto as Exhibit A-1, and
that are deposited with and registered in the name of the Depositary or its
nominee, representing a series of Notes sold in reliance on Rule 144A.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR DEBT" means (i) all Indebtedness outstanding under the Credit
Facility, including any Guarantee thereof and all Hedging Obligations with
respect thereto, (ii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the Notes, (iii) all Obligations with
respect to
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the foregoing, and (iv) all interest with respect to the foregoing clauses
(i) and (ii) accruing during the pendency of an Insolvency or Liquidation
Proceeding, whether or not allowed or allowable thereunder. Notwithstanding
anything to the contrary in the foregoing, Senior Debt will not include (w)
any liability for federal, state, local or other taxes owed or owing by the
Company, (x) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates, (y) any trade payables or liability to trade creditors or
obligations with respect to consigned inventory arising in the ordinary
course of business (including guarantees thereof or instruments evidencing
such liabilities) or (z) any Indebtedness that is incurred in violation of
the Indenture.
"SENIOR SUBORDINATED NOTES" means the Company's 9_% Senior Subordinated
Notes due 2008.
"SHELF REGISTRATION STATEMENT" means the Shelf Registration Statement as
defined in the Registration Rights Agreement.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Securities Act, as such Regulation is in
effect on the date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb), as amended, as in effect on the date hereof.
"TRANSFER RESTRICTED SECURITIES" means Notes or beneficial interests
therein that bear or are required to bear the Private Placement Legend.
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"TRUSTEE" means Bank One, NA until a successor replaces it in accordance
with the applicable provisions of this Indenture, and thereafter means the
successor.
"UNRESTRICTED GLOBAL NOTES" means one or more Global Notes that do not
and are not required to bear the Private Placement Legend.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of
the Board of Directors; but only to the extent that such Subsidiary: (a) has
no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company
or such Restricted Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results;
(d) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (e) has at least one director on its board of directors
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by Section 4.07 hereof. If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under Section 4.09 hereof, the Company shall be in
default of such covenant). The Board of Directors of the Company may at any
time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
PROVIDED that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under Section 4.09 hereof,
and (ii) no Default or Event of Default would be in existence following such
designation.
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"VOTING STOCK" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (ii)
the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person and/or by one or more Wholly Owned Subsidiaries of such Person.
"2003 INDENTURE" means the Indenture dated as of June 17, 1993, among
the Company, MSC and Harris Trust Savings Bank, as Trustee, relating to the
2003 Notes, as amended from time to time.
"2003 NOTES" means the 9 1/4% Senior Subordinated Notes due 2003 of the
Company issued pursuant to the 2003 Indenture.
SECTION 1.2. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
TERM DEFINED IN SECTION
<S> <C>
Affiliate Transaction 4.11
Asset Sale Offer 4.10
Change of Control Offer 4.14
Change of Control Payment 4.14
Change of Control Payment Date 4.14
Covenant Defeasance 8.03
Custodian 6.01
DTC 2.03
Event of Default 6.01
Excess Proceeds 4.10
incur 4.09
Legal Defeasance 8.02
Offer Amount 3.09
Offer Period 3.09
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Paying Agent 2.03
Payment Default 6.01
Permitted Indebtedness 4.09
Purchase Date 3.09
Registrar 2.03
Repurchase Offer 3.09
Restricted Payments 4.07
</TABLE>
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in, and made a part of, this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"INDENTURE SECURITIES" means the Notes;
"INDENTURE SECURITY HOLDER" means a Holder of a Note;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee;
"OBLIGOR" on the Notes means the Company, the Guarantor and any
successor obligor upon the Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by the Commission rule
under the TIA have the meanings so assigned to them therein.
SECTION 1.4. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it herein;
(2) an accounting term not otherwise defined herein has the meaning
assigned to it in accordance with GAAP;
(3) "OR" is not exclusive;
(4) words in the singular include the plural, and in the plural include
the singular;
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(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act shall
be deemed to include substitute, replacement or successor sections
or rules adopted by the Commission from time to time.
ARTICLE 2
The Notes
SECTION 2.1. FORM AND DATING.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A-1 or Exhibit A-2 attached hereto.
The Notes may have notations, legends or endorsements required by law, stock
exchange rule or usage. Each Note shall be dated the date of its
authentication. The Notes initially shall be issued in denominations of
$1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall constitute, and
are hereby expressly made, a part of this Indenture and the Company, the
Guarantor and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby.
(a) GLOBAL NOTES. Notes offered and sold to QIBs in reliance on Rule
144A shall be issued initially in the form of Rule 144A Global Notes, which
shall be deposited on behalf of the purchasers of the Notes represented
thereby with a custodian of the Depositary, and registered in the name of the
Depositary or a nominee of the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate
principal amount of the Rule 144A Global Notes may from time to time be
increased or decreased by adjustments made on the records of the Trustee and
the Depositary or its nominee as hereinafter provided.
Notes offered and sold in reliance on Regulation S shall be issued initially
in the form of the Regulation S Temporary Global Note, which shall be
deposited on behalf of the purchasers of the Notes represented thereby with
the Trustee, as custodian for the Depositary, and registered in the name of
the Depositary or the nominee of the Depositary for the accounts of
designated agents holding on behalf of Euroclear or Cedel, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
"40-day restricted period" (as defined in Regulation S) shall be terminated
upon the receipt by the Trustee of (i) a written certificate from the
Depositary, together with copies of certificates from Euroclear
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and Cedel certifying that they have received certification of non-United
States beneficial ownership of 100% of the aggregate principal amount of the
Regulation S Temporary Global Notes (except to the extent of any beneficial
owners thereof who acquired an interest therein pursuant to another exemption
from registration under the Securities Act and who will take delivery of a
beneficial ownership interest in a Rule 144A Global Note, all as contemplated
by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the
Company certifying as to the same matters covered in clause (i) above.
Following the termination of the 40-day restricted period, beneficial
interests in the Regulation S Temporary Global Note shall be exchanged for
beneficial interests in Regulation S Permanent Global Notes pursuant to the
Applicable Procedures. Simultaneously with the authentication of Regulation
S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary
Global Notes. The aggregate principal amount of the Regulation S Temporary
Global Notes and the Regulation S Permanent Global Notes may from time to
time be increased or decreased by adjustments made on the records of the
Trustee and the Depositary or its nominee, as the case may be, in connection
with transfers of interest as hereinafter provided.
Each Global Note shall represent such of the outstanding Notes as shall
be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Notes from time to time endorsed thereon and
that the aggregate amount of outstanding Notes represented thereby may from
time to time be reduced or increased, as appropriate, to reflect exchanges,
redemptions and transfers of interests. Any endorsement of a Global Note to
reflect the amount of any increase or decrease in the amount of outstanding
Notes represented thereby shall be made by the Trustee or the Note Custodian,
at the direction of the Trustee, in accordance with instructions given by the
Holder thereof as required by Section 2.06 hereof.
The provisions of the "OPERATING PROCEDURES OF THE EUROCLEAR SYSTEM" and
"TERMS AND CONDITIONS GOVERNING USE OF EUROCLEAR" and the "MANAGEMENT
REGULATIONS" and "INSTRUCTIONS TO PARTICIPANTS" of Cedel shall be applicable
to interests in the Regulation S Temporary Global Notes and the Regulation S
Permanent Global Notes that are held by Participants through Euroclear or
Cedel. The Trustee shall have no obligation to notify Holders of any such
procedures or to monitor or enforce compliance with the same.
Except as set forth in Section 2.06 hereof, the Global Notes may be
transferred, in whole and not in part, only to another nominee of the
Depositary or to a successor of the Depositary or its nominee.
(b) BOOK-ENTRY PROVISIONS. This Section 2.01(b) shall apply only to
Rule 144A Global Notes and Regulation S Permanent Global Notes deposited with
or on behalf of the Depositary.
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The Company shall execute and the Trustee shall, in accordance with this
Section 2.01(b), authenticate and deliver the Global Notes that (i) shall be
registered in the name of the Depositary or the nominee of the Depositary and
(ii) shall be delivered by the Trustee to the Depositary or pursuant to the
Depositary's instructions or held by the Trustee as custodian for the
Depositary.
Participants shall have no rights either under this Indenture with
respect to any Global Note held on their behalf by the Depositary or by the
Note Custodian as custodian for the Depositary or under such Global Note, and
the Depositary may be treated by the Company, the Trustee and any agent of
the Company or the Trustee as the absolute owner of such Global Note for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Trustee or any agent of the Company or the Trustee
from giving effect to any written certification, proxy or other authorization
furnished by the Depositary or impair, as between the Depositary and its
Participants, the operation of customary practices of such Depositary
governing the exercise of the rights of an owner of a beneficial interest in
any Global Note.
(c) DEFINITIVE NOTES. Notes issued in certificated form shall be
substantially in the form of Exhibit A-1 attached hereto (but without
including the text referred to in footnotes 1 and 3 thereto).
SECTION 2.2. EXECUTION AND AUTHENTICATION.
An Officer shall sign the Notes for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Note no longer holds that office
at the time a Note is authenticated, the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature of
the Trustee. The signature shall be conclusive evidence that the Note has
been authenticated under this Indenture. The form of Trustee's certificate
of authentication to be borne by the Notes shall be substantially as set
forth in Exhibit A-1 or Exhibit A-2 hereto.
The Trustee shall, upon a written order of the Company signed by an
Officer directing the Trustee to authenticate the Notes, authenticate Notes
for original issue up to the aggregate principal amount stated in paragraph 4
of the Notes. The Trustee shall, upon written order of the Company signed by
an Officer, authenticate New Senior Subordinated Notes for original issuance
in exchange for a like principal amount of Senior Subordinated Notes
exchanged in the Exchange Offer or otherwise exchanged for New Senior
Subordinated Notes pursuant to the terms of the Registration Rights
Agreement. The aggregate
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<PAGE>
principal amount of Notes outstanding at any time may not exceed such amount
except as provided in Section 2.07 hereof.
The Trustee may (at the Company's expense) appoint an authenticating agent
acceptable to the Company to authenticate Notes. An authenticating agent may
authenticate Notes whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
SECTION 2.3. REGISTRAR AND PAYING AGENT.
The Company shall maintain (i) an office or agency where Notes may be
presented for registration of transfer or for exchange ("REGISTRAR") and (ii) an
office or agency where Notes may be presented for payment ("PAYING AGENT"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
The Company may appoint one or more additional paying agents. The term "PAYING
AGENT" includes any additional paying agent. The Company may change any Paying
Agent or Registrar without notice to any Holder. The Company shall notify the
Trustee in writing of the name and address of any Agent not a party to this
Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC") to act
as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Note Custodian with respect to the Global Notes. The
Company initially appoints the Trustee to act as the Registrar and Paying Agent
with respect to the Definitive Notes.
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent shall hold in trust for the benefit of Holders
or the Trustee all money held by the Paying Agent for the payment of principal,
premium or Liquidated Damages, if any, or interest on the Notes, and shall
notify the Trustee of any default by the Company in making any such payment.
While any such default continues, the Trustee may require a Paying Agent to pay
all money held by it to the Trustee. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee. Upon payment over to
the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall
have no further liability for the money. If the Company or a Subsidiary acts as
Paying Agent, it shall segregate and hold in a separate trust fund for the
benefit of the
24
<PAGE>
Holders all money held by it as Paying Agent. Upon the occurrence of events
specified in Section 6.01(vii) through (ix) hereof, the Trustee shall serve as
Paying Agent for the Notes.
SECTION 2.5. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA Section 312(a). If the Trustee
is not the Registrar, the Company and/or the Guarantor shall furnish to the
Trustee at least seven (7) Business Days before each interest payment date and
at such other times as the Trustee may request in writing, a list in such form
and as of such date as the Trustee may reasonably require of the names and
addresses of the Holders of Notes and the Company and the Guarantor shall
otherwise comply with TIA Section 312(a).
SECTION 2.6. TRANSFER AND EXCHANGE.
(a) TRANSFER AND EXCHANGE OF GLOBAL NOTES. The transfer and exchange of
Global Notes or beneficial interests therein shall be effected through the
Depositary, in accordance with this Indenture and the procedures of the
Depositary therefor, which shall include restrictions on transfer comparable to
those set forth herein to the extent required by the Securities Act. Beneficial
interests in a Global Note may be transferred to Persons who take delivery
thereof in the form of a beneficial interest in the same Global Note in
accordance with the transfer restrictions set forth in the legend in subsection
(g) of this Section 2.06. Transfers of beneficial interests in the Global Notes
to Persons required to take delivery thereof in the form of an interest in
another Global Note shall be permitted as follows:
(i) RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE. If, at
any time, an owner of a beneficial interest in a Rule 144A Global Note
deposited with the Depositary (or the Trustee as custodian for the
Depositary) wishes to transfer its beneficial interest in such Rule 144A
Global Note to a Person who is required or permitted to take delivery
thereof in the form of an interest in a Regulation S Global Note, such
owner shall, subject to the Applicable Procedures, exchange or cause the
exchange of such interest for an equivalent beneficial interest in a
Regulation S Global Note as provided in this Section 2.06(a)(i). Upon
receipt by the Trustee of (1) instructions given in accordance with the
Applicable Procedures from a Participant directing the Trustee to credit or
cause to be credited a beneficial interest in the Regulation S Global Note
in an amount equal to the beneficial interest in the Rule 144A Global Note
to be exchanged, (2) a written order given in accordance with the
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<PAGE>
Applicable Procedures containing information regarding the Participant
account of the Depositary and the Euroclear or Cedel account to be credited
with such increase, and (3) a certificate in the form of Exhibit B-1 hereto
given by the owner of such beneficial interest stating that the transfer of
such interest has been made in compliance with the transfer restrictions
applicable to the Global Notes and pursuant to and in accordance with Rule
903 or Rule 904 of Regulation S, then the Trustee, as Registrar, shall
instruct the Depositary to reduce or cause to be reduced the aggregate
principal amount at maturity of the applicable Rule 144A Global Note and to
increase or cause to be increased the aggregate principal amount at
maturity of the applicable Regulation S Global Note by the principal amount
at maturity of the beneficial interest in the Rule 144A Global Note to be
exchanged or transferred, to credit or cause to be credited to the account
of the Person specified in such instructions, a beneficial interest in the
Regulation S Global Note equal to the reduction in the aggregate principal
amount at maturity of the Rule 144A Global Note, and to debit, or cause to
be debited, from the account of the Person making such exchange or transfer
the beneficial interest in the Rule 144A Global Note that is being
exchanged or transferred.
(ii) REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE. If, at
any time, after the expiration of the 40-day restricted period, an owner of
a beneficial interest in a Regulation S Global Note deposited with the
Depositary or with the Trustee as custodian for the Depositary wishes to
transfer its beneficial interest in such Regulation S Global Note to a
Person who is required or permitted to take delivery thereof in the form of
an interest in a Rule 144A Global Note, such owner shall, subject to the
Applicable Procedures, exchange or cause the exchange of such interest for
an equivalent beneficial interest in a Rule 144A Global Note as provided in
this Section 2.06(a)(ii). Upon receipt by the Trustee of (1) instructions
from Euroclear or Cedel, if applicable, and the Depositary, directing the
Trustee, as Registrar, to credit or cause to be credited a beneficial
interest in the Rule 144A Global Note equal to the beneficial interest in
the Regulation S Global Note to be exchanged, such instructions to contain
information regarding the Participant account with the Depositary to be
credited with such increase, (2) a written order given in accordance with
the Applicable Procedures containing information regarding the participant
account of the Depositary and (3) a certificate in the form of Exhibit B-2
attached hereto given by the owner of such beneficial interest stating (A)
if the transfer is pursuant to Rule 144A, that the Person transferring such
interest in a Regulation S Global Note reasonably believes that the Person
acquiring such interest in a Rule 144A Global Note is a QIB and is
obtaining such beneficial interest in a transaction meeting the
requirements of Rule 144A and any applicable
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blue sky or securities laws of any state of the United States, (B) that the
transfer complies with the requirements of Rule 144 under the Securities
Act, (C) if the transfer is to an Institutional Accredited Investor that
such transfer is in compliance with the Securities Act and a certificate in
the form of Exhibit C attached hereto and, if such transfer is in respect
of an aggregate principal amount of less than $100,000, an Opinion of
Counsel acceptable to the Company that such transfer is in compliance with
the Securities Act or (D) if the transfer is pursuant to any other
exemption from the registration requirements of the Securities Act, that
the transfer of such interest has been made in compliance with the transfer
restrictions applicable to the Global Notes and pursuant to and in
accordance with the requirements of the exemption claimed, such statement
to be supported by an Opinion of Counsel from the transferee or the
transferor in form reasonably acceptable to the Company and to the
Registrar and in each case, in accordance with any applicable securities
laws of any state of the United States or any other applicable
jurisdiction, then the Trustee, as Registrar, shall instruct the Depositary
to reduce or cause to be reduced the aggregate principal amount at maturity
of such Regulation S Global Note and to increase or cause to be increased
the aggregate principal amount at maturity of the applicable Rule 144A
Global Note by the principal amount at maturity of the beneficial interest
in the Regulation S Global Note to be exchanged or transferred, and the
Trustee, as Registrar, shall instruct the Depositary, concurrently with
such reduction, to credit or cause to be credited to the account of the
Person specified in such instructions a beneficial interest in the
applicable Rule 144A Global Note equal to the reduction in the aggregate
principal amount at maturity of such Regulation S Global Note and to debit
or cause to be debited from the account of the Person making such transfer
the beneficial interest in the Regulation S Global Note that is being
exchanged or transferred.
(b) TRANSFER AND EXCHANGE OF DEFINITIVE NOTES. When Definitive Notes are
presented by a Holder to the Registrar with a request to register the transfer
of the Definitive Notes or to exchange such Definitive Notes for an equal
principal amount of Definitive Notes of other authorized denominations, the
Registrar shall register the transfer or make the exchange as requested only if
the Definitive Notes are presented or surrendered for registration of transfer
or exchange, are endorsed and contain a signature guarantee or accompanied by a
written instrument of transfer in form satisfactory to the Registrar duly
executed by such Holder or by his attorney and contains a signature guarantee,
duly authorized in writing and the Registrar received the following
documentation (all of which may be submitted by facsimile):
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(i) in the case of Definitive Notes that are Transfer Restricted
Securities, such request shall be accompanied by the following additional
information and documents, as applicable:
(A) if such Transfer Restricted Security is being delivered
to the Registrar by a Holder for registration in the name of such
Holder, without transfer, or such Transfer Restricted Security is
being transferred to the Company or any of its Subsidiaries, a
certification to that effect from such Holder (in substantially the
form of Exhibit B-3 hereto); or
(B) if such Transfer Restricted Security is being
transferred to a QIB in accordance with Rule 144A under the Securities
Act or pursuant to an exemption from registration in accordance with
Rule 144 under the Securities Act or pursuant to an effective
registration statement under the Securities Act, a certification to
that effect from such Holder (in substantially the form of Exhibit B-3
hereto); or
(C) if such Transfer Restricted Security is being
transferred to a Non-U.S. Person in an offshore transaction in
accordance with Rule 904 under the Securities Act, a certification to
that effect from such Holder (in substantially the form of Exhibit B-3
hereto);
(D) if such Transfer Restricted Security is being
transferred to an Institutional Accredited Investor in reliance on an
exemption from the registration requirements of the Securities Act
other than those listed in subparagraphs (B) and (C) above, a
certification to that effect from such Holder (in substantially the
form of Exhibit B-3 hereto), a certification substantially in the form
of Exhibit C hereto, and, if such transfer is in respect of an
aggregate principal amount of Notes of less than $100,000, an Opinion
of Counsel acceptable to the Company that such transfer is in
compliance with the Securities Act; or
(E) if such Transfer Restricted Security is being
transferred in reliance on any other exemption from the registration
requirements of the Securities Act, a certification to that effect
from such Holder (in substantially the form of Exhibit B-3 hereto) and
an Opinion of Counsel from such Holder or the transferee reasonably
acceptable to the Company and to the Registrar to the effect that such
transfer is in compliance with the Securities Act.
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(c) TRANSFER OF A BENEFICIAL INTEREST IN A RULE 144A GLOBAL NOTE OR
REGULATION S PERMANENT GLOBAL NOTE FOR A DEFINITIVE NOTE.
(i) Any Person having a beneficial interest in a Rule 144A Global
Note or Regulation S Permanent Global Note may upon request, subject to the
Applicable Procedures, exchange such beneficial interest for a Definitive
Note. Upon receipt by the Trustee of written instructions or such other
form of instructions as is customary for the Depositary (or Euroclear or
Cedel, if applicable), from the Depositary or its nominee on behalf of any
Person having a beneficial interest in a Rule 144A Global Note or
Regulation S Permanent Global Note, and, in the case of a Transfer
Restricted Security, the following additional information and documents
(all of which may be submitted by facsimile):
(A) if such beneficial interest is being transferred to the
Person designated by the Depositary as being the beneficial owner, a
certification to that effect from such Person (in substantially the
form of Exhibit B-4 hereto);
(B) if such beneficial interest is being transferred to a
QIB in accordance with Rule 144A under the Securities Act or pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act or pursuant to an effective registration statement
under the Securities Act, a certification to that effect from the
transferor (in substantially the form of Exhibit B-4 hereto);
(C) if such beneficial interest is being transferred to an
Institutional Accredited Investor, pursuant to a private placement
exemption from the registration requirements of the Securities Act
(and based on an opinion of counsel if the Company so requests), a
certification to that effect from such Holder (in substantially the
form of Exhibit B-4 hereto) and a certificate from the applicable
transferee (in substantially the form of Exhibit C hereto); or
(D) if such beneficial interest is being transferred in
reliance on any other exemption from the registration requirements of
the Securities Act, a certification to that effect from the transferor
(in substantially the form of Exhibit B-4 hereto) and an Opinion of
Counsel from the transferee or the transferor reasonably acceptable to
the Company and to the Registrar to the effect that such transfer is
in compliance with the Securities Act, in which case the Trustee or
the Note Custodian, at the direction of the Trustee, shall, in
accordance with the standing instructions and
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procedures existing between the Depositary and the Note Custodian,
cause the aggregate principal amount of Rule 144A Global Notes or
Regulation S Permanent Global Notes, as applicable, to be reduced
accordingly and, following such reduction, the Company shall execute
and, the Trustee shall authenticate and deliver to the transferee a
Definitive Note in the appropriate principal amount.
(ii) Definitive Notes issued in exchange for a beneficial interest
in a Rule 144A Global Note or Regulation S Permanent Global Note, as
applicable, pursuant to this Section 2.06(c) shall be registered in such
names and in such authorized denominations as the Depositary, pursuant to
instructions from its direct or Indirect Participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Definitive Notes to
the Persons in whose names such Notes are so registered. Following any
such issuance of Definitive Notes, the Trustee, as Registrar, shall
instruct the Depositary to reduce or cause to be reduced the aggregate
principal amount at maturity of the applicable Global Note to reflect the
transfer.
(d) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL NOTES.
Notwithstanding any other provision of this Indenture (other than the provisions
set forth in subsection (f) of this Section 2.06), a Global Note may not be
transferred as a whole except by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor Depositary or
a nominee of such successor Depositary.
(e) TRANSFER AND EXCHANGE OF A DEFINITIVE NOTE FOR A BENEFICIAL INTEREST
IN A GLOBAL NOTE. A definitive Note may not be transferred or exchanged for a
beneficial interest in a Global Note.
(f) AUTHENTICATION OF DEFINITIVE NOTES IN ABSENCE OF DEPOSITARY. If at
any time:
(i) the Depositary for the Notes notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global
Notes and a successor Depositary for the Global Notes is not appointed by
the Company within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of Definitive Notes under this
Indenture, then the Company shall execute, and the Trustee shall, upon
receipt of an authentication order in accordance with Section 2.02 hereof,
authenticate and deliver, Definitive Notes in an aggregate principal
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amount equal to the principal amount of the Global Notes in exchange for
such Global Notes.
(g) LEGENDS.
(i) Except as permitted by the following paragraphs (ii), (iii)
and (iv), each Note certificate evidencing Global Notes and Definitive
Notes (and all Notes issued in exchange therefor or substitution thereof)
shall bear the legend (the "PRIVATE PLACEMENT LEGEND") in substantially the
following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.
EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES, FOR THE BENEFIT OF THE COMPANY, THAT (A)
SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a)
INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS
A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION
S UNDER THE SECURITIES ACT, OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE
OF CLAUSE (b), (c), OR (d), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY
SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND
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EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN
(A) ABOVE."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global Note)
pursuant to Rule 144 under the Securities Act or pursuant to an effective
registration statement under the Securities Act:
(A) in the case of any Transfer Restricted Security that is
a Definitive Note, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Note that
does not bear the legend set forth in (i) above and rescind any
restriction on the transfer of such Transfer Restricted Security upon
receipt of a certification from the transferring holder substantially
in the form of Exhibit B-4 hereto; and
(B) in the case of any Transfer Restricted Security
represented by a Global Note, such Transfer Restricted Security shall
not be required to bear the legend set forth in (i) above, but shall
continue to be subject to the provisions of Section 2.06(a) and (b)
hereof; PROVIDED, HOWEVER, that with respect to any request for an
exchange of a Transfer Restricted Security that is represented by a
Global Note for a Definitive Note that does not bear the legend set
forth in (i) above, which request is made in reliance upon Rule 144,
the Holder thereof shall certify in writing to the Registrar that such
request is being made pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit B-4 hereto).
(iii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global Note)
in reliance on any exemption from the registration requirements of the
Securities Act (other than exemptions pursuant to Rule 144A or Rule 144
under the Securities Act) in which the Holder or the transferee provides an
Opinion of Counsel to the Company and the Registrar in form and substance
reasonably acceptable to the Company and the Registrar (which Opinion of
Counsel shall also state that the transfer restrictions contained in the
legend are no longer applicable):
(A) in the case of any Transfer Restricted Security that is
a Definitive Note, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Note that
does not bear the legend set forth in (i) above and rescind any
restriction on the transfer of such Transfer Restricted Security; and
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(B) in the case of any Transfer Restricted Security
represented by a Global Note, such Transfer Restricted Security shall
not be required to bear the legend set forth in (i) above, but shall
continue to be subject to the provisions of Section 2.06(a) and (b)
hereof.
(iv) Notwithstanding the foregoing, upon the consummation of the
Exchange Offer in accordance with the Registration Rights Agreement, the
Company shall issue and, upon receipt of an authentication order in
accordance with Section 2.02 hereof, the Trustee shall authenticate (i) one
or more Unrestricted Global Notes in aggregate principal amount equal to
the principal amount of the Restricted Beneficial Interests tendered for
acceptance by persons that are not (x) broker-dealers, (y) Persons
participating in the distribution of the Notes or (z) Persons who are
affiliates (as defined in Rule 144) of the Company and accepted for
exchange in the Exchange Offer and (ii) Definitive Notes that do not bear
the Private Placement Legend in an aggregate principal amount equal to the
principal amount of the Restricted Definitive Notes accepted for exchange
in the Exchange Offer. Concurrently with the issuance of such Notes, the
Trustee shall cause the aggregate principal amount of the applicable
Restricted Global Notes to be reduced accordingly and the Company shall
execute and the Trustee shall authenticate and deliver to the Persons
designated by the Holders of Definitive Notes so accepted Definitive Notes
in the appropriate principal amount.
(h) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTES. At such time as all
beneficial interests in Global Notes have been exchanged for Definitive Notes,
redeemed, repurchased or cancelled, all Global Notes shall be returned to or
retained and cancelled by the Trustee in accordance with Section 2.11 hereof.
At any time prior to such cancellation, if any beneficial interest in a Global
Note is exchanged for Definitive Notes, redeemed, repurchased or cancelled, the
principal amount of Notes represented by such Global Note shall be reduced
accordingly and an endorsement shall be made on such Global Note, by the Trustee
or the Notes Custodian, at the direction of the Trustee, to reflect such
reduction.
(i) GENERAL PROVISIONS RELATING TO TRANSFERS AND EXCHANGES.
(1) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Global Notes
and Definitive Notes at the Registrar's request.
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(2) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may require
payment of a sum sufficient to cover any stamp or transfer tax or
similar governmental charge payable in connection therewith (other
than any such stamp or transfer taxes or similar governmental charge
payable upon exchange or transfer pursuant to Sections 2.10, 3.06,
4.10, 4.14 and 9.05 hereto).
(3) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive
Notes shall be the valid obligations of the Company, evidencing the
same debt, and entitled to the same benefits under this Indenture, as
the Global Notes or Definitive Notes surrendered upon such
registration of transfer or exchange.
(4) The Registrar shall not be required:(A) to issue, to
register the transfer of or to exchange Notes during a period
beginning at the opening of fifteen (15) Business Days before the day
of any selection of Notes for redemption under Section 3.02 hereof and
ending at the close of business on the day of selection, (B) to
register the transfer of or to exchange any Note so selected for
redemption in whole or in part, except the unredeemed portion of any
Note being redeemed in part, or (C) to register the transfer of or to
exchange a Note between a record date and the next succeeding interest
payment date.
(5) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and the Company may deem
and treat the Person in whose name any Note is registered as the
absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Notes and for all other purposes,
and neither the Trustee, any Agent nor the Company shall be affected
by notice to the contrary.
(6) The Trustee shall authenticate Global Notes and
Definitive Notes in accordance with the provisions of Section 2.02
hereof.
SECTION 2.7. REPLACEMENT NOTES.
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If any mutilated Note is surrendered to the Trustee, or the Company and the
Trustee receives evidence to their satisfaction of the destruction, loss or
theft of any Note, the Company shall issue and the Trustee, upon the written
order of the Company signed by an Officer of the Company, shall authenticate a
replacement Note if the Trustee's requirements are met. If required by the
Trustee or the Company, an indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any Agent and any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Company and the Trustee may
charge for their expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company and shall
be entitled to all of the benefits of this Indenture equally and proportionately
with all other Notes duly issued hereunder.
SECTION 2.8. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by the
Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, a
Note does not cease to be outstanding because the Company or the Guarantor or an
Affiliate of the Company or the Guarantor holds the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under Section 4.01
hereof, it ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent (other than the Company, the Guarantor, a Subsidiary
or an Affiliate of any thereof) holds, on a redemption date or maturity date,
money sufficient to pay Notes payable on that date, then on and after that
date such Notes shall be deemed to be no longer outstanding and shall cease
to accrue interest.
SECTION 2.9. TREASURY NOTES.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company or the Guarantor, or by any Affiliate of the Company or the Guarantor
shall be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes shown on the Trustee's register as
being
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so owned shall be so disregarded. Notwithstanding the foregoing, Notes that are
to be acquired by the Company or the Guarantor or an Affiliate of the Company or
the Guarantor pursuant to an exchange offer, tender offer or other agreement
shall not be deemed to be owned by such entity until legal title to such Notes
passes to such entity.
SECTION 2.10. TEMPORARY NOTES.
Until Definitive Notes are ready for delivery, the Company may prepare and
the Trustee shall authenticate temporary Notes upon a written order of the
Company signed by an Officer of the Company. Temporary Notes shall be
substantially in the form of Definitive Notes but may have variations that the
Company considers appropriate for temporary Notes. Without unreasonable delay,
the Company shall prepare and the Trustee shall upon receipt of a written order
of the Company signed by an Officer authenticate Definitive Notes in exchange
for temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits of this
Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver to the Trustee for cancellation any
Notes previously authenticated and delivered hereunder or which the Company may
have acquired in any manner whatsoever, and all Notes so delivered shall be
promptly cancelled by the Trustee. All Notes surrendered for registration of
transfer, exchange or payment, if surrendered to any Person other than the
Trustee, shall be delivered to the Trustee. The Trustee and no one else shall
cancel all Notes surrendered for registration of transfer, exchange, payment,
replacement or cancellation. Subject to Section 2.07 hereof, the Company may
not issue new Notes to replace Notes that it has redeemed or paid or that have
been delivered to the Trustee for cancellation. All cancelled Notes held by the
Trustee shall be destroyed and certification of their destruction delivered to
the Company, unless by a written order, signed by an Officer of the Company, the
Company shall direct that cancelled Notes be returned to it.
SECTION 2.12. DEFAULTED INTEREST.
If the Company or the Guarantor defaults in a payment of interest on the
Notes, it shall pay the defaulted interest in any lawful manner plus, to the
extent lawful, interest payable on the defaulted interest, to the Persons who
are Holders on a subsequent special record date, which date shall be at the
earliest practicable date but in all events at least five (5) Business Days
prior to the payment date, in
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each case at the rate provided in the Notes and in Section 4.01 hereof. The
Company shall fix or cause to be fixed each such special record date and payment
date, and shall promptly thereafter, notify the Trustee of any such date. At
least fifteen (15) days before the special record date, the Company (or the
Trustee, in the name and at the expense of the Company) shall mail or cause to
be mailed to Holders a notice that states the special record date, the related
payment date and the amount of such interest to be paid.
SECTION 2.13. RECORD DATE.
The record date for purposes of determining the identity of Holders of the
Notes entitled to vote or consent to any action by vote or consent authorized or
permitted under this Indenture shall be determined as provided for in TIA
Section 316(c).
SECTION 2.14. COMPUTATION OF INTEREST.
Interest on the Notes shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
SECTION 2.15. CUSIP NUMBER.
The Company in issuing the Notes may use a "CUSIP" number, and if it does
so, the Trustee shall use the CUSIP number in notices of redemption or exchange
as a convenience to Holders; PROVIDED that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Notes and that reliance may be placed only on
the other identification numbers printed on the Notes. The Company shall
promptly notify the Trustee of any change in the CUSIP number.
ARTICLE 3
REDEMPTION AND PREPAYMENT
SECTION 3.1. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional redemption
provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30
days but not more than 60 days before a redemption date (unless a shorter period
is acceptable to the Trustee) an Officers' Certificate setting forth (i) the
Section of this Indenture pursuant to which the redemption shall occur, (ii) the
redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the
redemption price.
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If the Company is required to make an offer to purchase Notes pursuant to
Section 4.10 or 4.14 hereof, it shall furnish to the Trustee, at least 30 days
before the scheduled purchase date, an Officers' Certificate setting forth (i)
the section of this Indenture pursuant to which the offer to purchase shall
occur, (ii) the terms of the offer, (iii) the principal amount of Notes to be
purchased, (iv) the purchase price, (v) the purchase date and (vi) and further
setting forth a statement to the effect that (a) the Company or one its
Subsidiaries has affected an Asset Sale and there are Excess Proceeds
aggregating more than $5.0 million or (b) a Change of Control has occurred, as
applicable.
SECTION 3.2. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a PRO RATA basis or by
lot; PROVIDED that no Notes of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on
the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
SECTION 3.3. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a redemption date, the
Company shall mail or cause to be mailed by first class mail, a notice of
redemption to each Holder whose Notes are to be redeemed.
The notice shall identify the Notes to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price for the Notes and accrued
interest, and Liquidated Damages, if any;
(3) if any Note is being redeemed in part, the portion of
the principal amount of such Notes to be redeemed and that, after the
redemption date, upon surrender of such Note, a new Note or Notes in
principal
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amount equal to the unredeemed portion shall be issued upon surrender
of the original Note;
(4) the name and address of the Paying Agent;
(5) that Notes called for redemption must be surrendered to
the Paying Agent to collect the redemption price;
(6) that, unless the Company defaults in making such
redemption payment, interest and Liquidated Damages, if any, on Notes
called for redemption cease to accrue on and after the redemption
date;
(7) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being
redeemed; and
(8) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Notes.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense; PROVIDED, HOWEVER, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date (or such shorter period as shall be acceptable to the Trustee),
an Officers' Certificate requesting that the Trustee give such notice and
setting forth the information to be stated in the notice as provided in the
preceding paragraph. The notice mailed in the manner herein provided shall be
conclusively presumed to have been duly given whether or not the Holder receives
such notice. In any case, failure to give such notice by mail or any defect in
the notice to the Holder of any Note shall not affect the validity of the
proceeding for the redemption of any other Note.
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03 hereof,
Notes called for redemption become irrevocably due and payable on the redemption
date at the redemption price plus accrued and unpaid interest and Liquidated
Damages, if any, to such date. A notice of redemption may not be conditional.
SECTION 3.5. DEPOSIT OF REDEMPTION OR PURCHASE PRICE.
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On or before 10:00 a.m. (New York City time) on each redemption date or the
date on which Notes must be accepted for purchase pursuant to Section 4.10 or
4.14, the Company shall deposit with the Trustee or with the Paying Agent in
immediately available funds money sufficient to pay the redemption or purchase
price of and accrued and unpaid interest and Liquidated Damages, if any, on all
Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent
shall promptly return to the Company upon its written request any money
deposited with the Trustee or the Paying Agent by the Company in excess of the
amounts necessary to pay the redemption or purchase price of (including any
applicable premium) and accrued and unpaid interest and Liquidated Damages, if
any, on all Notes to be redeemed or purchased.
If Notes called for redemption or tendered in an Asset Sale Offer or Change
of Control Offer are paid or if the Company has deposited with the Trustee or
Paying Agent money sufficient to pay the redemption or purchase price of and
unpaid and accrued interest and Liquidated Damages, if any, on all Notes to be
redeemed or purchased, on and after the redemption or purchase date interest and
Liquidated Damages, if any, shall cease to accrue on the Notes or the portions
of Notes called for redemption or tendered and not withdrawn in an Asset Sale
Offer or Change of Control Offer (regardless of whether certificates for such
securities are actually surrendered). If a Note is redeemed or purchased on or
after an interest record date but on or prior to the related interest payment
date, then any accrued and unpaid interest and Liquidated Damages, if any, shall
be paid to the Person in whose name such Note was registered at the close of
business on such record date. If any Note called for redemption shall not be so
paid upon surrender for redemption because of the failure of the Company to
comply with the preceding paragraph, interest shall be paid on the unpaid
principal and Liquidated Damages, if any, from the redemption or purchase date
until such principal and Liquidated Damages, if any, is paid, and to the extent
lawful on any interest not paid on such unpaid principal, in each case, at the
rate provided in the Notes and in Section 4.01 hereof.
SECTION 3.6. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall issue
and, upon the Company's written request, the Trustee shall authenticate for the
Holder at the expense of the Company a new Note equal in principal amount to the
unredeemed portion of the Note surrendered.
SECTION 3.7. OPTIONAL REDEMPTION.
(a) Except as set forth in the next paragraph, the Notes will not be
redeemable at the Company's option prior to March 15, 2003. Thereafter, the
Notes will be subject to redemption at any time at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
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redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on March 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003 104.938%
2004 103.292%
2005 101.646%
2006 and thereafter 100.000%
</TABLE>
(b) Notwithstanding the foregoing, at any time prior to March 15, 2001,
the Company may redeem up to 40% of the original aggregate principal amount of
Notes at a redemption price of 109.875% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of a Public Equity Offering;
PROVIDED that at least 60% of the original aggregate principal amount of Notes
remains outstanding immediately after the occurrence of each such redemption;
and PROVIDED, further, that such redemption shall occur within 45 days of the
date of the closing of such Public Equity Offering.
SECTION 3.8. MANDATORY REDEMPTION.
Except as set forth under Sections 3.09, 4.10 and 4.14 hereof, the Company
shall not be required to make mandatory redemption or sinking fund payments with
respect to the Notes.
SECTION 3.9. REPURCHASE OFFERS.
In the event that the Company shall be required to commence an offer to all
Holders to repurchase Notes (a "REPURCHASE OFFER") pursuant to Section 4.10
hereof, an "ASSET SALE OFFER," or pursuant to Section 4.14 hereof, a "CHANGE OF
CONTROL OFFER," the Company shall follow the procedures specified below.
Within 30 days following any Change of Control or the date on which the
aggregate amount of Excess Proceeds exceeds $5 million pursuant to Section 4.10
hereof, the Company will mail a notice to each Holder describing the transaction
or transactions that constitute the Change of Control or give rise to the Asset
Sale Offer and offering to repurchase Notes as required by Section 4.10 hereof,
in the case of an Asset Sale Offer, or by Section 4.14 hereof, in the case of a
Change of Control Offer, on the date specified in such notice, which date shall
be no earlier than 30 days and no later than 60 days from the date such notice
is mailed (the "PURCHASE DATE"). A Repurchase Offer shall remain open for a
period of twenty (20) Business Days following its commencement and no longer,
except to the
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extent that a longer period is required by applicable law (the "OFFER PERIOD").
On the Purchase Date, the Company shall purchase the principal amount of Notes
required to be purchased pursuant to Section 4.10 hereof, in the case of an
Asset Sale Offer, or 4.14 hereof, in the case of a Change of Control Offer (the
"OFFER AMOUNT") or, if less than the Offer Amount has been tendered, all Notes
tendered in response to the Repurchase Offer. Payment for any Notes so
purchased shall be made in the same manner as interest payments are made.
If the Purchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued and unpaid interest and
Liquidated Damages, if any, shall be paid to the Person in whose name a Note is
registered at the close of business on such record date, and no additional
interest or Liquidated Damages, if any, shall be payable to Holders who tender
Notes pursuant to the Repurchase Offer.
Upon the commencement of a Repurchase Offer, the Company shall send, by
first class mail, a notice to the Trustee and each of the Holders. The notice
shall contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to such Repurchase Offer. The Repurchase Offer shall be
made to all Holders. The notice, which shall govern the terms of the Repurchase
Offer, shall describe the transaction or transactions that constitute the Change
of Control or gave rise to the Asset Sale Offer, as the case may be and shall
state:
(a) that the Repurchase Offer is being made pursuant to this Section 3.09
and Section 4.10 or 4.14 hereof, as the case may be, and the length of time the
Repurchase Offer shall remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Note not tendered or accepted for payment shall continue to
accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Repurchase Offer shall cease to accrue
interest and Liquidated Damages, if any, after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to a
Repurchase Offer shall be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note, duly completed,
or transfer by book-entry transfer, to the Company, the Depositary, or the
Paying Agent at the address specified in the notice not later than the close of
business on the last day of the Offer Period;
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(f) that Holders shall be entitled to withdraw their election if the
Company, the Depositary or the Paying Agent, as the case may be, receives, not
later than the expiration of the Offer Period, a telegram, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Note the Holder delivered for purchase and a statement that such
Holder is withdrawing his election to have such Note purchased;
(g) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Offer Amount, the Company shall select the Notes to be
purchased on a PRO RATA basis (with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of $1,000, or
integral multiples thereof, shall be purchased); and
(h) that Holders whose Notes were purchased only in part shall be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered (or transferred by book-entry transfer).
On the Purchase Date, the Company shall, to the extent lawful, (i) accept
for payment, on a PRO RATA basis to the extent necessary, the Offer Amount of
Notes or portions thereof tendered pursuant to the Repurchase Offer, or if less
than the Offer Amount has been tendered, all Notes tendered, (ii) deliver or
cause the Paying Agent or depository, as the case may be, to deliver to the
Trustee Notes so accepted and (iii) deliver to the Trustee an Officers'
Certificate stating that such Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this Section 3.09. The
Company, the Depositary or the Paying Agent, as the case may be, shall promptly
(but in any case not later than two (2) Business Days after the Purchase Date)
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
plus any accrued and unpaid interest and Liquidated Damages, if any, thereon,
and the Company shall promptly issue a new Note, and the Trustee shall
authenticate and mail or deliver such new Note, to such Holder, equal in
principal amount to any unpurchased portion of such Holder's Notes surrendered.
Any Note not so accepted shall be promptly mailed or delivered by the Company to
the Holder thereof. The Company shall publicly announce in a newspaper of
general circulation or in a press release provided to a nationally recognized
financial wire service the results of the Repurchase Offer on the Purchase Date.
Other than as specifically provided in this Section 3.09, any purchase
pursuant to this Section 3.09 shall be made pursuant to the provisions of
Sections 3.01, 3.02, 3.05 and 3.06 hereof.
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ARTICLE 4
COVENANTS
SECTION 4.1. PAYMENT OF NOTES.
The Company shall pay or cause to be paid the principal of, premium, if
any, and interest on the Notes on the dates and in the manner provided in the
Notes. The Company shall pay all Liquidated Damages, if any, in the same
manner on the dates and in the amounts set forth in the Registration Rights
Agreement. Principal, premium and Liquidated Damages, if any, and interest,
shall be considered paid for all purposes hereunder on the date the Paying Agent
if other than the Company, the Guarantor or a Subsidiary thereof holds, as of
10:00 a.m. (New York City time) money deposited by the Company in immediately
available funds and designated for and sufficient to pay all such principal,
premium and Liquidated Damages, if any, and interest, then due.
The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
1% per annum in excess of the then applicable interest rate on the Notes to the
extent lawful; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages (without regard to any applicable grace period) at the same
rate to the extent lawful.
SECTION 4.2. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, the City of New
York an office or agency (which may be an office of the Trustee or an affiliate
of the Trustee or Registrar) where Notes may be surrendered for registration of
transfer or for exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The Company shall give
prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; PROVIDED, HOWEVER,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
the City of New York for such purposes. The Company shall give
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prompt written notice to the Trustee of any such designation or rescission and
of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the Trustee as
one such office or agency of the Company in accordance with Section 2.03 hereof.
SECTION 4.3. COMMISSION REPORTS.
Whether or not required by the rules and regulations of the Commission, so
long as any Notes are outstanding, the Company (or MSC, as the case may be)
shall furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company (or MSC, as the case may be)
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon from certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company (or MSC, as the case may be) were
required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, the Company (or MSC, as the case may
be) shall file a copy of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and MSC shall furnish to the
Holders, and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act. The Company shall at all times comply with TIA Section
314(a).
The financial information to be distributed to Holders of Notes shall be
filed with the Trustee and mailed to the Holders at their addresses appearing in
the register of Notes maintained by the Registrar, within 15 days after the same
would be required to be filed with the Commission if the Company were required
to file the Forms containing such financial information.
The Company shall provide the Trustee with a sufficient number of copies of
all reports and other documents and information and, if requested by the
Company, the Trustee will deliver such reports to the Holders under this Section
4.03.
SECTION 4.4. COMPLIANCE CERTIFICATE.
The Company shall deliver to the Trustee, no later than the date year-end
financial statements are required to be filed with the Trustee and mailed to the
Holders under Section 4.03 hereof, an Officers' Certificate stating that a
review of
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the activities of the Company and its Subsidiaries during the preceding fiscal
year has been made under the supervision of the signing Officers with a view to
determining whether each has kept, observed, performed and fulfilled its
obligations under this Indenture (including, with respect to any Restricted
Payments made during such year, the basis upon which the calculations required
by Section 4.07 hereof were computed, which calculations may be based on the
Company's latest available financial statements), and further stating, as to
each such Officer signing such certificate, that, to the best of his or her
knowledge, each entity has kept, observed, performed and fulfilled each and
every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions of this
Indenture (or, if a Default or Event of Default shall have occurred, describing
all such Defaults or Events of Default of which he or she may have knowledge and
what action the Company is taking or proposes to take with respect thereto) and
that, to the best of his or her knowledge, no event has occurred and remains in
existence by reason of which payments on account of the principal of, premium or
Liquidated Damages, if any, or interest on the Notes is prohibited or if such
event has occurred, a description of the event and what action the Company is
taking or proposes to take with respect thereto.
So long as not contrary to the then current recommendations of the American
Institute of Certified Public Accountants, in connection with the year-end
financial statements delivered pursuant to Section 4.03 hereof, the Company
shall use its best efforts to deliver a written statement of the Company's
independent public accountants (who shall be a firm of established national
reputation) that in making the examination necessary for certification of such
financial statements, nothing has come to their attention that would lead them
to believe that the Company has violated any provisions of Article Four or
Section 5.01 hereof or, if any such violation has occurred, specifying the
nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for any
failure to obtain knowledge of any such violation. In the event that such
written statement of the Company's independent public accountants cannot be
obtained, the Company shall deliver an Officers' Certificate certifying that it
has used its best efforts to obtain such statements and was unable to do so.
The Company shall, so long as any of the Notes are outstanding, deliver to
the Trustee, forthwith upon any Officer becoming aware of any Default or Event
of Default, an Officers' Certificate specifying such Default or Event of Default
and what action the Company is taking or proposes to take with respect thereto.
SECTION 4.5. TAXES.
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Each of the Company and the Guarantor shall pay, and shall cause each of
its Subsidiaries to pay, prior to delinquency all material taxes, assessments
and governmental levies, except such as are contested in good faith and by
appropriate proceedings and with respect to which appropriate reserves have been
taken in accordance with GAAP.
SECTION 4.6. STAY, EXTENSION AND USURY LAWS.
Each of the Company and the Guarantor covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, that may
affect the covenants or the performance of this Indenture; and each of the
Company and the Guarantor (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
shall not, by resort to any such law, hinder, delay or impede the execution of
any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law has been enacted.
SECTION 4.7. RESTRICTED PAYMENTS.
From and after the date hereof the Company shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests or to the direct or
indirect holders of the Company's or any of its Restricted Subsidiaries' Equity
Interests in their capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any direct or indirect parent of the Company; (iii)
make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is PARI PASSU with
or subordinated to the Notes (other than the Notes and the 2003 Notes), except a
payment of interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "RESTRICTED PAYMENTS"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted to
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incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow
Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after the
date of the Indenture (excluding Restricted Payments permitted by clauses (ii)
and (iii) of the next succeeding paragraph), is less than the sum of (i) 50% of
the Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company or MSC (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company or MSC that
have been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or convertible debt securities that
have been converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted Investment
plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a Restricted
Subsidiary, the fair market value of such redesignated Subsidiary (as determined
in good faith by the Board of Directors) as of the date of its redesignation or
(B) pays any cash dividends or cash distributions to the Company or any of its
Restricted Subsidiaries, 50% of any such cash dividends or cash distributions
made after the date of the Indenture.
The foregoing provisions shall not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests
of the Company or MSC in exchange for, or out of the net cash proceeds of the
substantially concurrent sale or issuance (other than to a Restricted Subsidiary
of the Company) of, other Equity Interests of the Company or MSC (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of
PARI PASSU or subordinated Indebtedness with the net cash proceeds from an
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incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Restricted Subsidiary of the Company to the holders of its Equity
Interests on a pro rata basis; (v) any repurchase of Equity Interests of the
Company or MSC from present and former employees and directors of the Company or
its Subsidiaries or MSC in an aggregate amount not to exceed $5 million; (vi)
Permitted Investments; or (vii) other Restricted Payments in an aggregate amount
not to exceed $5 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation (as
determined in good faith by the Board of Directors). Such designation shall
only be permitted if such Restricted Payment would be permitted at such time and
if such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined in good faith by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture.
SECTION 4.8. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to
the
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Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2)
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except for such encumbrances
or restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Credit Facility as in effect as of
the date of the Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are no more
restrictive in the aggregate (as determined by the Board of Directors in good
faith) with respect to such dividend and other payment restrictions than those
contained in the Credit Facility as in effect on the date of the Indenture,
(c) the Indenture and the Notes and the 2003 Indenture and the 2003 Notes,
(d) any applicable law, rule, regulation or order, (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (g) Capital Lease Obligations, mortgage financings and purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, (h) Permitted Refinancing Indebtedness, provided that the material
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (i) contracts for the sale of
assets, including without limitation customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary, and (j) any other agreement or instrument evidencing or relating to
secured Indebtedness of the Company or any Restricted Subsidiary otherwise
permitted to be issued pursuant to Section 4.09 and Section 4.12 that limit the
right of the debtor to dispose of the property or assets securing such
Indebtedness.
SECTION 4.9. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
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The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "INCUR") any Indebtedness (including Acquired Debt) and the
Company will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Cash Flow Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.0 to 1, determined on a Pro Forma Basis.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"PERMITTED INDEBTEDNESS"):
(i) the incurrence by the Company of Indebtedness under the
Credit Facility in an aggregate principal amount not to exceed
$182.0 million outstanding at any time;
(ii) the incurrence by the Company and its Restricted Subsidiaries
of the Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by
the Notes;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings, purchase money obligations and Attributable Debt in an
aggregate principal amount not to exceed $15 million in any one year;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Subsidiaries and was
not incurred in connection with, or in contemplation of, such acquisition
by the Company or one of its Subsidiaries; PROVIDED FURTHER that the
principal amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness incurred pursuant to this
clause (v), does not exceed $5 million;
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(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace,
Indebtedness that was permitted by the Indenture to be incurred;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Restricted Subsidiaries; provided, however, that
(i) if the Company is the obligor on such Indebtedness, such Indebtedness
is expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Notes and (ii)(A) any subsequent issuance
or transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Wholly Owned Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the case
may be;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging currency risk or interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of this Indenture
to be outstanding;
(ix) the guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness of a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant and the
guarantee by Subsidiaries of Senior Debt of the Company;
(x) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(xi) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect to workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit
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or the incurrence of such Indebtedness, such obligations are reimbursed
within 30 days following such drawing or incurrence;
(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business; and
(xiii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness, including Attributable Debt
incurred after the date of the Indenture, in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (xiii), not to
exceed $5 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. The amount of Indebtedness issued at a price
which is less than the principal amount thereof shall be equal to the amount of
the liability in respect thereof determined in accordance with GAAP. Neither the
accrual of interest nor the issuance of additional Indebtedness in the form of
additional promissory notes or otherwise in lieu of the payment of interest nor
the accretion of accreted value will be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
SECTION 4.10. ASSET SALES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 80% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash;
PROVIDED that the amount of (x) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any Guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or
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such Restricted Subsidiary from further liability and (y) any securities, notes
or other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are converted by the Company or such Restricted
Subsidiary into cash within 90 days (to the extent of the cash received), shall
be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Senior Debt (and to correspondingly reduce commitments with respect thereto in
the case of revolving borrowings) or existing 2003 Notes, or (b) to the
acquisition of a controlling interest in another business, the making of a
capital expenditure or the acquisition of other long-term assets, in each case,
in a Permitted Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce the revolving Indebtedness under
the Credit Facility or otherwise invest such Net Proceeds in any manner that is
not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph will
be deemed to constitute "EXCESS PROCEEDS." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all Holders of Notes (an "ASSET SALE OFFER") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in Section 3.09 hereof.
To the extent that the aggregate amount of Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a PRO RATA
basis. Upon completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "AFFILIATE TRANSACTION") unless (i) such Affiliate Transaction is
entered into in good faith and on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any
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Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $10
million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; PROVIDED that the following shall
not be deemed Affiliate Transactions: (q) any employment agreement entered into
by the Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, (r) transactions between or among the Company and/or its Restricted
Subsidiaries, (s) Permitted Investments and Restricted Payments that are
permitted by the provisions of Section 4.07 hereof, (t) customary loans,
advances, fees and compensation paid to, and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any of its
Restricted Subsidiaries, (u) consulting and other advisory fees paid to MSC not
to exceed $250,000 in any one year, and (v) transactions pursuant to any
contract or agreement in effect on the date hereof as the same may be amended,
modified or replaced from time to time so long as any such amendment,
modification or replacement is no less favorable to the Company and its
Restricted Subsidiaries than the contract or agreement as in effect on the date
hereof or is approved by a majority of the disinterested directors of the
Company.
SECTION 4.12. LIENS.
The Company shall not and shall not permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume or otherwise cause or suffer to
exist any Lien that secures obligations under any PARI PASSU Indebtedness or
subordinated Indebtedness on any asset or property now owned or hereafter
acquired by the Company or any of its Subsidiaries, or any income or profits
therefrom or assign or convey any right to receive income therefrom, unless the
Notes are equally and ratably secured with the obligations so secured until such
time as such obligations are no longer secured by a Lien; PROVIDED, that in any
case involving a Lien securing subordinated Indebtedness, such Lien is
subordinated to the Lien securing the Notes to the same extent that such
subordinated Indebtedness is subordinated to the Notes.
SECTION 4.13. SALE AND LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; PROVIDED that
the
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Company may enter into a sale and leaseback transaction if (i) the Company could
have (a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction pursuant to Section 4.09 hereof
and (b) incurred a Lien to secure such Indebtedness pursuant to Section 4.12
hereof, (ii) the gross cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to the
Trustee) of the property that is the subject of such sale and leaseback
transaction and (iii) the transfer of assets in such sale and leaseback
transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, Section 4.10 hereof.
SECTION 4.14. OFFER TO PURCHASE UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"CHANGE OF CONTROL PAYMENT"). Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"CHANGE OF CONTROL PAYMENT DATE"), pursuant to the procedures required by
Section 3.09 hereof and described in such notice. The Company shall comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; PROVIDED that each such new Note will be in a
principal
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amount of $1,000 or an integral multiple thereof. Prior to complying with the
provisions of this Section 4.14, but in any event within 30 days following a
Change of Control, the Company shall either repay all outstanding Indebtedness
under the Credit Facility and terminate the commitments thereunder or obtain the
requisite consents under the Credit Facility to permit the repurchase of Notes
required by this Section 4.14. The Company shall publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of this Indenture are applicable. Except as
described above with respect to a Change of Control, this Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
SECTION 4.15. CORPORATE EXISTENCE.
Subject to Section 4.14 and Article 5 hereof, as the case may be, each of
the Company and the Guarantor shall do or cause to be done all things necessary
to preserve and keep in full force and effect its corporate existence and the
corporate, partnership or other existence of each of its Subsidiaries in
accordance with the respective organizational documents (as the same may be
amended from time to time) of the Guarantor, the Company or any such Subsidiary
and the rights (charter and statutory), licenses and franchises of the
Guarantor, the Company and its Subsidiaries; PROVIDED that neither the Guarantor
nor the Company shall be required to preserve any such right, license or
franchise, or the corporate, partnership or other existence of the Guarantor or
any Subsidiaries, if the Board of Directors of the Company or the Guarantor
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Guarantor, the Company and its Subsidiaries,
taken as a whole, and that the loss thereof is not adverse in any material
respect to the Holders of the Notes.
SECTION 4.16. LIMITATION ON ISSUANCES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES.
The Company (i) shall not, and shall not permit any Wholly Owned Restricted
Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose
of any Capital Stock of any Wholly Owned Subsidiary of the Company to any Person
(other than the Company or a Wholly Owned Restricted Subsidiary of the Company),
unless (a) such transfer, conveyance, sale, lease or other disposition is of all
the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with Section 4.10 hereof, and (ii) will not permit any
Wholly Owned Restricted Subsidiary of the Company to
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issue any of its Equity Interests (other than, if necessary, shares of its
Capital Stock constituting directors' qualifying shares) to any Person other
than to the Company or a Wholly Owned Restricted Subsidiary of the Company
except that a Wholly Owned Restricted Subsidiary of the Company may issue shares
of common stock with no preferences or special rights or privileges and with no
redemption or prepayment provisions provided the cash Net Proceeds from such
issuance of such common stock are applied in accordance with Section 4.10
hereof.
SECTION 4.17. LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS.
The Company shall not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("GUARANTEED
INDEBTEDNESS"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "SUBSIDIARY GUARANTEE") of payment of the Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any such Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
and each Restricted Subsidiary's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
SECTION 4.18. BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
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would not be material to the Company and its Restricted Subsidiaries taken as a
whole.
SECTION 4.19. PAYMENT FOR CONSENTS.
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions hereof or
the Notes unless such consideration is offered to be paid or is paid to all
Holders of the Notes that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
SECTION 4.20. ANTI-LAYERING.
The Company shall not, and the Company will not permit any of its
Subsidiaries to, incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is both (a) subordinate or junior in right of
payment to any Senior Debt and (b) senior in any respect in right of payment to
the Notes; and the Guarantor shall not incur, create, issue, assume, guarantee
or otherwise become liable for any Indebtedness that is both (a) subordinate or
junior in right of payment to its Guarantor Senior Debt and (b) senior in right
of payment to its Note Guarantee.
SECTION 4.21. RESTRICTIVE COVENANT OF MSC.
MSC shall not engage in any activities other than holding 100% of the
Capital Stock of the Company and providing services to and management of the
Company and it will not incur any liabilities other than any liabilities
relating to the Guarantee of the Company's obligations pursuant to the Credit
Facility, the Guarantee of the Notes, the Guarantee of the 2003 Notes, the
Guarantee of any Indebtedness permitted by Section 4.09 and any other
obligations or liabilities incidental to holding 100% of the Capital Stock of
the Company.
ARTICLE 5
SUCCESSORS
SECTION 5.1. MERGER, CONSOLIDATION OR SALE OF ASSETS.
The Company shall not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or
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more related transactions, to another corporation, Person or entity unless (i)
the Company is the surviving corporation or the entity or the Person formed by
or surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the Notes and this Indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
(iv) except in the case of a merger of the Company with or into MSC or a Wholly
Owned Restricted Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such transaction and
determined on a Pro Forma Basis, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Cash Flow Coverage Ratio test set forth
in the first paragraph of Section 4.09 hereof.
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the assets, of
the Company in accordance with Section 5.01 hereof, the successor entity or
Person formed by such consolidation or into or with which the Company is merged
or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition, the provisions of this Indenture referring to
the "COMPANY" shall refer instead to the successor entity or Person and not to
the Company), and shall exercise every right and power of, the Company under
this Indenture with the same effect as if such successor entity or Person had
been named as the Company herein; PROVIDED, that, (i) solely for the purposes of
computing Consolidated Net Income for purposes of clause (c) of the first
paragraph of Section 4.07 hereof, the Consolidated Net Income of any person
other than the Company and its Subsidiaries shall be included only for periods
subsequent to the effective time of such merger, consolidation, sale,
assignment, transfer, lease, conveyance or other disposition; and (ii) in the
case of any sale, assignment, transfer, lease, conveyance or other disposition
of less than all of the assets of the predecessor Company, the predecessor
Company shall not be released or discharged from the obligation to pay the
principal of or interest and Liquidated Damages, if any, on the Notes.
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ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT.
Each of the following constitutes an "EVENT OF DEFAULT":
(i) default for 30 days in the payment when due of interest on,
or Liquidated Damages with respect to, the Notes (whether or not prohibited
by the Subordination provisions of the Indenture);
(ii) default in payment when due of principal of or premium, if
any, on the Notes (whether or not prohibited by the Subordination
provisions of the Indenture);
(iii) failure by the Company to comply with the provisions
described under Sections 4.10 or 4.14 or Article 5 hereof;
(iv) failure by the Company for 30 days after notice from the
Trustee or the Holders of at least 25% in principal amount of the Notes
then outstanding to comply with the provisions described under Section 4.07
or 4.09 hereof;
(v) failure by the Company for 60 days after notice from the
Trustee or the Holders of at least 25% in principal amount of the Notes
then outstanding to comply with any of its other agreements in this
Indenture or the Notes;
(vi) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the date hereof, which default (a) is caused by
a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "PAYMENT DEFAULT") or
(b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $15.0 million or more;
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(vii) failure by the Company or any of its Restricted Subsidiaries
to pay final judgments aggregating in excess of $15.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
(viii) the Company or any of its Significant Subsidiaries or any
group of Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary, pursuant to or within the meaning of Bankruptcy
Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it
in an involuntary case,
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property,
(D) makes a general assignment for the benefit of its
creditors, or
(E) generally is not paying its debts as they become
due; or
(ix) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary in an involuntary
case;
(B) appoints a Custodian of the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary or for all or
substantially all of the property of the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary; or
(C) orders the liquidation of the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days.
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The term "CUSTODIAN" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
SECTION 6.2. ACCELERATION.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; PROVIDED, HOWEVER, that
if any Indebtedness or Obligation is outstanding pursuant to the Credit
Facility, upon a declaration of acceleration by the Holders of the Notes or the
Trustee, all principal and interest under this Indenture shall be due and
payable upon the earlier of (x) the day which is five Business Days after the
provision to the Company, the Credit Agent and the Trustee of such written
notice of acceleration or (y) the date of acceleration of any Indebtedness under
the Credit Facility; and PROVIDED, FURTHER, that in the event of an acceleration
based upon an Event of Default set forth in clause (vi) of Section 6.01 hereof,
such declaration of acceleration shall be automatically annulled if the holders
of Indebtedness which is the subject of such acceleration have rescinded their
declaration of acceleration in respect of such Indebtedness or such Payment
Default shall have been cured or waived within 30 days thereof and no other
Event of Default has occurred during such 30-day period which has not been
cured, paid or waived. Notwithstanding the foregoing, in the case of an Event
of Default as described in clause (viii) or (ix) of Section 6.01 hereof, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce this Indenture or the Notes except as
provided in this Indenture.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of Section 3.07(a) hereof, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Notes. If an Event of Default occurs prior to
March 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to March 15, 2003, then, to the
extent permitted by law, the amount payable in respect of such Notes for
purposes of this paragraph for each of the twelve-month periods beginning on
March 15 of the years indicated below shall be set forth below, expressed as
percentages of the principal amount that would otherwise be due but for the
provisions of this sentence, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of payment:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
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1998 109.875%
1999 108.888%
2000 107.900%
2001 106.913%
2002 105.925%
</TABLE>
SECTION 6.3. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of principal, premium, if any, interest
and Liquidated Damages, if any, on the Notes or to enforce the performance of
any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
SECTION 6.4. WAIVER OF PAST DEFAULTS.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
this Indenture (including any acceleration (other than an automatic acceleration
resulting from an Event of Default under clause (viii) or (ix) of Section 6.01
hereof) except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes (other than as a result of an
acceleration), which shall require the consent of all of the Holders of the
Notes then outstanding.
SECTION 6.5. CONTROL BY MAJORITY.
The Holders of a majority in principal amount of the then outstanding Notes
may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust power
conferred on it. However, (i) the Trustee may refuse to follow any direction
that conflicts with law or this Indenture, that the Trustee determines may be
unduly
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prejudicial to the rights of other Holders of Notes or that may involve the
Trustee in personal liability, and (ii) the Trustee may take any other action
deemed proper by the Trustee which is not inconsistent with such direction. In
case an Event of Default shall occur (which shall not be cured), the Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Notwithstanding any provision to
the contrary in this Indenture, the Trustee is under no obligation to exercise
any of its rights or powers under this Indenture at the request of any Holder of
Notes, unless such Holder shall offer to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
SECTION 6.6. LIMITATION ON SUITS.
A Holder of a Note may pursue a remedy with respect to this Indenture, the
Note Guarantee or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice of a
continuing Event of Default or the Trustee receives such notice from the
Company;
(b) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if requested,
provide to the Trustee indemnity satisfactory to the Trustee against any loss,
liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Notes do not give the Trustee a direction
inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
SECTION 6.7. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, premium, if any, interest, and
Liquidated Damages, if any, on the Note, on or after the respective due dates
expressed in the Note (including in connection with an offer to purchase), or to
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bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.8. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(i) or (ii) hereof occurs
and is continuing, the Trustee is authorized to recover judgment in its own name
and as trustee of an express trust against the Company for the whole amount of
principal of, premium and Liquidated Damages, if any, and interest remaining
unpaid on the Notes and interest on overdue principal and, to the extent lawful,
interest and such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
securities or property payable or deliverable upon the conversion or exchange of
the Notes or on any such claims and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee, and in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due to it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall
be deemed to authorize the Trustee to authorize or consent to or accept or adopt
on behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10. PRIORITIES.
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If the Trustee collects any money pursuant to this Article 6, it shall pay
out the money in the following order:
FIRST: to the Trustee, its agents and attorneys for amounts due under
Section 7.07 hereof, including payment of all compensation, expense and
liabilities incurred, and all advances made, by the Trustee and the costs and
expenses of collection;
SECOND: to Holders of Notes for amounts due and unpaid on the Notes for
principal, premium, if any, interest, and Liquidated Damages, if any, ratably,
without preference or priority of any kind, according to the amounts due and
payable on the Notes for principal, premium, if any, interest, and Liquidated
Damages, if any, respectively;
THIRD: without duplication, to the Holders for any other Obligations owing
to the Holders under this Indenture and the Notes; and
FOURTH: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section 6.11
does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant
to Section 6.07 hereof, or a suit by Holders of more than 10% in principal
amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing of which a
Responsible Officer of the Trustee has knowledge, the Trustee shall exercise
such of the rights and powers vested in it by this Indenture and use the same
degree of
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care and skill in its exercise, as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by the
express provisions of this Indenture or the TIA and the Trustee need
perform only those duties that are specifically set forth in this Indenture
or the TIA and no others, and no implied covenants or obligations shall be
read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section 7.01;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of this
Indenture that in any way relates to the Trustee is subject to paragraphs (a),
(b) and (c) of this Section 7.01.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or incur any liability. The Trustee shall be under no
obligation to exercise any of its rights and powers under this Indenture at the
request of any Holders, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
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(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 7.2. RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely on the truth of the statements and
correctness of the opinions contained in, and shall be protected from acting or
refraining from acting upon, any document believed by it to be genuine and to
have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. Prior to taking, suffering or
admitting any action, the Trustee may consult with counsel of the Trustee's own
choosing and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any demand,
request, direction or notice from the Company or the Guarantor shall be
sufficient if signed by an Officer of the Company or the Guarantor, as
applicable.
(f) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders unless such Holders shall have offered to the Trustee reasonable
security or indemnity satisfactory to the Trustee against the costs, expenses
and liabilities that might be incurred by it in compliance with such request or
direction.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE.
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The Trustee in its individual or any other capacity may become the owner of
Notes and may otherwise deal with the Company, the Guarantor or any Affiliate of
the Company or the Guarantor with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the Commission
for permission to continue as Trustee or resign. Any Agent may do the same with
like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11
hereof.
SECTION 7.4. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture, the Note Guarantee or the Notes, it
shall not be accountable for the Company's use of the proceeds from the Notes or
any money paid to the Company or upon the Company's direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
SECTION 7.5. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if it is
known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders
of Notes a notice of the Default or Event of Default within 90 days after it
occurs. Except in the case of a Default or Event of Default in payment on any
Note pursuant to Section 6.01(i) or (ii) hereof, the Trustee may withhold the
notice if and so long as a committee of its Responsible Officers in good faith
determines that withholding the notice is in the interests of the Holders of the
Notes.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15 beginning with the May 15 following the
date of this Indenture, and for so long as Notes remain outstanding, the Trustee
shall mail to the Holders of the Notes a brief report dated as of such reporting
date that complies with TIA Section 313(a) (but if no event described in TIA
Section 313(a) has occurred within the twelve months preceding the reporting
date, no report need be transmitted). The Trustee also shall comply with TIA
Section 313(b). The Trustee shall also transmit by mail all reports as
required by TIA Section 313(c).
A copy of each report at the time of its mailing to the Holders of Notes
shall be mailed to the Company and filed with the Commission and each stock
exchange on which the Company has informed the Trustee in writing the Notes are
listed in accordance with TIA Section 313(d). The Company shall promptly
notify
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the Trustee when the Notes are listed on any stock exchange and of any delisting
thereof.
SECTION 7.7. COMPENSATION AND INDEMNITY.
The Company and the Guarantor shall pay to the Trustee from time to time
reasonable compensation for its acceptance of this Indenture and services
hereunder. To the extent permitted by law, the Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company and the Guarantor shall indemnify the Trustee against any and
all losses, liabilities or expenses incurred by it arising out of or in
connection with the acceptance or administration of its duties under this
Indenture, including the costs and expenses of enforcing this Indenture against
the Company and the Guarantor (including this Section 7.07) and defending itself
against any claim (whether asserted by the Company, the Guarantor or any Holder
or any other person) or liability in connection with the exercise or performance
of any of its powers or duties hereunder except to the extent any such loss,
liability or expense may be attributable to its negligence or bad faith. The
Trustee shall notify the Company and the Guarantor promptly of any claim for
which it may seek indemnity. Failure by the Trustee to so notify the Company
and the Guarantor shall not relieve the Company and the Guarantor of its
obligations hereunder. The Company and the Guarantor shall defend the claim and
the Trustee shall cooperate in the defense. The Trustee may have separate
counsel and the Company and the Guarantor shall pay the reasonable fees and
expenses of such counsel. The Company and the Guarantor need not pay for any
settlement made without its consent, which consent shall not be unreasonably
withheld.
The obligations of the Company and the Guarantor under this Section 7.07
shall survive the satisfaction and discharge of this Indenture.
To secure the Company's and the Guarantor' payment obligations in this
Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or
property held or collected by the Trustee, except that held in trust to pay
principal, interest and Liquidated Damages, if any, on particular Notes. Such
Lien shall survive the satisfaction and discharge of this Indenture and the
resignation or removal of the Trustee.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(viii) or (ix) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its agents
and
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counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section 313(b)(2) to
the extent applicable.
SECTION 7.8. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.08.
The Trustee may resign in writing at any time and be discharged from the
trust hereby created by so notifying the Company. The Holders of a majority in
principal amount of the then outstanding Notes may remove the Trustee by so
notifying the Trustee and the Company in writing. The Company may remove the
Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company, or
the Holders of at least 10% in principal amount of the then outstanding Notes
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee, after written request by any Holder of a Note who has been
a Holder of a Note for at least six months, fails to comply with Section 7.10
hereof, such Holder of a Note may petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor Trustee.
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A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon, the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and the duties of the Trustee under
this Indenture. The successor Trustee shall mail a notice of its succession to
the Holders of the Notes. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, PROVIDED that all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.08, the Company's obligations under Section 7.07 hereof shall
continue for the benefit of the retiring Trustee.
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee or any Agent consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee or any Agent, as applicable.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or state
authorities. The Trustee and its direct parent shall at all times have a
combined capital surplus of at least $50.0 million as set forth in its most
recent annual report of condition.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section
310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
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SECTION 8.1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company and the Guarantor may, at the option of their respective Boards
of Directors evidenced by a resolution set forth in an Officers' Certificate, at
any time, elect to have either Section 8.02 or 8.03 hereof be applied to all
outstanding Notes and Note Guarantee upon compliance with the conditions set
forth below in this Article 8.
SECTION 8.2. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, the Company and the Guarantor shall, subject to
the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed
to have been discharged from their respective obligations with respect to all
outstanding Notes and Note Guarantee on the date the conditions set forth below
are satisfied (hereinafter, "LEGAL DEFEASANCE"). For this purpose, Legal
Defeasance means that the Company and the Guarantor shall be deemed to have paid
and discharged the entire Indebtedness represented by the outstanding Notes and
Note Guarantee, which shall thereafter be deemed to be "OUTSTANDING" only for
the purposes of Section 8.05 hereof and the other Sections of this Indenture
referred to in (a) and (b) below, and to have satisfied all their respective
other obligations under such Notes and Note Guarantee and this Indenture (and
the Trustee, on demand of and at the expense of the Company, shall execute
proper instruments acknowledging the same), except for the following provisions
which shall survive until otherwise terminated or discharged hereunder: (a) the
rights of Holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest and Liquidated Damages, if any, on
such Notes when such payments are due from the trust referred to in Section
8.04(a); (b) the Company's obligations with respect to such Notes under Sections
2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.10 and 4.02 hereof; (c) the rights,
powers, trusts, duties and immunities of the Trustee including without
limitation thereunder Section 7.07, 8.05 and 8.07 hereof and the Company's
obligations in connection therewith and (d) the provisions of this Article 8.
Subject to compliance with this Article 8, the Company may exercise its option
under this Section 8.02 notwithstanding the prior exercise of its option under
Section 8.03 hereof.
SECTION 8.3. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, each of the Company and the Guarantor shall,
subject to the satisfaction of the conditions set forth in Section 8.04 hereof,
be released from its obligations under the covenants contained in Sections 3.09,
4.05, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18,
4.19, 4.20, 4.21 and 5.01 hereof with respect to the outstanding Notes and Note
Guarantee on
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and after the date the conditions set forth below are satisfied (hereinafter,
"COVENANT DEFEASANCE"), and the Notes and Note Guarantee shall thereafter be
deemed not "outstanding" for the purposes of any direction, waiver, consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes and Note
Guarantee shall not be deemed outstanding for accounting purposes). For this
purpose, Covenant Defeasance means that, with respect to the outstanding Notes
and Note Guarantee, the Company or any of its Subsidiaries or the Guarantor may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document and such omission to comply shall not constitute a Default
or an Event of Default under Section 6.01 hereof, but, except as specified
above, the remainder of this Indenture and such Notes and Note Guarantee shall
be unaffected thereby. In addition, upon the Company's exercise under Section
8.01 hereof of the option applicable to this Section 8.03, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, Sections
6.01(iii) through 6.01(v) hereof shall not constitute Events of Default.
SECTION 8.4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Section 8.02 or 8.03 hereof to the outstanding Notes and Note Guarantee:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as shall be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium and Liquidated Damages, if any,
and interest on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date;
(b) in the case of an election under Section 8.02 hereof, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date hereof, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding Notes
shall not recognize income, gain or loss for federal income tax purposes as a
result of
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such Legal Defeasance and shall be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.03 hereof, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes shall not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and shall be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit) or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument (other than this Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound;
(f) the Company shall have delivered to the Trustee an Opinion of Counsel
to the effect that after the 91st day following the deposit, the trust funds
shall not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(h) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
SECTION 8.5. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS.
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Subject to Section 8.06 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.05, the
"TRUSTEE") pursuant to Section 8.04 hereof in respect of the outstanding Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal, premium, if any, interest and
Liquidated Damages, if any, but such money need not be segregated from other
funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon the written request
of the Company and be relieved of all liability with respect to any money or
non-callable Government Securities held by it as provided in Section 8.04 hereof
which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are
in excess of the amount thereof that would then be required to be deposited to
effect an equivalent Legal Defeasance or Covenant Defeasance.
SECTION 8.6. REPAYMENT TO THE COMPANY.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of, premium, if any,
interest or Liquidated Damages, if any, on any Note and remaining unclaimed for
one year after such principal, and premium, if any, or interest or Liquidated
Damages, if any, has become due and payable shall be paid to the Company on its
written request or (if then held by the Company) shall be discharged from such
trust; and the Holder of such Note shall thereafter, as an unsecured general
creditor, look only to the Company for payment thereof, and all liability of the
Trustee or such Paying Agent with respect to such trust money, and all liability
of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER,
that the Trustee or such Paying Agent, before being required to make any such
repayment, may at the expense of the Company cause to be published once, in the
New York Times and The Wall Street Journal (national edition), notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less
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than 30 days from the date of such notification or publication, any unclaimed
balance of such money then remaining shall be repaid to the Company.
SECTION 8.7. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United States dollars
or non-callable Government Securities in accordance with Section 8.02 or 8.03
hereof, as the case may be, by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the obligations of the Company and the Guarantor under this
Indenture, the Notes and the Note Guarantee shall be revived and reinstated as
though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until
such time as the Trustee or Paying Agent is permitted to apply all such money in
accordance with Section 8.02 or 8.03 hereof, as the case may be; PROVIDED,
HOWEVER, that, if the Company makes any payment of principal of, premium, if
any, interest or Liquidated Damages, if any, on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
ARTICLE 9
Amendment, Supplement and Waiver
SECTION 9.1. WITHOUT CONSENT OF HOLDERS OF THE NOTES.
Notwithstanding Section 9.02 of this Indenture, without the consent of any
Holder of Notes, the Company, the Guarantor and the Trustee may amend or
supplement this Indenture, the Notes or the Note Guarantee:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to provide for the assumption of the Company's or the Guarantor's
obligations to the Holders of the Notes in the case of a merger or
consolidation;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the legal
rights hereunder of any Holder of the Notes;
(e) to comply with requirements of the Commission in order to effect or
maintain the qualification of this Indenture under the TIA; or
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(f) to allow any Subsidiary to Guarantee the Notes.
Upon the written request of the Company accompanied by a resolution of its
Board of Directors of the Company authorizing the execution of any such amended
or supplemental indenture, and upon receipt by the Trustee of the documents
described in Section 9.06 hereof, the Trustee shall join with the Company and
the Guarantor in the execution of any amended or supplemental indenture
authorized or permitted by the terms of this Indenture and to make any further
appropriate agreements and stipulations that may be therein contained, but the
Trustee shall not be obligated to enter into such amended or supplemental
indenture that affects its own rights, duties or immunities under this Indenture
or otherwise.
SECTION 9.2. WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.02, or as provided in Section
10.13 or Section 12.13, this Indenture, the Notes or the Note Guarantee may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer, for Notes), and, any existing Default or Event of Default or
compliance with any provision of this Indenture, the Notes or the Note Guarantee
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding Notes (including consents obtained in connection with or
a tender offer or exchange offer for the Notes).
Upon the request of the Company accompanied by a resolution of its Board of
Directors authorizing the execution of any such amended or supplemental
indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of the documents described in Section 9.06 hereof, the Trustee shall
join with the Company and the Guarantor in the execution of such amended or
supplemental indenture unless such amended or supplemental indenture affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise, in
which case the Trustee may, but shall not be obligated to, enter into such
amended or supplemental indenture.
It shall not be necessary for the consent of the Holders of Notes under
this Section 9.02 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof. After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders of each Note affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any
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way impair or affect the validity of any such amended or supplemental indenture
or waiver.
Subject to Sections 6.02, 6.04, 6.07, 10.13 and 12.13 hereof, the Holders
of a majority in aggregate principal amount of the Notes then outstanding may
amend or waive compliance in a particular instance by the Company or the
Guarantor with any provision of this Indenture, the Notes or the Note
Guarantee. However, without the consent of each Holder affected, an amendment
or waiver may not (with respect to any Notes held by a non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Note or
alter the provisions with respect to the redemption of the Notes (other than
provisions relating to Sections 3.09, 4.10 and 4.14 hereof);
(c) reduce the rate of or change the time for payment of interest on any
Note;
(d) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration);
(e) make any Note payable in money other than that stated in the Notes;
(f) make any change in Section 6.04 or 6.07 hereof;
(g) waive a redemption or repurchase payment with respect to any Note
(other than a payment required by Section 4.10 or 4.14 hereof); or
(h) make any change in the amendment and waiver provisions of this Article
9.
SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture, the Note Guarantee or the
Notes shall be set forth in an amended or supplemental indenture that complies
with the TIA as then in effect.
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent to it
by a Holder of a Note is a continuing consent by the Holder and every
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subsequent Holder of a Note or portion of a Note that evidences the same debt as
the consenting Holder's Note, even if notation of the consent is not made on any
Note. However, any such Holder or subsequent Holder of a Note may revoke the
consent as to its Note if the Trustee receives written notice of revocation
before the date the waiver, supplement or amendment becomes effective. When an
amendment, supplement or waiver becomes effective in accordance with its terms,
it thereafter binds every Holder.
The Company may, but shall not be obligated to, fix a record date for
determining which Holders of the Notes must consent to such amendment,
supplement or waiver. If the Company fixes a record date, the record date shall
be fixed at (i) the later of 30 days prior to the first solicitation of such
consent or the date of the most recent list of Holders of Notes furnished for
the Trustee prior to such solicitation pursuant to Section 2.05 hereof or (ii)
such other date as the Company shall designate.
SECTION 9.5. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental indenture authorized
pursuant to this Article 9 if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The
Company and the Guarantor may not sign an amendment or supplemental indenture
until their respective Boards of Directors approve it. In signing or refusing
to sign any amended or supplemental indenture the Trustee shall be entitled to
receive and (subject to Section 7.01 hereof) shall be fully protected in relying
upon, in addition to the documents required by Section 13.04 hereof, an
Officers' Certificate and an Opinion of Counsel stating that the execution of
such amended or supplemental indenture is authorized or permitted by this
Indenture, that it is not inconsistent herewith, and that it will be valid and
binding upon the Company and the Guarantor in accordance with its terms.
ARTICLE 10
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SUBORDINATION
SECTION 10.1. AGREEMENT TO SUBORDINATE.
The Company agrees, and each Holder of Notes by accepting a Note agrees,
that the Indebtedness evidenced by the Note is subordinated in right of payment,
to the extent and in the manner provided in this Article, to the prior payment
in full in cash of all Senior Debt (whether outstanding on the date hereof or
hereafter created, incurred, assumed or guaranteed), and that the subordination
is for the benefit of the holders of Senior Debt. Except to the extent set
forth under Section 4.10, the Notes shall be PARI PASSU in right of payment with
the 2003 Notes.
SECTION 10.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors in any
Insolvency or Liquidation Proceeding with respect to the Company, all amounts
due or to become due under or with respect to all Senior Debt shall first be
paid in full in cash before any payment is made on account of the Notes. Upon
any such Insolvency or Liquidation Proceeding, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, to which the Holders of the Notes or the Trustee would be entitled
shall be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making such payment or distribution,
or by the Holders of the Notes or by the Trustee if received by them, directly
to the holders of Senior Debt (PRO RATA to such holders on the basis of the
amounts of Senior Debt held by such holders) or their Representative or
Representatives, as their interests may appear, for application to the payment
of the Senior Debt remaining unpaid until all such Senior Debt has been paid in
full in cash, after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of Senior Debt.
SECTION 10.3. DEFAULT ON DESIGNATED SENIOR DEBT.
(a) In the event of and during the continuation of any default in the
payment of principal of, interest or premium, if any, on any Senior Debt, or any
Obligation owing from time to time under or in respect of Senior Debt, or in the
event that any event of default (other than a payment default) with respect to
any Senior Debt shall have occurred and be continuing and shall have resulted in
such Senior Debt becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, or (b) if any event of
default other than as described in clause (a) above with respect to any
Designated Senior Debt shall have occurred and be continuing permitting the
holders of such Designated Senior Debt (or their Representative or
Representatives) to declare
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such Designated Senior Debt due and payable prior to the date on which it would
otherwise have become due and payable, then no payment shall be made by or on
behalf of the Company on account of the Notes (x) in case of any payment or
nonpayment default specified in (a), unless and until such default shall have
been cured or waived in writing in accordance with the instruments governing
such Senior Debt or such acceleration shall have been rescinded or annulled, or
(y) in case of any nonpayment event of default specified in (b), during the
period (a "PAYMENT BLOCKAGE PERIOD") commencing on the date the Company or the
Trustee receives written notice (a "PAYMENT NOTICE") of such event of default
(which notice shall be binding on the Trustee and the Holders of Notes as to the
occurrence of such nonpayment event of default) from the Credit Agent (or other
holders of Designated Senior Debt or their Representative or Representatives)
and ending on the earliest of (A) 179 days after such date, (B) the date, if
any, on which such Designated Senior Debt to which such default relates is paid
in full in cash or such default is cured or waived in writing in accordance with
the instruments governing such Designated Senior Debt by the holders of such
Designated Senior Debt and (C) the date on which the Trustee receives written
notice from the Credit Agent (or other holders of Designated Senior Debt or
their Representative or Representatives), as the case may be, terminating the
Payment Blockage Period. During any consecutive 360-day period, the aggregate
of all Payment Blockage Periods shall not exceed 179 days and there shall be a
period of at least 181 consecutive days in each consecutive 360-day period when
no Payment Blockage Period is in effect. No event of default which existed or
was continuing with respect to the Senior Debt for which notice commencing a
Payment Blockage Period was given on the date such Payment Blockage Period
commenced shall be or be made the basis for the commencement of any subsequent
Payment Blockage Period unless such event of default is cured or waived for a
period of not less than 90 consecutive days.
SECTION 10.4. ACCELERATION OF NOTES.
If payment of the Notes is accelerated because of an Event of Default, the
Company shall promptly notify holders of Senior Debt of the acceleration.
SECTION 10.5. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder of a Note receives any payment
of any Obligations with respect to the Notes at a time when such payment is
prohibited by Section 10.03 hereof, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, upon written request, to, the holders of Senior Debt or their
Representative under the indenture or other agreement (if any) pursuant to which
Senior Debt may have been issued, as their respective interests may appear, for
application to the payment of all Obligations with respect to Senior Debt
remain-
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ing unpaid to the extent necessary to pay such Obligations in full in cash in
accordance with their terms, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 10, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders of the Notes or
the Company or any other Person money or assets to which any holders of Senior
Debt shall be entitled by virtue of this Article 10, except if such payment is
made as a result of the willful misconduct or gross negligence of the Trustee.
SECTION 10.6. NOTICE BY THE COMPANY.
The Company shall promptly notify the Trustee and the Paying Agent of any
facts known to the Company that would cause a payment of any Obligations with
respect to the Notes to violate this Article, which notice shall specifically
refer to this Article 10, but failure to give such notice shall not affect the
subordination of the Notes to the Senior Debt as provided in this Article.
SECTION 10.7. SUBROGATION.
After all Senior Debt is paid in full in cash and until the Notes are paid
in full, Holders of the Notes shall be subrogated (equally and ratably with all
other PARI PASSU indebtedness) to the rights of holders of Senior Debt to
receive distributions applicable to Senior Debt to the extent that distributions
otherwise payable to the Holders of the Notes have been applied to the payment
of Senior Debt. A distribution made under this Article to holders of Senior
Debt that otherwise would have been made to Holders of the Notes is not, as
between the Company and Holders of the Notes, a payment by the Company on the
Senior Debt.
SECTION 10.8. RELATIVE RIGHTS.
This Article defines the relative rights of Holders of the Notes and
holders of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders of the Notes, the
obligations of the Company, which are absolute and unconditional, to pay
principal of and interest on the Notes in accordance with their terms;
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(2) affect the relative rights of Holders of the Notes and creditors
of the Company other than their rights in relation to holders of Senior
Debt; or
(3) prevent the Trustee or any Holder of the Notes from exercising
its available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt to receive distributions and
payments otherwise payable to Holders of the Notes.
If the Company fails because of this Article to pay principal of or
interest on a Note on the due date, the failure is still a Default or Event of
Default.
SECTION 10.9. SUBORDINATION MAY NOT BE IMPAIRED BY THE COMPANY.
No right of any holder of Senior Debt to enforce the subordination of the
Indebtedness evidenced by the Notes shall be impaired by any act or failure to
act by the Company or any Holder or by the failure of the Company or any Holder
to comply with this Indenture.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Senior Debt, or any of them, may, at any time and from time to time,
without the consent of or notice to the Holders of the Notes, without incurring
any liabilities to any Holder of any Notes and without impairing or releasing
the subordination and other benefits provided in this Indenture or the
obligations of the Holders of the Notes to the holders of the Senior Debt, even
if any right of reimbursement or subrogation or other right or remedy of any
Holder of Notes is affected, impaired or extinguished thereby, do any one or
more of the following:
(1) change the manner, place or terms of payment or change or extend
the time of payment of, or renew, exchange, amend, increase or alter, the
terms of any Senior Debt, any security therefor or guaranty thereof or any
liability of any obligor thereon (including any guarantor) to such holder,
or any liability incurred directly or indirectly in respect thereof
or otherwise amend, renew, exchange, extend, modify, increase or
supplement in any manner any Senior Debt or any instrument evidencing or
guaranteeing or securing the same or any agreement under which Senior
Debt is outstanding;
(2) sell, exchange, release, surrender, realize upon, enforce or
otherwise deal with in any manner and in any order any property pledged,
mortgaged or otherwise
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securing Senior Debt or any liability of any obligor thereon, to such
holder, or any liability incurred directly or indirectly in respect
thereof;
(3) settle or compromise any Senior Debt or any other liability of
any obligor of the Senior Debt to such holder or any security therefor or
any liability incurred directly or indirectly in respect thereof and apply
any sums by whomsoever paid and however realized to any liability
(including, without limitation, Senior Debt) in any manner or order; and
(4) fail to take or to record or to otherwise perfect, for any reason
or for no reason, any lien or security interest securing Senior Debt by
whomsoever granted, exercise or delay in or refrain from exercising any
right or remedy against any obligor or any guarantor or any other person,
elect any remedy and otherwise deal freely with any obligor and any
security for the Senior Debt or any liability of any obligor to such
holder or any liability incurred directly or indirectly in respect thereof.
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Company referred to in
this Article 10, the Trustee and the Holders of the Notes shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such Representative or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the Holders
of the Notes for the purpose of ascertaining the Persons entitled to participate
in such distribution, the holders of the Senior Debt and other Indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
10.
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 10 or any other provision of
this Indenture, the Trustee shall not be charged with knowledge of the existence
of any facts that would prohibit the making of any payment or distribution by
the Trustee, and the Trustee and the Paying Agent may continue to make payments
on
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the Notes, unless the Trustee shall have received at its Corporate Trust Office
at least three Business Days prior to the date of such payment written notice of
facts that would cause the payment of any Obligations with respect to the Notes
to violate this Article, which notice shall specifically refer to this Article
10. Only the Company or a Representative may give the notice. Nothing in this
Article 10 shall impair the claims of, or payments to, the Trustee under or
pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Senior Debt
with the same rights it would have if it were not Trustee. Any Agent may do the
same with like rights.
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of a Note by the Holder's acceptance thereof authorizes and
directs the Trustee on the Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for
any and all such purposes, including without limitation the timely filing of a
claim for the unpaid balance of the Notes held by such Holder in the form
required in any Insolvency or Liquidation Proceeding and causing such claim to
be approved. If the Trustee does not file a proper proof of claim or proof of
debt in the form required in any proceeding referred to in Section 6.09 hereof
at least 30 days before the expiration of the time to file such claim, the
Representatives of the Designated Senior Debt, including the Credit Agent, are
hereby authorized to file an appropriate claim for and on behalf of the Holders
of the Notes.
SECTION 10.13. AMENDMENTS.
Any amendment to the provisions of this Article 10 shall require the
consent of the Holders of at least 75% in aggregate principal amount of the
Notes then outstanding if such amendment would adversely affect the rights of
the Holders of Notes.
ARTICLE 11
Guarantee of Notes
SECTION 11.1. NOTE GUARANTEE.
Subject to Section 11.03 hereof, the Guarantor hereby unconditionally
guarantees to each Holder of a Note authenticated and delivered by the Trustee
and to the Trustee and its successors and assigns, irrespective of the validity
and
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enforceability of this Indenture, the Notes and the Obligations of the Company
hereunder and thereunder, that: (a) the principal of, premium, if any, interest
and Liquidated Damages, if any, on the Notes will be promptly paid in full when
due, subject to any applicable grace period, whether at maturity, by
acceleration, redemption or otherwise, and interest on the overdue principal,
premium, if any, (to the extent permitted by law) interest and Liquidated
Damages, if any, on the Notes, and all other payment Obligations of the Company
to the Holders or the Trustee hereunder or thereunder, will be promptly paid in
full and performed, all in accordance with the terms hereof and thereof; and (b)
in case of any extension of time of payment or renewal of any Notes or any of
such other Obligations, the same will be promptly paid in full when due or
performed in accordance with the terms of the extension or renewal, subject to
any applicable grace period, whether at stated maturity, by acceleration,
redemption or otherwise. Failing payment when so due of any amount so
guaranteed for whatever reason the Guarantor will be obligated to pay the same
immediately. An Event of Default under this Indenture or the Notes shall
constitute an event of default under the Note Guarantee, and shall entitle the
Holders to accelerate the Obligations of the Guarantor hereunder in the same
manner and to the same extent as the Obligations of the Company. The Guarantor
hereby agree that its Obligations hereunder shall be unconditional, irrespective
of the validity, regularity or enforceability of the Notes or this Indenture,
the absence of any action to enforce the same, any waiver or consent by any
Holder with respect to any provisions hereof or thereof, the recovery of any
judgment against the Company, any acion to enforce the same or any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of the Guarantor. The Guarantor hereby waives diligence, presentment,
demand of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever and covenants that, subject
to the provisions of Article 8 of the Indenture, this Note Guarantee will not be
discharged except by complete performance of the Obligations contained in the
Notes and this Indenture. If any Holder or the Trustee is required by any court
or otherwise to return to the Company, the Guarantor, or any Note Custodian,
Trustee, liquidator or other similar official acting in relation to either the
Company or the Guarantor, any amount paid by either to the Trustee or such
Holder, this Note Guarantee, to the extent theretofore discharged, shall be
reinstated in full force and effect. The Guarantor agrees that it shall not be
entitled to, and hereby waives, any right of subrogation in relation to the
Holders in respect of any Obligations guaranteed hereby. The Guarantor further
agrees that, as between the Guarantor, on the one hand, and the Holders and the
Trustee, on the other hand, (x) the maturity of the Obligations guaranteed
hereby may be accelerated as provided in Article 6 for the purposes of this Note
Guarantee, notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the Obligations guaranteed hereby, and (y) in
the event of any declaration of acceleration of such Obligations as provided in
Article 6
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hereof, such Obligations (whether or not due and payable) shall forthwith become
due and payable by the Guarantor for the purpose of this Note Guarantee.
SECTION 11.2. EXECUTION AND DELIVERY OF NOTE GUARANTEE.
To evidence its Note Guarantee set forth in Section 11.01, the Guarantor
hereby agrees that a notation of such Note Guarantee substantially in the form
of Exhibit D shall be endorsed by an Officer of the Guarantor on each Note
authenticated and delivered by the Trustee and that this Indenture shall be
executed on behalf of the Guarantor, by manual or facsimile signature, by an
Officer of the Guarantor.
The Guarantor hereby agrees that its Note Guarantee set forth in Section
11.01 shall remain in full force and effect notwithstanding any failure to
endorse on each Note a notation of such Note Guarantee.
If an Officer whose signature is on this Indenture or on the Note Guarantee
no longer holds that office at the time the Trustee authenticates the Note on
which a Note Guarantee is endorsed, the Note Guarantee shall be valid
nevertheless.
The delivery of any Note by the Trustee, after the authentication thereof
hereunder, shall constitute due delivery of the Note Guarantee set forth in this
Indenture on behalf of the Guarantor.
SECTION 11.3. LIMITATION ON GUARANTOR LIABILITY.
For purposes hereof, the Guarantor's liability shall be limited to the
lesser of (i) the aggregate amount of the Obligations of the Company under the
Notes and this Indenture and (ii) the amount, if any, which would not have (A)
rendered the Guarantor "INSOLVENT" (as such term is defined in the United States
Bankruptcy Code and in the Debtor and Creditor Law of the State of New York) or
(B) left the Guarantor with unreasonably small capital at the time its Note
Guarantee of the Notes was entered into; PROVIDED that, it will be a presumption
in any lawsuit or other proceeding in which the Guarantor is a party that the
amount guaranteed pursuant to the Note Guarantee is the amount set forth in
clause (i) above unless any creditor, or representative of creditors of the
Guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor,
otherwise proves in such a lawsuit that the aggregate liability of the Guarantor
is the amount set forth in clause (ii) above. In making any determination as to
solvency or sufficiency of capital of the Guarantor in accordance with the
previous sentence, the right of the Guarantor to contribution from another
guarantor, and any other rights the Guarantor may have, contractual or
otherwise, shall be taken into account.
SECTION 11.4. "TRUSTEE" TO INCLUDE PAYING AGENT.
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In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "TRUSTEE" as
used in this Article 11 shall in each case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully and for all intents and purposes as if such Paying Agent were
named in this Article 11 in place of the Trustee.
ARTICLE 12
Subordination of Note Guarantee
SECTION 12.1. AGREEMENT TO SUBORDINATE.
The Guarantor agrees, and each Holder by accepting a Note agrees, that all
Obligations evidenced by the Note Guarantee shall be subordinated in right of
payment, to the extent and in the manner provided in this Article 12, to the
prior payment in full in cash of all Guarantor Senior Debt (whether outstanding
on the date hereof or hereafter created, incurred, assumed or guaranteed), and
that the subordination is for the benefit of the holders of Guarantor Senior
Debt. The Note Guarantee shall be PARI PASSU in right of payment with the
Guarantee of the 2003 Notes.
SECTION 12.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any payment or distribution of assets of the Guarantor of any kind or
character, whether in cash, property or securities, to creditors in any
Insolvency or Liquidation Proceeding with respect to the Guarantor, all amounts
due or to become due under or with respect to all Guarantor Senior Debt shall
first be paid in full in cash before any payment is made on account of the Note
Guarantee. Upon any such Insolvency or Liquidation Proceeding, any payment or
distribution of assets of the Guarantor of any kind or character, whether in
cash, property or securities, to which the Holders or the Trustee would be
entitled shall be paid by the Guarantor or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by the Holders or by the Trustee if received by them, directly
to the holders of Guarantor Senior Debt (PRO RATA to such holders on the basis
of the amounts of Guarantor Senior Debt held by such holders) or their
Representative or Representatives, as their interests may appear, for
application to the payment of the Guarantor Senior Debt remaining unpaid until
all such Guarantor Senior Debt has been paid in full in cash, after giving
effect to any concurrent payment, distribution or provision therefor to or for
the holders of Guarantor Senior Debt.
SECTION 12.3. DEFAULT ON DESIGNATED GUARANTOR SENIOR DEBT.
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(a) In the event of and during the continuation of any default in the
payment of principal of, interest or premium, if any, on any Guarantor Senior
Debt, or any Obligation owing from time to time under or in respect of Guarantor
Senior Debt, or in the event that any event of default (other than a payment
default) with respect to any Guarantor Senior Debt shall have occurred and be
continuing and shall have resulted in such Guarantor Senior Debt becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable, or (b) if any event of default other than as
described in clause (a) above with respect to any Designated Guarantor Senior
Debt shall have occurred and be continuing permitting the holders of such
Designated Guarantor Senior Debt (or their Representative or Representatives) to
declare such Designated Guarantor Senior Debt due and payable prior to the date
on which it would otherwise have become due and payable, then no payment shall
be made by or on behalf of the Guarantor on account of the Note Guarantee (x) in
case of any payment or nonpayment default specified in (a), unless and until
such default shall have been cured or waived in writing in accordance with the
instruments governing such Guarantor Senior Debt or such acceleration shall have
been rescinded or annulled, or (y) in case of any nonpayment event of default
specified in (b), during the period (a "PAYMENT BLOCKAGE PERIOD") commencing on
the date the Guarantor or the Trustee receives written notice (a "PAYMENT
NOTICE") of such event of default (which notice shall be binding on the Trustee
and the Holders as to the occurrence of such nonpayment event of default) from
the Credit Agent (or other holders of Designated Guarantor Senior Debt or their
Representative or Representatives) and ending on the earliest of (A) 179 days
after such date, (B) the date, if any, on which such Designated Guarantor Senior
Debt to which such default relates is paid in full in cash or such default is
cured or waived in writing in accordance with the instruments governing such
Designated Guarantor Senior Debt by the holders of such Designated Guarantor
Senior Debt and (C) the date on which the Trustee receives written notice from
the Credit Agent (or other holders of Designated Guarantor Senior Debt or their
Representative or Representatives), as the case may be, terminating the Payment
Blockage Period. During any consecutive 360-day period, the aggregate of all
Payment Blockage Periods shall not exceed 179 days and there shall be a period
of at least 181 consecutive days in each consecutive 360-day period when no
Payment Blockage Period is in effect. No event of default which existed or was
continuing with respect to the Guarantor Senior Debt for which notice commencing
a Payment Blockage Period was given on the date such Payment Blockage Period
commenced shall be or be made the basis for the commencement of any subsequent
Payment Blockage Period unless such event of default is cured or waived for a
period of not less than 90 consecutive days.
SECTION 12.4. ACCELERATION OF NOTE GUARANTEE.
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If payment of the Note Guarantee is accelerated because of an Event of
Default, the Guarantor shall promptly notify holders of Guarantor Senior Debt of
the acceleration.
SECTION 12.5. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder receives any payment of any
Obligations with respect to the Note Guarantee at a time when such payment is
prohibited by Section 12.03 hereof, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, upon written request, to, the holders of Guarantor Senior Debt or
their Representative under the indenture or other agreement (if any) pursuant to
which Guarantor Senior Debt may have been issued, as their respective interests
may appear, for application to the payment of all Obligations with respect to
Guarantor Senior Debt remaining unpaid to the extent necessary to pay such
Obligations in full in cash in accordance with their terms, after giving effect
to any concurrent payment or distribution to or for the holders of Guarantor
Senior Debt.
With respect to the holders of Guarantor Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 12, and no implied covenants or
obligations with respect to the holders of Guarantor Senior Debt shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Guarantor Senior Debt, and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or on
behalf of Holders or the Guarantor or any other Person money or assets to which
any holders of Guarantor Senior Debt shall be entitled by virtue of this Article
12, except if such payment is made as a result of the willful misconduct or
gross negligence of the Trustee.
SECTION 12.6. NOTICE BY GUARANTOR.
The Guarantor shall promptly notify the Trustee and the Paying Agent of any
facts known to the Guarantor that would cause a payment of any Obligations with
respect to the Note Guarantee to violate this Article, which notice shall
specifically refer to this Article 12, but failure to give such notice shall not
affect the subordination of the Note Guarantee to the Guarantor Senior Debt as
provided in this Article.
SECTION 12.7. SUBROGATION.
After all Guarantor Senior Debt is paid in full in cash and until the Note
Guarantee is paid in full, Holders shall be subrogated (equally and ratably with
all PARI PASSU indebtedness) to the rights of holders of Guarantor Senior Debt
to receive distributions applicable to Guarantor Senior Debt to the extent that
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distributions otherwise payable to the Holders have been applied to the payment
of Guarantor Senior Debt. A distribution made under this Article to holders of
Guarantor Senior Debt that otherwise would have been made to Holders is not, as
between the Guarantor and Holders, a payment by the Guarantor on the Guarantor
Senior Debt.
SECTION 12.8. RELATIVE RIGHTS.
This Article defines the relative rights of Holders and holders of
Guarantor Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Guarantor and Holders, the obligations of
the Guarantor, which are absolute and unconditional, to pay principal of
and interest on the Notes in accordance with the terms of the Note
Guarantee;
(2) affect the relative rights of Holders and creditors of the
Guarantor other than their rights in relation to holders of Guarantor
Senior Debt; or
(3) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or Event of Default, subject to the rights of
holders and owners of Guarantor Senior Debt to receive distributions and
payments otherwise payable to Holders.
If the Guarantor fails because of this Article to pay principal of or
interest on a Note in accordance with the terms of the Note Guarantee, the
failure is still a Default or Event of Default.
SECTION 12.9. SUBORDINATION MAY NOT BE IMPAIRED BY GUARANTOR.
No right of any holder of Guarantor Senior Debt to enforce the
subordination of the Obligations evidenced by the Note Guarantee shall be
impaired by any act or failure to act by the Guarantor or any Holder or by the
failure of the Guarantor or any Holder to comply with this Indenture.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Guarantor Senior Debt, or any of them, may, at any time and from time
to time, without the consent of or notice to the Holders, without incurring any
liabilities to any Holder and without impairing or releasing the subordination
and other benefits provided in this Indenture or the obligations of the Holders
to the holders of the Guarantor Senior Debt, even if any right of reimbursement
or subrogation or other right or remedy of any Holder is affected, impaired or
extinguished thereby, do any one or more of the following:
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(1) change the manner, place or terms of payment or change or
extend the time of payment of, or renew, exchange, amend, increase
or alter, the terms of any Guarantor Senior Debt, any security
therefor or guaranty thereof or any liability of any obligor
thereon (including any guarantor) to such holder, or any liability
incurred directly or indirectly in respect thereof or otherwise
amend, renew, exchange, extend, modify, increase or supplement in
any manner any Guarantor Senior Debt or any instrument evidencing
or guaranteeing or securing the same or any agreement under which
Guarantor Senior Debt is outstanding;
(2) sell, exchange, release, surrender, realize upon, enforce or
otherwise deal with in any manner and in any order any property
pledged, mortgaged or otherwise securing Guarantor Senior Debt or
any liability of any obligor thereon, to such holder, or any
liability incurred directly or indirectly in respect thereof;
(3) settle or compromise any Guarantor Senior Debt or any other
liability of any obligor of the Guarantor Senior Debt to such
holder or any security therefor or any liability incurred directly
or indirectly in respect thereof and apply any sums by whomsoever
paid and however realized to any liability (including, without
limitation, Guarantor Senior Debt) in any manner or order; and
(4) fail to take or to record or to otherwise perfect, for any
reason or for no reason, any lien or security interest securing
Guarantor Senior Debt by whomsoever granted, exercise or delay in
or refrain from exercising any right or remedy against any obligor
or any guarantor or any other person, elect any remedy and
otherwise deal freely with any obligor and any security for the
Guarantor Senior Debt or any liability of any obligor to such
holder or any liability incurred directly or indirectly in respect
thereof.
SECTION 12.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to holders of
Guarantor Senior Debt, the distribution may be made and the notice given to
their Representative.
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Upon any payment or distribution of assets of the Guarantor referred to in
this Article 12, the Trustee and the Holders shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Guarantor Senior Debt and other Indebtedness of
the Company or the Guarantor, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 12.
SECTION 12.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 12 or any other provision of
this Indenture, the Trustee shall not be charged with knowledge of the existence
of any facts that would prohibit the making of any payment or distribution by
the Trustee, and the Trustee and the Paying Agent may continue to make payments
on the Notes or the Note Guarantee, unless the Trustee shall have received at
its Corporate Trust Office at least three Business Days prior to the date of
such payment written notice of facts that would cause the payment of any
Obligations with respect to the Notes or the Note Guarantee to violate this
Article, which notice shall specifically refer to this Article 12. Only the
Company, the Guarantor or a Representative may give the notice. Nothing in this
Article 12 shall impair the claims of, or payments to, the Trustee under or
pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Guarantor
Senior Debt with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
SECTION 12.12. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder by the Holder's acceptance thereof authorizes and directs the
Trustee on the Holder's behalf to take such action as may be necessary or
appropriate to effectuate the subordination as provided in this Article 12, and
appoints the Trustee to act as the Holder's attorney-in-fact for any and all
such purposes, including without limitation the timely filing of a claim for the
unpaid balance of the Notes held by such Holder in the form required in any
Insolvency or Liquidation Proceeding and causing such claim to be approved. If
the Trustee does not file a proper proof of claim or proof of debt in the form
required in any proceeding referred to in Section 6.09 hereof at least 30 days
before the expiration of the time to file such claim, the Representatives of the
Designated Guarantor Senior Debt, including the Credit Agent, are hereby
authorized to file an appropriate claim for and on behalf of the Holders.
SECTION 12.13. AMENDMENTS.
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Any amendment to the provisions of this Article 12 shall require the
consent of the Holders of at least 75% in aggregate principal amount of the
Notes then outstanding if such amendment would adversely affect the rights of
the Holders.
ARTICLE 13
Miscellaneous
SECTION 13.1. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by TIA Section 318(c), the imposed duties shall control.
SECTION 13.2. NOTICES.
Any notice or communication by the Company, the Guarantor or the Trustee to
the others is duly given if in writing and delivered in person or mailed by
registered or certified mail, return receipt requested, telecopier or overnight
air courier guaranteeing next day delivery, to the others' address:
If to the Company or the Guarantor:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, Minneapolis 55343
Telecopier No.: (612) 931-8047
Attention: General Counsel
With a copy to:
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Telecopier No.: (612) 336-3026
Attention: Susan Jacobson
and
Moss & Barnett
4800 Norwest Center
90 South Seventh Street
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Minneapolis, MN 55402
Telecopier No.: (612) 339-6686
Attention: Janna Severance
If to the Trustee:
Bank One, NA
100 East Broad Street
Columbus, OH 43271
Telecopier No.: (614) 248-5195
Attention: Corporate Trust Department
The Company, the Guarantor or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to Holders) shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; five Business Days after being deposited in the mail, postage
prepaid, if mailed; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier promising next Business Day delivery.
Any notice or communication to a Holder shall be mailed by first class mail
or by overnight air courier promising next Business Day delivery to its address
shown on the register kept by the Registrar. Any notice or communication shall
also be so mailed to any Person described in TIA Section 313(c), to the extent
required by the TIA. Failure to mail a notice or communication to a Holder or
any defect in it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company mails a notice or communication to Holders, it shall mail a
copy to the Trustee and each Agent at the same time.
SECTION 13.3. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF
NOTES.
Holders may communicate pursuant to TIA Section 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Company,
the Trustee, the Registrar and anyone else shall have the protection of TIA
Section 312(c).
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SECTION 13.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company or the Guarantor to the
Trustee to take any action under this Indenture (other than the initial issuance
of the Senior Subordinated Notes), the Company or Guarantor shall furnish to the
Trustee upon request:
(a) an Officers' Certificate in form and substance reasonably satisfactory
to the Trustee (which shall include the statements set forth in Section 13.05
hereof) stating that, in the opinion of the signers, all conditions precedent
and covenants, if any, provided for in this Indenture relating to the proposed
action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably satisfactory to
the Trustee (which shall include the statements set forth in Section 13.05
hereof) stating that, in the opinion of such counsel, all such conditions
precedent and covenants have been satisfied.
SECTION 13.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA
Section 314(e) and shall include:
(a) a statement that the Person making such certificate or opinion has
read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has made
such examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
satisfied; and
(d) a statement as to whether or not, in the opinion of such Person, such
condition or covenant has been satisfied.
SECTION 13.6. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
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SECTION 13.7. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of the Company
(other than the Guarantor) or the Guarantor, as such, shall have any liability
for any obligations of the Company or the Guarantor under the Notes, this
Indenture, the Note Guarantee or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes.
SECTION 13.8. GOVERNING LAW.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO
CONSTRUE THIS INDENTURE, THE NOTES AND THE NOTE GUARANTEE.
SECTION 13.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other indenture, loan or
debt agreement of the Company or its Subsidiaries or of any other Person. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.
SECTION 13.10. SUCCESSORS.
All agreements of the Company and the Guarantor in this Indenture, the
Notes and the Note Guarantee shall bind their respective successors and
assigns. All agreements of the Trustee in this Indenture shall bind its
successors and assigns.
SECTION 13.11. SEVERABILITY.
In case any provision in this Indenture or in the Notes shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
SECTION 13.12. COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
SECTION 13.13. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the Articles and
Sections of this Indenture have been inserted for convenience of
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reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
100
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SIGNATURES
Dated as of April 6, 1998 THE MUSICLAND GROUP, INC.
By: /s/ Jack W. Eugster
------------------------------------
Name: Jack W. Eugster
Title: CEO and Chairman
MUSICLAND STORES CORPORATION
By: /s/ Jack W. Eugster
------------------------------------
Name: Jack W. Eugster
Title: CEO and Chairman
BANK ONE, NA,
as Trustee
By: /s/ Joseph C. Ludes
------------------------------
Name: Joseph C. Ludes
Title: Vice President
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EXHIBIT A-1
(Face of Senior Subordinated Note)
9_% Senior Subordinated Notes due 2008
No. $ CUSIP NO. 627578AB3
--- ---------------
THE MUSICLAND GROUP, INC.
promises to pay to ________________ or registered assigns, the principal sum of
___________ Dollars on March 15, 2008.
Interest Payment Dates: March 15 and September 15
Record Dates: March 1 and September 1
THE MUSICLAND GROUP, INC.
By:
-------------------------------
Name:
Title:
This is one of the Senior Subordinated Notes
referred to in the within-mentioned Indenture:
Dated:
------------------------
BANK ONE, NA,
as Trustee
By:
----------------------------------
1
<PAGE>
(Back of Senior Subordinated Note)
9_% Senior Subordinated Notes due 2008
[Unless and until it is exchanged in whole or in part for Senior
Subordinated Notes in definitive form, this Senior Subordinated Note may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor Depositary or
a nominee of such successor Depositary. Unless this certificate is presented by
an authorized representative of The Depository Trust Company (55 Water Street,
New York, New York)("DTC"), to the issuer or its agent for registration of
transfer, exchange or payment, and any certificate issued is registered in the
name of Cede & Co. or such other name as may be requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or such other
entity as may be requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL in as much as the registered owner hereof, Cede & Co., has an
interest herein.](1)
- - ------------------
(1) This paragraph should be included only if the Senior Subordinated Note is
issued in global form.
2
<PAGE>
[THE SECURITY (OR ITS PREDECESSOR) EVIDENCED
HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED
HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER
OF THE SECURITY EVIDENCED HEREBY IS HEREBY
NOTIFIED THAT THE SELLER MAY BE RELYING ON THE
EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THE SECURITY EVIDENCED HEREBY
AGREES, FOR THE BENEFIT OF THE COMPANY, THAT (A)
SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES
TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS
A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(b) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE
UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904
OF REGULATION S UNDER THE SECURITIES ACT, OR (d)
IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
(AND, IN THE CASE OF CLAUSE (b), (c) or (d), BASED
UPON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH
CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES OR ANY
OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO,
NOTIFY ANY PURCHASER FROM IT OF THE SECURITY
EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET
FORTH IN (A) ABOVE.](2)
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.
1. INTEREST. The Musicland Group, Inc., a Delaware corporation, or
its successor (the "COMPANY"), promises to pay interest on the
principal amount of this Senior Subordinated Note at the rate of
9_% per annum and shall pay the Liquidated Damages, if any,
payable pursuant to Section 5 of the Registration Rights
Agreement referred to below. The Company will pay interest and
Liquidated Damages, if any, in United States dollars (except as
otherwise provided herein) semi-annually in arrears on March 15
and September 15, commencing on September 15, 1998, or if any
such day is not a Business Day, on the next succeeding Business
Day (each an "INTEREST
- - -------------------------
(2) This paragraph should be removed upon the exchange of Senior Subordinated
Notes for New Senior Subordinated Notes in the Exchange Offer or upon the
registration of the Senior Subordinated Notes pursuant to the terms of the
Registration Rights Agreement.
3
<PAGE>
PAYMENT DATE"). Interest on the Senior Subordinated Notes shall
accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of issuance;
PROVIDED that if there is no existing Default or Event of Default
in the payment of interest, and if this Senior Subordinated Note
is authenticated between a record date referred to on the face
hereof and the next succeeding Interest Payment Date, interest
shall accrue from such next succeeding Interest Payment Date,
except in the case of the original issuance of Senior
Subordinated Notes, in which case interest shall accrue from the
date of authentication. The Company shall pay interest
(including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue principal at the rate equal to 1% per
annum in excess of the then applicable interest rate on the
Senior Subordinated Notes to the extent lawful; it shall pay
interest (including post-petition interest in any proceeding
under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages (without regard to any applicable grace
period) at the same rate to the extent lawful. Interest shall be
computed on the basis of a 360-day year comprised of twelve
30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Senior
Subordinated Notes (except defaulted interest) and Liquidated
Damages, if any, on the applicable Interest Payment Date to the
Persons who are registered Holders of Senior Subordinated Notes
at the close of business on the March 1 or September 1 next
preceding the Interest Payment Date, even if such Senior
Subordinated Notes are canceled after such record date and on or
before such Interest Payment Date, except as provided in Section
2.12 of the Indenture with respect to defaulted interest. The
Senior Subordinated Notes shall be payable as to principal,
premium and Liquidated Damages, if any, and interest at the
office or agency of the Company maintained for such purpose
within or without the City and State of New York, or, at the
option of the Company, payment of interest and Liquidated
Damages, if any, may be made by check mailed to the Holders at
their respective addresses set forth in the register of Holders;
PROVIDED that payment by wire transfer of immediately available
funds shall be required with respect to principal of, premium and
Liquidated Damages, if any, and interest on, all Global Notes and
all other Senior Subordinated Notes the Holders of which shall
have provided written wire transfer instructions to the Company
and the Paying Agent. Such payment shall be in such coin or
currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, Bank One, NA, the Trustee
under the Indenture, shall act as Paying Agent and Registrar.
The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company or any of its Subsidiaries may
act in any such capacity.
4. INDENTURE. The Company issued the Senior Subordinated Notes
under an Indenture dated as of April 6, 1998 ("INDENTURE") among
the Company, the Guarantor and the Trustee. The terms of the
Senior Subordinated Notes include those stated in the Indenture
and those made a part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (15 U.S. Code Sections
77aaa-77bbbb) (the "TIA"). The Senior Subordinated Notes are
subject to all such terms, and Holders are referred to the
Indenture and such Act for a statement of such terms. The Senior
Subordinated Notes are general unsecured Obligations of the
Company limited to $150,000,000 in aggregate principal amount,
plus amounts, if any, sufficient to pay premium or Liquidated
Damages, if any, and interest on outstanding Senior Subordinated
Notes as set forth in Paragraph 2 hereof.
4
<PAGE>
5. OPTIONAL REDEMPTION.
Except as set forth in the next paragraph, the Senior
Subordinated Notes shall not be redeemable at the Company's
option prior to March 15, 2003. Thereafter, the Senior
Subordinated Notes shall be subject to redemption at any time at
the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below
together with accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on March 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003 104.938%
2004 103.292%
2005 101.646%
2006 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to March
15, 2001, the Company may redeem up to 40% of the original
aggregate principal amount of Senior Subordinated Notes at a
redemption price of 109.875% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net proceeds of a Public
Equity Offering; PROVIDED that at least 60% of the original
aggregate principal amount of Senior Subordinated Notes remains
outstanding immediately after the occurrence of each such
redemption; and PROVIDED, FURTHER, that such redemption shall
occur within 45 days of the date of the closing of such Public
Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall
not be required to make mandatory redemption or sinking fund
payments with respect to the Senior Subordinated Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) Upon the occurrence of a Change of Control, each Holder of
Senior Subordinated Notes will have the right to require the
Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Senior Subordinated
Notes pursuant to the offer described below (the "CHANGE OF
CONTROL OFFER") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon, to the date of
purchase. Within 30 days following any Change of Control, the
Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control
and offering to purchase Senior Subordinated Notes on the date
specified in such notice, which date shall be no earlier than 30
days and no later than 60 days from the date such notice is
mailed, pursuant to the procedures governing the Change of
Control Offer required by the Indenture.
(b) When the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company shall offer to all Holders of Senior
Subordinated Notes (an "ASSET SALE OFFER") to purchase the
maximum principal amount of Senior Subordinated Notes that may be
purchased out of the Excess Proceeds at an offer price in cash
equal to 100% of principal amount thereof, plus accrued and
unpaid interest and Liquidated
5
<PAGE>
Damages thereon, if any, to the date of purchase in accordance
with the procedures set forth in the Indenture. To the extent
that the aggregate amount of Senior Subordinated Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds,
the Company may use any remaining Excess Proceeds for any general
corporate purposes. If the aggregate principal amount of Senior
Subordinated Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Senior
Subordinated Notes to be purchased on a PRO RATA basis. Upon
completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
(c) Holders of the Senior Subordinated Notes that are the
subject of an offer to purchase will receive a Change of Control
Offer or Asset Sale Offer from the Company prior to any related
purchase date and may elect to have such Senior Subordinated
Notes purchased by completing the form titled "OPTION OF HOLDER
TO ELECT PURCHASE" appearing below.
8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at
least 30 days but not more than 60 days before the redemption
date to each Holder whose Senior Subordinated Notes are to be
redeemed at its registered address. Senior Subordinated Notes in
denominations larger than $1,000 may be redeemed in part but only
in whole multiples of $1,000, unless all of the Senior
Subordinated Notes held by a Holder are to be redeemed. On and
after the redemption date, interest and Liquidated Damages, if
any, ceases to accrue on the Senior Subordinated Notes or
portions thereof called for redemption.
9. SUBORDINATION. The Senior Subordinated Notes are subordinated to
Senior Debt, which is: (i) all Indebtedness outstanding under the
Credit Facility, including any Guarantee thereof and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness
permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Senior Subordinated
Notes, (iii) all Obligations with respect to the foregoing, and
(iv) all interest with respect to the foregoing clauses (i) and
(ii) accruing during the pendency of an Insolvency or Liquidation
Proceeding, whether or not allowed or allowable thereunder.
Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (w) any liability for federal, state, local
or other taxes owed or owing by the Company, (x) any Indebtedness
of the Company to any of its Subsidiaries or other Affiliates,
(y) any trade payables or liability to trade creditors or
obligations with respect to consigned inventory arising in the
ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities) or (z) any Indebtedness
that is incurred in violation of the Indenture. To the extent
provided in the Indenture, Senior Debt must be paid before the
Senior Subordinated Notes may be paid. The Company agrees and
each Holder of Senior Subordinated Notes by accepting a Senior
Subordinated Note consents and agrees to the subordination
provided in the Indenture and authorizes the Trustee to give it
effect.
10. DENOMINATIONS, TRANSFER, EXCHANGE. The Senior Subordinated Notes
are in registered form without coupons in initial denominations
of $1,000 and integral multiples of $1,000. The transfer of the
Senior Subordinated Notes may be registered and the Senior
Subordinated Notes may be exchanged as provided in the
Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay
any taxes and fees required by law or permitted by the
Indenture. The
6
<PAGE>
Company need not exchange or register the transfer of any Senior
Subordinated Note or portion of a Senior Subordinated Note
selected for redemption, except for the unredeemed portion of any
Senior Subordinated Note being redeemed in part. Also, it need
not exchange or register the transfer of any Senior Subordinated
Notes for a period of 15 days before a selection of Senior
Subordinated Notes to be redeemed or during the period between a
record date and the corresponding Interest Payment Date.
11. PERSONS DEEMED OWNERS. The registered Holder of a Senior
Subordinated Note may be treated as its owner for all purposes.
12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to the following
paragraph and certain other provisions set forth in the
Indenture, the Indenture, the Senior Subordinated Notes and the
Note Guarantee may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the
Senior Subordinated Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of
or, tender offer or exchange offer for Senior Subordinated
Notes), and any existing Default or Event of Default or
compliance with any provision of the Indenture, the Senior
Subordinated Notes or the Note Guarantee may be waived with the
consent of the Holders of a majority in principal amount of the
then outstanding Senior Subordinated Notes (including consents
obtained in connection with a tender offer or exchange offer for
Senior Subordinated Notes).
Without the consent of any Holder of Senior Subordinated
Notes, the Company, the Guarantor and the Trustee may amend or
supplement the Indenture, the Note Guarantee or the Senior
Subordinated Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Subordinated
Notes in addition to or in place of certificated Senior
Subordinated Notes, to provide for the assumption of the
Company's or the Guarantor's obligations to Holders of Senior
Subordinated Notes in the case of a merger or consolidation, to
make any change that would provide any additional rights or
benefits to the Holders of Senior Subordinated Notes or that does
not adversely affect the legal rights under the Indenture of any
such Holder, to comply with the requirements of the Commission in
order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act or to allow any Subsidiary to
guarantee the Senior Subordinated Notes. Any amendments with
respect to subordination provisions of the Senior Subordinated
Notes or the Note Guarantee would require the consent of the
Holders of at least 75% in aggregate principal amount of the
Senior Subordinated Notes then outstanding if such amendment
would adversely affect the rights of the Holders of the Senior
Subordinated Notes.
13. DEFAULTS AND REMEDIES. Events of Default include: (i) default
for 30 days in the payment when due of interest on or Liquidated
Damages, if any, with respect to the Senior Subordinated Notes;
(ii) default in payment when due of the principal of or premium,
if any, on the Senior Subordinated Notes; (iii) failure by the
Company to comply with the provisions described in Section 4.10
or 4.14 or Article 5 of the Indenture; (iv) failure by the
Company for 30 days after notice from the Trustee or the Holders
of at least 25% in principal amount of the Senior Subordinated
Notes then outstanding to comply with the provisions described in
Section 4.07 or 4.09 of the Indenture; (v) failure by the Company
for 60 days after notice from the Trustee or the Holders of at
least 25% in principal amount of the Senior Subordinated Notes
then outstanding to comply with its other agreements in the
Indenture or the Senior Subordinated Notes; (vi) default under
any mortgage, indenture or instrument under
7
<PAGE>
which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or
any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on
such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a
"PAYMENT DEFAULT") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $15.0 million or more; (vii) failure by
the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $15.0 million, which judgments
are not paid, discharged or stayed within 60 days after their
entry; and (viii) certain events of bankruptcy or insolvency with
respect to the Company, any of its Significant Subsidiaries or
any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary.
If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of the
then outstanding Senior Subordinated Notes may declare all the
Senior Subordinated Notes to be due and payable immediately;
PROVIDED, HOWEVER, that if any Indebtedness or Obligation is
outstanding pursuant to the Credit Facility, upon a declaration
of acceleration by the Holders of the Senior Subordinated Notes
or the Trustee, all principal and interest under the Indenture
shall be due and payable upon the earlier of (x) the day which is
five Business Days after the provision to the Company, the Credit
Agent and the Trustee of such written notice of acceleration or
(y) the date of acceleration of any Indebtedness under the Credit
Facility; and PROVIDED, FURTHER, that in the event of an
acceleration based upon an Event of Default set forth in clause
(vi) above, such declaration of acceleration shall be
automatically annulled if the holders of Indebtedness which is
the subject of such acceleration have rescinded their declaration
of acceleration in respect of such Indebtedness or such Payment
Default shall have been cured or waived within 30 days thereof
and no other Event of Default has occurred during such 30-day
period which has not been cured, paid or waived. Notwithstanding
the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries, all outstanding
Senior Subordinated Notes will become due and payable without
further action or notice. Holders of the Senior Subordinated
Notes may not enforce the Indenture or the Senior Subordinated
Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the
then outstanding Senior Subordinated Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold
from Holders of the Senior Subordinated Notes notice of any
continuing Default or Event of Default (except a Default or Event
of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and
perform services for the Company, the Guarantor or their
respective Affiliates, and may otherwise deal with the Company,
the Guarantor or their respective Affiliates, as if it were not
the Trustee.
8
<PAGE>
15. NO RECOURSE AGAINST OTHERS. No director, officer, employee,
incorporator or stockholder of the Company or the Guarantor, as
such, shall have any liability for any obligations of the Company
or the Guarantor under the Senior Subordinated Notes, the
Indenture or the Note Guarantee or for any claim based on, in
respect of, or by reason of, such obligations or their creation.
Each Holder of Senior Subordinated Notes by accepting a Senior
Subordinated Note waives and releases all such liability. The
waiver and release are part of the consideration for the issuance
of the Senior Subordinated Notes and any Note Guarantee.
16. AUTHENTICATION. This Senior Subordinated Note shall not be valid
until authenticated by the manual signature of the Trustee or an
authenticating agent.
17. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common),
CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
18. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES.
In addition to the rights provided to Holders of the Senior
Subordinated Notes under the Indenture, Holders of Transferred
Restricted Securities (as defined in the Registration Rights
Agreement) shall have all the rights set forth in the A/B
Exchange Registration Rights Agreement, dated as of the date
hereof, among the Company, the Guarantor and the Initial
Purchaser (the "REGISTRATION RIGHTS AGREEMENT").
19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the
Company has caused CUSIP numbers to be printed on the Senior
Subordinated Notes and the Trustee may use CUSIP numbers in
notices of redemption as a convenience to the Holders. No
representation is made as to the accuracy of such numbers either
as printed on the Senior Subordinated Notes or as contained in
any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company shall furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, MN 55343
Telecopy: (612) 931-8047
General Counsel
9
<PAGE>
ASSIGNMENT FORM
To assign this Senior Subordinated Note, fill in the form below: (I) or (we)
assign and transfer this Senior Subordinated Note to
- - --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- - --------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
to transfer this Senior Subordinated Note on the books of the Company. The
agent may substitute another to act for him.
- - --------------------------------------------------------------------------------
Date:
Your Signature:_______________________________________
(Sign exactly as your name appears on the face of this
Senior Subordinated Note)
Signature Guarantee:
10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Senior Subordinated Note purchased by the
Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below:
/ / Section 4.10 Section 4.14
If you want to elect to have only part of the Senior Subordinated Note
purchased by the Company pursuant to Section 4.10 or Section 4.14 of the
Indenture, state the amount you elect to have purchased: $___________
Date:
Your Signature:____________________________________________
(Sign exactly as your name appears on the Senior Subordinated Note)
Tax Identification No.:_________
Signature Guarantee:
11
<PAGE>
SCHEDULE OF EXCHANGES OF SENIOR SUBORDINATED NOTES (3)
THE FOLLOWING EXCHANGES OF A PART OF THIS GLOBAL NOTE FOR OTHER SENIOR
SUBORDINATED NOTES HAVE BEEN MADE:
<TABLE>
<CAPTION>
Principal Amount Signature of
Amount of decrease Amount of increase of this Global authorized officer
in Principal Amount in Principal Note following of Trustee or Senior
Date of Exchange of this Global Note Amount of this such decrease (or Subordinated Note
Global Note increase) Custodian
<S> <C> <C> <C> <C>
</TABLE>
- - -------------------------
(3) This should be included only if the Senior Subordinated Note is issued in
global form.
12
<PAGE>
EXHIBIT A-2
(Face of Regulation S Temporary Global Note)
9_% Senior Subordinated Notes due 2008
No. $
----- --------------- CINS NO. U61809AA4
THE MUSICLAND GROUP, INC.
promises to pay to ________________ or registered assigns, the principal sum of
________ Dollars on March 15, 2008.
Interest Payment Dates: March 15 and September 15
Record Dates: March 1 and September 1
THE MUSICLAND GROUP, INC.
By:
------------------------------
Name:
Title:
This is one of the Senior Subordinated Notes
referred to in the within-mentioned Indenture:
Dated:
-------------------------
BANK ONE, NA,
as Trustee
By:
-----------------------------
1
<PAGE>
(Back of Regulation S Temporary Global Note)
9_% Senior Subordinated Note due 2008
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SENIOR
SUBORDINATED NOTES IN DEFINITIVE FORM, THIS SENIOR SUBORDINATED NOTE MAY NOT BE
TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY
OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR
A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET,
NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER
ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
[THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES, FOR THE BENEFIT OF THE COMPANY, THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED
STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED
STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 903
OR RULE 904 OF REGULATION S OF THE SECURITIES ACT, OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND,
IN THE CASE OF CLAUSES (b), (c) OR (d), BASED UPON AN OPINION OF COUNSEL IF THE
COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO,
NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A) ABOVE.
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR
2
<PAGE>
DEFINITIVE SENIOR SUBORDINATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS
DEFINED HEREIN).
NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY
GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON PRIOR TO THE
EXCHANGE OF THIS REGULATION S TEMPORARY GLOBAL NOTE FOR A REGULATION S PERMANENT
GLOBAL NOTE AS CONTEMPLATED BY THE INDENTURE.]
Until this Regulation S Temporary Global Note is exchanged for Regulation S
Permanent Global Notes, the Holder hereof shall not be entitled to receive
payments of interest or Liquidated Damages, if any, hereon although interest and
Liquidated Damages, if any, will continue to accrue; until so exchanged in full,
this Regulation S Temporary Global Note shall in all other respects be entitled
to the same benefits as other Senior Subordinated Notes under the Indenture.
This Regulation S Temporary Global Note is exchangeable in whole or in part
for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes
only (i) on or after the termination of the 40-day restricted period (as defined
in Regulation S) and (ii) upon presentation of certificates (accompanied by an
Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon
exchange of this Regulation S Temporary Global Note for one or more Regulation S
Permanent Global Notes or Rule 144A Global Notes, the Trustee shall cancel this
Regulation S Temporary Global Note.
This Regulation S Temporary Global Note shall not become valid or
obligatory until the certificate of authentication hereon shall have been duly
manually signed by the Trustee in accordance with the Indenture. This
Regulation S Temporary Global Note shall be governed by and construed in
accordance with the laws of the State of the New York. All references to "$,"
"Dollars," "dollars" or "U.S. $" are to such coin or currency of the United
States of America as at the time shall be legal tender for the payment of public
and private debts therein.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. INTEREST. The Musicland Group, Inc., a Delaware corporation, or its
successor (the "COMPANY"), promises to pay interest on the principal
amount of this Senior Subordinated Note at the rate of 9_% per annum
and shall pay the Liquidated Damages, if any, payable pursuant to
Section 5 of the Registration Rights Agreement referred to below. The
Company will pay interest and Liquidated Damages, if any, in United
States dollars (except as otherwise provided herein) semi-annually in
arrears on March 15 and September 15, commencing on September 15,
1998, or if any such day is not a Business Day, on the next succeeding
Business Day (each an "INTEREST PAYMENT DATE"). Interest on the
Senior Subordinated Notes shall accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from
the date of issuance; PROVIDED that if there is no existing Default or
Event of Default in the payment of interest, and if this Senior
Subordinated Note is authenticated between a record date referred to
on the face hereof and the next succeeding Interest Payment Date,
interest shall accrue from such next succeeding Interest Payment Date,
except in the case of the
- - ------------------------------
1 These paragraphs should be removed upon the exchange of Regulation S
Temporary Global Notes for Regulation S Permanent Global Notes pursuant to the
Indenture.
3
<PAGE>
original issuance of Senior Subordinated Notes, in which case interest
shall accrue from the date of authentication. The Company shall pay
interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue principal at the rate equal to 1% per annum
in excess of the then applicable interest rate on the Senior
Subordinated Notes to the extent lawful; it shall pay interest
(including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest and Liquidated
Damages (without regard to any applicable grace period) at the same
rate to the extent lawful. Interest shall be computed on the basis of
a 360-day year comprised of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Senior
Subordinated Notes (except defaulted interest) and Liquidated Damages,
if any, on the applicable Interest Payment Date to the Persons who are
registered Holders of Senior Subordinated Notes at the close of
business on the March 1 or September 1 next preceding the Interest
Payment Date, even if such Senior Subordinated Notes are canceled
after such record date and on or before such Interest Payment Date,
except as provided in Section 2.12 of the Indenture with respect to
defaulted interest. The Senior Subordinated Notes shall be payable as
to principal, premium and Liquidated Damages, if any, and interest at
the office or agency of the Company maintained for such purpose within
or without the City and State of New York, or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be
made by check mailed to the Holders at their respective addresses set
forth in the register of Holders; PROVIDED that payment by wire
transfer of immediately available funds shall be required with respect
to principal of, premium and Liquidated Damages, if any, and interest
on, all Global Notes and all other Senior Subordinated Notes the
Holders of which shall have provided written wire transfer
instructions to the Company and the Paying Agent. Such payment shall
be in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private
debts.
3. PAYING AGENT AND REGISTRAR. Initially, Bank One, NA, the Trustee
under the Indenture, shall act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any
Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Senior Subordinated Notes under an
Indenture dated as of April 6, 1998 ("INDENTURE") among the Company,
the Guarantor and the Trustee. The terms of the Senior Subordinated
Notes include those stated in the Indenture and those made a part of
the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Senior
Subordinated Notes are subject to all such terms, and Holders are
referred to the Indenture and such Act for a statement of such terms.
The Senior Subordinated Notes are general unsecured Obligations of the
Company limited to $150,000,000 in aggregate principal amount, plus
amounts, if any, sufficient to pay premium or Liquidated Damages, if
any, and interest on outstanding Senior Subordinated Notes as set
forth in Paragraph 2 hereof.
5. OPTIONAL REDEMPTION.
Except as set forth in the next paragraph, the Senior
Subordinated Notes shall not be redeemable at the Company's option
prior to March 15, 2003. Thereafter, the Senior Subordinated Notes
shall be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor
4
<PAGE>
more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below together with accrued
and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on March 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . 104.938%
2004 . . . . . . . . . . . . . . . . . . . 103.292%
2005 . . . . . . . . . . . . . . . . . . . 101.646%
2006 and thereafter . . . . . . . . . . . 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to March 15,
2001, the Company may redeem up to 40% of the original aggregate
principal amount of Senior Subordinated Notes at a redemption price of
109.875% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption
date, with the net proceeds of a Public Equity Offering; PROVIDED that
at least 60% of the original aggregate principal amount of Senior
Subordinated Notes remains outstanding immediately after the
occurrence of each such redemption; and PROVIDED, FURTHER, that such
redemption shall occur within 45 days of the date of the closing of
such Public Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not
be required to make mandatory redemption or sinking fund payments with
respect to the Senior Subordinated Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) Upon the occurrence of a Change of Control, each Holder of Senior
Subordinated Notes will have the right to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Senior Subordinated Notes pursuant to the
offer described below (the "CHANGE OF CONTROL OFFER") at an offer
price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the date of purchase. Within 30 days following any Change
of Control, the Company will mail a notice to each Holder describing
the transaction or transactions that constitute the Change of Control
and offering to purchase Senior Subordinated Notes on the date
specified in such notice, which date shall be no earlier than 30 days
and no later than 60 days from the date such notice is mailed,
pursuant to the procedures governing the Change of Control Offer
required by the Indenture.
(b) When the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company shall offer to all Holders of Senior Subordinated
Notes (an "ASSET SALE OFFER") to purchase the maximum principal amount
of Senior Subordinated Notes that may be purchased out of the Excess
Proceeds at an offer price in cash equal to 100% of principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase in accordance with the
procedures set forth in the Indenture. To the extent that the
aggregate amount of Senior Subordinated Notes tendered pursuant to an
Asset Sale Offer is less than the Excess
5
<PAGE>
Proceeds, the Company may use any remaining Excess Proceeds for any
general corporate purposes. If the aggregate principal amount of
Senior Subordinated Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Senior
Subordinated Notes to be purchased on a PRO RATA basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
(c) Holders of the Senior Subordinated Notes that are the subject of
an offer to purchase will receive a Change of Control Offer or Asset
Sale Offer from the Company prior to any related purchase date and may
elect to have such Senior Subordinated Notes purchased by completing
the form titled "Option of Holder to Elect Purchase" appearing below.
8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least
30 days but not more than 60 days before the redemption date to each
Holder whose Senior Subordinated Notes are to be redeemed at its
registered address. Senior Subordinated Notes in denominations larger
than $1,000 may be redeemed in part but only in whole multiples of
$1,000, unless all of the Senior Subordinated Notes held by a Holder
are to be redeemed. On and after the redemption date, interest and
Liquidated Damages, if any, ceases to accrue on the Senior
Subordinated Notes or portions thereof called for redemption.
9. SUBORDINATION. The Senior Subordinated Notes are subordinated to
Senior Debt, which is: (i) all Indebtedness outstanding under the
Credit Facility, including any Guarantee thereof and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness
permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Senior Subordinated Notes,
(iii) all Obligations with respect to the foregoing, and (iv) all
interest with respect to the foregoing clauses (i) and (ii) accruing
during the pendency of an Insolvency or Liquidation Proceeding,
whether or not allowed or allowable thereunder. Notwithstanding
anything to the contrary in the foregoing, Senior Debt will not
include (w) any liability for federal, state, local or other taxes
owed or owing by the Company, (x) any Indebtedness of the Company to
any of its Subsidiaries or other Affiliates, (y) any trade payables or
liability to trade creditors or obligations with respect to consigned
inventory arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities) or (z)
any Indebtedness that is incurred in violation of the Indenture. To
the extent provided in the Indenture, Senior Debt must be paid before
the Senior Subordinated Notes may be paid. The Company agrees and
each Holder of Senior Subordinated Notes by accepting a Senior
Subordinated Note consents and agrees to the subordination provided in
the Indenture and authorizes the Trustee to give it effect.
10. DENOMINATIONS, TRANSFER, EXCHANGE. The Senior Subordinated Notes are
in registered form without coupons in initial denominations of $1,000
and integral multiples of $1,000. The transfer of the Senior
Subordinated Notes may be registered and the Senior Subordinated Notes
may be exchanged as provided in the Indenture. The Registrar and the
Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company need not exchange or register
the transfer of any Senior Subordinated Note or portion of a Senior
Subordinated Note
6
<PAGE>
selected for redemption, except for the unredeemed portion of any
Senior Subordinated Note being redeemed in part. Also, it need not
exchange or register the transfer of any Senior Subordinated Notes for
a period of 15 days before a selection of Senior Subordinated Notes to
be redeemed or during the period between a record date and the
corresponding Interest Payment Date.
11. PERSONS DEEMED OWNERS. The registered Holder of a Senior Subordinated
Note may be treated as its owner for all purposes.
12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to the following paragraph
and certain other provisions set forth in the Indenture, the
Indenture, the Senior Subordinated Notes and the Note Guarantee may be
amended or supplemented with the consent of the Holders of at least a
majority in principal amount of the Senior Subordinated Notes then
outstanding (including, without limitation, consents obtained in
connection with a purchase of or, tender offer or exchange offer for
Senior Subordinated Notes), and any existing Default or Event of
Default or compliance with any provision of the Indenture, the Senior
Subordinated Notes or the Note Guarantee may be waived with the
consent of the Holders of a majority in principal amount of the then
outstanding Senior Subordinated Notes (including consents obtained in
connection with a tender offer or exchange offer for Senior
Subordinated Notes).
Without the consent of any Holder of Senior Subordinated Notes,
the Company, the Guarantor and the Trustee may amend or supplement the
Indenture, the Note Guarantee or the Senior Subordinated Notes to cure
any ambiguity, defect or inconsistency, to provide for uncertificated
Senior Subordinated Notes in addition to or in place of certificated
Senior Subordinated Notes, to provide for the assumption of the
Company's or the Guarantor's obligations to Holders of Senior
Subordinated Notes in the case of a merger or consolidation, to make
any change that would provide any additional rights or benefits to the
Holders of Senior Subordinated Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, to comply
with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act or to
allow any Subsidiary to guarantee the Senior Subordinated Notes. Any
amendments with respect to subordination provisions of the Senior
Subordinated Notes or the Note Guarantee would require the consent of
the Holders of at least 75% in aggregate principal amount of the
Senior Subordinated Notes then outstanding if such amendment would
adversely affect the rights of the Holders of Senior Subordinated
Notes.
13. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30
days in the payment when due of interest on or Liquidated Damages, if
any, with respect to the Senior Subordinated Notes; (ii) default in
payment when due of the principal of or premium, if any, on the Senior
Subordinated Notes; (iii) failure by the Company to comply with the
provisions described in Section 4.10 or 4.14 or Article 5 of the
Indenture; (iv) failure by the Company for 30 days after notice from
the Trustee or the Holders of at least 25% in principal amount of the
Senior Subordinated Notes to comply with the provisions described in
Section 4.07 or 4.09 of the Indenture; (v) failure by the Company for
60 days after notice from the Trustee or the Holders of at least 25%
in principal amount of the Senior Subordinated Notes then outstanding
to comply with its other agreements in the Indenture or the Senior
7
<PAGE>
Subordinated Notes; (vi) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after
the date of the Indenture, which default (a) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "PAYMENT DEFAULT") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any such other
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $15.0 million or
more; (vii) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $15.0
million, which judgments are not paid, discharged or stayed within 60
days after their entry; and (viii) certain events of bankruptcy or
insolvency with respect to the Company, any of its Significant
Subsidiaries or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the then
outstanding Senior Subordinated Notes may declare all the Senior
Subordinated Notes to be due and payable immediately; PROVIDED,
HOWEVER, that if any Indebtedness or Obligation is outstanding
pursuant to the Credit Facility, upon a declaration of acceleration by
the Holders of the Senior Subordinated Notes or the Trustee, all
principal and interest under the Indenture shall be due and payable
upon the earlier of (x) the day which is five Business Days after the
provision to the Company, the Credit Agent and the Trustee of such
written notice of acceleration or (y) the date of acceleration of any
Indebtedness under the Credit Facility; and PROVIDED, FURTHER, that in
the event of an acceleration based upon an Event of Default set forth
in clause (vi) above, such declaration of acceleration shall be
automatically annulled if the holders of Indebtedness which is the
subject of such acceleration have rescinded their declaration of
acceleration in respect of such Indebtedness or such Payment Default
shall have been cured or waived within 30 days thereof and no other
Event of Default has occurred during such 30-day period which has not
been cured, paid or waived. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy
or insolvency with respect to the Company or any of its Significant
Subsidiaries, all outstanding Senior Subordinated Notes will become
due and payable without further action or notice. Holders of the
Senior Subordinated Notes may not enforce the Indenture or the Senior
Subordinated Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the
then outstanding Senior Subordinated Notes may direct the Trustee in
its exercise of any trust or power. The Trustee may withhold from
Holders of the Senior Subordinated Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines
that withholding notice is in their interest.
14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform
services for the Company, the Guarantor or their respective
Affiliates, and may otherwise deal with
8
<PAGE>
the Company, the Guarantor or their respective Affiliates, as if it
were not the Trustee.
15. NO RECOURSE AGAINST OTHERS. No director, officer, employee,
incorporator or stockholder of the Company or the Guarantor, as such,
shall have any liability for any obligations of the Company or the
Guarantor under the Senior Subordinated Notes, the Indenture or the
Note Guarantee or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Senior
Subordinated Notes by accepting a Senior Subordinated Note waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Senior Subordinated Notes and
any Note Guarantee.
16. AUTHENTICATION. This Senior Subordinated Note shall not be valid
until authenticated by the manual signature of the Trustee or an
authenticating agent.
17. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entireties), JT TEN (= joint tenants with right
of survivorship and not as tenants in common), CUST (= Custodian), and
U/G/M/A (= Uniform Gifts to Minors Act).
18. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In
addition to the rights provided to Holders of the Senior Subordinated
Notes under the Indenture, Holders of Transferred Restricted
Securities (as defined in the Registration Rights Agreement) shall
have all the rights set forth in the A/B Exchange Registration Rights
Agreement, dated as of the date hereof, among the Company, the
Guarantor and the Initial Purchaser (the "REGISTRATION RIGHTS
AGREEMENT").
19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company
has caused CUSIP numbers to be printed on the Senior Subordinated
Notes and the Trustee may use CUSIP numbers in notices of redemption
as a convenience to the Holders. No representation is made as to the
accuracy of such numbers either as printed on the Senior Subordinated
Notes or as contained in any notice of redemption and reliance may be
placed only on the other identification numbers placed thereon.
The Company shall furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
9
<PAGE>
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, MN 55343
Telecopy: (612) 931-8047
General Counsel
10
<PAGE>
ASSIGNMENT FORM
To assign this Senior Subordinated Note, fill in the form below: (I) or (we)
assign and transfer this Senior Subordinated Note to
- - --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ____________________________________________________
to transfer this Senior Subordinated Note on the books of the Company. The
agent may substitute another to act for him.
- - --------------------------------------------------------------------------------
Date: Your Signature:
----------------------------------
(Sign exactly as your name appears
on the face of this Senior
Subordinated Note)
Signature Guarantee:
11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Senior Subordinated Note purchased by the
Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below:
/ / Section 4.10 Section 4.14
If you want to elect to have only part of the Senior Subordinated Note
purchased by the Company pursuant to Section 4.10 or Section 4.14 of the
Indenture, state the amount you elect to have purchased: $___________
Date: Your Signature:
----------------------------------
(Sign exactly as your name appears
on the face of this Senior
Subordinated Note)
Tax Identification No.:
---------
Signature Guarantee:
12
<PAGE>
SCHEDULE OF EXCHANGES FOR GLOBAL NOTES
The following exchanges of a part of this Regulation S Temporary Global
Note for other Global Notes have been made:
<TABLE>
<CAPTION>
Amount of decrease in Amount of increase in Principal Amount of this Signature of
Date of Exchange Principal Amount Principal Amount Global Note authorized officer of Trustee or
- - ---------------- of this Global of this Global following such decrease Senior Subordinated Note
Note Note (or increase) Custodian
---- ---- ------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
13
<PAGE>
EXHIBIT B-1
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE
(Pursuant to Section 2.06(a)(i) of the Indenture)
Bank One, NA
c/o Corporate Trust Office
235 West Shrock Road
Westerville, OH 43081
Re: 9_% Senior Subordinated Notes due 2008 The Musicland Group, Inc.
Reference is hereby made to the Indenture, dated as of April 6, 1998 (the
"INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the
"COMPANY"), and Musicland Stores Corporation, a Delaware corporation, ("MSC" or
the "GUARANTOR") and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
This letter relates to $ _______________ principal amount of Senior
Subordinated Notes which are evidenced by one or more Rule 144A Global Notes and
held with the Depositary in the name of ______________________ (the
"TRANSFEROR"). The Transferor has requested a transfer of such beneficial
interest in the Senior Subordinated Notes to a Person who will take delivery
thereof in the form of an equal principal amount of Senior Subordinated Notes
evidenced by one or more Regulation S Global Notes, which amount, immediately
after such transfer, is to be held with the Depositary through Euroclear or
Cedel or both.
In connection with such request and in respect of such Senior Subordinated
Notes, the Transferor hereby certifies that such transfer has been effected in
compliance with the transfer restrictions applicable to the Global Notes and
pursuant to and in accordance with Rule 903 or Rule 904 under the United States
Securities Act of 1933, as amended (the "SECURITIES ACT"), and accordingly the
Transferor hereby further certifies that:
(1) The offer of the Senior Subordinated Notes was not made to a person in
the United States;
(2) either:
(a) at the time the buy order was originated, the transferee was
outside the United States or the Transferor and any person acting
on its behalf reasonably believed and believes that the
transferee was outside the United States; or
(b) the transaction was executed in, on or through the facilities of
a designated offshore securities market and neither the
Transferor
1
<PAGE>
nor any person acting on its behalf knows that the transaction
was prearranged with a buyer in the United States;
(3) no directed selling efforts have been made in contravention of the
requirements of Rule 904(b) of Regulation S;
(4) the transaction is not part of a plan or scheme to evade the
registration provisions of the Securities Act; and
(5) upon completion of the transaction, the beneficial interest being
transferred as described above is to be held with the Depositary
through Euroclear or Cedel or both.
Upon giving effect to this request to exchange a beneficial interest in a
Rule 144A Global Note for a beneficial interest in a Regulation S Global Note,
the resulting beneficial interest shall be subject to the restrictions on
transfer applicable to Regulation S Global Notes pursuant to the Indenture and
the Securities Act and, if such transfer occurs prior to the end of the 40-day
restricted period associated with the initial offering of Senior Subordinated
Notes, the additional restrictions applicable to transfers of interest in the
Regulation S Temporary Global Note.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc
Montgomery Securities LLC, the initial purchasers of such Senior Subordinated
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Regulation S under the
Securities Act.
[Insert Name of Transferor]
By:
-------------------------------------
Name:
Title:
Dated:
cc: The Musicland Group, Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
BT Alex. Brown Incorporated
NationsBanc Montgomery Securities LLC
2
<PAGE>
EXHIBIT B-2
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE
(Pursuant to Section 2.06(a)(ii) of the Indenture)
Bank One, NA
c/o Corporate Trust Office
235 West Shrock Road
Westerville, OH 43081
Re: 9_% Senior Subordinated Notes due 2008 The Musicland Group, Inc.
Reference is hereby made to the Indenture, dated as of April 6, 1998 (the
"INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the
"COMPANY"), and Musicland Stores Corporation, a Delaware corporation, ("MSC" or
the "GUARANTOR") and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
This letter relates to $_________ principal amount of Senior Subordinated
Notes which are evidenced by one or more Regulation S Global Notes and held with
the Depositary through Euroclear or Cedel in the name of ______________________
(the "TRANSFEROR"). The Transferor has requested a transfer of such beneficial
interest in the Senior Subordinated Notes to a Person who will take delivery
thereof in the form of an equal principal amount of Senior Subordinated Notes
evidenced by one or more Rule 144A Global Notes, to be held with the Depositary.
In connection with such request and in respect of such Senior Subordinated
Notes, the Transferor hereby certifies that:
[CHECK ONE]
/ / such transfer is being effected pursuant to and in accordance with Rule
144A under the United States Securities Act of 1933, as amended (the
"SECURITIES ACT"), and, accordingly, the Transferor hereby further
certifies that the Senior Subordinated Notes are being transferred to a
Person that the Transferor reasonably believes is purchasing the Senior
Subordinated Notes for its own account, or for one or more accounts with
respect to which such Person exercises sole investment discretion, and such
Person and each such account is a "QUALIFIED INSTITUTIONAL BUYER" within
the meaning of Rule 144A in a transaction meeting the requirements of Rule
144A;
or
/ / such transfer is being effected pursuant to and in accordance with Rule 144
under the Securities Act;
1
<PAGE>
or
/ / such transfer is being effected pursuant to an exemption under the
Securities Act other than Rule 144A, Rule 144 or Rule 904 and the
Transferor further certifies that the Transfer complies with the transfer
restrictions applicable to beneficial interests in Global Notes and
Definitive Senior Subordinated Notes bearing the Private Placement Legend
and the requirements of the exemption claimed, which certification is
supported by (x) if such transfer is in respect of a principal amount of
Senior Subordinated Notes at the time of Transfer of $100,000 or more, a
certificate executed by the Transferee in the form of Exhibit C to the
Indenture, or (y) if such Transfer is in respect of a principal amount of
Senior Subordinated Notes at the time of transfer of less than $100,000,
(1) a certificate executed in the form of Exhibit C to the Indenture and
(2) an Opinion of Counsel provided by the Transferor or the Transferee (a
copy of which the Transferor has attached to this certification), to the
effect that (1) such Transfer is in compliance with the Securities Act and
(2) such Transfer complies with any applicable blue sky securities laws of
any state of the United States;
or
/ / such transfer is being effected pursuant to an effective registration
statement under the Securities Act;
or
/ / such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Senior
Subordinated Notes are being transferred in compliance with the transfer
restrictions applicable to the Global Notes and in accordance with the
requirements of the exemption claimed, which certification is supported by
an Opinion of Counsel, provided by the transferor or the transferee (a copy
of which the Transferor has attached to this certification) in form
reasonably acceptable to the Company and to the Registrar, to the effect
that such transfer is in compliance with the Securities Act;
and such Senior Subordinated Notes are being transferred in compliance with any
applicable blue sky securities laws of any state of the United States.
Upon giving effect to this request to exchange a beneficial interest in
Regulation S Global Notes for a beneficial interest in 144A Global Notes, the
resulting beneficial interest shall be subject to the restrictions on transfer
applicable to Rule 144A Global Notes pursuant to the Indenture and the
Securities Act.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc
Montgomery Securities LLC, the initial purchasers of such Senior Subordinated
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Regulation S under the
Securities Act.
2
<PAGE>
[Insert Name of Transferor]
By:
-------------------------------------
Name:
Title:
Dated:
cc: The Musicland Group, Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
BT Alex. Brown Incorporated
NationsBanc Montgomery Securities LLC
3
<PAGE>
EXHIBIT B-3
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
OF DEFINITIVE SENIOR SUBORDINATED NOTES
(Pursuant to Section 2.06(b) of the Indenture)
Bank One, NA
c/o Corporate Trust Office
235 West Shrock Road
Westerville, OH 43081
Re: 9_% Senior Subordinated Notes due 2008 of The Musicland Group, Inc.
Reference is hereby made to the Indenture, dated as of April 6, 1998 (the
"INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the
"Company"), Musicland Stores Corporation, a Delaware corporation ("MSC" or the
"GUARANTOR") and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.
This letter relates to $_______________ principal amount of Senior
Subordinated Notes which are evidenced by one or more Definitive Senior
Subordinated Notes in the name of ________________ (the "TRANSFEROR"). The
Transferor has requested an exchange or transfer of such Definitive Senior
Subordinated Note(s) in the form of an equal principal amount of Senior
Subordinated Notes evidenced by one or more Definitive Senior Subordinated
Notes, to be delivered to the Transferor or, in the case of a transfer of such
Senior Subordinated Notes, to such Person as the Transferor instructs the
Trustee.
In connection with such request and in respect of the Senior Subordinated
Notes surrendered to the Trustee herewith for exchange (the "SURRENDERED SENIOR
SUBORDINATED NOTES"), the Holder of such Surrendered Senior Subordinated Notes
hereby certifies that:
[CHECK ONE]
/ / the Surrendered Senior Subordinated Notes are being acquired for the
Transferor's own account, without transfer;
or
/ / the Surrendered Senior Subordinated Notes are being transferred to the
Company;
or
/ / the Surrendered Senior Subordinated Notes are being transferred pursuant to
and in accordance with Rule 144A under the United States Securities Act of
1933, as amended (the "SECURITIES ACT"), and, accordingly, the Transferor
hereby further certifies that the Surrendered Senior Subordinated Notes are
being transferred to a Person that the Transferor reasonably believes is
purchasing the Surrendered Senior Subordinated Notes for its own account,
or for one or more accounts with
1
<PAGE>
respect to which such Person exercises sole investment discretion, and such
Person and each such account is a "QUALIFIED INSTITUTIONAL BUYER" within
the meaning of Rule 144A, in each case in a transaction meeting the
requirements of Rule 144A;
or
/ / the Surrendered Senior Subordinated Notes are being transferred in a
transaction permitted by Rule 144 under the Securities Act;
or
/ / the Surrendered Senior Subordinated Notes are being transferred pursuant to
an exemption under the Securities Act other than Rule 144A, Rule 144 or
Rule 904 and the Transferor further certifies that the Transfer complies
with the transfer restrictions applicable to beneficial interests in Global
Notes and Definitive Senior Subordinated Notes bearing the Private
Placement Legend and the requirements of the exemption claimed, which
certification is supported by (x) if such transfer is in respect of a
principal amount of Senior Subordinated Notes at the time of Transfer of
$100,000 or more, a certificate executed by the Transferee in the form of
Exhibit C to the Indenture, or (y) if such Transfer is in respect of a
principal amount of Senior Subordinated Notes at the time of transfer of
less than $100,000, (1) a certificate executed in the form of Exhibit C to
the Indenture and (2) an Opinion of Counsel provided by the Transferor or
the Transferee (a copy of which the Transferor has attached to this
certification), to the effect that (1) such Transfer is in compliance with
the Securities Act and (2) such Transfer complies with any applicable blue
sky securities laws of any state of the United States;
or
/ / the Surrendered Senior Subordinated Notes are being transferred pursuant to
an effective registration statement under the Securities Act;
or
/ / such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Senior
Subordinated Notes are being transferred in compliance with the transfer
restrictions applicable to the Global Notes and in accordance with the
requirements of the exemption claimed, which certification is supported by
an Opinion of Counsel, provided by the transferor or the transferee (a copy
of which the Transferor has attached to this certification) in form
reasonably acceptable to the Company and to the Registrar, to the effect
that such transfer is in compliance with the Securities Act;
and the Surrendered Senior Subordinated Notes are being transferred in
compliance with any applicable blue sky securities laws of any state of the
United States.
2
<PAGE>
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc
Montgomery Securities LLC, the initial purchasers of such Senior Subordinated
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Regulation S under the
Securities Act.
[Insert Name of Transferor]
By:
-------------------------------------
Name:
Title:
Dated:
----------------------
cc: The Musicland Group, Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
BT Alex. Brown Incorporated
NationsBanc Montgomery Securities LLC
3
<PAGE>
EXHIBIT B-4
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM RULE 144A GLOBAL NOTE OR REGULATION S
PERMANENT GLOBAL NOTE
TO DEFINITIVE SENIOR SUBORDINATED NOTE
(Pursuant to Section 2.06(c) of the Indenture)
Bank One, NA
c/o Corporate Trust Office
235 West Shrock Road
Westerville, OH 43081
Re: 9_% Senior Subordinated Notes due 2008 of The Musicland Group, Inc.
Reference is hereby made to the Indenture, dated as of April 6, 1998 (the
"INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the
"Company"), Musicland Stores Corporation, a Delaware corporation ("MSC" or the
"GUARANTOR"), and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.
This letter relates to $__________ principal amount of Senior Subordinated
Notes which are evidenced by a beneficial interest in one or more Rule 144A
Global Notes or Regulation S Permanent Global Notes in the name of ____________
______ (the "TRANSFEROR"). The Transferor has requested an exchange or transfer
of such beneficial interest in the form of an equal principal amount of Senior
Subordinated Notes evidenced by one or more Definitive Senior Subordinated
Notes, to be delivered to the Transferor or, in the case of a transfer of such
Senior Subordinated Notes, to such Person as the Transferor instructs the
Trustee.
In connection with such request and in respect of the Senior Subordinated
Notes surrendered to the Trustee herewith for exchange (the "SURRENDERED SENIOR
SUBORDINATED NOTES"), the Holder of such Surrendered Senior Subordinated Notes
hereby certifies that:
[CHECK ONE]
/ / the Surrendered Senior Subordinated Notes are being transferred to the
beneficial owner of such Senior Subordinated Notes;
or
/ / the Surrendered Senior Subordinated Notes are being transferred pursuant to
and in accordance with Rule 144A under the United States Securities Act of
1933, as amended (the "SECURITIES ACT"), and, accordingly, the Transferor
hereby further certifies that the Surrendered Senior Subordinated Notes are
being transferred to a Person that the Transferor reasonably believes is
purchasing the Surrendered Senior Subordinated Notes for its own account,
or for one or more accounts with respect to which such Person exercises
sole investment discretion, and such Person and each such account is
1
<PAGE>
a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A, in each
case in a transaction meeting the requirements of Rule 144A;
or
/ / the Surrendered Senior Subordinated Notes are being transferred in a
transaction permitted by Rule 144 under the Securities Act;
or
/ / the Surrendered Senior Subordinated Notes are being transferred pursuant to
an effective registration statement under the Securities Act;
or
/ / the Surrendered Senior Subordinated Notes are being transferred pursuant to
an exemption under the Securities Act other than Rule 144A, Rule 144 or
Rule 904 and the Transferor further certifies that the Transfer complies
with the transfer restrictions applicable to beneficial interests in Global
Notes and Definitive Senior Subordinated Notes bearing the Private
Placement Legend and the requirements of the exemption claimed, which
certification is supported by (x) if such transfer is in respect of a
principal amount of Senior Subordinated Notes at the time of Transfer of
$100,000 or more, a certificate executed by the Transferee in the form of
Exhibit C to the Indenture, or (y) if such Transfer is in respect of a
principal amount of Senior Subordinated Notes at the time of transfer of
less than $100,000, (1) a certificate executed in the form of Exhibit C to
the Indenture and (2) an Opinion of Counsel provided by the Transferor or
the Transferee (a copy of which the Transferor has attached to this
certification), to the effect that (1) such Transfer is in compliance with
the Securities Act and (2) such Transfer complies with any applicable blue
sky securities laws of any state of the United States;
or
/ / such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Senior
Subordinated Notes are being transferred in compliance with the transfer
restrictions applicable to the Global Notes and in accordance with the
requirements of the exemption claimed, which certification is supported by
an Opinion of Counsel, provided by the transferor or the transferee (a copy
of which the Transferor has attached to this certification) in form
reasonably acceptable to the Company and to the Registrar, to the effect
that such transfer is in compliance with the Securities Act;
and the Surrendered Senior Subordinated Notes are being transferred in
compliance with any applicable blue sky securities laws of any state of the
United States.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin &
Jenrette Securities
2
<PAGE>
Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities
LLC, the initial purchasers of such Senior Subordinated Notes being transferred.
Terms used in this certificate and not otherwise defined in the Indenture have
the meanings set forth in Regulation S under the Securities Act.
[Insert Name of Transferor]
By:
-------------------------------------
Name:
Title:
Dated:
----------------------
cc: The Musicland Group, Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
BT Alex. Brown Incorporated
NationsBanc Montgomery Securities LLC
3
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
Bank One, NA
c/o Corporate Trust Office
235 West Shrock Road
Westerville, OH 43081
Re: 9_% Senior Subordinated Notes due 2008 of The Musicland Group, Inc.
Reference is hereby made to the Indenture, dated as of April 6, 1998 (the
"INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the
"Company"), Musicland Stores Corporation, a Delaware corporation ("MSC" or the
"GUARANTOR"), and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.
In connection with our proposed purchase of $__________ aggregate principal
amount of:
/ / (a) Beneficial interests, or
/ / (b) Definitive Senior Subordinated Notes,
we confirm that:
1. We understand that any subsequent transfer of the Senior Subordinated
Notes of any interest therein is subject to certain restrictions and conditions
set forth in the Indenture and the undersigned agrees to be bound by, and not to
resell, pledge or otherwise transfer the Senior Subordinated Notes or any
interest therein except in compliance with, such restrictions and conditions and
the Securities Act of 1933, as amended (the "SECURITIES ACT").
2. We understand that the offer and sale of the Senior Subordinated Notes
have not been registered under the Securities Act, and that the Senior
Subordinated Notes and any interest therein may not be offered or sold except as
permitted in the following sentence. We agree, on our own behalf and on behalf
of any accounts for which we are acting as hereinafter stated, that if we should
sell the Senior Subordinated Notes or any interest therein, (A) we will do so
only (1)(a) to a person who the Seller reasonably believes is a qualified
institutional buyer (as defined in Rule 144A under the Securities Act) in a
transaction meeting the requirements of 144A, (b) in a transaction meeting the
requirements of Rule 144 under the Securities Act, (c) outside the United States
to a foreign person in a transaction meeting the requirements of Rule 904 of the
Securities Act, or (d) in accordance with another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel), (2) to the Company or any of its subsidiaries or (3) pursuant to an
effective registration statement and, in each case, in accordance with any
applicable securities laws of any State of the United States or any other
applicable jurisdiction and (B)
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we will, and each subsequent holder will be required to, notify any purchaser
from it of the security evidenced hereby of the resale restrictions set forth in
(A) above."
3. We understand that, on any proposed resale of the Senior Subordinated
Notes or beneficial interests, we will be required to furnish to you and the
Company such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Senior Subordinated
Notes purchased by us will bear a legend to the foregoing effect.
4. We are an institutional "ACCREDITED INVESTOR" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Senior Subordinated
Notes, and we and any accounts for which we are acting are each able to bear the
economic risk of our or its investment.
5. We are acquiring the Senior Subordinated Notes or beneficial interests
therein purchased by us for our own account or for one or more accounts (each of
which is an institutional "ACCREDITED INVESTOR") as to each of which we exercise
sole investment discretion.
6. We are not acquiring the Senior Subordinated Notes with a view to any
distribution thereof that would violate the Securities Act or the securities
laws of any State of the United States.
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You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
----------------------------------------
[Insert Name of Accredited
Investor]
By:
-------------------------------------
Name:
Title:
Dated: ,
-------------- ----
3
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EXHIBIT D
NOTE GUARANTEE
Subject to Section 11.03 of the Indenture, the Guarantor hereby
unconditionally guarantees to each Holder of a Senior Subordinated Note
authenticated and delivered by the Trustee and to the Trustee and its successors
and assigns, irrespective of the validity and enforceability of the Indenture,
the Senior Subordinated Notes and the Obligations of the Company under the
Senior Subordinated Notes or under the Indenture, that: (a) the principal of,
premium, if any, interest and Liquidated Damages, if any, on the Senior
Subordinated Notes will be promptly paid in full when due, subject to any
applicable grace period, whether at maturity, by acceleration, redemption or
otherwise, and interest on overdue principal, premium, if any, (to the extent
permitted by law) interest and Liquidated Damages, if any, on the Senior
Subordinated Notes and all other payment Obligations of the Company to the
Holders or the Trustee under the Indenture or under the Senior Subordinated
Notes will be promptly paid in full and performed, all in accordance with the
terms thereof; and (b) in case of any extension of time of payment or renewal of
any Senior Subordinated Notes or any of such other payment Obligations, the same
will be promptly paid in full when due or performed in accordance with the terms
of the extension or renewal, subject to any applicable grace period, whether at
stated maturity, by acceleration, redemption or otherwise. Failing payment when
so due of any amount so guaranteed or any performance so guaranteed for whatever
reason, the Guarantor will be obligated to pay the same immediately.
The obligations of the Guarantor to the Holders and to the Trustee pursuant
to this Note Guarantee and the Indenture are expressly set forth in Article 11
of the Indenture, and reference is hereby made to such Indenture for the precise
terms of this Note Guarantee. The terms of Article 11 of the Indenture are
incorporated herein by reference.
This is a continuing Guarantee and, subject to the provisions of Article 8
of the Indenture, shall remain in full force and effect and shall be binding
upon the Guarantor and its respective successors and assigns to the extent set
forth in the Indenture until full and final payment of all of the Company's
Obligations under the Senior Subordinated Notes and the Indenture and shall
inure to the benefit of the successors and assigns of the Trustee and the
Holders and, in the event of any transfer or assignment of rights by any Holder
or the Trustee, the rights and privileges herein conferred upon that party shall
automatically extend to and be vested in such transferee or assignee, all
subject to the terms and conditions hereof. This is a Note Guarantee of payment
and not a guarantee of collection.
This Note Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Senior Subordinated Note upon which
this Note Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
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For purposes hereof, the Guarantor's liability shall be limited to the
lesser of (i) the aggregate amount of the Obligations of the Company under the
Senior Subordinated Notes and the Indenture and (ii) the amount, if any, which
would not have (A) rendered such Guarantor "INSOLVENT" (as such term is defined
in the United States Bankruptcy Code and in the Debtor and Creditor Law of the
State of New York) or (B) left the Guarantor with unreasonably small capital at
the time its Note Guarantee of the Senior Subordinated Notes was entered into;
PROVIDED that, it will be a presumption in any lawsuit or other proceeding in
which the Guarantor is a party that the amount guaranteed pursuant to the Note
Guarantee is the amount set forth in clause (i) above unless any creditor, or
representative of creditors of the Guarantor, or debtor in possession or trustee
in bankruptcy of the Guarantor, otherwise proves in such a lawsuit that the
aggregate liability of the Guarantor is limited to the amount set forth in
clause (ii) above. The Indenture provides that, in making any determination as
to the solvency or sufficiency of capital of the Guarantor in accordance with
the previous sentence, the right of the Guarantor to contribution from another
guarantor and any other rights such Guarantor may have, contractual or
otherwise, shall be taken into account.
The Indenture provides that all Obligations evidenced by this Note
Guarantee shall be subordinated in right of payment, to the extent and in the
manner provided in Article 12 of the Indenture, to the prior payment in full in
cash of all Guarantor Senior Debt (whether outstanding on the date of the
Indenture or created, incurred, assumed or guaranteed thereafter), and that the
subordination is for the benefit of the holders of Guarantor Senior Debt.
Capitalized terms used herein have the same meanings given in the Indenture
unless otherwise indicated.
Dated as of , 1998 MUSICLAND STORES CORPORATION
-----------
By:
-------------------------------------
Name:
Title:
1
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CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
TRUST INDENTURE
ACT SECTION INDENTURE SECTION
<S> <C>
310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.03; 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.03
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 7.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06;13.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03;13.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.04
(c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.04
(c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.05
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05,13.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316(a)(last sentence). . . . . . . . . . . . . . . . . . . . . . 2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.13
317(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.01
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.01
N.A. means not applicable.
</TABLE>
i
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*This Cross-Reference Table is not part of the Indenture.
ii
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A/B EXCHANGE
REGISTRATION RIGHTS AGREEMENT
Dated as of April 6, 1998
by and among
The Musicland Group, Inc.
Musicland Stores Corporation
and
Donaldson Lufkin & Jenrette
Securities Corporation
BT Alex. Brown Incorporated
NationsBanc Montgomery Securities LLC
<PAGE>
This Registration Rights Agreement (this "AGREEMENT") is made and entered
into as of April 6, 1998, by and among The Musicland Group, Inc., a Delaware
corporation (the "COMPANY"), Musicland Stores Corporation, a Delaware
corporation (the "GUARANTOR"), and Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities
LLC (each an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"),
each of whom has agreed to purchase the Company's 9_% Series A Senior
Subordinated Notes due 2008 (the "SERIES A NOTES") pursuant to the Purchase
Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated April 1,
1998, (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantor and
the Initial Purchasers. In order to induce the Initial Purchasers to purchase
the Series A Notes, the Company has agreed to provide the registration rights
set forth in this Agreement. The execution and delivery of this Agreement is a
condition to the obligations of the Initial Purchasers set forth in the Purchase
Agreement. Capitalized terms used herein and not otherwise defined shall have
the meaning assigned to them in the Indenture, dated as of April 6, 1998,
between the Company, the Guarantor and Bank One, NA, as Trustee, relating to the
Series A Notes and the Series B Notes (the "INDENTURE").
The parties hereby agree as follows:
SECTION 1. DEFINITIONS.
As used in this Agreement, the following capitalized terms shall have the
following meanings:
ACT: The Securities Act of 1933, as amended.
AFFILIATE: As defined in Rule 144 of the Act.
BROKER-DEALER: Any broker or dealer registered under the Exchange Act.
BUSINESS DAY: Any day other than a Saturday, Sunday or other day in the
City of New York on which banks are authorized to close.
CLOSING DATE: The date hereof.
COMMISSION: The Securities and Exchange Commission.
CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes
of this Agreement upon the occurrence of (a) the filing and effectiveness under
the Act of the Exchange Offer Registration Statement relating to the Series B
Notes to be issued in the Exchange Offer, (b) the maintenance of such
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Exchange Offer Registration Statement continuously effective and the keeping of
the Exchange Offer open for a period not less than the period required pursuant
to Section 3(b) hereof and (c) the delivery by the Company to the Registrar
under the Indenture of Series B Notes in the same aggregate principal amount as
the aggregate principal amount of Series A Notes tendered by Holders thereof
pursuant to the Exchange Offer.
CONSUMMATION DEADLINE: As defined in Section 3(b) hereof.
EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
EXCHANGE OFFER: The exchange and issuance by the Company of a principal
amount of Series B Notes (which shall be registered pursuant to the Exchange
Offer Registration Statement) equal to the outstanding principal amount of
Series A Notes that are tendered by such Holders in connection with such
exchange and issuance.
EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating
to the Exchange Offer, including the related Prospectus.
EXEMPT RESALES: The transactions in which the Initial Purchasers propose
to sell the Series A Notes to certain "qualified institutional buyers," as such
term is defined in Rule 144A under the Act and pursuant to Regulation S under
the Act.
FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof.
HOLDERS: As defined in Section 2 hereof.
PROSPECTUS: The prospectus included in a Registration Statement at the
time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
RECOMMENCEMENT DATE: As defined in Section 6(d) hereof.
REGISTRATION DEFAULT: As defined in Section 5 hereof.
REGISTRATION STATEMENT: Any registration statement of the Company and the
Guarantor relating to (a) an offering of Series B Notes pursuant to an Exchange
Offer or (b) the registration for resale of Transfer Restricted Securities
pursuant to the Shelf Registration Statement, in each case, (i) that is filed
pursuant
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to the provisions of this Agreement and (ii) including the Prospectus included
therein, all amendments and supplements thereto (including post-effective
amendments) and all exhibits and material incorporated by reference therein.
REGULATION S: Regulation S promulgated under the Act.
RULE 144: Rule 144 promulgated under the Act.
SERIES B NOTES: The Company's 9_% Series B Senior Subordinated Notes due
2008 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii)
as contemplated by Section 6(b) hereof.
SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof.
SUSPENSION NOTICE: As defined in Section 6(d) hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as
in effect on the date of the Indenture.
TRANSFER RESTRICTED SECURITIES: Each Series A Note, until the earliest to
occur of (a) the date on which such Series A Note is exchanged in the Exchange
Offer for a Series B Note which is entitled to be resold to the public by the
Holder thereof without complying with the prospectus delivery requirements of
the Act, (b) the date on which such Series A Note has been disposed of in
accordance with a Shelf Registration Statement (and the purchasers thereof have
been issued Series B Notes), or (c) the date on which such Series A Note is
distributed to the public pursuant to Rule 144 under the Act (and purchasers
thereof have been issued Series B Notes) and each Series B Note until the date
on which such Series B Note is disposed of by a Broker-Dealer pursuant to the
"Plan of Distribution" contemplated by the Exchange Offer Registration Statement
(including the delivery of the Prospectus contained therein).
SECTION 2. HOLDERS.
A Person is deemed to be a holder of Transfer Restricted Securities (each,
a "HOLDER") whenever such Person owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER.
(a) Unless the Exchange Offer shall not be permitted by applicable federal
law (after the procedures set forth in Section 6(a)(i) below have been complied
with), the Company and the Guarantor shall (i) cause the Exchange Offer
Registration Statement to be filed with the Commission as soon as practicable
after the Closing Date, but in no event later than 60 days after the Closing
Date (such 60th day being the "FILING DEADLINE"), (ii) use its best efforts
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to cause such Exchange Offer Registration Statement to become effective at the
earliest possible time, but in no event later than 150 days after the Closing
Date (such 150th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection
with the foregoing, (A) file all pre-effective amendments to such Exchange Offer
Registration Statement as may be necessary in order to cause it to become
effective, (B) file, if applicable, a post-effective amendment to such Exchange
Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause
all necessary filings, if any, in connection with the registration and
qualification of the Series B Notes to be made under the Blue Sky laws of such
jurisdictions as are necessary to permit Consummation of the Exchange Offer, and
(iv) upon the effectiveness of such Exchange Offer Registration Statement,
commence and Consummate the Exchange Offer. The Exchange Offer shall be on the
appropriate form permitting (i) registration of the Series B Notes to be offered
in exchange for the Series A Notes that are Transfer Restricted Securities and
(ii) resales of Series B Notes by Broker-Dealers that tendered into the Exchange
Offer Series A Notes that such Broker-Dealer acquired for its own account as a
result of market making activities or other trading activities (other than
Series A Notes acquired directly from the Company or any of its Affiliates) as
contemplated by Section 3(c) below.
(b) The Company and the Guarantor shall use their respective best
efforts to cause the Exchange Offer Registration Statement to be effective
continuously, and shall keep the Exchange Offer open for a period of not less
than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; PROVIDED, HOWEVER, that in
no event shall such period be less than 20 Business Days. The Company and
the Guarantor shall cause the Exchange Offer to comply with all applicable
federal and state securities laws. No securities other than the Series B
Notes shall be included in the Exchange Offer Registration Statement. The
Company and the Guarantor shall use their respective best efforts to cause
the Exchange Offer to be Consummated on the earliest practicable date after
the Exchange Offer Registration Statement has become effective, but in no
event later than 30 Business Days thereafter (such 30th day being the
"CONSUMMATION DEADLINE").
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Broker-Dealer who holds Transfer Restricted Securities that
were acquired for the account of such Broker-Dealer as a result of market-making
activities or other trading activities (other than Series A Notes acquired
directly from the Company or any Affiliate of the Company), may exchange such
Transfer Restricted Securities pursuant to the Exchange Offer. Such "Plan of
Distribution" section shall also contain all other information with respect to
such sales by such Broker-Dealers that the Commission may require in order to
permit such sales
5
<PAGE>
pursuant thereto, but such "Plan of Distribution" shall not name any such
Broker-Dealer or disclose the amount of Transfer Restricted Securities held by
any such Broker-Dealer, except to the extent required by the Commission as a
result of a change in policy, rules or regulations after the date of this
Agreement. See the Shearman & Sterling no-action letter (available July 2,
1993).
Because such Broker-Dealer may be deemed to be an "underwriter" within the
meaning of the Act and must, therefore, deliver a prospectus meeting the
requirements of the Act in connection with its initial sale of any Series B
Notes received by such Broker-Dealer in the Exchange Offer, the Company and
Guarantor shall permit the use of the Prospectus contained in the Exchange Offer
Registration Statement by such Broker-Dealer to satisfy such prospectus delivery
requirement. To the extent necessary to ensure that the prospectus contained in
the Exchange Offer Registration Statement is available for sales of Series B
Notes by Broker-Dealers, the Company and the Guarantor agree to use their
respective best efforts to keep the Exchange Offer Registration Statement
continuously effective, supplemented, amended and current as required by and
subject to the provisions of Sections 6(a) and 6(c) hereof and in conformity
with the requirements of this Agreement, the Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period of
one year from the Consummation Deadline or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration Statement
have been sold pursuant thereto. The Company and the Guarantor shall provide
sufficient copies of the latest version of such Prospectus to such
Broker-Dealers, promptly upon request, and in no event later than one day after
such request, at any time during such period.
SECTION 4. SHELF REGISTRATION.
(a) SHELF REGISTRATION. If (i) the Exchange Offer is not permitted by
applicable law (after the Company and the Guarantor have complied with the
procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer
Restricted Securities shall notify the Company within 20 Business Days following
the Consummation Deadline that (A) such Holder was prohibited by law or
Commission policy from participating in the Exchange Offer or (B) such Holder
may not resell the Series B Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A
Notes acquired directly from the Company or any of its Affiliates, then the
Company and the Guarantor shall:
6
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(x) cause to be filed, on or prior to 60 days after the earlier of
(i) the date on which the Company determines that the Exchange Offer
Registration Statement cannot be filed as a result of clause 4(a)(i) above
and (ii) the date on which the Company receives the notice specified in
clause 4(a)(ii) above, (such earlier date, the "FILING DEADLINE"), a shelf
registration statement pursuant to Rule 415 under the Act (which may be an
amendment to the Exchange Offer Registration Statement (the "SHELF
REGISTRATION STATEMENT")), relating to all Transfer Restricted Securities,
and
(y) shall use their respective best efforts to cause such Shelf
Registration Statement to become effective on or prior to 90 days after the
Filing Deadline for the Shelf Registration Statement (such 90th day the
"EFFECTIVENESS DEADLINE").
If, after the Company has filed an Exchange Offer Registration Statement
that satisfies the requirements of Section 3(a) above, the Company is required
to file and make effective a Shelf Registration Statement solely because the
Exchange Offer is not permitted under applicable federal law (I.E., clause
4(a)(i) above), then the filing of the Exchange Offer Registration Statement
shall be deemed to satisfy the requirements of clause (x) above; PROVIDED that,
in such event, the Company shall remain obligated to meet the Effectiveness
Deadline set forth in clause (y).
To the extent necessary to ensure that the Shelf Registration Statement is
available for sales of Transfer Restricted Securities by the Holders thereof
entitled to the benefit of this Section 4(a) and the other securities required
to be registered therein pursuant to Section 6(b)(ii) hereof, the Company and
the Guarantor shall use their respective best efforts to keep any Shelf
Registration Statement required by this Section 4(a) continuously effective,
supplemented, amended and current as required by and subject to the provisions
of Sections 6(b) and 6(c) hereof and in conformity with the requirements of this
Agreement, the Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period of at least two years (as extended
pursuant to Section 6(d)) following the Closing Date, or such shorter period as
will terminate when all Transfer Restricted Securities covered by such Shelf
Registration Statement have been sold pursuant thereto.
(b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH THE
SHELF REGISTRATION STATEMENT. No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, either with such Holder's notice specified in 4(a)(ii)
or
7
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within 10 days after receipt of a request therefor, the information specified in
Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. No Holder of Transfer Restricted Securities shall
be entitled to liquidated damages pursuant to Section 5 hereof unless and until
such Holder shall have provided all such information. Each selling Holder
agrees to promptly furnish additional information required to be disclosed in
order to make the information previously furnished to the Company by such Holder
not materially misleading.
SECTION 5. LIQUIDATED DAMAGES.
If (a) any Registration Statement required by this Agreement is not filed
with the Commission on or prior to the applicable Filing Deadline, (b) any such
Registration Statement has not been declared effective by the Commission on or
prior to the applicable Effectiveness Deadline, (c) the Exchange Offer has not
been Consummated on or prior to the Consummation Deadline or (d) any
Registration Statement required by this Agreement is filed and declared
effective but shall thereafter cease to be effective or fail to be usable for
its intended purpose without being succeeded immediately by a post-effective
amendment to such Registration Statement that cures such failure and that is
itself declared effective immediately (each such event referred to in clauses
(a) through (d), a "REGISTRATION DEFAULT"), then the Company and the Guarantor
hereby jointly and severally agree to pay to each Holder of Transfer Restricted
Securities affected thereby liquidated damages in an amount equal to $.05 per
week per $1,000 in principal amount of Transfer Restricted Securities held by
such Holder for each week or portion thereof that the Registration Default
continues for the first 90-day period immediately following the occurrence of
such Registration Default. The amount of the liquidated damages shall increase
by an additional $.05 per week per $1,000 in principal amount of Transfer
Restricted Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of liquidated
damages of $.50 per week per $1,000 in principal amount of Transfer Restricted
Securities; PROVIDED that the Company and the Guarantor shall in no event be
required to pay liquidated damages for more than one Registration Default at any
given time. Notwithstanding anything to the contrary set forth herein, (i) upon
filing of the Exchange Offer Registration Statement (and/or, if applicable, the
Shelf Registration Statement), in the case of clause (a) above, (ii) upon the
effectiveness of the Exchange Offer Registration Statement (and/or, if
applicable, the Shelf Registration Statement), in the case of clause (b) above,
(iii) upon Consummation of the Exchange Offer, in the case of clause (c) above,
or (iv) upon the filing of a post-effective amendment to the Registration
Statement or an additional Registration Statement that causes the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf
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Registration Statement) to again be declared effective or made usable in the
case of clause (d) above, the liquidated damages payable with respect to the
Transfer Restricted Securities as a result of such clause (a), (b), (c) or (d),
as applicable, shall cease.
All accrued liquidated damages shall be paid to the Holders entitled
thereto, in the manner provided for the payment of interest in the Indenture, on
each Interest Payment Date, as more fully set forth in the Indenture and the
Notes. Notwithstanding the fact that any securities for which liquidated
damages are due cease to be Transfer Restricted Securities, all obligations of
the Company and the Guarantor to pay liquidated damages with respect to
securities shall survive until such time as such obligations with respect to
such securities shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES.
(a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection with the
Exchange Offer, the Company and the Guarantor shall (x) comply with all
applicable provisions of Section 6(c) below, (y) use their respective best
efforts to effect such exchange and to permit the resale of Series B Notes by
Broker-Dealers that tendered in the Exchange Offer Series A Notes that such
Broker-Dealer acquired for its own account as a result of its market making
activities or other trading activities (other than Series A Notes acquired
directly from the Company or any of its Affiliates) being sold in accordance
with the intended method or methods of distribution thereof, and (z) comply with
all of the following provisions:
(i) If, following the date hereof there has been announced a
change in Commission policy with respect to exchange offers such as the
Exchange Offer, that in the reasonable opinion of counsel to the Company
raises a substantial question as to whether the Exchange Offer is permitted
by applicable federal law, the Company and the Guarantor hereby agree to
seek a no-action letter or other favorable decision from the Commission
allowing the Company and the Guarantor to Consummate an Exchange Offer for
such Transfer Restricted Securities. The Company and the Guarantor hereby
agree to pursue the issuance of such a decision to the Commission staff
level. In connection with the foregoing, the Company and the Guarantor
hereby agree to take all such other actions as may be requested by the
Commission or otherwise required in connection with the issuance of such
decision, including without limitation (A) participating in telephonic
conferences with the Commission, (B) delivering to the Commission staff an
analysis prepared by counsel to the Company setting forth the legal bases,
if any, upon which such counsel has concluded that
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such an Exchange Offer should be permitted and (C) diligently pursuing a
resolution (which need not be favorable) by the Commission staff.
(ii) As a condition to its participation in the Exchange Offer,
each Holder of Transfer Restricted Securities (including, without
limitation, any Holder who is a Broker Dealer) shall furnish, upon the
request of the Company, prior to the Consummation of the Exchange Offer, a
written representation to the Company and the Guarantor (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an Affiliate of
the Company, (B) it is not engaged in, and does not intend to engage in,
and has no arrangement or understanding with any person to participate in,
a distribution of the Series B Notes to be issued in the Exchange Offer and
(C) it is acquiring the Series B Notes in its ordinary course of business.
As a condition to its participation in the Exchange Offer each Holder using
the Exchange Offer to participate in a distribution of the Series B Notes
shall acknowledge and agree that, if the resales are of Series B Notes
obtained by such Holder in exchange for Series A Notes acquired directly
from the Company or an Affiliate thereof, then (1) it could not, under
Commission policy as in effect on the date of this Agreement, rely on the
position of the Commission enunciated in MORGAN STANLEY AND CO., INC.
(available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available
May 13, 1988), as interpreted in the Commission's letter to SHEARMAN &
STERLING dated July 2, 1993, and similar no-action letters (including, if
applicable, any no-action letter obtained pursuant to Section 6(a)(i)
above), and (2) it must comply with the registration and prospectus
delivery requirements of the Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered by
an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company and the Guarantor shall provide a supplemental
letter to the Commission (A) stating that the Company and the Guarantor are
registering the Exchange Offer in reliance on the position of the
Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available May
13, 1988), MORGAN STANLEY AND CO., INC. (available June 5, 1991) as
interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2,
1993, and, if applicable, any no-action letter obtained pursuant to Section
6(a)(i) above, (B) including a representation that neither the Company nor
any Guarantor has entered into any arrangement or understanding with any
Person to distribute the Series B Notes to be received in the Exchange
Offer and that, to the best of the Company's and
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the Guarantor's information and belief, each Holder participating in the
Exchange Offer is acquiring the Series B Notes in its ordinary course of
business and has no arrangement or understanding with any Person to
participate in the distribution of the Series B Notes received in the
Exchange Offer and (C) any other undertaking or representation required by
the Commission as set forth in any no-action letter obtained pursuant to
Section 6(a)(i) above, if applicable.
(b) SHELF REGISTRATION STATEMENT. In connection with the Shelf
Registration Statement, the Company and the Guarantor shall
(i) comply with all the provisions of Section 6(c) below and use
their respective best efforts to effect such registration to permit the
sale of the Transfer Restricted Securities being sold in accordance with
the intended method or methods of distribution thereof (as indicated in the
information furnished to the Company pursuant to Section 4(b) hereof), and
pursuant thereto the Company and the Guarantor will prepare and file with
the Commission a Registration Statement relating to the registration on any
appropriate form under the Act, which form shall be available for the sale
of the Transfer Restricted Securities in accordance with the intended
method or methods of distribution thereof within the time periods and
otherwise in accordance with the provisions hereof, and
(ii) issue, upon the request of any Holder or purchaser of Series
A Notes covered by any Shelf Registration Statement contemplated by this
Agreement, Series B Notes having an aggregate principal amount equal to the
aggregate principal amount of Series A Notes sold pursuant to the Shelf
Registration Statement and surrendered to the Company for cancellation; the
Company shall register Series B Notes on the Shelf Registration Statement
for this purpose and issue the Series B Notes to the purchaser(s) of
securities subject to the Shelf Registration Statement in the names as such
purchaser(s) shall designate; provided that the Company shall not be
required to pay duplicate registration filing fees to the Commission when
registering Series B Notes previously registered as Series A Notes. The
Company shall use its best efforts to cause the CUSIP Service Bureau to
issue the same CUSIP No. for the Series A Notes sold pursuant to the Shelf
Registration Statement and the Series B Notes.
(c) GENERAL PROVISIONS. In connection with any Registration Statement and
any related Prospectus required by this Agreement, the Company and the Guarantor
shall:
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(i) use their respective best efforts to keep such Registration
Statement continuously effective and provide all requisite financial
statements for the period specified in Section 3 or 4 of this Agreement, as
applicable. Upon the occurrence of any event that would cause any such
Registration Statement or the Prospectus contained therein (A) to contain
an untrue statement of material fact or omit to state any material fact
necessary to make the statements therein not misleading or (B) not to be
effective and usable for resale of Transfer Restricted Securities during
the period required by this Agreement, the Company and the Guarantor shall
file promptly an appropriate amendment to such Registration Statement
curing such defect, and, if Commission review is required, use their
respective best efforts to cause such amendment to be declared effective as
soon as practicable.
(ii) prepare and file with the Commission such amendments and
post-effective amendments to the applicable Registration Statement as may
be necessary to keep such Registration Statement effective for the
applicable period set forth in Section 3 or 4 hereof, as the case may be;
cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under
the Act, and to comply fully with Rules 424, 430A and 462, as applicable,
under the Act in a timely manner; and comply with the provisions of the Act
with respect to the disposition of all securities covered by such
Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the sellers thereof set forth
in such Registration Statement or supplement to the Prospectus;
(iii) advise each Holder promptly and, if requested by such Holder,
confirm such advice in writing, (A) when the Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to
any applicable Registration Statement or any post-effective amendment
thereto, when the same has become effective, (B) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information relating
thereto, (C) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement under the Act or of the
suspension by any state securities commission of the qualification of the
Transfer Restricted Securities for offering or sale in any jurisdiction, or
the initiation of any proceeding for any of the preceding purposes, and (D)
of the existence of any fact or the happening of any event that makes any
statement of a material fact made in the Registration Statement, the
Prospectus, any amendment or supplement thereto or any document
incorporated by reference therein untrue, or that
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requires the making of any additions to or changes in the Registration
Statement in order to make the statements therein not misleading, or that
requires the making of any additions to or changes in the Prospectus in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. If at any time the Commission
shall issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Transfer Restricted Securities under state securities
or Blue Sky laws, the Company and the Guarantor shall use their respective
best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(iv) subject to Section 6(c)(i), if any fact or event contemplated
by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a
supplement or post-effective amendment to the Registration Statement or
related Prospectus or any document incorporated therein by reference or
file any other required document so that, as thereafter delivered to the
purchasers of Transfer Restricted Securities, the Prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(v) furnish to the designated representative of each Holder as
specified in Section 7(b) in connection with such exchange or sale, if any,
before filing with the Commission, copies of any Registration Statement or
any Prospectus included therein or any amendments or supplements to any
such Registration Statement or Prospectus (including all documents
incorporated by reference after the initial filing of such Registration
Statement), which documents will be subject to the review and comment of
such Holders in connection with such sale, if any, for a period of at least
five Business Days, and the Company will not file any such Registration
Statement or Prospectus or any amendment or supplement to any such
Registration Statement or Prospectus (including all such documents
incorporated by reference) to which such Holders shall reasonably object
within five Business Days after the receipt thereof. A Holder shall be
deemed to have reasonably objected to such filing if such Registration
Statement, amendment, Prospectus or supplement, as applicable, as proposed
to be filed, contains an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading or fails to comply with the applicable requirements of the Act;
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(vi) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to the designated representative of each
Holder as specified in Section 7(b) in connection with such exchange or
sale, if any, make the Company's and the Guarantor's representatives
available for discussion of such document and other customary due diligence
matters, and include such information in such document prior to the filing
thereof as such Holders may reasonably request;
(vii) make available, at reasonable times, for inspection by the
designated representative of each Holder as specified in Section 7(b) or
any accountant retained by such Holders, all financial and other records,
pertinent corporate documents of the Company and the Guarantor and cause
the Company's and the Guarantor's officers, directors and employees to
supply all information reasonably requested by any such designated
representative or accountant in connection with such Registration Statement
or any post-effective amendment thereto subsequent to the filing thereof
and prior to its effectiveness;
(viii) if requested by any Holders in connection with such exchange
or sale, promptly include in any Registration Statement or Prospectus,
pursuant to a supplement or post-effective amendment if necessary, such
information as such Holders may reasonably request to have included
therein, including, without limitation, information relating to the "Plan
of Distribution" of the Transfer Restricted Securities; and make all
required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after the Company is notified of the matters to be
included in such Prospectus supplement or post-effective amendment;
(ix) furnish to the designated representative of each Holder as
specified in Section 7(b) in connection with such exchange or sale, without
charge, at least one copy of the Registration Statement, as first filed
with the Commission, and of each amendment thereto, including all documents
incorporated by reference therein and all exhibits (including exhibits
incorporated therein by reference);
(x) deliver to each Holder without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment or
supplement thereto as such Persons reasonably may request; the Company and
the Guarantor hereby consent to the use (in accordance with law) of the
Prospectus and any amendment or supplement thereto by each selling Holder
in connection with the offering and the sale of the Transfer
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Restricted Securities covered by the Prospectus or any amendment or
supplement thereto;
(xi) upon the request of any Holder who holds at least 5% in
aggregate principal amount of such class of Transfer Restricted Securities,
enter into such agreements (including underwriting agreements) and make
such representations and warranties and take all such other actions in
connection therewith in order to expedite or facilitate the disposition of
the Transfer Restricted Securities pursuant to any applicable Registration
Statement contemplated by this Agreement as may be reasonably requested by
any Holder in connection with any sale or resale pursuant to any applicable
Registration Statement provided, that, the Company and the Guarantor shall
not be required to enter into any such agreements more than once with
respect to all of the Transfer Restricted Securities. In such connection,
the Company and the Guarantor shall:
(A) upon request of any Holder, furnish (or in the case of
Sections 6(c)(xi)(A)(2) and 6(c)(xi)(A)(3), use its best efforts to
cause to be furnished) to each Holder, upon Consummation of the
Exchange Offer or upon the effectiveness of the Shelf Registration
Statement, as the case may be:
(1) a certificate, dated such date, signed on behalf of the
Company and the Guarantor by (x) the President or any Vice
President and (y) a principal financial or accounting officer
of the Company and the Guarantor, confirming, as of the date
thereof, the matters set forth in Sections 9(a), 9(b) and
9(c) of the Purchase Agreement and such other similar matters
as such Holders may reasonably request;
(2) an opinion, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, of counsel for
the Company and the Guarantor covering matters similar to
those set forth in paragraph (e) of Section 9 of the Purchase
Agreement and such other matter as such Holder may reasonably
request, and in any event including a statement to the effect
that such counsel has participated in conferences with
officers and other representatives of the Company and the
Guarantor, representatives of the independent public
accountants for the Company and the Guarantor and have
considered the matters required to be
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stated therein and the statements contained therein, although
such counsel has not independently verified the accuracy,
completeness or fairness of such statements; and that such
counsel advises that, on the basis of the foregoing (relying
as to materiality to the extent such counsel deems
appropriate upon the statements of officers and other
representatives of the Company and the Guarantor) and without
independent check or verification), no facts came to such
counsel's attention that caused such counsel to believe that
the applicable Registration Statement, at the time such
Registration Statement or any post-effective amendment
thereto became effective and, in the case of the Exchange
Offer Registration Statement, as of the date of Consummation
of the Exchange Offer, contained an untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus contained in such
Registration Statement as of its date and, in the case of the
opinion dated the date of Consummation of the Exchange Offer,
as of the date of Consummation, contained an untrue statement
of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading. Without limiting the foregoing, such counsel may
state further that such counsel assumes no responsibility
for, and has not independently verified, the accuracy,
completeness or fairness of the financial statements, notes
and schedules and other financial data included in any
Registration Statement contemplated by this Agreement or the
related Prospectus; and
(3) a customary comfort letter, dated the date of
Consummation of the Exchange Offer, or as of the date of
effectiveness of the Shelf Registration Statement, as the
case may be, from the Company's independent accountants, in
the customary form and covering matters of the type
customarily covered in comfort letters to underwriters in
connection with underwritten offerings, and affirming the
matters set forth in the comfort letters delivered pursuant
to Section 9(g) of the Purchase Agreement; and
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(B) deliver such other documents and certificates as may be
reasonably requested by the selling Holders to evidence compliance
with the matters covered in Section 6(c)(xi)(A) above and with any
customary conditions contained in any agreement entered into by the
Company and the Guarantor pursuant to this Section 6(c)(xi);
(xii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders and their counsel in
connection with the registration and qualification of the Transfer
Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders may request and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Transfer Restricted Securities covered by the
applicable Registration Statement; PROVIDED, HOWEVER, that neither the
Company nor the Guarantor shall be required to register or qualify as a
foreign corporation where it is not now so qualified or to take any action
that would subject it to the service of process in suits or to taxation,
other than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject;
(xiii) in connection with any sale of Transfer Restricted Securities
that will result in such securities no longer being Transfer Restricted
Securities, cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Transfer Restricted Securities to
be sold and not bearing any restrictive legends; and to register such
Transfer Restricted Securities in such denominations and such names as the
selling Holders may request at least two Business Days prior to such sale
of Transfer Restricted Securities;
(xiv) use their respective best efforts to cause the disposition of
the Transfer Restricted Securities covered by the Registration Statement to
be registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers thereof to
consummate the disposition of such Transfer Restricted Securities, subject
to the proviso contained in Section 6(c)(xii) above;
(xv) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of a Registration Statement covering such
Transfer Restricted Securities and provide the Trustee under the Indenture
with printed certificates for the Transfer Restricted Securities which are
in a form eligible for deposit with the Depository Trust Company;
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(xvi) otherwise use their respective best efforts to comply with
all applicable rules and regulations of the Commission, and make generally
available to its security holders with regard to any applicable
Registration Statement, as soon as practicable, a consolidated earnings
statement meeting the requirements of Rule 158 (which need not be audited)
covering a twelve-month period beginning after the effective date of the
Registration Statement (as such term is defined in paragraph (c) of Rule
158 under the Act);
(xvii) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by
this Agreement and, in connection therewith, cooperate with the Trustee and
the Holders to effect such changes to the Indenture as may be required for
such Indenture to be so qualified in accordance with the terms of the TIA;
and execute and use its best efforts to cause the Trustee to execute, all
documents that may be required to effect such changes and all other forms
and documents required to be filed with the Commission to enable such
Indenture to be so qualified in a timely manner; and
(xviii) provide promptly to each Holder, upon request, each document
filed with the Commission pursuant to the requirements of Section 13 or
Section 15(d) of the Exchange Act.
(d) RESTRICTIONS ON HOLDERS. Each Holder agrees by acquisition of a
Transfer Restricted Security that, upon receipt of the notice referred to in
Section 6(c)(iii)(C) or any notice from the Company of the existence of any fact
of the kind described in Section 6(c)(iii)(D) hereof (in each case, a
"SUSPENSION NOTICE"), such Holder will forthwith discontinue disposition of
Transfer Restricted Securities pursuant to the applicable Registration Statement
until (i) such Holder has received copies of the supplemented or amended
Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is
advised in writing by the Company that the use of the Prospectus may be resumed,
and has received copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT
DATE"). Each Holder receiving a Suspension Notice hereby agrees that it will
either (i) destroy any Prospectuses, other than permanent file copies, then in
such Holder's possession which have been replaced by the Company with more
recently dated Prospectuses or (ii) deliver to the Company (at the Company's
expense) all copies, other than permanent file copies, then in such Holder's
possession of the Prospectus covering such Transfer Restricted Securities that
was current at the time of receipt of the Suspension Notice. The time period
regarding the effectiveness of such Registration Statement set forth in Section
3 or 4 hereof, as applicable, shall be extended by a number of days equal to the
number of days in the period from and
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including the date of delivery of the Suspension Notice to the date of delivery
of the Recommencement Date.
(e) The Company's obligation to file the Registration Statements, and to
cause such Registration Statements to become effective, shall be limited to the
filing and effectiveness of one (1) Exchange Offer Registration Statement and,
if required under Section 4 of this Agreement, one (1) Shelf Registration
Statement.
SECTION 7. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's and the Guarantor's performance
of or compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses; (ii) all fees and
expenses of compliance with federal securities and state Blue Sky or securities
laws; (iii) all expenses of printing (including printing certificates for the
Series B Notes to be issued in the Exchange Offer and printing of Prospectuses),
messenger and delivery services and telephone; (iv) all fees and disbursements
of counsel for the Company and the Guarantor and, to the extent provided in
Section 7(b), the fees and disbursements of counsel for the Holders of Transfer
Restricted Securities; (v) all application and filing fees, if any, in
connection with listing the Series B Notes on a national securities exchange or
automated quotation system pursuant to the requirements hereof; and (vi) all
fees and disbursements of independent certified public accountants of the
Company and the Guarantor (including the expenses of any special audit and
comfort letters required by or incident to such performance).
The Company will, in any event, bear its and the Guarantor internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses
of any annual audit and the fees and expenses of any Person, including
special experts, retained by the Company or the Guarantor.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company and the Guarantor
will reimburse the Initial Purchasers and the Holders of Transfer Restricted
Securities who are tendering Series A Notes in the Exchange Offer and/or selling
or reselling Series A Notes or Series B Notes pursuant to the "Plan of
Distribution" contained in the Exchange Offer Registration Statement or the
Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements of not more than one counsel, who shall be Davis Polk & Wardwell,
unless another firm shall be chosen by the Holders of a majority in principal
amount of
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the Transfer Restricted Securities for whose benefit such Registration Statement
is being prepared.
SECTION 8. INDEMNIFICATION.
(a) The Company and the Guarantor agree, jointly and severally, to
indemnify and hold harmless each Holder, its directors, officers and each
Person, if any, who controls such Holder (within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act), from and against any and all losses,
claims, damages, liabilities, judgments, (including without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement, preliminary prospectus or Prospectus (or any amendment or supplement
thereto) provided by the Company to any Holder or any prospective purchaser of
Series B Notes or registered Series A Notes, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by an untrue
statement or omission or alleged untrue statement or omission that is based upon
information relating to any of the Holders furnished in writing to the Company
by any of the Holders; PROVIDED, HOWEVER, that the foregoing indemnity agreement
with respect to the preliminary prospectus shall not inure to the benefit of any
Holder who failed to deliver the Prospectus, as then amended or supplemented (so
long as the Prospectus and any such amendment or supplement was provided by the
Company to the Holders in the requisite quantity and on a timely basis to permit
proper delivery) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in the preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented..
(b) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Company and the Guarantor,
and their respective directors and officers, and each person, if any, who
controls (within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act) the Company, or the Guarantor to the same extent as the
foregoing indemnity from the Company and the Guarantor set forth in Section
8(a) above, but only with reference to information relating to such Holder
furnished in writing to the Company by such Holder expressly for use in any
Registration Statement. In no
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event shall any Holder, its directors, officers or any Person who controls such
Holder be liable or responsible for any amount in excess of the amount by which
the total amount received by such Holder with respect to its sale of Transfer
Restricted Securities pursuant to a Registration Statement exceeds (i) the
amount paid by such Holder for such Transfer Restricted Securities and (ii) the
amount of any damages that such Holder, its directors, officers or any Person
who controls such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PERSON") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), a Holder shall not be required to assume the
defense of such action pursuant to this Section 8(c), but may employ separate
counsel and participate in the defense thereof, but the fees and expenses of
such counsel, except as provided below, shall be at the expense of the Holder).
Any indemnified party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of the indemnified party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the indemnifying party, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including any
impeded parties) include both the indemnified party and the indemnifying party,
and the indemnified party shall have been advised by such counsel that there may
be one or more legal defenses available to it which are different from or
additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by a majority of
the Holders, in the case of the parties indemnified pursuant to Section 8(a),
and by the Company and Guarantor, in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all
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<PAGE>
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with the indemnifying party's written consent or (ii)
effected without the indemnifying party's written consent if the settlement is
entered into more than twenty Business Days after the indemnifying party shall
have received a request from the indemnified party for reimbursement for the
fees and expenses of counsel (in any case where such fees and expenses are at
the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent that the indemnification provided for in this Section 8
is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Guarantor, on the one hand, and the Holders, on the other hand, from their sale
of Transfer Restricted Securities or (ii) if the allocation provided by clause
8(d)(i) is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of the Company and the Guarantor, on the one hand,
and of the Holder, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
fault of the Company and the Guarantor, on the one hand, and of the Holder, on
the other hand, shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Guarantor, on the one hand, or by the Holder, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
22
<PAGE>
The Company, the Guarantor and each Holder agree that it would not be just
and equitable if contribution pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Holders were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Holder, its
directors, its officers or any Person, if any, who controls such Holder shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the total received by such Holder with respect to the sale of Transfer
Restricted Securities pursuant to a Registration Statement exceeds (i) the
amount paid by such Holder for such Transfer Restricted Securities and (ii) the
amount of any damages which such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 8(d) are several in
proportion to the respective principal amount of Transfer Restricted Securities
held by each Holder hereunder and not joint.
SECTION 9. RULE 144A AND RULE 144.
The Company and the Guarantor agree with each Holder, for so long as any
Transfer Restricted Securities remain outstanding and during any period in which
the Company or the Guarantor (i) is not subject to Section 13 or 15(d) of the
Exchange Act, to make available, upon request of any Holder, to such Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
designated by such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Act in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of
the Exchange Act, to make all filings required thereby in a timely manner in
order to permit resales of such Transfer Restricted Securities pursuant to Rule
144.
SECTION 10. MISCELLANEOUS.
(a) REMEDIES. The Company and the Guarantor acknowledge and agree that
any failure by the Company and/or the Guarantor to comply with their
23
<PAGE>
respective obligations under Sections 3 and 4 hereof may result in material
irreparable injury to the Initial Purchasers or the Holders for which there is
no adequate remedy at law, that it will not be possible to measure damages for
such injuries precisely and that, in the event of any such failure, the Initial
Purchasers or any Holder may obtain such relief as may be required to
specifically enforce the Company's and the Guarantor's obligations under
Sections 3 and 4 hereof.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor the Guarantor
will, on or after the date of this Agreement, enter into any agreement with
respect to its securities that is inconsistent with the rights granted to the
Holders in this Agreement or otherwise conflicts with the provisions hereof.
Neither the Company nor the Guarantor has previously entered into any
agreement granting any registration rights with respect to its securities to
any Person, except for the Warrant and Registration Rights Agreement dated as
of June 16, 1997 among the Guarantor and the Investors listed therein. The
rights granted to the Holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Company's
and the Guarantor's securities under any agreement in effect on the date
hereof.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless (i) in the case of Section 5
hereof and this clause 10(c)(i), the Company has obtained the written consent of
Holders of all outstanding Transfer Restricted Securities and (ii) in the case
of all other provisions hereof, the Company has obtained the written consent of
Holders of a majority of the outstanding principal amount of Transfer Restricted
Securities (excluding Transfer Restricted Securities held by the Company or its
Affiliates). Notwithstanding the foregoing, a waiver or consent to departure
from the provisions hereof that relates exclusively to the rights of Holders
whose Transfer Restricted Securities are being tendered pursuant to the Exchange
Offer, and that does not affect directly or indirectly the rights of other
Holders whose Transfer Restricted Securities are not being tendered pursuant to
such Exchange Offer, may be given by the Holders of a majority of the
outstanding principal amount of Transfer Restricted Securities subject to such
Exchange Offer.
(d) THIRD PARTY BENEFICIARY. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company and the
Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and
shall have the right to enforce such agreements directly to the extent they may
deem such enforcement necessary or advisable to protect its rights or the rights
of Holders hereunder.
24
<PAGE>
(e) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of
the Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company or the Guarantor:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, MN 55343-9134
Telecopier No.: (612) 931-8047
Attention: General Counsel
With a copy to:
Moss & Barnett
4800 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Telecopier No.: (612) 339-6686
Attention: Janna R. Severance
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and on the next Business Day, if timely delivered
to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders; PROVIDED, that nothing herein shall be deemed to permit any assignment,
transfer or other disposition of Transfer Restricted Securities in violation of
the terms hereof or of the Purchase Agreement or the Indenture. If any
transferee of any Holder shall acquire Transfer Restricted Securities in any
manner, whether by
25
<PAGE>
operation of law or otherwise, such Transfer Restricted Securities shall be held
subject to all of the terms of this Agreement, and by taking and holding such
Transfer Restricted Securities such Person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of this
Agreement, including the restrictions on resale set forth in this Agreement and,
if applicable, the Purchase Agreement, and such Person shall be entitled to
receive the benefits hereof.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) ENTIRE AGREEMENT. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted with respect to the Transfer
Restricted Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
26
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
The Musicland Group, Inc.
By: /s/ Jack W. Eugster
--------------------------------
Name: Jack W. Eugster
Title: CEO and Chairman
Musicland Stores Corporation
By: /s/ Jack W. Eugster
--------------------------------
Name: Jack W. Eugster
Title: CEO and Chairman
Donaldson, Lufkin & Jenrette
Securities Corporation
BT Alex. Brown Incorporated
NationsBanc Montgomery Securities LLC
By: Donaldson, Lufkin & Jenrette
Securities Corporation, on behalf
of the Initial Purchasers
By: /s/ Ephraim Fields
-------------------------------------
Name: Ephraim Fields
Title: Vice President
27
<PAGE>
EXHIBIT A
NOTICE OF FILING OF
A/B EXCHANGE OFFER REGISTRATION STATEMENT
Date:___, 1998
To: Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Louise Guarneri (Compliance Department)
Fax: (212) 892-7272
From: The Musicland Group, Inc.
9_% Series A Senior Subordinated Notes due 2008
For your information only (NO ACTION REQUIRED):
Today, ______, 1998, we filed [an A/B Exchange Registration Statement/a
Shelf Registration Statement] with the Securities and Exchange Commission. We
currently expect this registration statement to be declared effective within __
business days of the date hereof.
<PAGE>
CROSS-REFERENCE TARGET LIST
NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE
TARGET PULL-DOWN LIST.
(This list is for the use of the wordprocessor only,
is not a part of this document and may be discarded.)
<TABLE>
<CAPTION>
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
- - -------------------------------- ---------------------------- ---------------------------- ----------------------------
- - -------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
2. . . . . . . . . . . . holders
3. . . . . . . . . .reg.exch.off
3(a) . . . . . . . . . .deadline
3(b) . . . . . . . . . . off.eff
3(c) . . . . . . . . . plan.dist
4. . . . . . . . . . . shelf.reg
4(a) . . . . . . .shelf.reg.dead
4(a)(i). . . . exch.off.not.perm
4(a)(ii) . . . . . holder.notify
4(b) . . . . . . .prov.cert.info
5. . . . . . . . . . . . liq.dam
6. . . . . . . . . . . . reg.pro
6(a) . . . . . exch.off.reg.stmt
6(a)(i). . . . . chg.comm.policy
6(b) . . . . . . .shelf.reg.stmt
6(b)(i). . . sale.trans.restrict
6(b)(ii) . . . . .series.b.notes
6(c) . . . . . . . . . .gen.prov
6(c)(i). . . . . . .reg.cont.eff
6(c)(iii). . . . aff.mark.marker
6(c)(iii)(C) . . .iss.stop.order
6(c)(iii)(D) . exist.fact.untrue
6(c)(iv) . . . . . .prepare.supp
6(c)(xi) . . . . . . .holder.req
6(c)(xi)(A). . . . . .req.holder
6(c)(xi)(A)(2) . . .co.coun.opin
6(c)(xi)(A)(3) . . . comfort.ltr
6(c)(xii). . . . . . . .blue.sky
6(d) . . . . . .restrict.holders
7(b) . . . . . company.reimburse
8. . . . . . . . . . . . . indem
8(a) . . . . . . . . . .co.indem
8(b) . . . . . . . .holder.indem
8(c) . . . . . . . . indem.party
8(d) . . . . . . . indem.unavail
8(d)(i). . . . . . .appro.propor
10(c)(i) . . writ.consent.holder
</TABLE>
<PAGE>
EXCHANGE AGENT AGREEMENT
THIS EXCHANGE AGENT AGREEMENT (this "Agreement") is made and entered into
as of April 21, 1998, by and between Musicland Stores Corporation
("MSC"), a Delaware corporation, and its wholly-owned subsidiary, The Musicland
Group, Inc. ("MGI"), a Delware corporation (as to MSC and MGI, together, the
"Company"), and Bank One, N.A., a national banking association incorporated and
existing under the laws of the United States, as exchange agent ("Exchange
Agent").
RECITALS
The Company is making an offer to exchange (the "Exchange Offer") the
Series A 9 7/8% Senior Subordinated Notes due 2008 of MGI and associated
Guarantee of MSC (the "Outstanding Notes") for an equal principal amount of
Series B 9 7/8% Senior Subordinated Notes of MGI due 2008 and associated
Guarantee of MSC (the "Exchange Notes") upon the terms and subject to the
conditions set forth in the Company's Registration Statement on Form S-4
(Commission File No. 333-_________) and related final prospectus (the
"Prospectus");
The Exchange Offer will commence as soon as practicable after the Company's
Registration Statement on Form S-4 relating to the Exchange Offer is declared
effective under the Securities Act of 1933, as certified in writing to Exchange
Agent by the Company (the "Effective Time"); and
This Agreement shall be deemed to take effect at the Effective Time.
AGREEMENT
NOW, THEREFORE, Exchange Agent is hereby appointed by the Company, and
Exchange Agent hereby accepts such appointment and shall act as Exchange Agent
in connection with the Exchange Offer. In connection therewith, the undersigned
parties hereby agree as follows:
1. MAILING TO HOLDERS OF THE OUTSTANDING NOTES. Immediately upon receipt
of certification from the Company as to the Effective Time and copies of the
Prospectus, Letter of Transmittal and Notice of Guaranteed Delivery, Exchange
Agent will mail to each Holder (as defined in the Indenture) of any Outstanding
Notes (i) a Letter of Transmittal with instructions (including instructions for
completing a substitute Form W-9), substantially in the form attached hereto as
EXHIBIT A (the "Letter of Transmittal"), (ii) a Prospectus, (iii) a return
envelope for use in effecting the surrender of the Outstanding Notes in exchange
for the Exchange Notes and (iv) a Notice of Guaranteed Delivery attached hereto
as EXHIBIT B (the "Notice of Guaranteed Delivery").
1
<PAGE>
Copies of the Prospectus, Letter of Transmittal and Notice of Guaranteed
Delivery will be furnished to Exchange Agent by the Company in quantities agreed
to between Exchange Agent and the Company.
Exchange Agent, in its capacity as transfer agent and registrar of the
Outstanding Notes, possesses a list (including mailing addresses) of the Holders
of the Outstanding Notes.
2. ATOP REGISTRATION. As of the date hereof, the Exchange Agent shall
have established an account with The Depository Trust Company ("DTC") in its
name to facilitate book-entry tender of Outstanding Notes through DTC's
Automated Tender Offer Program.
3. RECEIPT OF LETTERS OF TRANSMITTAL AND RELATED ITEMS. From and after
the Effective Time, Exchange Agent is hereby authorized and directed to accept
(subject to withdrawal rights described in the Prospectus) (i) Letters of
Transmittal, duly executed in accordance with the instructions thereto (or a
manually signed facsimile thereof), and any requisite collateral documents from
Holders of the Outstanding Notes and (ii) surrendered Outstanding Notes to which
such Letters of Transmittal relate. Exchange Agent is authorized to request
from any person tendering Outstanding Notes such additional documents as
Exchange Agent or the Company deems appropriate.
4. DEFECTIVE OR DEFICIENT OUTSTANDING NOTES AND INSTRUMENTS. As soon as
practicable after receipt, Exchange Agent shall examine the Outstanding Notes,
the Letters of Transmittal and the other documents delivered to Exchange Agent
in connection with tenders of Outstanding Notes to ascertain whether (i) the
Letters of Transmittal are completed and executed in accordance with the
instructions set forth therein, (ii) the Outstanding Notes have otherwise been
properly tendered in accordance with the Prospectus and the Letters of
Transmittal and (iii) if applicable, the other documents (including the Notice
of Guaranteed Delivery) are properly completed and executed. If any Letter of
Transmittal or other document has been improperly completed or executed or the
Outstanding Notes accompanying such Letter of Transmittal are not in proper form
for transfer, or have been improperly tendered, or if some other irregularity in
connection with any tender of any Outstanding Notes exists, Exchange Agent shall
promptly report such information to the Company and, upon consultation with the
Company and its counsel, endeavor, subject to the terms and conditions of the
Exchange Offer, to cause such action to be taken as is necessary to correct such
irregularity. Determination of all questions as to the validity, form,
eligibility (including timeliness of receipt), acceptance and withdrawal of any
Outstanding Notes tendered or delivered shall be determined by the Company, it
its sole discretion. Notwithstanding the above, the Exchange Agent shall not be
under any duty to give notification of defects in such tenders and shall not
incur any liability for failure to give such notification. The Company reserves
the absolute right (i) to reject any or all tenders of any particular
Outstanding Notes determined by the Company not to be in proper form or the
acceptance or exchange of which may, in the opinion of Company counsel, be
unlawful and (ii) to waive any of the conditions of the Exchange Offer or any
defect or irregularity in the tender of any particular Outstanding Notes, and
the Company's interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and Notice of Guaranteed Delivery and the
instructions set forth therein) will be final and binding.
2
<PAGE>
5. REQUIREMENTS OF TENDERS. Tenders of Outstanding Notes shall be made
only as set forth in the Prospectus and the Letter of Transmittal, and
Outstanding Notes shall be considered properly tendered only when the conditions
set forth in subparagraphs:
(a) (i) a properly completed and duly executed Letter of Transmittal (or a
manually signed facsimile thereof), with any required signature guarantee and
any other required documents, are received by the Exchange Agent at the address
set forth in the Letter of Transmittal and Outstanding Notes (in any integral
multiple of $1,000) are received by the Exchange Agent at its address or by
book-entry transfer through DTC's Automated Tender Offer Program into its
account at or prior to the Expiration Date or (ii) a properly completed and duly
executed Notice of Guaranteed Delivery substantially in the form provided by the
Company (by facsimile transmission, mail, telegram, or hand delivery), with an
appropriate guarantee of signature and delivery from an Eligible Guarantor
Institution within the meaning of Rule 17 Ad-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), are received by the Exchange Agent
at or prior to the Expiration Date and the Letter of Transmittal (or a facsimile
thereof), together with the certificate(s) representing the Outstanding Notes in
proper form for transfer or a book-entry confirmation through DTC's Automated
Tender Offer Program, as the case may be, and any other required documents
required by the Letters of Transmittal are received by the Exchange Agent within
five (5) business days after the Expiration Date; and
(b) the adequacy of the items relating to Outstanding Notes, and the
Letters of Transmittal therefor and any Notice of Guaranteed Delivery and any
other required documents has been favorably passed upon by the Company.
Notwithstanding the provisions of the preceding subparagraph, Outstanding Notes
that the Company otherwise shall approve as having been properly tendered shall
be considered to be properly tendered for all purposes of the Exchange Offer.
6. CERTAIN DEFINITIONS. For purposes of this Agreement, an "Eligible
Guarantor Institution" within the meaning of Rule 17 Ad-15 under the Exchange
Act shall mean a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States; "business day"
shall mean a day upon which the New York Stock Exchange is open for trading; and
"Expiration Date" shall mean 5:00 p.m., New York City time, on _______________,
1998, unless the Exchange Offer is extended by the Company in its sole
discretion, in which case, the term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended.
7. EXCHANGE OF THE OUTSTANDING NOTES. Promptly after the Expiration Date,
upon surrender of the Outstanding Notes in accordance with the Letter of
Transmittal and Prospectus, Exchange Agent is hereby directed to deliver or
cause to be delivered as promptly as possible to the Holders of such surrendered
Outstanding Notes, in accordance with this Agreement and the terms of the
Exchange Offer, the amount of the Exchange Notes to which such Holders of the
Outstanding Notes are entitled. The principal amount of the Exchange Notes to
be delivered to a Holder shall equal the principal amount of the Outstanding
Notes surrendered.
3
<PAGE>
The Exchange Notes shall be mailed by Exchange Agent, in accordance with
the instructions contained in the Letter of Transmittal, by first class or
registered mail, and under coverage of Exchange Agent's blanket surety bond for
first class or registered mail losses protecting the Company from loss or
liability arising out of the non-receipt or non-delivery of such Exchange Notes
or the replacement thereof.
8. APPLICATION OF THE EXCHANGE NOTES. The Exchange Notes and any other
property (the "Property") to be deposited with, or received by Exchange Agent
from the Company as exchange agent constitute a special, segregated account,
held solely for the benefit of the Company and Holders tendering Outstanding
Notes, as their interests may appear, and the Property shall not be commingled
with the securities, money, assets or property of Exchange Agent or any other
person. Exchange Agent hereby waives any and all rights of lien (including
banker's lien), attachment or set-off whatsoever, if any, against the Property,
whether such rights arise by reason of statutory or common law, by contract or
otherwise except to the extent set forth in the Indenture with respect to the
Outstanding Notes and the Exchange Notes.
9. REQUESTS. On each business day after receipt of the first Letter of
Transmittal, and up to and including the Expiration Date, Exchange Agent shall
advise the Company (or such other persons as the Company may direct) by
telephone, not later than 5:00 p.m., Minneapolis, Minnesota time, of the
principal amount of the Outstanding Notes which have been duly tendered on such
day, stating separately (i) the principal amount of the Outstanding Notes
tendered pursuant to DTC's Automated Tender Offer Program, (ii) the principal
amount of the Outstanding Notes tendered about which Exchange Agent has
questions concerning validity, (iii) the number of Outstanding Notes tendered
and not withdrawn that are represented by certificates, (iv) the number of
Outstanding Notes tendered and not withdrawn that are represented by Notices of
Guaranteed Delivery and (v) the aggregate principal amount of the Outstanding
Notes tendered and not withdrawn through the time of such telephone call.
Promptly thereafter (by the next business day), Exchange Agent shall confirm
such advice in writing, to be transmitted by telecopier, overnight courier or
other special form of delivery. In addition, the Exchange Agent shall provide,
and cooperate in making available to the Company, such other information as it
may reasonably request upon written request made from time to time. The
Exchange Agent shall, without limitation, permit the Company, and such other
persons as it may reasonably request, access to those persons on the Exchange
Agent's staff who are responsible for receiving tenders of Outstanding Notes in
order to insure that, immediately prior to the Expiration Date, the Company
shall have received information in sufficient detail to enable it to decide
whether to extend the Expiration Date of the Exchange Offer.
10. RECORD KEEPING. Each Letter of Transmittal, Outstanding Note, Notice
of Guaranteed Delivery and any other documents received by the Exchange Agent in
connection with the Exchange Offer shall be stamped by the Exchange Agent to
show the date of the receipt (or if Outstanding Notes are tendered by book-entry
delivery, such form of record keeping of receipt as is customary for tenders
through DTC's Automated Tender Offer Program) and, if defective, the date and
time the last defect was waived by the Company or was cured. Each Letter of
Transmittal and Outstanding Note that is accepted by the Company shall be
retained in the Exchange Agent's possession until the Expiration Date. As
promptly as practicable
4
<PAGE>
thereafter, the Exchange Agent will deliver those items, together with all
properly tendered and canceled Outstanding Notes, to the Company, by certified
mail with proper insurance. If after the Expiration Date the Exchange Agent
receives any Letters of Transmittal (or functional equivalent thereof), the
Exchange Agent shall return the same together with all enclosures to the party
from whom such documents were received.
11. DISCREPANCIES IN THE AMOUNT OF THE OUTSTANDING NOTES OWNED. Exchange
Agent shall endeavor to reconcile any discrepancies between the amount of the
Outstanding Notes, claimed to be owned by a surrendering Holder of the
Outstanding Notes and the amount of the Outstanding Notes indicated on the books
of the Transfer Agent as of the "record date" (as defined in the section of the
Prospectus captioned "The Exchange Offer"). If, based upon reliable
documentation, Exchange Agent determines that the Outstanding Notes with respect
to which such discrepancy exists are valid Outstanding Notes, then Exchange
Agent shall deliver the Exchange Notes provided for herein to the holder
surrendering such Outstanding Notes. In case of any questions about whether the
Outstanding Notes are valid Outstanding Notes, Exchange Agent shall be entitled
to receive instructions from the Company and proceed based upon such
instructions.
12. OUTSTANDING NOTES AND OTHER NAMES. If an Exchange Note is to be
registered in a name other than that of the record Holder of surrendered
Outstanding Notes, conditions to the issuance thereof shall be (i) that the
Outstanding Note so surrendered shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange shall pay
to Exchange Agent any transfer or other taxes required by reason of the
registration of such Exchange Note in any name other than that of the Holder of
the Outstanding Note surrendered, or otherwise required, or shall establish to
Exchange Agent's satisfaction that such tax has been paid or is not payable and
(ii) that the record Holder deliver such other documents and instruments as
Company counsel or Exchange Agent shall require.
If the Letter of Transmittal is signed by a person other than the
registered Holder of the tendered Outstanding Note or the Exchange Note is to be
issued (or any untendered principal amount of the Outstanding Note is to be
reissued) to a person other than the registered Holder of the tendered
Outstanding Note, the registered Holder must either properly endorse the
Outstanding Note tendered or transmit a properly completed separate bond power
guaranteed by an Eligible Guarantor Institution, and such Outstanding Note must
otherwise be in proper form for transfer. In addition, such registered Holder
and/or such other person shall deliver such other documents and instruments as
Company counsel or Exchange Agent shall require, in which case the Exchange Note
shall be mailed to such assignee or transferee at the address so required.
13. PARTIAL TENDERS. If, pursuant to the Exchange Offer, less than all of
the principal amount of any Outstanding Notes submitted to Exchange Agent is to
be tendered, Exchange Agent shall, promptly after the Expiration Date, cause a
new Outstanding Note for the principal amount not being tendered to be returned
to, or in accordance with the instruction of, each Holder who has made a partial
tender of Outstanding Notes.
5
<PAGE>
14. WITHDRAWALS. A tendering Holder may withdraw tendered Outstanding
Notes as set forth in the Prospectus, in which event Exchange Agent shall, as
promptly as practicable after proper notification of such withdrawal, return
such Outstanding Notes to, or in accordance with the instructions of, such
Holder and such Outstanding Notes shall no longer be considered properly
tendered. All questions as to the form and validity of notices of withdrawal,
including timeliness of receipt, shall be determined by the Company, in its sole
discretion, which determination shall be final and binding. A withdrawal of
tender of Outstanding Notes may not be rescinded and any Outstanding Notes
withdrawn will thereafter be deemed not validly tendered for purposes of the
Exchange Offer, provided, however, that withdrawn Outstanding Notes may be
retendered at any time on or prior to the Expiration Date.
15. REJECTION OF TENDERS. If, pursuant to the Exchange Offer, the Company
does not accept for exchange any of the Outstanding Notes tendered by a Holder
of Outstanding Notes, Exchange Agent shall, promptly after the Expiration Date,
cause the Outstanding Notes not accepted to be returned to, or in accordance
with the instructions of, such Holder of Outstanding Notes.
16. CANCELLATION OF EXCHANGED OUTSTANDING NOTES. Exchange Agent is
authorized and directed to cancel all Outstanding Notes received by Exchange
Agent upon delivering the Exchange Notes to tendering holders of the Outstanding
Notes as provided herein. Exchange Agent shall maintain a record as to which
Outstanding Notes have been exchanged and cancelled and shall deliver the same
to the registrar and transfer agent for the Outstanding Notes and the Exchange
Notes.
17. REQUESTS FOR INFORMATION. Exchange Agent shall accept and comply with
telephone and mail requests from Holders or persons acting on behalf of Holders
for information concerning the proper surrender of the Outstanding Notes. Upon
request, Exchange Agent shall furnish copies of the Prospectus, any supplements
to the Prospectus, the Letter of Transmittal and the other materials referred to
in the Prospectus as being available to holders of Outstanding Notes. The
Company will supply Exchange Agent with copies of such documents upon request by
Exchange Agent. Notwithstanding anything herein to the contrary, the Exchange
Agent is not authorized to offer any concessions or to pay any commissions to
any brokers, dealers, banks or other persons or to engage or to utilize any
persons to solicit tenders.
18. TAX MATTERS. Exchange Agent shall comply with applicable requirements
of the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder in connection with the Exchange Offer and shall file with
the Internal Revenue Service all reports and other information required to be
filed with the Internal Revenue Service in connection with the Exchange Offer,
provided, however, that if Exchange Agent has questions with respect to any such
information, it shall so notify, and request direction from, the Company.
19. REPORTS. Within 5 days after the Expiration Date, Exchange Agent
shall furnish the Company a final report detailing the receipt and cancellation
of Outstanding Notes and the issuance of the Exchange Notes.
6
<PAGE>
20. FEES. For Exchange Agent's services as exchange agent hereunder, the
Company will pay Exchange Agent $100 per Letter of Transmittal mailed by the
Exchange Agent pursuant to Section 1 hereof, plus reasonable out-of-pocket
expenses, including reasonable counsel fees and disbursements.
21. MISCELLANEOUS. As exchange agent hereunder, Exchange Agent:
a. shall have no duties or obligations other than those specifically
set forth in this Agreement;
b. will make no representation and will have no responsibility as to
the validity, value or genuineness of the Exchange Offer and shall not make
any recommendation as to whether a Holder of Outstanding Notes should or
should not tender its Outstanding Notes;
c. shall not be obligated to take any legal action hereunder which
might by Exchange Agent's reasonable judgment involve any expense or
liability unless Exchange Agent shall have been furnished with reasonable
indemnity;
d. may rely on and shall be protected in acting in good faith upon
any certificate, instrument, opinion, notice, instruction, letter, telegram
or other document, or any security, delivered to Exchange Agent and
believed by Exchange Agent to be genuine and to have been signed by the
proper party or parties;
e. may rely on and shall be protected in acting in good faith upon
the written instructions of the Chief Financial Officer, President, or Vice
President/General Counsel of the Company, or such other employees and
representatives as the Company may hereafter designate in writing;
f. shall not be liable for any claim, loss, liability or expense,
incurred without Exchange Agent's negligence or willful misconduct, arising
out of or in connection with the administration of Exchange Agent's duties
hereunder;
g. may consult with counsel reasonably satisfactory to the Company,
and the opinion of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by
Exchange Agent hereunder in good faith and in accordance with the opinion
of such counsel; and
h. shall follow and act upon such instructions in connection with
the Exchange Offer which may be given to Exchange Agent by the Company,
counsel for the Company or such other persons as the Company may authorize.
22. INDEMNIFICATION. THE COMPANY CONVENANTS AND AGREES TO REIMBURSE,
INDEMNIFY AND HOLD EXCHANGE AGENT HARMLESS AGAINST ANY COSTS, EXPENSES
(INCLUDING REASONABLE EXPENSES OF EXCHANGE AGENT'S LEGAL
7
<PAGE>
COUNSEL), LOSSES OR DAMAGE WHICH, WITHOUT NEGLIGENCE, WILLFUL MISCONDUCT OR BAD
FAITH ON EXCHANGE AGENT'S PART OR ARISING OUT OF OR ATTRIBUTABLE THERETO, MAY BE
PAID, INCURRED OR SUFFERED BY EXCHANGE AGENT, OR TO WHICH EXCHANGE AGENT MAY
BECOME SUBJECT BY REASON OF OR AS A RESULT OF: (I) THE ADMINISTRATION OF
EXCHANGE AGENT'S DUTIES HEREUNDER, INCLUDING ANY CLAIMS AGAINST EXCHANGE AGENT
BY ANY HOLDER TENDERING OUTSTANDING NOTES FOR EXCHANGE, OR (II) BY REASON OF OR
AS A RESULT OF EXCHANGE AGENT'S COMPLIANCE WITH THE INSTRUCTIONS SET FORTH
HEREIN OR WITH ANY WRITTEN OR ORAL INSTRUCTIONS DELIVERED TO EXCHANGE AGENT
PURSUANT HERETO. The Company shall be entitled to participate at its own
expense in the defense, and if the Company so elects at any time after receipt
of such notice, the Company shall assume the defense of any suit brought to
enforce any such claim. In the event that the Company assumes the defense of
any such suit, the Company shall not be liable for the fees and expenses
thereafter accruing of any counsel retained by Exchange Agent, unless in the
reasonable judgment of the Company's counsel it is advisable for Exchange Agent
to be represented by separate counsel. In no case shall the Company be liable
under this indemnity with respect to any claim or action against Exchange Agent
unless the Company shall be promptly notified by Exchange Agent, by letter or by
facsimile confirmed by letter, of the written assertion of a claim or shall have
been served with a summons or other first legal process giving information as to
the nature and basis of an action, but failure so to promptly notify the Company
shall not relieve the Company from any liability which it may have otherwise
than on account of this indemnity, except to the extent the Company is
materially prejudiced or forfeits substantial rights and defenses by reason of
such failure.
23. APPLICABLE LAW. This Agreement and appointment of Exchange Agent as
exchange agent shall be construed and enforced in accordance with the laws of
the State of Minnesota and shall inure to the benefit of, and the obligations
created hereby shall be binding upon, the successor and assigns of the parties
hereto.
24. NOTICES. Notices or demands authorized by this Agreement to be given
or made by Exchange Agent or by a holder of the Outstanding Notes to or on the
Company shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with Exchange
Agent) as follows:
Musicland Stores Corporation
10400 Yellow Circle Drive
Minnetonka, MN 55343
Attn: Heidi Hoard, Vice President and
General Counsel
8
<PAGE>
With copy to:
Moss & Barnett
4800 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Attn: Janna R. Severance
Any notice or demand authorized by this Agreement to be given or made by
the Company or by a holder of the Outstanding Notes to or in Exchange Agent
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address if filed in writing with the Company)
as follows:
Bank One, N.A.
235 West Schrock Road
Westerville, Ohio 43271-0184
Attention: Ms. Lora Marsch
Corporate Trust Operations
With copy to:
Bank One, N.A.
100 East Broad Street
Columbus, Ohio 43271-0181
Attention: Mr. Joseph C. Ludes
Corporate Trust Administration
Any notice or demand authorized by this Agreement to be given or made by
the Company or Exchange Agent to or on a holder of the Outstanding Notes shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the Company's
books.
25. CHANGE OF EXCHANGE AGENT. Exchange Agent may resign and be
discharged from its duties under this Agreement by giving to the Company
thirty days prior written notice, by first-class mail, postage prepaid,
specifying a date when such resignation shall take effect. If Exchange Agent
resigns or becomes incapable of acting as exchange agent and the Company
fails to appoint a new exchange agent within a period of 30 days after it has
been notified in writing of such resignation or incapacity by Exchange Agent,
the Company shall become the exchange agent and any Holder of the Outstanding
Notes may apply to any court of competent jurisdiction for the appointment of
a successor to Exchange Agent. Pending the appointment of a successor to
Exchange Agent, either by the Company or by such a court, the duties of the
exchange agent shall be carried out by the Company. After appointment, the
successor exchange agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally name as exchange agent
without the further act or deed; but the Exchange Agent shall
9
<PAGE>
deliver and transfer to the successor exchange agent any property at the time
held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose.
26. TERM. This Agreement shall terminate, except for Section 22 hereof,
30 days after the Expiration Date; provided, however, that the term of this
Agreement may be extended at the request of the Company and the agreement of
Exchange Agent. Any portion of the Exchange Notes which remain undistributed to
the holders of the Outstanding Notes after the expiration of this Agreement
shall be marked, canceled and delivered to the Company upon demand, and any
holders of unsurrendered Outstanding Notes shall thereafter have no right to
exchange their Outstanding Notes for Exchange Notes.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and such counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Exchange Agent have caused this Agreement
to be signed by their respective officers thereunto authorized as of the date
first written above.
MUSICLAND STORES CORPORATION
By: /s/
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
THE MUSICLAND GROUP, INC.
By: /s/
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
BANK ONE, N.A.
By: /s/
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
10
<PAGE>
April 24, 1998
Board of Directors
Musicland Stores Corporation
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, MN 55343
Ladies and Gentlemen:
This opinion is rendered in connection with the filing by The Musicland
Group, Inc. ("MGI") and its sole shareholder, Musicland Stores Corporation (the
"Guarantor"), with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, of a Registration Statement on Form S-4 (the
"Registration Statement") with respect to the issuance by MGI of $150,000,000 of
its 9 7/8% Series B Senior Subordinated Notes Due 2008 (the "New Notes") and the
guaranty of the New Notes by the Guarantor (the "New Note Guarantee") in
exchange for MGI's 9 7/8% Series A Senior Subordinated Notes Due 2008, in the
amount of $150,000,000 (the "Old Notes") and a Guarantee of the Old Notes by the
Guarantor (the "Old Notes Guarantee"). The Old Notes and the New Notes are
issued under an Indenture (the "Indenture") among MGI, the Guarantor and Bank
One, N.A., as Trustee (the "Trustee").
We have examined the originals or copies, certified to our satisfaction, of
such corporate instruments and certificates of public officials and officers and
representatives of MGI and the Guarantor, and have made such examination of law,
as we have deemed relevant and necessary as a basis for the opinions hereafter
set forth. In such examination, we have assumed the genuineness of all
signatures and the authenticity and conformity to original documents submitted
to us as certified or photocopies.
Based upon the foregoing and subject to the qualifications noted below, we
are of the opinion that:
(1) The Indenture has been duly authorized by MGI and the Guarantor and
constitutes a valid and legally binding instrument enforceable against
MGI and the Guarantor in accordance with its terms.
<PAGE>
Board of Directors
_______, 1998
Page 2
(2) The Old Notes and the New Notes have been duly authorized by MGI and,
upon their execution and delivery by MGI and authentication by the
Trustee under the Indenture, will constitute valid and legally binding
obligations of MGI entitled to the benefits of the Indenture.
(3) The Old Note Guarantee and the New Note Guarantee have been duly
authorized by the Guarantor and constitute the valid and legally
binding obligations of the Guarantor.
The foregoing opinion with respect to the enforceability and valid and
legally binding nature of the Indenture, the Old Notes, the New Notes, the Old
Note Guarantee and the New Note Guarantee is subject to bankruptcy, insolvency,
reorganization, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
Further, this opinion is based upon an examination of the Federal laws of the
United States and the laws of the state of Minnesota and no opinion is expressed
as to the application of the laws of any other jurisdiction.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus included
therein.
Very truly yours,
MOSS & BARNETT, A PROFESSIONAL ASSOCIATION
By /s/ Janna R Severance
--------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion herein of
our report dated January 21, 1998 and the incorporation by reference in this
Registration Statement on Form S-4 of our report dated January 21, 1998,
included in Musicland Stores Corporation and Subsidiaries Form 10-K for the year
ended December 31, 1997, and to all references to our firm included in this
Registration Statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 24, 1998
<PAGE>
Registration No.
-------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
BANK ONE, N.A. f/k/a BANK ONE, COLUMBUS, N.A.
Not Applicable 31-4148768
(State of Incorporation (I.R.S. Employer
if not a national bank) Identification No.)
100 East Broad Street, Columbus, Ohio 43271-0181
(Address of trustee's principal (Zip Code) executive offices)
c/o Bank One Trust Company, NA
100 East Broad Street
Columbus, Ohio 43271-0181
(614) 248-5579
(Name, address and telephone number of agent for service)
The Musicland Group, Inc.
(Exact name of obligor as specified in its charter)
Delaware 41-1307776
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
10400 Yellow Circle Drive, Minnetonka, MN 55343
(Address of principal executive (Zip Code)
office)
9 7/8% Senior Subordinated Notes due 2008
(Title of the Indenture securities)
GENERAL
1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Cleveland, Cleveland, Ohio
Federal Deposit Insurance Corporation, Washington, D.C.
<PAGE>
The Board of Governors of the Federal Reserve System, Washington, D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee.
16. LIST OF EXHIBITS
LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY
AND QUALIFICATION. (EXHIBITS IDENTIFIED IN PARENTHESES, ON FILE WITH THE
COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS EXHIBITS HERETO.)
Exhibit 1 - A copy of the Articles of Association of the trustee as now in
effect.
Exhibit 2 - A copy of the Certificate of Authority of the trustee to commence
business, see Exhibit 2 to Form T-1, filed in connection with Form S-3 relating
to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities
and Exchange Commission File No. 33-50709.
Exhibit 3 - A copy of the Authorization of the trustee to exercise corporate
trust powers, see Exhibit 3 to Form T-1, filed in connection with Form S-3
relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003,
Securities and Exchange Commission File No. 33-50709.
Exhibit 4 - A copy of the Bylaws of the trustee as now in effect.
<PAGE>
Exhibit 5 - Not applicable.
Exhibit 6 - The consent of the trustee required by Section 321(b) of the Trust
Indenture Act of 1939, as amended.
Exhibit 7 - Report of Condition of the trustee as of the close of business on
December 31, 1997, published pursuant to the requirements of the Comptroller of
the Company, see attached.
Exhibit 8 - Not applicable.
Exhibit 9 - Not applicable.
Items 3 through 15 are not answered pursuant to General Instruction B which
requires responses to Item 1, 2 and 16 only, if the obligor is not in default.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, Bank One, NA, a national banking association organized
under the National Banking Act, has duly caused this statement of eligibility
and qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, all in Columbus, Ohio, on April 13, 1998.
Bank One, NA
By: /s/
----------------------------------
Authorized Signer
<PAGE>
Exhibit 1
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLES OF ASSOCIATION
For the purpose of organizing an association to carry on the business of
banking under the laws of the United States, the following Articles of
Association are entered into:
FIRST. The title of this Association shall be BANK ONE, COLUMBUS, NATIONAL
ASSOCIATION.
SECOND. The main office of the Association shall be in Columbus, County of
Franklin, State of Ohio. The general business of the Association shall be
conducted at its main office and its branches.
THIRD. The Board of Directors of this Association shall consist of not
less than five nor more than twenty-five Directors, the exact number of
Directors within such minimum and maximum limits to be fixed and determined from
time-to-time by resolution of the shareholders at any annual or special meeting
thereof, provided, however, that the Board of Directors, by resolution of a
majority thereof, shall be authorized to increase the number of its members by
not more than two between regular meetings of the shareholders. Each Director,
during the full term of his directorship, shall own, as qualifying shares, the
minimum number of shares of either this Association or of its parent bank
holding company in accordance with the provisions of applicable law. Unless
otherwise provided by the laws of the United States, any vacancy in the Board of
Directors for any reason, including an increase in the number thereof, may be
filled by action of the Board of Directors.
-4-
<PAGE>
FOURTH. The annual meeting of the shareholders for the election of
Directors and the transaction of whatever other business may be brought before
said meeting shall be held at the main office of this Association or such other
place as the Board of Directors may designate, on the day of each year specified
therefor in the By-Laws, but if no election is held on that day, it may be held
on any subsequent business day according to the provisions of law; and all
elections shall be held according to such lawful regulations as may be
prescribed by the Board of Directors.
FIFTH. The authorized amount of capital stock of this Association shall be
2,073,750 shares of common stock of the par value of Ten Dollars ($10) each; but
said capital stock may be increased or decreased from time-to-time, in
accordance with the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the
Association shall have the preemptive or preferential right of subscription to
any share of any class of stock of this Association, whether now or hereafter
authorized or to any obligations convertible into stock of this Association,
issued or sold, nor any right of subscription to any thereof other than such, if
any, as the Board of Directors, in its discretion, may from time-to-time
determine and at such price as the Board of Directors may from time-to-time fix.
This Association, at any time and from time-to-time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of the
shareholders.
SIXTH. The Board of Directors shall appoint one of its members President
of the Association, who shall be Chairman of the Board, unless the Board
appoints another director to be the Chairman. The Board of Directors shall have
the power to appoint one or more Vice Presidents and to appoint a Secretary and
such other officers and employees as may be required to transact the business of
this Association.
The Board of Directors shall have the power to define the duties of
the officers and employees of this Association; to fix the salaries to be paid
to them; to dismiss them; to require bonds from them and to fix the penalty
thereof; to regulate the manner in which any increase of the capital of this
Association shall be made; to manage and administer the business and affairs of
this Association; to make all By-Laws that it may be lawful for them to make;
and generally to do and perform all acts that it may be legal for a Board of
Directors to do and perform.
SEVENTH. The Board of Directors shall have the power to change the
location of the main office to any other place within the limits of the City of
Columbus, Ohio,
-5-
<PAGE>
without the approval of the shareholders but subject to the approval of the
Comptroller of the Currency; and shall have the power to establish or change the
location of any branch or branches of this Association to any other location,
without the approval of the shareholders but subject to the approval of the
Comptroller of the Currency.
EIGHTH. The corporate existence of this Association shall continue until
terminated in accordance with the laws of the United States.
NINTH. The Board of Directors of this Association, or any three or more
shareholders owning, in the aggregate, not less than 10 percent of the stock of
this Association, may call a special meeting of shareholders at any time.
Unless otherwise provided by the laws of the United States, a notice of the
time, place and purpose of every annual and special meeting of the shareholders
shall be given by first-class mail, postage prepaid, mailed at least ten days
prior to the date of such meeting to each shareholder of record at his address
as shown upon the books of this Association.
-6-
<PAGE>
TENTH. Every person who is or was a Director, officer or employee of
the Association or of any other corporation which he served as a Director,
officer or employee at the request of the Association as part of his
regularly assigned duties may be indemnified by the Association in accordance
with the provisions of this paragraph against all liability (including,
without limitation, judgments, fines, penalties and settlements) and all
reasonable expenses (including, without limitation, attorneys' fees and
investigative expenses) that may be incurred or paid by him in connection
with any claim, action, suit or proceeding, whether civil, criminal or
administrative (all referred to hereafter in this paragraphs as "Claims") or
in connection with any appeal relating thereto in which he may become
involved as a party or otherwise or with which he may be threatened by reason
of his being or having been a Director, officer or employee of the
Association or such other corporation, or by reason of any action taken or
omitted by him in his capacity as such Director, officer or employee, whether
or not he continues to be such at the time such liability or expenses are
incurred, provided that nothing contained in this paragraph shall be
construed to permit indemnification of any such person who is adjudged guilty
of, or liable for, willful misconduct, gross neglect of duty or criminal
acts, unless, at the time such indemnification is sought, such
indemnification in such instance is permissible under applicable law and
regulations, including published rulings of the Comptroller of the Currency
or other appropriate supervisory or regulatory authority, and provided
further that there shall be no indemnification of directors, officers, or
employees against expenses, penalties, or other payments incurred in an
administrative proceeding or action instituted by an appropriate regulatory
agency which proceeding or action results in a final order assessing civil
money penalties or requiring affirmative action by an individual or
individuals n the form of payments to the Association. Every person who may
be indemnified under the provisions of this paragraph and who has been wholly
successful on the merits with respect to any Claim shall be entitled to
indemnification as of right. Except as provided in the preceding sentence,
any indemnification under this paragraph shall be at the sole discretion of
the Board of Directors and shall be made only if the Board of Directors or
the Executive Committee acting by a quorum consisting of Directors who are
not parties to such Claim shall find or if independent legal counsel (who may
be the regular counsel of the Association) selected by the Board of Directors
or Executive Committee whether or not a disinterested quorum exists shall
render their opinion that in view of all of the circumstances then
surrounding the Claim, such indemnification is equitable and in the best
interests of the Association. Among the circumstances to be taken into
consideration in arriving at such a finding or opinion is the existence or
non-existence of a contract of insurance or indemnity under which the
Association would be wholly or partially reimbursed for such indemnification,
but the existence or non-existence of such insurance is not the sole
circumstance to be considered nor shall it be wholly determinative of whether
such
-7-
<PAGE>
indemnification shall be made. In addition to such finding or opinion, no
indemnification under this paragraph shall be made unless the Board of Directors
or the Executive Committee acting by a quorum consisting of Directors who are
not parties to such Claim shall find or if independent legal counsel (who may be
the regular counsel of the Association) selected by the Board of Directors or
Executive Committee whether or not a disinterested quorum exists shall render
their opinion that the Director, officer or employee acted in good faith in what
he reasonably believed to be the best interests of the Association or such other
corporation and further in the case of any criminal action or proceeding, that
the Director, officer or employee reasonably believed his conduct to be lawful.
Determination of any Claim by judgment adverse to a Director, officer or
employee by settlement with or without Court approval or conviction upon a plea
of guilty or of NOLO CONTENDERE or its equivalent shall not create a presumption
that a Director, officer or employee failed to meet the standards of conduct set
forth in this paragraph. Expenses incurred with respect to any Claim may be
advanced by the Association prior to the final disposition thereof upon receipt
of an undertaking satisfactory to the Association by or on behalf of the
recipient to repay such amount unless it is ultimately determined that he is
entitled to indemnification under this paragraph. The rights of indemnification
provided in this paragraph shall be in addition to any rights to which any
Director, officer or employee may otherwise be entitled by contract or as a
matter of law.
-8-
<PAGE>
Every person who shall act as a Director, officer or employee of this
Association shall be conclusively presumed to be doing so in reliance upon the
right of indemnification provided for in this paragraph.
ELEVENTH. These Articles of Association may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of a
majority of the stock of this Association, unless the vote of the holders of a
greater amount of stock is required by law, and in that case by the vote of the
holders of such greater amount.
-9-
<PAGE>
Exhibit 4
BY-LAWS
OF
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLE I
MEETING OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETING. The regular annual meeting of the Shareholders
of the Bank for the election of Directors and for the transaction of such
business as may properly come before the meeting shall be held at its main
banking house, or other convenient place duly authorized by the Board of
Directors, on the third Monday of January of each year, or on the next
succeeding banking day, if the day fixed falls on a legal holiday. If from any
cause, an election of directors is not made on the day fixed for the regular
meeting of shareholders or, in the event of a legal holiday, on the next
succeeding banking day, the Board of Directors shall order the election to be
held on some subsequent day, as soon thereafter as practicable, according to the
provisions of law; and notice thereof shall be given in the manner herein
provided for the annual meeting. Notice of such annual meeting shall be given
by or under the direction of the Secretary or such other officer as may be
designated by the Chief Executive Officer by first-class mail, postage prepaid,
to all shareholders of record of the Bank at their respective addresses as shown
upon the books of the Bank mailed not less than ten days prior to the date fixed
for such meeting.
SECTION 1.02. SPECIAL MEETINGS. A special meeting of the shareholders of this
Bank may be called at any time by the Board of Directors or by any three or more
shareholders owning, in the aggregate, not less than ten percent of the stock of
this Bank. The notice of any special meeting of the shareholders called by the
Board of Directors, stating the time, place and purpose of the meeting, shall be
given by or under the direction of the Secretary, or such other officer as is
designated by the Chief Executive Officer, by first-class mail, postage prepaid,
to all shareholders of
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record of the Bank at their respective addresses as shown upon the books of the
Bank, mailed not less than ten days prior to the date fixed for such meeting.
Any special meeting of shareholders shall be conducted and its proceedings
recorded in the manner prescribed in these By-Laws for annual meetings of
shareholders.
SECTION 1.03. SECRETARY OF SHAREHOLDERS' MEETING. The Board of Directors may
designate a person to be the Secretary of the meetings of shareholders. In the
absence of a presiding officer, as designated in these By-Laws, the Board of
Directors may designate a person to act as the presiding officer. In the event
the Board of Directors fails to designate a person to preside at a meeting of
shareholders and a Secretary of such meeting, the shareholders present or
represented shall elect a person to preside and a person to serve as Secretary
of the meeting.
The Secretary of the meetings of shareholders shall cause the returns made
by the judges and election and other proceedings to be recorded in the minute
book of the Bank. The presiding officer shall notify the directors-elect of
their election and to meet forthwith for the organization of the new board.
The minutes of the meeting shall be signed by the presiding officer and the
Secretary designated for the meeting.
SECTION 1.04. JUDGES OF ELECTION. The Board of Directors may appoint as
many as three shareholders to be judges of the election, who shall hold and
conduct the same, and who shall, after the election has been held, notify, in
writing over their signatures, the secretary of the shareholders' meeting of
the result thereof and the names of the Directors elected; provided, however,
that upon failure for any reason of any judge or judges of election, so
appointed by the directors, to serve, the presiding officer of the meeting
shall appoint other shareholders or their proxies to fill the vacancies. The
judges of election at the request of the chairman of the meeting, shall act
as tellers of any other vote by ballot taken at such meeting, and shall
notify, in writing over their signatures, the secretary of the Board of
Directors of the result thereof.
SECTION 1.05. PROXIES. In all elections of Directors, each shareholder of
record, who is qualified to vote under the provisions of Federal Law, shall
have the right to vote the number of shares of record in his name for as many
persons as there are Directors to be elected, or to cumulate such shares as
provided by Federal Law. In deciding all other questions at meetings of
shareholders, each shareholder shall be entitled to one vote on each share of
stock of record in his name. Shareholders may
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vote by proxy duly authorized in writing. All proxies used at the annual
meeting shall be secured for that meeting only, or any adjournment thereof,
and shall be dated, and if not dated by the shareholder, shall be dated as of
the date of receipt thereof. No officer or employee of this Bank may act as
proxy.
SECTION 1.06. QUORUM. Holders of record of a majority of the shares of the
capital stock of the Bank, eligible to be voted, present either in person or
by proxy, shall constitute a quorum for the transaction of business at any
meeting of shareholders, but shareholders present at any meeting and
constituting less than a quorum may, without further notice, adjourn the
meeting from time to time until a quorum is obtained. A majority of the
votes cast shall decide every question or matter submitted to the
shareholders at any meeting, unless otherwise provided by law or by the
Articles of Association.
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ARTICLE II
DIRECTORS
SECTION 2.01. MANAGEMENT OF THE BANK. The business of the Bank shall be
managed by the Board of Directors. Each director of the Bank shall be the
beneficial owner of a substantial number of shares of BANC ONE CORPORATION and
shall be employed either in the position of Chief Executive Officer or active
leadership within his or her business, professional or community interest which
shall be located within the geographic area in which the Bank operates, or as an
executive officer of the Bank. A director shall not be eligible for nomination
and re-election as a director of the Bank if such person's executive or
leadership position within his or her business, professional or community
interests which qualifies such person as a director of Bank terminates. The age
of 70 is the mandatory retirement age as a director of the Bank. When a
person's eligibility as director of the Bank terminates, whether because of
change in share ownership, position, residency or age, within 30 days after such
termination, such person shall submit his resignation as a director to be
effective at the pleasure of the Board provided, however, that in no event shall
such person be nominated or elected as a director. Provided, however, following
a person's retirement or resignation as a director because of the age
limitations herein set forth with respect to election or re-election as a
director, such person may, in special or unusual circumstances, and at the
discretion of the Board, be elected by the directors as a Director Emeritus of
the Bank for a limited period of time. A Director Emeritus shall have the right
to participate in board meetings but shall be without the power to vote and
shall be subject to re-election by the Board at its organizational meeting
following the Bank's annual meeting of shareholders.
SECTION 2.02. QUALIFICATIONS. Each director shall have the qualification
prescribed by law. No person elected a director may exercise any of the powers
of his office until he has taken the oath of such office.
SECTION 2.03. TERM OF OFFICE/VACANCIES. A director shall hold office until the
annual meeting for the year in which his term expires and until his successor
shall be elected and shall qualify, subject, however, to his prior death,
resignation, or removal from office. Whenever any vacancy shall occur among the
directors, the remaining directors shall constitute the directors of the Bank
until such vacancy is filled by the remaining directors, and any director so
appointed shall hold office for the unexpired term of his or her successor.
Notwithstanding the foregoing, each director shall hold office and serve at the
pleasure of the Board.
SECTION 2.04. ORGANIZATION MEETING. The directors elected by the share-
holders shall meet for organization of the new board at the time fixed by the
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presiding officer of the annual meeting. If at the time fixed for such meeting
there is no quorum present, the Directors in attendance may adjourn from time to
time until a quorum is obtained. A majority of the number of Directors elected
by the shareholders shall constitute a quorum for the transaction of business.
SECTION 2.05. REGULAR MEETINGS. The regular meetings of the Board of Directors
shall be held on the third Monday of each calendar month excluding March and
July, which meeting will be held at 4:00 p.m. When any regular meeting of the
Board falls on a holiday, the meeting shall be held on such other day as the
Board may previously designate or should the Board fail to so designate, on such
day as the Chairman of the Board of President may fix. Whenever a quorum is not
present, the directors in attendance shall adjourn the meeting to a time not
later than the date fixed by the Bylaws for the next succeeding regular meeting
of the Board.
SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held at the call of the Chairman of the Board or President, or at the
request of two or more Directors. Any special meeting may be held at such place
in Franklin County, Ohio, and at such time as may be fixed in the call. Written
or oral notice shall be given to each Director not later than the day next
preceding the day on which special meeting is to be held, which notice may be
waived in writing.
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The presence of a Director at any meeting of the Board shall be deemed a waiver
of notice thereof by him. Whenever a quorum is not present the Directors in
attendance shall adjourn the special meeting from day to day until a quorum is
obtained.
SECTION 2.07. QUORUM. A majority of the Directors shall constitute a quorum at
any meeting, except when otherwise provided by law; but a lesser number may
adjourn any meeting, from time-to-time, and the meeting may be held, as
adjourned, without further notice. When, however, less than a quorum as herein
defined, but at least one-third and not less than two of the authorized number
of Directors are present at a meeting of the Directors, business of the Bank may
be transacted and matters before the Board approved or disapproved by the
unanimous vote of the Directors present.
SECTION 2.08. COMPENSATION. Each member of the Board of Directors shall
receive such fees for, and transportation expenses incident to, attendance at
Board and Board Committee Meetings and such fees for service as a Director
irrespective of meeting attendance as from time to time are fixed by resolution
of the Board; provided, however, that payment hereunder shall not be made to a
Director for meetings attended and/or Board service which are not for the Bank's
sole benefit and which are concurrent and duplicative with meetings attended or
board service for an affiliate of the Bank for which the Director receives
payment; and provided further, that payment hereunder shall not be made in the
case of any Director in the regular employment of the Bank or of one of its
affiliates.
SECTION 2.09. EXECUTIVE COMMITTEE. There shall be a standing committee of
the Board of Directors known as the Executive Committee which shall possess
and exercise, when the Board is not in session, all powers of the Board that
may lawfully be delegated. The Executive Committee shall also exercise the
powers of the Board of Directors in accordance with the Provisions of the
"Employees Retirement Plan" and the "Agreement and Declaration of Trust" as
the same now exist or may be amended hereafter. The Executive Committee
shall consist of not fewer than four board members, including the Chairman of
the Board and President of the Bank, one of whom, as hereinafter required by
these By-laws, shall be the Chief Executive Officer. The other members of
the Committee shall be appointed by the Chairman of the Board or by the
President, with the approval of the Board and shall continue as members of
the Executive Committee until their successors are appointed, provided,
however, that any member of the Executive Committee may be removed by the
Board upon a majority vote thereof at any regular or special meeting of the
Board. The Chairman or President shall fill any vacancy in the Committee by
the appointment of another Director, subject to the approval of the Board of
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Directors. The regular meetings of the Executive Committee shall be held on a
regular basis as scheduled by the Board of Directors. Special meetings of the
Executive Committee shall be held at the call of the Chairman or President or
any two members thereof at such time or times as may be designated. In the
event of the absence of any member or members of the Committee, the presiding
member may appoint a member or members of the Board to fill the place or places
of such absent member or members to serve during such absence. Not fewer than
three members of the Committee must be present at any meeting of the Executive
Committee to constitute a quorum, provided, however that with regard to any
matters on which the Executive Committee shall vote, a majority of the Committee
members present at the meeting at which a vote is to be taken shall not be
officers of the Bank and, provided further, that if, at any meeting at which the
Chairman of the Board and President are both present, Committee members who are
not officers are not in the majority, then the Chairman of the Board or
President, which ever of such officers is not also the Chief Executive Officer,
shall not be eligible to vote at such meeting and shall not be recognized for
purposes of determining if a quorum is present at such meeting. When neither
the Chairman of the Board nor President are present, the Committee shall appoint
a presiding officer. The Executive Committee shal keep a record of its
proceedings and report its proceedings and the action taken by it to the Board
of Directors.
SECTION 2.10 COMMUNITY REINVESTMENT ACT AND COMPLIANCE POLICY COMMITTEE. There
shall be a standing committee of the Board of Directors known as the Community
Reinvestment Act and Compliance Policy Committee the duties of which shall be,
at least once in each calendar year, to review, develop and recommend policies
and programs related to the Bank's Community Reinvestment Act Compliance and
regulatory compliance with all existing statutes, rules and regulations
affecting the Bank under state and federal law. Such Committee shall provide
and promptly make a full report of such review of current Bank policies with
regard to Community Reinvestment Act and regulatory compliance in writing to the
Board, with recommendations, if any, which may be necessary to correct any
unsatisfactory conditions. Such Committee may, in its discretion, in fulfilling
its duties, utilize the Community Reinvestment Act officers of the Bank, Banc
One Ohio Corporation and Banc One Corporation and may engage outside Community
Reinvestment Act experts, as approved by the Board, to review, develop and
recommend policies and programs as herein required. The Community Reinvestment
Act and regulatory compliance policies and procedures established and the
recommendations made shall be consistent with, and shall supplement, the
Community Reinvestment Act and regulatory compliance programs, policies and
procedures of Banc One Corporation and Banc One Ohio Corporation. The Community
Reinvestment Act and Compliance Policy Committee shall consist of not fewer than
four board members, one of whom shall be the Chief Executive Officer
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and a majority of whom are not officers of the Bank. Not fewer than three
members of the Committee, a majority of whom are not officers of the Bank, must
be present to constitute a quorum. The Chairman of the Board or President of
the Bank, whichever is not the Chief Executive Officer, shall be an ex officio
member of the Community Reinvestment Act and Compliance Policy Committee. The
Community Reinvestment Act and Compliance Policy Committee, whose chairman shall
be appointed by the Board, shall keep a record of its proceedings and report its
proceedings and the action taken by it to the Board of Directors.
SECTION 2.11. TRUST COMMITTEES. There shall be two standing Committees known
as the Trust Management Committee and the Trust Examination Committee appointed
as hereinafter provided.
SECTION 2.12. OTHER COMMITTEES. The Board of Directors may appoint such
special committees from time to time as are in its judgment necessary in the
interest of the Bank.
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ARTICLE III
OFFICERS, MANAGEMENT STAFF AND EMPLOYEES
SECTION 3.01. OFFICERS AND MANAGEMENT STAFF.
(a) The officers of the Bank shall include a President, Secretary and
Security Officer and may include a Chairman of the Board, one or more
Vice Chairmen, one or more Vice Presidents (which may include one or
more Executive Vice Presidents and/or Senior Vice Presidents) and one
or more Assistant Secretaries, all of whom shall be elected by the
Board. All other officers may be elected by the Board or appointed in
writing by the Chief Executive Officer. The salaries of all officers
elected by the Board shall be fixed by the Board. The Board from
time-to-time shall designate the President or Chairman of the Board to
serve as the Bank's Chief Executive Officer.
(b) The Chairman of the Board, if any, and the President shall be elected
by the Board from their own number. The President and Chairman of the
Board shall be re-elected by the Board annually at the organizational
meeting of the Board of Directors following the Annual Meeting of
Shareholders. Such officers as the Board shall elect from their own
number shall hold office from the date of their election as officers
until the organization meeting of the Board of Directors following the
next Annual Meeting of Shareholders, provided, however, that such
officers may be relieved of their duties at any time by action of the
Board in which event all the powers incident to their office shall
immediately terminate.
(c) Except as provided in the case of the elected officers who are
members of the Board, all officers, whether elected or appointed,
shall hold office at the pleasure of the Board. Except as
otherwise limited by law or these By-laws, the Board assigns to
Chief Executive Officer and/or his designees the authority to
appoint and dismiss any elected or appointed officer or other
member of the Bank's management staff and other employees of the
Bank, as the person in charge of and responsible for any branch
office, department, section, operation, function, assignment or
duty in the Bank.
(d) The management staff of the Bank shall include officers elected by the
Board, officers appointed by the Chief Executive Officer, and such
other persons in the employment of the Bank who, pursuant to written
appointment and authorization by a duly authorized officer of the
Bank,
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perform management functions and have management responsibilities.
Any two or more offices may be held by the same person except that no
person shall hold the office of Chairman of the Board and/or President
and at the same time also hold the office of Secretary.
(e) The Chief Executive Officer of the Bank and any other officer of the
Bank, to the extent that such officer is authorized in writing by the
Chief Executive Officer, may appoint persons other than officers who
are in the employment of the Bank to serve in management positions and
in connection therewith, the appointing officer may assign such title,
salary, responsibilities and functions as are deemed appropriate by
him, provided, however, that nothing contained herein shall be
construed as placing any limitation on the authority of the Chief
Executive Officer as provided in this and other sections of these
By-Laws.
SECTION 3.02. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Bank shall have general and active management of the business of the Bank and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. Except as otherwise prescribed or limited by these
By-Laws, the Chief Executive Officer shall have full right, authority and
power to control all personnel, including elected and appointed officers, of
the Bank, to employ or direct the employment of such personnel and officers
as he may deem necessary, including the fixing of salaries and the dismissal
of them at pleasure, and to define and prescribe the duties and
responsibility of all Officers of the Bank, subject to such further
limitations and directions as he may from time-to-time deem proper. The Chief
Executive Officer shall perform all duties incident to his office and such
other and further duties, as may, from time-to-time, be required of him by
the Board of Directors or the shareholders. The specification of authority
in these By-Laws wherever and to whomever granted shall not be construed to
limit in any manner the general powers of delegation granted to the Chief
Executive Officer in conducting the business of the Bank. The Chief
Executive Officer or, in his absence, the Chairman of the Board or President
of the Bank, as designated by the Chief Executive Officer, shall preside at
all meetings of shareholders and meetings of the Board. In the absence of
the Chief Executive Officer, such officer as is designated by the Chief
Executive Officer shall be vested with all the powers and perform all the
duties of the Chief Executive Officer as defined by these By-Laws. When
designating an officer to serve in his absence, the Chief Executive Officer
shall select an officer who is a member of the Board of Directors whenever
such officer is available.
SECTION 3.03. POWERS OF OFFICERS AND MANAGEMENT STAFF. The Chief Executive
Officer, the Chairman of the Board, the President, and those officers so
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designated and authorized by the Chief Executive Officer are authorized for
an on behalf of the Bank, and to the extent permitted by law, to make loans
and discounts; to purchase or acquire drafts, notes, stock, bonds, and other
securities for investment of funds held by the Bank; to execute and purchase
acceptances; to appoint, empower and direct all necessary agents and
attorneys; to sign and give any notice required to be given; to demand
payment and/or to declare due for any default any debt or obligation due or
payable to the Bank upon demand or authorized to be declared due; to
foreclose any mortgages, to exercise any option, privilege or election to
forfeit, terminate, extend or renew any lease; to authorize and direct any
proceedings for the collection of any money or for the enforcement of any
right or obligation; to adjust, settle and compromise all claims of every
kind and description in favor of or against the Bank, and to give receipts,
releases and discharges therefor; to borrow money and in connection therewith
to make, execute and deliver notes, bonds or other evidences of indebtedness;
to pledge or hypothecate any securities or any stocks, bonds, notes or any
property real or personal held or owned by the Bank, or to rediscount any
notes or other obligations held or owned by the Bank, to employ or direct the
employment of all personnel, including elected and appointed officers, and
the dismissal of them at pleasure, and in furtherance of and in addition to
the powers hereinabove set forth to do all such acts and to take all such
proceedings as in his judgment are necessary and incidental to the operation
of the Bank.
Other persons in the employment of the Bank, including but not limited to
officers and other members of the management staff, may be authorized by the
Chief Executive Officer, or by an officer so designated and authorized by the
chief Executive Officer, to perform the powers set forth above, subject,
however, to such limitations and conditions as are set forth in the
authorization given to such persons.
SECTION 3.04. SECRETARY. The Secretary or such other officers as may be
designated by the Chief Executive Officer shall have supervision and control of
the records of the Bank and, subject to the direction of the Chief Executive
Officer, shall undertake other duties and functions usually performed by a
corporate secretary. Other officers may be designated by the Chief Executive
Officer or the Board of Directors as Assistant Secretary to perform the duties
of the Secretary.
SECTION 3.05. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of
the Board, President, any officer being a member of the Bank's management staff
who is also a person in charge of and responsible for any department within the
Bank and any other officer to the extent such officer is so designated and
authorized by the Chief Executive Officer, the Chairman of the
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Board, the President, or any other officer who is a member of the Bank's
management staff who is in charge of and responsible for any department within
the Bank, are hereby authorized on behalf of the Bank to sell, assign, lease,
mortgage, transfer, deliver and convey any real or personal property now or
hereafter owned by or standing in the name of the Bank or its nominee, or held
by this Bank as collateral security, and to execute and deliver such deeds,
contracts, leases, assignments, bills of sale, transfers or other papers or
documents as may be appropriate in the circumstances; to execute any loan
agreement, security agreement, commitment letters and financing statements and
other documents on behalf of the Bank as a lender; to execute purchase orders,
documents and agreements entered into by the Bank in the ordinary course of
business, relating to purchase, sale, exchange or lease of services, tangible
personal property, materials and equipment for the use of the Bank; to execute
powers of attorney to perform specific or general functions in the name of or on
behalf of the Bank; to execute promissory notes or other instruments evidencing
debt of the Bank; to execute instruments pledging or releasing securities for
public funds, documents submitting public fund bids on behalf of the Bank and
public fund contracts; to purchase and acquire any real or personal property
including loan portfolios and to execute and deliver such agreements, contracts
or other papers or documents as may be appropriate in the circumstances; to
execute any indemnity and fidelity bonds, proxies or other papers or documents
of like or different character necessary, desirable or incidental to the conduct
of its banking business; to execute and deliver settlement agreements or other
papers or documents as may be appropriate in connection with a dismissal
authorized by Section 3.01(c) of these By-laws; to execute agreements,
instruments, documents, contracts or other papers of like or difference
character necessary, desirable or incidental to the conduct of its banking
business; and to execute and deliver partial releases from and discharges or
assignments of mortgages, financing statements and assignments or surrender of
insurance policies, now or hereafter held by this Bank.
The Chief Executive Officer, Chairman of the Board, President, any officer
being a member of the Bank's management staff who is also a person in charge of
and responsible for any department within the Bank, and any other officer of the
Bank so designated and authorized by the Chief Executive Officer, Chairman of
the Board, President or any officer who is a member of the Bank's management
staff who is in charge of and responsible for any department within the Bank are
authorized for and on behalf of the Bank to sign and issue checks, drafts, and
certificates of deposit; to sign and endorse bills of exchange, to sign and
countersign foreign and domestic letters of credit, to receive and receipt for
payments of principal, interest, dividends, rents, fees and payments of every
kind and description paid to the Bank, to sign receipts for property acquired by
or entrusted to the Bank, to guarantee the genuineness of signatures on
assignments
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of stocks, bonds or other securities, to sign certifications of checks, to
endorse and deliver checks, drafts, warrants, bills, notes, certificates of
deposit and acceptances in all business transactions of the Bank.
Other persons in the employment of the Bank and of its subsidiaries,
including but not limited to officers and other members of the management staff,
may be authorized by the Chief Executive Officer, Chairman of the Board,
President or by an officer so designated by the Chief Executive Officer,
Chairman of the Board, or President to perform the acts and to execute the
documents set forth above, subject, however, to such limitations and conditions
as are contained in the authorization given to such person.
SECTION 3.06. PERFORMANCE BOND. All officers and employees of the Bank shall
be bonded for the honest and faithful performance of their duties for such
amount as may be prescribed by the Board of Directors.
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ARTICLE IV
TRUST DEPARTMENT
SECTION 4.01. TRUST DEPARTMENT. Pursuant to the fiduciary powers granted to
this Bank under the provisions of Federal Law and Regulations of the Comptroller
of the Currency, there shall be maintained a separate Trust Department of the
Bank, which shall be operated in the manner specified herein.
SECTION 4.02. TRUST MANAGEMENT COMMITTEE. There shall be a standing Committee
known as the Trust Management Committee, consisting of at least five members, a
majority of whom shall not be officers of the Bank. The Committee shall consist
of the Chairman of the Board who shall be Chairman of the Com- mittee, the
President, and at least three other Directors appointed by the Board of
Directors and who shall continue as members of the Committee until their
successors are appointed. Any vacancy in the Trust Management Committee may be
filled by the Board at any regular or special meeting. In the event of the
absence of any member or members, such Committee may, in its discretion, appoint
members of the Board to fill the place of such absent members to serve during
such absence. Three members of the Committee shall constitute a quorum. Any
member of the Committee may be removed by the Board by a majority vote at any
regular or special meeting of the Board. The Committee shall meet at such times
as it may determine or at the call of the Chairman, or President or any two
members thereof.
The Trust Management Committee, under the general direction of the Board of
Directors, shall supervise the policy of the Trust Department which shall be
formulated and executed in accordance with Law, Regulations of the Comptroller
of the Currency, and sound fiduciary principles.
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SECTION 4.03. TRUST EXAMINATION COMMITTEE. There shall be a standing Commit-
tee known as the Trust Examination Committee, consisting of three directors
appointed by the Board of Directors and who shall continue as members of the
committee until their successors are appointed. Such members shall not be
active officers of the Bank. Two members of the Committee shall constitute a
quorum. Any member of the Committee may be removed by the Board by a majority
vote at any regular or special meeting of the Board. The Committee shall meet
at such times as it may determine or at the call of two members thereof.
This Committee shall, at least once during each calendar year and within
fifteen months of the last such audit, or at such other time(s) as may be
required by Regulations of the Comptroller of the Currency, make suitable audits
of the Trust Department or cause suitable audits to be made by auditors
responsible only to the Board of Directors, and at such time shall ascertain
whether the Department has been administered in accordance with Law, Regulations
of the Comptroller of the Currency and sound fiduciary principles.
The Committee shall promptly make a full report of such audits in writing
to the Board of Directors of the Bank, together with a recommendation as to what
action, if any, may be necessary to correct any unsatisfactory condition. A
report of the audits together with the action taken thereon shall be noted in
the Minutes of the Board of Directors and such report shall be a part of the
records of this Bank.
SECTION 4.04. MANAGEMENT. The Trust Department shall be under the management
and supervision of an officer of the Bank or of the trust affiliate of the Bank
designated by and subject to the advice and direction of the Chief Executive
Officer. Such officer having supervisory responsibility over the Trust
Department shall do or cause to be done all things necessary or proper in
carrying on the business of the Trust Department in accordance with provisions
of law and applicable regulations.
SECTION 4.05. HOLDING OF PROPERTY. Property held by the Trust Department may
be carried in the name of the Bank in its fiduciary capacity, in the name of
Bank, or in the name of a nominee or nominees.
SECTION 4.06. TRUST INVESTMENTS. Funds held by the Bank in a fiduciary
capacity awaiting investment or distribution shall not be held uninvested or
undistributed any longer than is reasonable for the proper management of the
account and shall be invested in accordance with the instrument establishing a
fiduciary relationship and local law. Where such instrument does not specify
the character or class of investments to be made and does not vest in the Bank
any
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discretion in the matter, funds held pursuant to such instrument shall be
invested in any investment which corporate fiduciaries may invest under local
law.
The investments of each account in the Trust Department shall be kept
separate from the assets of the Bank, and shall be placed in the joint custody
or control of not less than two of the officers or employees of the Bank or of
the trust affiliate of the Bank designated for the purpose by the Trust
Management Committee.
SECTION 4.07. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman
of the Board, President, any officer of the Trust Department, and such other
officers of the trust affiliate of the Bank as are specifically designated
and authorized by the Chief Executive Officer, the President, or the officer
in charge of the Trust Department, are hereby authorized, on behalf of this
Bank, to sell, assign, lease, mortgage, transfer, deliver and convey any real
property or personal property and to purchase and acquire any real or
personal property and to execute and deliver such agreements, contracts, or
other papers and documents as may be appropriate in the circumstances for
property now or hereafter owned by or standing in the name of this Bank, or
its nominee, in any fiduciary capacity, or in the name of any principal for
whom this Bank may now or hereafter be acting under a power of attorney, or
as agent and to execute and deliver partial releases from any discharges or
assignments or mortgages and assignments or surrender of insurance policies,
to execute and deliver deeds, contracts, leases, assignments, bills of sale,
transfers or such other papers or documents as may be appropriate in the
circumstances for property now or hereafter held by this Bank in any
fiduciary capacity or owned by any principal for whom this Bank may now or
hereafter be acting under a power of attorney or as agent; to execute and
deliver settlement agreements or other papers or documents as may be
appropriate in connection with a dismissal authorized by Section 3.01(c) of
these By-laws; provided that the signature of any such person shall be
attested in each case by any officer of the Trust Department or by any other
person who is specifically authorized by the Chief Executive Officer, the
President or the officer in charge of the Trust Department.
The Chief Executive Officer, Chairman of the Board, President, any officer
of the Trust Department and such other officers of the trust affiliate of the
Bank as are specifically designated and authorized by the Chief Executive
Officer, the President, or the officer in charge of the Trust Department, or any
other person or corporation as is specifically authorized by the Chief Executive
Officer, the President or the officer in charge of the Trust Department, are
hereby authorized on behalf of this Bank, to sign any and all pleadings and
papers in probate and other court proceedings, to execute any indemnity and
fidelity bonds, trust agreements, proxies or other papers or documents of like
or different character necessary, desirable or
-25-
<PAGE>
incidental to the appointment of the Bank in any fiduciary capacity and the
conduct of its business in any fiduciary capacity; also to foreclose any
mortgage, to execute and deliver receipts for payments of principal,
interest, dividends, rents, fees and payments of every kind and description
paid to the Bank; to sign receipts for property acquired or entrusted to the
Bank; also to sign stock or bond certificates on behalf of this Bank in any
fiduciary capacity and on behalf of this Bank as transfer agent or registrar;
to guarantee the genuineness of signatures on assignments of stocks, bonds or
other securities, and to authenticate bonds, debentures, land or lease trust
certificates or other forms of security issued pursuant to any indenture
under which this Bank now or hereafter is acting as Trustee. Any such
person, as well as such other persons as are specifically authorized by the
Chief Executive Officer or the officer in charge of the Trust Department, may
sign checks, drafts and orders for the payment of money executed by the Trust
Department in the course of its business.
SECTION 4.08. VOTING OF STOCK. The Chairman of the Board, President, any
officer of the Trust Department, any officer of the trust affiliate of the Bank
and such other persons as may be specifically authorized by Resolution of the
Trust Management Committee or the Board of Directors, may vote shares of stock
of a corporation of record on the books of the issuing company in the name of
the Bank or in the name of the Bank as fiduciary, or may grant proxies for the
voting of such stock of the granting if same is permitted by the instrument
under which the Bank is acting in a fiduciary capacity, or by the law applicable
to such fiduciary account. In the case of shares of stock which are held by a
nominee of the Bank, such shares may be voted by such person(s) authorized by
such nominee.
-26-
<PAGE>
ARTICLE V
STOCKS AND STOCK CERTIFICATES
SECTION 5.01. STOCK CERTIFICATES. The shares of stock of the Bank shall be
evidenced by certificates which shall bear the signature of the Chairman of the
Board, the President, or a Vice President (which signature may be engraved,
printed or impressed), and shall be signed manually by the Secretary, or any
other officer appointed by the Chief Executive Officer for that purpose.
In case any such officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such before such
certificate is issued, it may be issued by the Bank with the same effect as if
such officer had not ceased to be such at the time of its issue. Each such
certificate shall bear the corporate seal of the Bank, shall recite on its fact
that the stock represented thereby is transferable only upon the books of the
Bank properly endorsed and shall recite such other information as is required by
law and deemed appropriate by the Board. The corporate seal may be facsimile
engraved or printed.
SECTION 5.02. STOCK ISSUE AND TRANSFER. The shares of stock of the Bank shall
be transferable only upon the stock transfer books of the Bank and except as
hereinafter provided, no transfer shall be made or new certificates issued
except upon the surrender for cancellation of the certificate or certificates
previously issued therefor. In the case of the loss, theft, or destruction of
any certificate, a new certificate may be issued in place of such certificate
upon the furnishing of any affidavit setting forth the circumstances of such
loss, theft, or destruction and indemnity satisfactory to the Chairman of the
Board, the President, or a Vice President. The Board of Directors, or the Chief
Executive Officer, may authorize the issuance of a new certificate therefor
without the furnishing of indemnity. Stock Transfer Books, in which all
transfers of stock shall be recorded, shall be provided.
The stock transfer books may be closed for a reasonable period and under
such conditions as the Board of Directors may at any time determine for any
meeting of shareholders, the payment of dividends or any other lawful purpose.
In lieu of closing the transfer books, the Board may, in its discretion, fix a
record date and hour constituting a reasonable period prior to the day
designated for the holding of any meeting of the shareholders or the day
appointed for the payment of any dividend or for any other purpose at the time
as of which shareholders entitled to notice of and to vote at any such meeting
or to receive such dividend or to be treated as shareholders for such other
purpose shall be determined, and only shareholders of record at such time shall
be entitled to notice of or to vote at such
-27-
<PAGE>
meeting or to receive such dividends or to be treated as shareholders for such
other purpose.
-28-
<PAGE>
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.01. SEAL. The impression made below is an impression of the seal
adopted by the Board of Directors of BANK ONE, NA f/k/a Bank One, Columbus, NA.
The Seal may be affixed by any officer of the Bank to any document executed by
an authorized officer on behalf of the Bank, and any officer may certify any
act, proceedings, record, instrument or authority of the Bank.
SECTION 6.02. BANKING HOURS. Subject to ratification by the Executive
Committee, the Bank and each of its Branches shall be open for business on such
days and during such hours as the Chief Executive Officer of the Bank shall,
from time to time, prescribe.
SECTION 6.03. MINUTE BOOK. The organization papers of this Bank, the Articles
of Association, the returns of the judges of elections, the By-Laws and any
amendments thereto, the proceedings of all regular and special meetings of the
shareholders and of the Board of Directors, and reports of the committees of the
Board of Directors shall be recorded in the minute book of the Bank. The
minutes of each such meeting shall be signed by the presiding Officer and
attested by the secretary of the meetings.
SECTION 6.04. AMENDMENT OF BY-LAWS. These By-Laws may be amended by vote of a
majority of the Directors.
-29-
<PAGE>
EXHIBIT 6
Securities and Exchange Commission
Washington, D.C. 20549
CONSENT
The undersigned, designated to act as Trustee under the Indenture for The
Musicland Group, Inc. described in the attached Statement of Eligibility and
Qualification, does hereby consent that reports of examinations by Federal,
State, Territorial, or District Authorities may be furnished by such authorities
to the Commission upon the request of the Commission.
This Consent is given pursuant to the provision of Section 321(b) of the Trust
Indenture Act of 1939, as amended.
Bank One, NA
Dated: By: /s/
-------------------------------
Authorized Signer
-30-
<PAGE>
EXHIBIT 7 TO FORM T-1
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1997
<TABLE>
<CAPTION>
DOLLAR AMOUNTS IN THOUSANDS
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin (1) $1,128,083
Interest-bearing balances (2) 1,100
Securities
Held-to-maturity securities 154,157
Available-for-sale securities 2,151,270
Federal funds sold and securities purchased under agreements to resell 653,609
Loans and lease financing receivables:
Loans and leases, net of unearned income 19,222,789
LESS: Allowance for loan and lease losses 459,898
LESS: Allocated transfer risk reserve 0
Loans and leases, net of unearned income, allowance, and reserve 18,762,891
Trading assets 24,918
Premises and fixed assets (including capitalized leases) 229,647
Other real estate owned 10,612
Investments in consolidated subsidiaries and associated companies 14,371
Customers' liability to this bank on acceptances outstanding 3,932
Intangible assets 130,801
Other assets 2,161,573
---------
TOTAL ASSETS $25,426,964
-----------
-----------
LIABILITIES
Deposits:
In domestic offices $14,741,933
Noninterest-bearing (1) 3,690,379
Interest-bearing 11,051,554
In foreign offices, Edge and Agreement subsidiaries, and IBFs 1,079,509
Noninterest-bearing 0
Interest-bearing 1,079,508
Federal funds purchased and securities sold under agreements to repurchase 3,642,733
Demand notes issued to the U.S. Treasury 86,152
Trading liabilities 0
Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
With a remaining maturity of one year or less 1,667,046
With a remaining maturity of more than one year through three years 470,970
With a remaining maturity of more than three years 164,948
Bank's liability on acceptances executed and outstanding 3,932
Subordinated notes and debentures (2) 729,196
Other liabilities 977,170
---------
TOTAL LIABILITIES $23,563,589
-----------
-----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus $ 0
Common stock 127,043
Surplus (exclude all surplus related to preferred stock) 738,352
Undivided profits and capital reserves 971,777
Net unrealized holding gains (losses) on available-for-sale securities 26,203
Cumulative foreign currency translation adjustments 0
TOTAL EQUITY CAPITAL $1,863,375
----------
----------
TOTAL LIABILITIES AND EQUITY CAPITAL $26,426,964
-----------
-----------
</TABLE>
- - ---------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
I, C. William Willen, Senior Vice President of the named bank, do hereby declare
that this Statement of Condition has been prepared in conformance with the
instructions issued by the appropriate regulatory authority and is true to the
best of my knowledge and belief.
/s/
- - ---------------------------------------
C. William Willen, Vice President
January 30, 1998
<PAGE>
LETTER OF TRANSMITTAL
THE MUSICLAND GROUP, INC.
OFFER TO EXCHANGE ITS REGISTERED 9 7/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS UNREGISTERED 9 7/8% SERIES A OUTSTANDING
SENIOR SUBORDINATED NOTES DUE 2008
PURSUANT TO THE PROSPECTUS, DATED , 1998.
- - --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. ON [ , 1998] UNLESS
EXTENDED (THE "EXPIRATION DATE"). TENDERS SHALL BE MADE TO THE EXCHANGE
AGENT AT THE ADDRESS STATED BELOW. TENDERS MAY BE WITHDRAWN PRIOR TO 5:00
P.M. ON THE EXPIRATION DATE.
- - --------------------------------------------------------------------------------
By Registered or Certified Mail,
By Overnight Courier, or By Hand:
Bank One, N.A.
235 West Schrock Road
Westerville, Ohio 43081
Attention: Corporate Trust Operations
By Facsimile: (614) 248-5088
Telephone: (800) 346-5153
Delivery of this Letter of Transmittal to an address other than as set forth
above, or transmission of instructions via a facsimile number other than the one
listed above will not constitute a valid delivery. The instructions accompanying
this Letter of Transmittal should be read carefully before this Letter of
Transmittal is completed.
The undersigned acknowledges that he or she has received the Prospectus,
dated [ ], 1998 (the "Prospectus"), of The Musicland Group, Inc., a
Delaware corporation (the "Company"), and this Letter of Transmittal (this
"Letter") which, together with the Prospectus, constitute the Company's offer
(the "Exchange Offer") to exchange an aggregate principal amount at maturity of
$ of 9 7/8% Series B Senior Subordinated Notes Due 2008 (the "New Notes")
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the Prospectus
is a part, for an equal principal amount of the Company's outstanding 9 7/8%
Series A Senior Subordinated Notes Due 2008 (the "Old Notes").
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. The Company reserves the right, at anytime or from time to
time, to extend the Exchange Offer at its discretion, in which event the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. In order to extend the Expiration Date, the Company will
notify the Exchange Agent of any extension by oral or written notice and will
mail to the record holders of Old Notes an announcement thereof, each prior to
9:00 a.m., Eastern Standard Time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
This Letter is to be completed by holders of Old Notes if (i) certificates
of the Old Notes are to be forwarded herewith or (ii) delivery of Old Notes is
to be made by book-entry transfer to the account maintained by the Exchange
Agent at The Depository Trust Company (the "Book-Entry Transfer Facility")
<PAGE>
pursuant to the procedures set forth in "The Exchange Offer" section of the
Prospectus. Holders of Old Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or confirmation of
the book-entry tender of their Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Old Notes in accordance with the guaranteed
delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
List below the Old Notes to which this Letter relates. If the space below is
inadequate, the certificate numbers and principal amount of Old Notes should be
listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
-------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL PRINCIPAL
NAME(S) AND ADDRESSES OF REGISTERED CERTIFICATE AMOUNT AMOUNT
HOLDER(S) (PLEASE FILL IN, IF BLANK) NUMBER(S)(1) OF OLD NOTE(S) TENDERED (2)
<S> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
TOTAL
- - ---------------------------------------------------------------------------------------------
</TABLE>
(1) Need not be completed if Old Notes are being tendered by book-entry
transfer.
(2) Unless otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof.
See Instruction 1.
/ / CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
Account Number _________________ Transaction Code Number ________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (For use
by Eligible Institutions Only)
Name(s) of Registered Old Note Holder(s) ___________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Note of Guaranteed Delivery ___________________________
Name of Institution which guaranteed delivery ______________________________
If Delivered by Book-Entry Transfer, Complete the Following:
Account Number _________________ Transaction Code Number ________________
<PAGE>
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENT OR SUPPLEMENTS
THERETO:
Name: ______________________________________________________________________
Address: ___________________________________________________________________
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and conditions of the Exchange Offer, the undersigned hereby
tenders to the Company the aggregate principal amount of Old Notes indicated
above. Subject to, and effective upon, the acceptance for exchange of the Old
Notes tendered in accordance with this Letter of Transmittal, the undersigned
sells, assigns and transfers to, or upon the order of, the Company all rights,
title and interest in and to the Old Notes tendered hereby.
The undersigned hereby represents and warrants that (i) the undersigned is
the owner of the Old Notes tendered hereby, (ii) the undersigned has full power
and authority to tender, exchange, sell, assign and transfer the Old Notes
tendered hereby and (iii) the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents to the Company that (i) any New Notes
acquired in exchange for Old Notes tendered hereby will have been acquired in
the ordinary course of business of the undersigned or such other person
receiving such New Notes, (ii) neither the holder of such Old Notes nor any such
other person is engaged in, or intends to engage in a distribution of such New
Notes, or has an arrangement or understanding with any person to participate in
the distribution of such New Notes, and (iii) neither the holder of such old
Notes nor any such other person is an "affiliate," as defined in Rule 405 under
the Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made by
the Company based upon the Company's understanding of an interpretation by the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in no-action letters issued to third parties, that the New Notes issued in
exchange for the Old Notes pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that: (1) such
holders are not affiliates of the Company within the meaning of Rule 405 under
the Securities Act; (2) such New Notes are acquired in the ordinary course of
such holders' business; and (3) such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the staff of the Commission has not considered the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. If a holder of Old Notes is an affiliate of the Company, or
is engaged in or intends to engage in a distribution of the New Notes or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder cannot rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. If the undersigned is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, it represents that the Old Notes to be exchanged for the New Notes
were acquired by it as a result of market-making activities or other trading
activities and acknowledges that it will deliver a prospectus in connection with
any resale of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
<PAGE>
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer--Withdrawal of Tenders"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED
THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
- - -------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
New Notes are to be issued in the name of and sent to someone other than the
person(s) whose signatures) appear(s) on this Letter above, or if Old Notes
delivered by book-entry transfer which are not accepted for exchange are to
be returned by credit to an account maintained at the Book-Entry Transfer
Facility other than the account indicated above.
Issue New Notes and/or Old Notes to:
Name(s) ____________________________________________________________________
(PLEASE TYPE OR PRINT)
__________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address: ___________________________________________________________________
(INCLUDING ZIP CODE)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)*
/ / Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
- - ------------------------------------------------------
- - ------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
New Notes are to be sent to someone other than the person(s) whose
signatures) appear(s) on this Letter above, or to such person(s) at an
address other than shown in the box entitled "Description of Old Notes" on
this Letter above.
Mail New Notes and/or Old Notes to:
Name(s) ____________________________________________________________________
(PLEASE TYPE OR PRINT)
__________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address: ___________________________________________________________________
(INCLUDING ZIP CODE)
-----------------------------------------------------------
<PAGE>
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES
FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR
THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR
TO 5:00 P.M., EASTERN STANDARD TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
- - --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
Dated: ______________________________________________________________ , 1998
__________________________________ , 1998
_____________________ _____________________ , 1998
(SIGNATURE OF OWNER) (DATE)
Area Code and Telephone Number: ____________________________________________
If a holder is tendering any Old Notes, this Letter of Transmittal must
be signed by the registered holder(s) as the name(s) appear(s) on the
certificates for the Old Notes or by an Persons) authorized to become
registered holder(s) by endorsements and documents transmitted herewith. If
signature is by a trustee, executor, administrator, guardian, officer or
other person acting in a fiduciary or representative capacity, please set
forth full title. See Instruction 3.
Name(s): ___________________________________________________________________
____________________________________________________________________________
(PLEASE TYPE OR PRINT)
Capacity: __________________________________________________________________
Address: ___________________________________________________________________
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed
by an Eligible Institution: ________________________________________________
(AUTHORIZED SIGNATURE)
__________________________________________________________________________
(TITLE)
__________________________________________________________________________
(NAME AND FIRM)
Dated _______________________________________________________________ , 1998
- - --------------------------------------------------------------------------------
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Offer to Exchange Registered
9 7/8% Series B Senior Subordinated Notes Due 2008 for any and all Outstanding
Unregistered 9 7/8% Series A Senior Subordinated Notes Due 2008 of The Musicland
Group, Inc.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter is to be completed by holders of Old Notes either if
certificates are to be forwarded herewith or if tenders are to be made pursuant
to the procedures for delivery by book-entry set forth in "The Exchange
Offer-Book--Entry Transfer" section of the Prospectus. Certificates for all
physically
<PAGE>
tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and any other documents required by this Letter, must be received by
the Exchange Agent at the address set forth herein on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures set forth below. Old Notes tendered hereby must be in denominations
of principal amount of maturity of $1,000 and any integral multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer-- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five business
days after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, or a Book-Entry
Confirmation, as the case may be, and any other documents required by this
Letter will be deposited by the Eligible Institution with the Exchange Agent,
and (iii) the certificates for all physically tendered Old Notes, in proper form
for transfer, or Book-Entry Confirmation, as the case may be, and all other
documents required by this Letter, are received by the Exchange Agent within
five business days after the date of execution of the Notice of Guaranteed
Delivery.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Old Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration
Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY BOOK
ENTRY TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of Old
Notes--Principal Amount Tendered." A reissued certificate representing the
balance of nontendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter, promptly after the
Expiration Date. All of the Old Notes delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes tendered
hereby, the signature must correspond with the name as written on the face of
the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be issued,
or any untendered Old Notes are to be reissued, to a person other than the
registered
<PAGE>
holder, then endorsements of any certificates transmitted hereby or separate
bond powers are required. Signatures on such certificates must be guaranteed by
an Eligible Institution.
If this Letter is signed by a person other than the registered holder of any
certificates specified herein, such certificates must be endorsed or accompanied
by appropriate bond powers, in either case signed exactly as the name of the
registered holder appears on the certificates and the signatures on such
certificates must be guaranteed by an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorney-in-fact, officers of corporations
or others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority to so act must be submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (an "Eligible
Institution").
Signatures on this Letter need not be guaranteed by an Eligible Institution,
provided the Old Notes are tendered: (i) by a registered holder of Old Notes
(which term, for purposes of the Exchange Offer, includes any participant in the
Book-Entry Transfer Facility system whose name appears on a security position
listing as the holder of such Old Notes) tendered who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter, or (ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter.
In the case of issuance in a different name, the employer identification or
social security number of the person named must also be indicated. A holder of
Old Notes tendering Old Notes by book-entry transfer may request that Old Notes
not exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder of Old Notes may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name and address of the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which, in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for as exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery of
New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old
<PAGE>
Notes is a nonresident, alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 6, it not be necessary for transfer
tax stamps to be affixed to the Old Notes specified in this Letter.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
Neither the Company, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: THE MUSICLAND GROUP, INC.
<TABLE>
<C> <S> <C>
- - -----------------------------------------------------------------------------------------
SUBSTITUTE Part 1-PLEASE PROVIDE TIN: -------------------
FORM W-9 YOUR TIN IN THE BOX Social Security Number OR
Department of the Treasury AT RIGHT AND CERTIFY Employer Identification Number
Internal Revenue Service BY SIGNING AND DATING
BELOW
- - -------------------------------------------------------
Payer's Request for Taxpayer Part 2 TIN Applied For [ ]
Identification Number (TIN)
and Certification
-------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me);
(2) I am not subject to backup withholding either because: (a) I am (exempt from backup
withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS")
that I am subject to backup withholding as a result of a failure to report all interests
or dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding; and
(3) any other information provided on this form is true and correct.
</TABLE>
Signature ________________________________ Date _______________
<TABLE>
<C> <S> <C>
You must cross out item (2) of the above certification if you have been notified by the
IRS that you are subject to backup withholding because of underreporting of interest or
dividends on your tax return and you have not been notified by the IRS that you are no
longer subject to backup withholding.
---------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
- - --------------------------------------------------------------------------------
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of the exchange, 31 percent of all reportable payments made to me
thereafter will be withheld until I provide a number.
Signature ________________________________ Date _______________
- - --------------------------------------------------------------------------------
<PAGE>
FORM OF
NOTICE OF GUARANTEED DELIVERY FOR
THE MUSICLAND GROUP, INC.
This form or one substantially equivalent thereto must be used to accept the
Exchange Offer of The Musicland Group, Inc. (the "Company") made pursuant to the
Prospectus, dated , 1998 (the "Prospectus") , and the enclosed Letter
of Transmittal (the "Letter of Transmittal") if certificates for Old Notes of
the Company are not immediately available or if the procedure for book-entry
transfer cannot be completed on a timely basis or time will not permit all
required documents to reach the Company prior to 5:00 P.M., Eastern Standard
Time, on the Expiration Date of the Exchange Offer. Such form may be delivered
or transmitted by facsimile transmission, mail or hand delivery to
(the "Exchange Agent") as set forth below. In addition, in
order to utilize the guaranteed delivery procedure to tender Old Notes pursuant
to the Exchange Offer, a completed signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
P.M., Eastern Standard Time, on the Expiration Date. Capitalized terms not
defined herein are defined in the Prospectus.
By Registered or Certified Mail,
By Overnight Courier, or By Hand:
Bank One, NA
235 West Schrock Road
Westerville, Ohio 43081
Attention: Corporate Trust Operations
By Facsimile: (614) 248-5088
Telephone: (800) 346-5153
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer Guaranteed
Delivery Procedures" section of the Prospectus.
<TABLE>
<S> <C>
Principal Amount of Old Notes Tendered:
$ If Old Notes will be delivered by book entry
transfer to The Depository Trust Company,
provide account number.
Certificate Nos. (if available
Total Principal Amount Represented by old
Notes Certificate (s):
$ Account Number
</TABLE>
<PAGE>
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned any every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
<TABLE>
<S> <C>
PLEASE SIGN HERE
Signature(s) of Owner(s)
or Authorized Signatory
Area Code and Telephone Number:
</TABLE>
Must be signed by the holder(s) of Old Notes as the name(s) of such
holder(s) appear(s) on the Old Notes certificates or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If any signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
<TABLE>
<S> <C>
Please print name(s) and address(s)
Name(s):
Capacity: Address(es)
</TABLE>
2
<PAGE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or a
member of the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or correspondent in the United States,
hereby guarantees that the certificates representing the principal amount of Old
Notes tendered hereby in proper form for transfer, or timely confirmation of the
book-entry transfer of such Old Notes into the Exchange Agent's account at The
Depository Trust Company pursuant to the procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" section of the Prospectus, together with
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof) with any required signature guarantee and any other documents required
by the Letter of Transmittal, will be received by the Exchange Agent at the
address set forth above, no later than five business days after the date of
execution hereof.
________________________________________________________________________________
<TABLE>
<S> <C>
Name of Firm Authorized Signature
Address Title
Zip Code (Please Type or Print)
Area Code and Tel. No. Dated:
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL
3
<PAGE>
FORM OF
THE MUSICLAND GROUP, INC.
OFFER TO EXCHANGE ITS REGISTERED
9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING UNREGISTERED
9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
To: Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
The Musicland Group, Inc. (the "Company") is offering to exchange (the
"Exchange Offer"), upon and subject to the terms and conditions set forth in the
Prospectus, dated , 1998 (the "Prospectus"), and the enclosed Letter
of Transmittal (the "Letter of Transmittal"), its registered 9 7/8% Series B
Senior Discount Notes Due 2008 (the "New Notes") for any and all of its
outstanding 9 7/8% Series A Senior Discount Notes Due 2008 (the "Old Notes").
The Exchange Offer is being made in order to satisfy certain obligations of the
Company contained in the Registration Rights Agreement dated as of April 6,
1998, between the Company and the Initial Purchasers.
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated , 1998;
2. The Letter of Transmittal for your use and for the information of your
clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer
if certificates for Old Notes are not immediately available or time will
not permit all required documents to reach the Exchange Agent prior to
the Expiration Date (as defined below) or if the procedure for book-entry
transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose account you
hold Old Notes registered in your name or the name of your nominee, with
space provided for obtaining such clients' instructions with regard to
the Exchange Offer;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. Return envelopes addressed to Bank One, N.A., the Exchange Agent for the
Old Notes.
Your prompt action is requested. The Exchange Offer will expire at 5:00
p.m., Eastern Standard Time, on , 1998 (the "Expiration Date") (30)
business days following commencement of the Exchange Offer), unless extended by
the Company. The Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time before 5:00 p.m., Eastern Standard Time, on the Expiration
Date.
To participate in the Exchange Offer, a duly executed and properly completed
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, should be sent to the Exchange
Agent and certificates representing the Old Notes should be delivered to the
Exchange Agent, all in accordance with the instructions set forth in the Letter
of Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the Exchange
Offer or to comply with the book-entry transfer procedures on a timely basis, a
tender may be effected by following guaranteed delivery procedures described in
the Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
The Company will, upon request, reimburse brokers, dealers, commercial banks
and trust companies for reasonable and necessary costs and expenses incurred by
them in forwarding the Prospectus and the related documents to the beneficial
owners of Old Notes held by them as nominee or in a fiduciary
<PAGE>
capacity. The Company will pay or cause to be paid all stock transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to the
Exchange Agent for the Old Notes, at its address and telephone number set forth
on the front of the Letter of Transmittal.
Very truly yours,
THE MUSICLAND GROUP, INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF
THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN
THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
2
<PAGE>
FORM OF
THE MUSICLAND GROUP, INC.
OFFER TO EXCHANGE ITS REGISTERED
9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING UNREGISTERED
9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
To: Our Clients
Enclosed for your consideration is a Prospectus, dated , 1998 (the
"Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of The Musicland
Group, Inc. (the "Company") to exchange its registered 9 7/8% Series B Senior
Subordinated Notes Due 2008 (the "New Notes") for any and all of its outstanding
9 7/8% Series A Senior Subordinated Notes Due 2008 (the "Old Notes"), upon the
terms and subject to the conditions described in the Prospectus. The Exchange
Offer is being made in order to satisfy certain obligations of the Company
contained in the Registration Rights Agreement dated as of April 6, 1998,
between the Company and the Initial Purchasers thereto.
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A tender of
such Old Notes may only be made by us as the holder of record and pursuant to
your instructions.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms and
conditions set forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in order
to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
Eastern Standard Time, on , 1998 (the "Expiration Date") (30 business
days following the commencement of the Exchange Offer) unless extended by the
Company. Any Old Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time before 5:00 p.m., Eastern Standard Time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus in the section captioned "The Exchange Offer--Conditions."
3. Any transfer taxes incident to the transfer of Old Notes from the holder
to the Company will be paid by the Company, except as otherwise provided
in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., Eastern Standard Time, on the
Expiration Date, unless extended by the Company.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. The Letter of Transmittal is furnished to you for your information
only and may not be used directly by you to tender Old Notes.
<PAGE>
INSTRUCTIONS WITH RESPECT TO
EXCHANGE OFFER
The undersigned acknowledges receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by the Company
with respect to the Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
<TABLE>
<S> <C>
Aggregate Principal Amount of Old Notes
9 7/8% Series A Senior Notes Due 2008
-------------------------------------------
Please do not tender any Old Notes held by
you for my account
-------------------------------------------
Dated: --------------, 1998 -------------------------------------------------------------
--------------------------------Signature(s)
- - ----------------------------------------------------------------------------------------
- - -------------------------------------------
Please print name(s) here
-------------------------------------------
--------------------------------Address(es)
---------------------------Area Code(s) and
Telephone Number(s)
-------------------------------------------
Tax Identification or Social Security No(s).
</TABLE>
None of the Old Notes held by us for your account will be tendered unless we
receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signatures) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for your
account.
2
<PAGE>
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
THE MUSICLAND GROUP, INC.
9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
(CUSIP #627578 AB 3)
(CINS #U61809 AA 4)
To: Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1998 (the "Prospectus") of The Musicland Group, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer") to exchange its registered % Series B Senior Subordinated
Notes Due 2008 (the "New Notes") for any outstanding % Series A Senior
Subordinated Notes Due 2008 (the "Old Notes"). Capitalized terms used but not
defined herein have the meaning as ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of the
undersigned.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (fill in amount) :
$ of the 9 7/8% Series A Senior Subordinated Notes due 2008
(CUSIP #627578 AB 3 or CINS #U61809 AA 4).
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if any)
$ of the 9 7/8% Series A Senior Subordinated Notes Due 2008
(CUSIP #627578 AB 3 or CINS #U61809 AA 4).
[ ] NOT to TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized to make, on
behalf of the undersigned (and the undersigned, by its signature below, hereby
makes to you), the representations and warranties contained in the Letter of
Transmittal that are to be made with respect to the undersigned as a beneficial
owner, including but not limited to the representations, that (i) the holder is
not an "affiliate" of the Company, (ii) any New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder and
(iii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes, it represents that such Old Notes were
acquired as a result of market-making activities or other trading activities,
and it acknowledges that it will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such New Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes, such broker-dealer is not deemed to admit that it is an "underwriter"
within the meaning of the Securities Act of 1933, as amended.
<PAGE>
SIGN HERE
NAME OF BENEFICIAL OWNER(S): _________________________
SIGNATURE(S): ________________________________________
NAME (S) (PLEASE PRINT) ______________________________
ADDRESS: _____________________________________________
TELEPHONE NUMBER _____________________________________
TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER: ___
_______________________________________________________
DATE: ________________________________________________
2
