UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-1623376
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
10400 Yellow Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
(612) 931-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
The number of shares outstanding of the Registrant's common stock as of
July 31, 1997 was 34,301,956 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 10
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 11
PART II - OTHER INFORMATION
Item 2. Changes in Securities. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signature 20
2
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1997 1996 1997 1996
--------- ------------- ---------- ----------
(As Adjusted) (As Adjusted)
(Note 5) (Note 5)
<S> <C> <C> <C> <C>
Sales .............................................. $ 342,746 $ 372,410 $ 718,826 $ 755,980
Cost of sales ...................................... 222,318 245,828 471,935 499,565
--------- --------- --------- ---------
Gross profit .................................... 120,428 126,582 246,891 256,415
Selling, general and administrative expenses ....... 121,543 135,814 251,489 275,303
Depreciation and amortization ...................... 9,627 11,175 19,479 22,734
Restructuring charge ............................... -- -- -- 35,000
--------- --------- --------- ---------
Operating loss .................................. (10,742) (20,407) (24,077) (76,622)
Interest expense ................................... 7,583 8,362 15,231 15,034
--------- --------- --------- ---------
Loss before income taxes ........................ (18,325) (28,769) (39,308) (91,656)
Income taxes ....................................... -- (4,689) -- (14,940)
--------- --------- --------- ---------
Net loss ........................................ $ (18,325) $ (24,080) $ (39,308) $ (76,716)
========= ========= ========= =========
Loss per common share ........................... $ (0.55) $ (0.72) $ (1.17) $ (2.30)
========= ========= ========= =========
Weighted average number of common shares outstanding 33,507 33,402 33,494 33,387
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30,
---------------------- December 31,
1997 1996 1996
---------- --------- ---------
(As Adjusted)
(Note 5)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 13,210 $ 5,485 $ 161,976
Inventories ................................................ 452,696 529,699 506,093
Deferred income taxes ...................................... 11,800 15,662 11,800
Other current assets ....................................... 8,647 33,705 31,492
--------- --------- ---------
Total current assets ..................................... 486,353 584,551 711,361
Property, at cost ............................................. 421,278 428,418 430,116
Accumulated depreciation and amortization ..................... (156,525) (140,793) (152,120)
--------- --------- ---------
Property, net .............................................. 264,753 287,625 277,996
Goodwill ...................................................... -- 96,755 --
Deferred income taxes ......................................... 1,200 -- 1,200
Other assets .................................................. 8,850 6,353 6,358
--------- --------- ---------
Total Assets ............................................. $ 761,156 $ 975,284 $ 996,915
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ....................... $ 6,786 $ -- $ 2,060
Revolver ................................................... 223,000 316,000 272,000
Accounts payable ........................................... 304,307 287,527 406,642
Restructuring reserve ...................................... 4,755 15,605 33,963
Other current liabilities .................................. 65,331 63,242 100,866
--------- --------- ---------
Total current liabilities ................................ 604,179 682,374 815,531
Long-term debt ................................................ 142,255 110,000 122,539
Other long-term liabilities ................................... 50,568 55,582 56,226
Deferred income taxes ......................................... -- 8,172 --
Stockholders' equity (deficit):
Preferred stock ($.01 par value; authorized: 5,000,000 .....
shares; issued and outstanding: none) -- -- --
Common stock ($.01 par value; authorized: 75,000,000
shares; issued and outstanding: 34,301,956 shares) ..... 343 343 343
Additional paid-in capital ................................. 254,739 254,411 253,896
Accumulated deficit ........................................ (277,957) (121,627) (238,649)
Deferred compensation ...................................... (7,998) (8,998) (7,998)
Common stock subscriptions ................................. (4,973) (4,973) (4,973)
--------- --------- ---------
Total stockholders' equity (deficit) ..................... (35,846) 119,156 2,619
--------- --------- ---------
Total Liabilities and Stockholders' Equity (Deficit) ..... $ 761,156 $ 975,284 $ 996,915
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1997 1996
------------ -------------
(As Adjusted)
(Note 5)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................................. $ (39,308) $ (76,716)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 19,711 23,043
Disposal of property .................................................... 2,334 1,633
Restructuring charge .................................................... -- 35,000
Deferred income taxes ................................................... -- 6,010
Changes in operating assets and liabilities:
Inventories ............................................................. 53,397 3,994
Other current assets .................................................... 22,845 (12,895)
Accounts payable ........................................................ (102,335) (116,321)
Restructuring reserve ................................................... (7,667) (3,741)
Other current liabilities ............................................... (35,504) (45,135)
Other assets ............................................................ (1,957) (210)
Other long-term liabilities ............................................. (1,905) 3,024
--------- ---------
Net cash used in operating activities .................................. (90,389) (182,314)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ...................................................... (3,819) (7,864)
--------- ---------
FINANCING ACTIVITIES:
Decrease in checks drawn in excess of bank balances ....................... -- (69,321)
Borrowings (repayments) under revolver .................................... (49,000) 263,000
Principal payments on long-term debt ...................................... (5,558) --
Proceeds from sale of common stock ........................................ -- 13
--------- ---------
Net cash provided by (used in) financing activities .................... (54,558) 193,692
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ (148,766) 3,514
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................ 161,976 1,971
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 13,210 $ 5,485
========= =========
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest ................................................................. $ 16,410 $ 13,582
Income taxes, net ........................................................ (22,954) 9,931
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share amounts)
1. 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 accompanying interim consolidated financial statements of the
Company are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of such consolidated financial statements have
been reflected in the interim periods presented. Such adjustments consisted only
of normal recurring items. The Company's business is seasonal and, accordingly,
interim results are not indicative of results for a full year. The significant
accounting policies and certain financial information which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying consolidated
financial statements of the Company should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K.
2. Summary of Significant Risks and Uncertainties and Going Concern
Assessment
In recent years, the Company's stores have faced increased competition
from 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 low prices offered by these non-mall
stores created intense price competition and adversely affected the performance
of both the Company's non-mall and mall stores. The Company experienced
liquidity pressures as a result of the challenging retail sales environment, the
negative impact of underperforming existing stores and new Media Play stores
opened in 1995 and 1996, particularly those which performed below expectations.
During the second half of 1996, the Company encountered difficulty in obtaining
shipments from certain vendors, primarily due to concerns about the Company's
liquidity. The competitive environment has eased somewhat in 1997 as a result of
the closing of stores by certain mall competitors and the continued voluntary
compliance by certain non-mall competitors with the more strictly enforced
minimum advertised price ("MAP") policies initiated by certain of the largest
prerecorded music suppliers.
Management implemented programs during 1996 to improve profitability,
reduce inventory levels and increase inventory turnover. More focused marketing
and advertising programs were instituted in late 1996. The Company slowed store
expansion to focus on improving performance in its existing stores and recorded
pretax restructuring charges totaling $75,000 to reflect estimated costs
associated with the closing of 114 underperforming stores and the Company's
distribution facility in Minneapolis, Minnesota. The goodwill write-downs taken
in 1995 and 1996, following evaluations of goodwill for impairment, have
eliminated goodwill from the Company's balance sheet. In addition, during the
first quarter of 1997, the Company reached voluntary agreements with the
majority of its vendors to temporarily defer existing trade payables and provide
continued product supply, subject to payment terms reduced to 10 days or less on
new purchases.
In June 1997, the Company completed agreements with its banks to amend
the existing credit agreement to provide additional flexibility in the covenants
and to provide additional financing under a term facility. The Company also
obtained the necessary amendments to financing agreements relating to its
Franklin distribution facility, three of its Media Play stores and its senior
subordinated notes. The Company had previously obtained waivers of certain
financial covenants and technical defaults under the credit agreement that had
been extended through June 30, 1997 to allow for adequate time to complete
6
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(Dollars in thousands, except per share amounts)
2. Summary of Significant Risks and Uncertainties and Going Concern
Assessment (Continued)
all of the necessary financing agreements and related amendments. Following
completion of these agreements, the Company began and has not yet finalized
negotiations with its vendors to develop a repayment schedule for the deferred
trade payables balances and to return to normal credit terms. While the actions
taken by management contributed to improved performance in the first half of
1997 and an improvement in the Company's financial position, uninterrupted
shipments from vendors on more flexible credit terms, particularly for seasonal
purchases, are essential to the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
3. Revolving Credit Facility and Term Loan
In June 1997, the Company obtained an amendment to its credit agreement
that 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 debt and trade
payables to eligible inventory ratio and the annual one day clean-down
requirement of borrowings under the revolving credit facility. The amendment
also allows for additional financing under a term loan facility. The Company had
previously obtained waivers of certain financial covenants and technical
defaults under the credit 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.
Pursuant to the amendment, borrowings are available under the revolving
credit facility up to a maximum of the lesser of 60% of eligible inventory or
$275,000 through December 11, 1997, $255,000 during the period from December 12,
1997 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. Outstanding revolver borrowings in excess
of $245,000 are secured by the Company's inventory. At June 30, 1997, the
maximum permitted borrowings under the revolver were $275,000. The Company had
revolver borrowings of $223,000 at June 30, 1997 and had cash and cash
equivalents of $13,210. The Company may request borrowings under the term loan
facility on or after September 15, 1997, provided certain conditions are met.
Any amount of the $50,000 term loan facility that is not borrowed by October 31,
1997 expires and is no longer available to the Company.
4. Restructuring Charges
During 1996, the Company implemented programs designed to improve
profitability and increase inventory turnover. Pretax restructuring charges of
$35,000 and $40,000 were recorded in the first and fourth quarters of 1996,
respectively, to reflect estimated costs associated with the closing of 115
underperforming stores and the Company's distribution facility in Minneapolis,
Minnesota. The store closings included 79 mall stores and 36 non-mall stores.
Through June 30, 1997, the Company closed the distribution facility and 114
stores. The Company had entered into a lease termination agreement with the
landlord of the one remaining non-mall store identified under the restructuring
program but exercised an option to reinstate the lease and consequently removed
the store from the closing list. As of June 30, 1997, $70,245 of the
restructuring reserve had been utilized, consisting of $31,759 of cash payments,
primarily related to payments to landlords for the early termination of
operating leases and legal and consulting fees, and $38,486 of non-cash charges
related to write-downs of leasehold improvements and
7
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(Dollars in thousands, except per share amounts)
4. Restructuring Charge (Continued)
certain equipment, net of unamortized lease credits. Because of the remaining
lease obligations on five non-mall stores which were closed without termination
agreements, the reserve balance of $4,755 was not reduced for the non-mall store
that was removed from the closing list.
5. Income Taxes
The effective income tax rates for the three months and six months
ended June 30, 1996 have been adjusted from 35.3% and 35.5%, respectively, to
16.3%, the income tax benefit was reduced from $10,150 and $32,550,
respectively, to $4,689 and $14,940, respectively, and the net current deferred
tax asset and net noncurrent deferred tax liability were increased (decreased)
by ($15,238) and $2,372, respectively, to reflect the effect of the deferred tax
valuation allowances recorded in the fourth quarter of 1996. The valuation
allowances were required because of the uncertainty of future earnings and
reduced the deferred income tax balances at December 31, 1996 to approximate the
remaining recoverable income taxes after carryback of the taxable loss for the
year ended December 31, 1996. Accordingly, the Company expects its tax provision
for the year ending December 31, 1997 to be minimal and no tax provision
(benefit) will be recorded on pretax earnings (loss) in interim periods during
1997. The effective income tax rates for the three months and six months ended
June 30, 1996, before consideration of the adjustment for valuation allowances,
vary from the federal statutory rate principally as a result of nondeductible
goodwill amortization and state income taxes.
6. Loss Per Common Share
Loss per common share amounts are computed by dividing net loss by the
weighted average number of common shares outstanding. For purposes of 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 and warrants are anti-dilutive due to the net loss in
each period.
7. Common Stock Warrants
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 are exercisable over a period of five years
and expire in 2002. The difference between the exercise price and 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.
8. Supplemental Cash Flow Information
The Company's distribution facility in Franklin, Indiana and most of
the related equipment, which together had an original cost of approximately
$30,000, were financed under an operating lease with a special purpose entity
that had been formed for the purpose of purchasing the land and equipment and
constructing the facility using secured long-term financing. The land, building
and equipment, together with the related mortgage note payable, were recorded on
the Company's books 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. The terms of the amendment required a principal payment of
$3,214 with the effective date of the amendment and require principal payments
of $3,214 in September 1997, $1,714 in December 1997 and $857 in February 1998,
with the balance due at the end of either the original term in March 1999 or the
one year renewal term in March 2000.
8
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(Dollars in thousands, except per share amounts)
9. Recently Issued Accounting Standards
Financial Accounting Standards Board Statement No. 128, "Earnings per
Share" ("Statement No. 128"), issued in February 1997 and effective for fiscal
years ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share ("EPS"). Implementation of Statement
No. 128 will not have a material impact on the Company's computation or
presentation of EPS, as the Company's common stock equivalents either have had
no material effect on earnings per share amounts or have been anti-dilutive with
respect to losses.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of the total of net income and the components of all other
nonowner changes in equity, or comprehensive income, either below net income
(loss) in the statement of operations, in a separate statement of comprehensive
income (loss) or within the statement of changes in stockholders' equity. The
Company has had no significant items of other comprehensive income.
9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have reviewed the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware corporation) and Subsidiaries as of June 30, 1997
and 1996, and the related consolidated statements of operations for the
three-month and six-month periods ended June 30, 1997 and 1996, and the
consolidated statements of cash flows for the six-month periods ended June 30,
1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Musicland Stores Corporation and
Subsidiaries as of December 31, 1996, and, in our report dated February 25,
1997, we expressed an unqualified opinion on that statement with an explanatory
fourth paragraph regarding the Company's ability to continue as a going concern.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced declining
operating results and liquidity constraints that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 22, 1997
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
In recent years, the Company's stores have faced increased competition
from 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 low prices offered by these non-mall
stores created intense price competition and adversely affected the performance
of both the Company's non-mall and mall stores. The Company experienced
liquidity pressures as a result of the challenging retail sales environment, the
negative impact of underperforming existing stores and new Media Play stores
opened in 1995 and 1996, particularly those which performed below expectations.
During the second half of 1996, the Company encountered difficulty in obtaining
shipments from certain vendors, primarily due to concerns about the Company's
liquidity. The competitive environment has eased somewhat in 1997 as a result of
the closing of stores by certain mall competitors and the continued voluntary
compliance by certain non-mall competitors with the more strictly enforced
minimum advertised price ("MAP") policies initiated by certain of the largest
prerecorded music suppliers.
Management implemented programs during 1996 to improve profitability,
reduce inventory levels and increase inventory turnover. More focused marketing
and advertising programs were instituted in late 1996. The Company slowed store
expansion to focus on improving performance in its existing stores and recorded
pretax restructuring charges totaling $75 million to reflect estimated costs
associated with the closing of 114 underperforming stores and the Company's
distribution facility in Minneapolis, Minnesota. The goodwill write-downs taken
in 1995 and 1996, following evaluations of goodwill for impairment, have
eliminated goodwill from the Company's balance sheet. In addition, during the
first quarter of 1997, the Company reached voluntary agreements with the
majority of its vendors to temporarily defer existing trade payables and provide
continued product supply, subject to payment terms reduced to 10 days or less on
new purchases. See "- Liquidity and Capital Resources."
In June 1997, the Company completed agreements with its banks to amend
the existing credit agreement to provide additional flexibility in the covenants
and to provide additional financing under a term facility. The Company also
obtained the necessary amendments to financing agreements relating to its
Franklin distribution facility, three of its Media Play stores and its senior
subordinated notes. The Company had previously obtained waivers of certain
financial covenants and technical defaults under the credit 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. Following
completion of these agreements, the Company began and has not yet finalized
negotiations with its vendors to develop a repayment schedule for the deferred
trade payables balances and to return to normal credit terms. While the actions
taken by management contributed to improved performance in the first half of
1997 and an improvement in the Company's financial position, uninterrupted
shipments from vendors on more flexible credit terms, particularly for seasonal
purchases, are essential to the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
11
<PAGE>
Results of Operations
The following table presents certain unaudited sales and store data for
the non-mall based full-media superstores (Media Play and On Cue), the mall
based music and video sell-through stores (Sam Goody, Musicland and Suncoast
Motion Picture Company) and in total for the Company for the three months and
six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------------
Percent of Total
-------------------------
1997 1996 % Change 1997 1996
------------- -------------- --------------- ------------ -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Sales:
Non-mall stores $ 114.4 $ 133.3 (14.2)% 33.4% 35.8%
Mall stores 225.6 235.6 ( 4.2) 65.8 63.3
Total (1) 342.7 372.4 ( 8.0) 100.0 100.0
Comparable store sales % change:
Non-mall stores (3.8)% 4.7% N/A N/A N/A
Mall stores (0.5) 0.6 N/A N/A N/A
Total (1) (1.6) 1.8 N/A N/A N/A
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------------
Percent of Total
-------------------------
1997 1996 % Change 1997 1996
------------- -------------- --------------- ------------ -----------
(dollars and square footage in millions)
<S> <C> <C> <C> <C> <C>
Sales:
Non-mall stores $ 244.7 $ 267.2 (8.4)% 34.0% 35.3%
Mall stores 468.7 481.9 (2.7) 65.2 63.7
Total (1) 718.8 756.0 (4.9) 100.0 100.0
Comparable store sales % change:
Non-mall stores 0.9% (0.1)% N/A N/A N/A
Mall stores 0.7 (0.9) N/A N/A N/A
Total (1) 0.7 (0.6) N/A N/A N/A
Store count at end of period:
Non-mall stores 224 243 (7.8) 16.2 16.4
Mall stores 1,137 1,214 (6.3) 82.4 82.1
Total (1) 1,380 1,479 (6.7) 100.0 100.0
Store square footage at end of period:
Non-mall stores 4.3 5.1 (15.6) 51.0 53.5
Mall stores 4.1 4.4 ( 6.4) 48.4 45.8
Total (1) 8.4 9.5 (11.4) 100.0 100.0
</TABLE>
------------------------------------------------------------------------------
(1) The totals include other divisions which individually are not significant.
Sales. Comparable stores sales results in the second quarter
and first half of 1997 were impacted by the lack of strong product releases,
primarily in prerecorded video, offset by comparable store sales gains in
prerecorded music. The following table shows the comparable store sales
percentage
12
<PAGE>
increase (decrease) attributable to the Company's two principal
product categories for the three months and six months ended June 30, 1997 and
1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Prerecorded music 4.0 % 3.7 % 4.4 % 2.3 %
Prerecorded video cassettes (7.8) 0.3 (2.9) (3.0)
</TABLE>
The decreases in total sales in the second quarter and first half of
1997 compared to the same periods in 1996 resulted primarily from the net
decrease in store count. The expansion of non-mall stores accounted for most of
the increase in total sales in the second quarter and first half of 1996. See
"-Liquidity and Capital Resources - Investing Activities."
During the second half of 1996, the Company encountered difficulty in
obtaining shipments from certain vendors in the books, computer software, video
games and trend product categories, primarily due to concerns about the
Company's liquidity. In 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 10 days or less on new purchases. In June 1997, the Company
began and has not yet finalized negotiations with its vendors to develop a
repayment schedule for the deferred trade payables balances and to return to
normal credit terms. Uninterrupted shipments from vendors on more flexible
credit terms, particularly for seasonal purchases, are essential to the
Company's ability to continue as a going concern. There can be no assurance that
the Company will continue to receive adequate product from its vendors on
acceptable credit terms. See "- Liquidity and Capital Resources."
Gross Profit. Gross profit as a percentage of sales was 35.1% in the
second quarter of 1997 compared with 34.0% in the second quarter of 1996, an
increase of 1.1%. For the first half of 1997, gross margin improved 0.4% to
34.3% from 33.9% in the first half of 1996. The gross margin increases in 1997
were principally attributable to less promotional pricing. Inventory shrinkage
in the second quarter and first half of 1997 increased by 0.5% and 0.4%,
respectively, from 1996. The impact of higher inventory shrinkage in 1997 was
offset by improvements to total Company gross margin resulting from decreases in
sales from the lower margin non-mall stores. Because the low-price, non-mall
superstores have a lower gross margin than mall stores, the expansion of
non-mall stores in previous periods negatively impacted total Company gross
margin as their sales increased in proportion to total Company sales. The
proportion of sales from the non-mall stores relative to total sales decreased
in the second quarter and first half of 1997 due to store closings and resulted
in improvements to gross margin of 0.4% and 0.2%, respectively. The Company
expects a reduced impact on gross margin from the non-mall stores because of the
non-mall store closings and the curtailment of non-mall store expansion. The
Company may also continue to benefit from the continued compliance by certain
non-mall competitors with the more strictly enforced MAP polices of certain of
the largest prerecorded music suppliers and the continued closing of stores by
certain mall competitors.
Selling, General and Administrative Expenses. The decreases in selling,
general and administrative expenses in the second quarter and first half of 1997
compared with the 1996 periods were primarily due to store closings. The Company
also achieved cost savings in 1997 from lease concessions for certain mall
stores, a reduction in advertising and the closing of the Minneapolis
distribution facility. Financial and legal advisory services and related
expenses, most of which were required or incurred in conjunction with the
Company's credit agreement, totaled approximately $0.5 million and $2.6 million
for the three months and six months ended June 30, 1997, respectively. Selling,
general and administrative expenses as a percentage of sales were 35.5% in the
second quarter of 1997 compared with 36.5% in the second quarter of 1996 and for
the first half were 35.0% in 1997 compared with 36.4% in 1996. These rate
decreases were mainly due to the cost savings discussed above. Management
expects these trends to continue into the third quarter.
13
<PAGE>
Depreciation and Amortization. Depreciation and amortization in the
second quarter and first half of 1997 decreased $1.5 million and $3.3 million,
respectively, over the same periods in 1996. Goodwill amortization, eliminated
after the write-down of the remaining goodwill balance in the fourth quarter of
1996, was $0.8 million and $1.5 million for the second quarter and first half of
1996, respectively. The decreases in other depreciation and amortization were
primarily attributable to store closings.
Restructuring Charges. During 1996, the Company implemented programs
designed to improve profitability and increase inventory turnover. Pretax
restructuring charges of $35 million and $40 million were recorded in the first
and fourth quarters of 1996, respectively, to reflect estimated costs associated
with the closing of 115 underperforming stores and the Company's distribution
facility in Minneapolis, Minnesota. The store closings included 79 mall stores
and 36 non-mall stores. Through June 30, 1997, the Company closed the
distribution facility and 114 stores. The Company had entered into a lease
termination agreement with the landlord of the one remaining non-mall store
identified under the restructuring program but exercised an option to reinstate
the lease and consequently removed the store from the closing list. As of June
30, 1997, $70.2 million of the restructuring reserve had been utilized,
consisting of $31.7 million of cash payments, primarily related to payments to
landlords for the early termination of operating leases and legal and consulting
fees, and $38.5 million of non-cash charges related to write-downs of leasehold
improvements and certain equipment, net of unamortized lease credits. Because of
the remaining lease obligations on five non-mall stores which were closed
without termination agreements, the reserve balance of $4.8 million was not
reduced for the non-mall store that was removed from the closing list. See "-
Liquidity and Capital Resources - Investing Activities."
Interest Expense. Interest expense in the second quarter of 1997
decreased $0.8 million, primarily due to lower outstanding borrowings on the
revolver. For the first half of 1997, the increase to interest expense resulting
from the increase in the weighted average interest rate on the revolver was
offset by lower outstanding revolver borrowings. For the second quarter of 1997
and 1996 and the first half of 1997 and 1996, the average daily revolver
balances, based upon the number of days outstanding, were $261.3 million, $304.0
million, $262.4 million and $268.2 million, respectively. The weighted average
interest rates on the revolver during the periods, based upon the average daily
balances, were 8.2%, 7.7%, 8.1% and 7.4%, respectively. See "- Liquidity and
Capital Resources."
Income Taxes. The effective income tax rates for the second quarter and
first half of 1996 have been adjusted from 35.3% and 35.5%, respectively, to
16.3%, and the income tax benefit was reduced from $10.2 million and $32.6
million, respectively, to $4.7 million and $14.9 million, respectively, to
reflect the effect of the deferred tax valuation allowances recorded in the
fourth quarter of 1996. The valuation allowances were required because of the
uncertainty of future earnings and reduced the deferred income tax balances at
December 31, 1996 to approximate the remaining recoverable income taxes after
carryback of the taxable loss for the year ended December 31, 1996. Accordingly,
the Company expects its tax provision for the year ending December 31, 1997 to
be minimal and no tax provision (benefit) will be recorded on pretax earnings
(loss) in interim periods during 1997. The effective income tax rates for the
three months and six months ended June 30, 1996, before consideration of the
adjustment for valuation allowances, vary from the federal statutory rate
principally as a result of nondeductible goodwill amortization and state income
taxes. See Note 5 of Notes to Consolidated Financial Statements.
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.
Recently Issued Accounting Standards. Financial Accounting Standards Board
Statement No. 128, "Earnings per Share" ("Statement No. 128"), issued in
February 1997 and effective for fiscal years ending after December 15, 1997,
establishes and simplifies standards for computing and presenting earnings per
share ("EPS"). Implementation of Statement No. 128 will not have a material
impact on the Company's computation or presentation of EPS, as the Company's
common stock equivalents either have had no material effect on earnings per
share amounts or have been anti-dilutive with respect to losses.
14
<PAGE>
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of the total of net income and the components of all other
nonowner changes in equity, or comprehensive income, either below net income
(loss) in the statement of operations, in a separate statement of comprehensive
income (loss) or within the statement of changes in stockholders' equity. The
Company has had no significant items of other comprehensive income.
Liquidity and Capital Resources
The Company's primary sources of capital are borrowings under the
revolving credit facility pursuant to the terms of its bank credit agreement and
internally generated cash. The credit agreement provides for a revolving credit
facility and expires in October 1999. In June 1997, the Company completed
agreements with its banks to amend the existing credit agreement and to provide
additional financing under a term loan facility of up to $50 million, provided
certain conditions are met. Pursuant to the amendment, borrowings are available
under the revolving credit facility up to a maximum of the lesser of the total
outstanding trade accounts payable, 60% of eligible inventory or $275 million
through December 11, 1997, $255 million during the period from December 12, 1997
through February 15, 1998 and $245 million 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. Outstanding revolver borrowings in excess
of $245 million are secured by the Company's inventory. At June 30, 1997, the
maximum permitted borrowings under the revolver were $275 million. The Company
had revolver borrowings of $223 million at June 30, 1997 and had cash and cash
equivalents of $13.2 million. The Company may request borrowings under the term
loan facility on or after September 15, 1997, provided certain conditions are
met. Any amount of the $50 million term loan facility that is not borrowed by
October 31, 1997 expires and is no longer available to the Company. See "-
Financing Activities" and Note 3 of Notes to Consolidated Financial Statements.
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,
consolidated tangible net worth and debt to total capitalization and removed
financial covenants related to the debt and trade payables to eligible inventory
ratio and the annual one day clean-down requirement of borrowings under the
revolving credit facility. The Company had previously obtained waivers of
certain financial covenants and technical defaults under the credit 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.
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 10 days or less on new purchases. Following completion of the
amendment to the credit agreement and other financing agreements and waivers in
June 1997, the Company began and has not yet finalized negotiations with its
vendors to develop a repayment schedule for the deferred trade payables balances
and to return to normal credit terms. The Company expects to complete
negotiations with its vendors by the fourth quarter of 1997 and anticipates that
the repayment schedule will include weekly payments for a major portion of the
amount deferred, with the balance to be paid by December 31, 1997. Should any or
all of these vendors decline a repayment schedule and demand immediate repayment
of the deferred balances, there can be no assurance that the Company will be
able to obtain adequate financing to make such payment. Uninterrupted shipments
from vendors on more flexible credit terms, particularly for seasonal purchases,
are essential to the Company's ability to continue as a going concern. There can
be no assurance that the Company will continue to receive adequate product from
its vendors on acceptable credit terms.
Operating Activities. Net cash used in operating activities (including in
1996 the decrease in checks drawn in excess of bank balances which relate to
vendor payments) during the six months ended June 30, 1997 and 1996 was $90.4
million and $251.6 million, respectively. The lower level of cash used in the
first six months of 1997 was primarily due to lower inventory levels as a result
of the consolidation
15
<PAGE>
of distribution centers into a single facility, store
closings and other initiatives designed by management to increase inventory
turnover. Additionally, the deferral of trade payable balances in the first
quarter of 1997 increased accounts payable and reduced cash payments during the
first six months of 1997 by approximately $50 million. Cash used for inventory
purchases, as reflected by the aggregate net changes in inventories, accounts
payable and checks drawn in excess of bank balances, was $48.9 million in 1997
compared to $181.6 million in 1996. The Company received income tax refunds in
the first half of 1997 totaling approximately $23 million from the carryback of
the taxable loss for the year ended December 31, 1996, while taxes paid in the
first six months of 1996 on taxable income in 1995 were approximately $9
million. Cash used in operating activities in the first six months of 1997
included $7.7 million of cash expenditures related to store closings under the
Company's restructuring programs.
Changes in the deferred income tax balances and most of the increase in
other current assets during the first six months of 1996 from December 31, 1995
were due to the tax provision (benefit) recorded on the loss in the first half
of 1996. The net current deferred tax asset and net noncurrent deferred tax
liability were increased (decreased) by ($15.2) million and $2.4 million,
respectively, to reflect the effect of the deferred tax valuation allowances
established in the fourth quarter of 1996. See Note 5 of Notes to Consolidated
Financial Statements. The increase in other assets reflects $1.7 million of cash
payments related to fees incurred in connection with the bank agreements and
other financing agreements completed in June 1997 that will be amortized over
the remaining terms of the related agreements. Other changes in other operating
assets and liabilities are primarily related to the seasonal nature of the
business and also reflect the effect of store closings and the curtailment of
store expansion.
Investing Activities. Store expansion and closings were as follows for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------------ ------------------------ -------------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Openings:
Non-mall stores - 4 - 13 6 82
Mall stores - 1 - 3 11 39
Total (1) - 6 - 17 18 128
Closings:
Non-mall stores - (9) (21) (12) (25) (12)
Mall stores (10) (11) (62) (21) (88) (58)
Total (1) (12) (21) (86) (34) (117) (71)
Net increase (decrease):
Non-mall stores - (5) (21) 1 (19) 70
Mall stores (10) (10) (62) (18) (77) (19)
Total (1) (12) (15) (86) (17) (99) 57
</TABLE>
- ---------------------------------------------
(1) The totals include other divisions which individually are not significant.
Through June 30, 1997, the Company has closed 114 stores, including 79
mall stores and 35 non-mall stores, under restructuring programs established in
1996. The Company is closely monitoring other nonproductive stores and may close
additional stores as those stores approach the end of their lease terms.
Inventories from closed stores will be either redeployed to existing stores that
are more profitable, returned to vendors or sold in preclosing liquidation
sales.
Capital expenditures in 1997 will be limited to approximately $15
million and will consist principally of improvements to existing stores. The
estimate of capital spending in 1997 was lowered from earlier projections
primarily due to a delay in plans for the downsizing of Media Play stores from
previous expectations. The Company anticipates that these capital expenditures
will be financed by borrowings under its revolving credit and term loan
facilities and internally generated cash. Since 1995, capital expenditures have
been significantly lower than in previous years, primarily due to the
curtailment of store expansion in response to the challenging retail
environment. Historically, most of the Company's
16
<PAGE>
capital expenditures have been for store expansion, and the majority of the
store expansion in recent years has consisted of new Media Play stores.
The Company's Franklin distribution facility and most of the related
equipment, which together had an original cost of approximately $30 million,
were financed under an operating lease with a special purpose entity. The land,
buildings and related equipment, together with the related mortgage note
payable, were recorded on the Company's books 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.
Financing Activities. The Company's financing activities principally
consisted of borrowings and repayments under its revolving credit facility. Cash
provided by (used in) financing activities (excluding in 1996 the decrease in
checks drawn in excess of bank balances which relate to vendor payments) was
($54.6) million and $263.0 million during the six months ended June 30, 1997 and
1996, respectively. Revolver borrowings and cash and cash equivalents were $223
million and $13.2 million, respectively, at June 30, 1997 compared with $316
million and $5.5 million, respectively, at June 30, 1996. The improvement in the
Company's financial position at June 30, 1997 was principally due to the closing
of underperforming stores, reduced inventory levels and expense reductions.
In March 1997, the Company made a principal payment of $1.8 million on
the mortgage note payable for three of its Media Play stores. The terms of an
amendment in June 1997 to the financing agreements for the three Media Play
stores required a principal payment in June 1997 of $0.5 million and require
payments of $1.0 million and $0.8 million in December 1997 and 1998,
respectively, with the balance due at the end of either the original term in May
2000 or the one year renewal term in May 2001. The terms of an amendment in June
1997 to the financing agreements related to the mortgage note payable for the
Company's distribution facility in Franklin, Indiana required a principal
payment in June 1997 of $3.2 million and require principal payments of $3.2
million in September 1997, $1.7 million in December 1997 and $0.9 million in
February 1998, with the balance due at the end of either the original term in
March 1999 or the one year renewal term in March 2000. The Company plans to
either sell and lease back these properties or seek other sources of financing
on or before the expiration of the mortgage notes payable. The Company's
revolving credit facility expires in October 1999. There can be no assurance
that the Company will be able to obtain adequate or alternative sources of
financing or otherwise meet its obligations under these agreements.
Forward-Looking Statements
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. In addition
to the factors discussed above, among the factors that could cause actual
results to differ materially are the following: the timing and strength of new
product offerings, 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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
(c) On June 16, 1997, the Company issued warrants to purchase 1,822,087.16
shares of its common stock as additional consideration in connection with a term
loan agreement to participating banks or their affiliates. The warrants are
exercisable over a period of five years at a price of $1.5625 per share. In
connection with this transaction, the Company claims exemption from registration
under Section 4(6) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder. All persons receiving the warrants were accredited investors as
defined in Regulation D. A Notice of Sale on Form D in connection with this
transaction was filed on June 30, 1997.
Item 5. Other Information.
On May 13, 1997, the Company's board of directors elected Gilbert L.
Wachsman, Vice Chairman of the Company, as a director for a term expiring at the
1997 Annual Meeting of Shareholders. Mr. Wachsman filled a position created by
the expansion of the Company's board of directors from eight to nine members.
Mr. Wachsman was re-elected to a three year term by the Company's shareholders
at the Annual Meeting held on July 31, 1997.
Keith A. Benson was appointed Vice Chairman and Chief Financial Officer
effective August 4, 1997. Mr. Benson has been an executive officer of the
Company since 1988 and, most recently, was President, Mall Stores Division since
August 12, 1996. Previously, Mr. Benson had served as President of the Music
Stores Division since August 1, 1994. He has held the positions of President, On
Cue Division from May 10, 1994 through July 31, 1994, Vice Chairman and Chief
Financial Officer of the Company from May 1, 1992 to May 10, 1994, Executive
Vice President and Chief Financial Officer from 1988 through April 1992, and
various key financial positions prior to 1988 since joining the Company in 1980
as its Controller. Mr. Benson succeeds Reid Johnson, who resigned as Executive
Vice President and Chief Financial Officer for personal reasons and had served
in that position since August 4, 1994.
Item 6. Exhibits and reports on form 8-K.
(a) Exhibits
4.1(a) First Supplemental Indenture dated as of June 13, 1997 to
the Senior Subordinated Note Indenture -------
4.2(f) Waivers and Agreements under Credit Agreement dated as of
May 19, 1997 to the Credit Agreement -------
4.2(g) Amendment No. 4 and Waiver dated as of June 16, 1997 to
the Credit Agreement -------
4.4(a) Term Loan Agreement dated as of June 16, 1997 (the "Term
Loan") among MGI, MSC, various financial institutions
and Morgan Guaranty Trust Company of New York, as agent -------
4.4(b) Security Agreement dated as of June 16, 1997 among MGI,
the Subsidiaries listed therein, the Debtors listed
therein and Morgan Guaranty Trust Company of New York,
as collateral agent -------
4.4(c) Warrant and Registration Rights Agreement dated as of
June 16, 1997 among MSC and the Investors listed therein -------
18
<PAGE>
10.1(d) Amendment No. 1 dated as of June 16, 1997 to the Lease -------
Agreement
10.1(e) Amendment No. 1 and Waiver dated as of June 16, 1997 to -------
the Participation Agreement
10.1(f) Amendment No. 1 dated as of June 16, 1997 to the Guaranty -------
10.2(f) Second Limited Waiver and Amendment dated as of June 16,
1997 of Certain Loan Documents and Key Agreements -------
10.11 Stock Option Plan for Unaffiliated Directors of MSC,
as amended June 12, 1997 -------
10.20 Executive Officer Short Term Incentive Plan dated as of
March 10, 1997 -------
15. Letter re unaudited interim financial information -------
27. Financial Data Schedules -------
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 30, 1997.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUSICLAND STORES CORPORATION
(Registrant)
By: /s/ Keith A. Benson
Keith A. Benson
Vice Chairman, Chief Financial
Officer and Director
(authorized officer, principal
financial and accounting officer)
Date: August 13, 1997
20
<PAGE>
THE MUSICLAND GROUP, INC.
AND
MUSICLAND STORES CORPORATION
AND
BANK ONE, NA, f/k/a Bank One, Columbus, NA, Trustee
(Successor to HARRIS TRUST AND SAVINGS BANK)
First Supplemental Indenture
Dated as of June 13 , 1997
9% SENIOR SUBORDINATED NOTES DUE 2003
Execution copy -6/12/97
<PAGE>
THIS FIRST SUPPLEMENTAL INDENTURE, dated as of June , 1997, among THE
MUSICLAND GROUP, INC., a Delaware corporation (the "Issuer"), MUSICLAND STORES
CORPORATION, a Delaware corporation (the "Guarantor"), and BANK ONE, NA,
formerly known as Bank One, Columbus, NA, a national banking association (the
"Trustee") as successor to HARRIS TRUST AND SAVINGS BANK (the "Original
Trustee").
WITNESSETH:
WHEREAS, the Issuer, the Guarantor and the original Trustee have
executed and delivered the Indenture dated as of June 17, 1993, (the
"Indenture");
WHEREAS, capitalized terms used herein without definition have the
respective meanings specified in the Indenture;
WHEREAS, the Issuer and the Guarantor desire to amend the Indenture
in the particulars set forth herein;
WHEREAS, Section 7.2 of the Indenture provides that the Issuer and the
Guarantor, when authorized by board resolutions of the Issuer and Guarantor,
respectively, and the Trustee may enter into supplemental indentures with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Securities at the time Outstanding by act of said Holders delivered to
the Trustee;
WHEREAS, consent to this First Supplemental Indenture from the Holders
of not less than a majority in aggregate principal amount of the Securities as
of May 30, 1997 has been obtained pursuant to Article Six of the Indenture;
AND WHEREAS, all things necessary to make this First Supplemental
Indenture a valid agreement of the Issuer and Guarantor in accordance with its
terms have been done;
(1)
Execution copy -6/12/97
<PAGE>
NOW THEREFORE:
For and in consideration of the premises, it is mutually covenanted and
agreed for the equal and proportionate benefit of all Holders of the Securities
as follows:
1. The definition of "Credit Agreement" contained in Section 1.1
of the Indenture is amended by adding to the end thereof the following:
"Without in any manner amending or limiting the generality of the
foregoing definition, it is specifically intended by the parties hereto that the
term "Credit Agreement" includes the revolving Credit Agreement dated as of
October 7, 1994, as heretofore and hereafter amended, among the Issuer, the
Guarantor, Morgan Guaranty Trust Company of New York, as Agent and the other
lenders party thereto from time to time (the "Revolving Credit Agreement"), and
the Term Loan Agreement to be dated as of June , 1997, as hereafter amended,
among the Issuer, the Guarantor, Morgan Guaranty Trust Company of New York, as
Agent and the other lenders party thereto from time to time (the "Term Loan
Agreement")."
2. Clause (xviii) of the definition of "Permitted Liens"
contained in Section 1.1 of the Indenture is amended to read in its entirety
as follows:
"(xviii) Liens on Capital Stock of Subsidiaries granted pursuant to the Credit
Agreement and other Liens granted pursuant to the Credit Agreement to secure
Debt consisting only of (A) advances under the Term Loan Agreement not exceeding
an aggregate principal amount of $50,000,000, (B) outstanding credit extensions
under the Revolving Credit Agreement in an aggregate principal amount not
exceeding $30,000,000 but only until the commitments under the Revolving Credit
Agreement are first reduced to $245,000,000 and (C) an additional amount not in
excess of $20,000,000 for accrued interest, collection costs and other fees at
any time outstanding under the Term Loan Agreement;"
(2)
Execution copy -6/12/97
<PAGE>
3. Section 3.8(a) of the Indenture is amended by deleting the word
"and" before clause (ix) and adding to the end thereof the following:
"and (x) Debt Incurred as the result of any reclassification pursuant
to GAAP of any lease which was in existence and classified as an operating lease
on or at any time prior to December 31, 1996 and Debt Incurred to purchase
leased assets under such operating leases but only to the extent in each such
instance that the Debt Incurred is not greater than the Issuer's original
liability under the operating lease"
4. Section 4.1(f) of the Indenture is amended by adding in each case
after the word "Debt" in the first, third and fifth lines thereof the following:
", other than Debt Incurred as the result of any
reclassification pursuant to GAAP of any operating lease or Debt Incurred to
purchase leased assets but only to the extent in each such instance that the
Debt Incurred is not greater than the Issuer's original liability under the
operating lease,"
5. The Indenture, supplemented as herein above set forth, is in all
respects ratified and confirmed, and the terms and conditions of the Indenture,
supplemented as herein above set forth, and the Securities and Note Guarantee
outstanding thereunder, shall be and remain in full force and effect.
6. This First Supplemental Indenture shall be governed by, and construed in
accordance with, the laws of the State of New York.
7. This First Supplemental Indenture may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
(3)
Execution copy -6/12/97
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, and where appropriate, the
irrespective corporate seals to be hereunto affixed and attested, as of the day
and year first written above.
THE MUSICLAND GROUP, INC.
(CORPORATE SEAL)
By
-----------------------
Jack W. Eugster
Title: Chairman and CEO
ATTEST:
By
------------------------
Title: Asst. Secretary
MUSICLAND STORES CORPORATION
(CORPORATE SEAL)
By
-------------------------
Jack W. Eugster
Title: Chairman and CEO
ATTEST:
By
------------------------
Title: Asst. Secretary
BANK ONE, NA.
Trustee
(CORPORATE SEAL)
By
Title: Authorized Signatory
ATTEST:
By
------------------------
Title: Authorized Signatory
(4)
Execution copy -6/12/97
<PAGE>
May 19, 1997
The Musicland Group, Inc.
Musicland Stores Corporation
10400 Yellow Circle Drive
Minnetonka, MN 55343
RE: Waivers and Agreements under Credit Agreement
Ladies/Gentlemen:
Please refer to the Credit Agreement dated as of October 7, 1994 (as
previously amended, the "Credit Agreement") among The Musicland Group, Inc.,
Musicland Stores Corporation, various financial institutions and Morgan Guaranty
Trust Company of New York, as Agent. Terms defined in the Credit Agreement are,
unless otherwise defined herein, used herein as so defined.
Pursuant to the Borrower's request, the Required Banks agree as follows:
The Required Banks hereby waive through June 30, 1997 any Default or Event
of Default which now or hereafter may exist under Section 5.7, 5.8, 5.9 or 5.23
of the Credit Agreement; it being understood that upon the expiration of such
waiver on June 30, 1997, the agent and the Banks may exercise any or all of
their rights with respect to any such Default or Event of Default.
The waivers set forth above shall become effective when the Agent has
received counterparts of this letter executed by the Required Banks (it being
understood that the Agent may rely upon facsimile confirmation of the execution
of a counterpart hereof by any Bank for purposes of determining such
effectiveness).
This letter may be executed in any number of counterparts and by the
different parties on separate counterparts, and each such counterpart shall be
deemed to be an original but all such counterparts shall together constitute one
and the same letter.
This letter shall be a contract made under and governed by the internal
laws of the State of New York applicable to contracts made and to be performed
within such State.
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By
Title:
FIRST BANK NATIONAL ASSOCIATION
<PAGE>
By
Title:
THE BANK OF TOKYO - MITSUBISHI,
LTD.
By
Title:
THE BANK OF NOVA SCOTIA
By
Title:
CITIBANK, N.A.
By
Title:
CREDIT AGRICOLE
By
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By
Title:
WELLS FARGO BANK
<PAGE>
By
Title:
THE FUJI BANK, LIMITED
By
Title:
THE HOKKAIDO TAKUSHOKU BANK,
LTD., NEW YORK BRANCH
By
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., CHICAGO BRANCH
By
Title:
NBD BANK, N.A.
By
Title:
PNC BANK, NATIONAL ASSOCIATION
By
Title:
SOCIETE GENERALE
<PAGE>
By
Title:
BEAR STEARNS GOVERNMENT
SECURITIES, INC.
By
Title:
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By
Title:
BANK OF AMERICA ILLINOIS
By
Title:
DLJ CAPITAL FUNDING, INC.
By
Title:
<PAGE>
MORGENS WATERFALL DOMESTIC
PARTNERS, L.L.C.
By
Title:
NATIONSBANK, N.A.
By
Title:
FERNWOOD RESTRUCTURINGS, LTD.
By
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By
Title:
FOURTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT dated as of June
16, 1997 (this "Fourth Amendment") amends the Credit Agreement dated as of
October 7, 1994 (as heretofore amended, the "Credit Agreement") among THE
MUSICLAND GROUP, INC. (the "Borrower"), MUSICLAND STORES CORPORATION ("MSC"),
various financial institutions (the "Banks") and MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent (in such capacity, the "Agent"). Terms defined in the
Credit Agreement are, unless otherwise defined herein or the context otherwise
requires, used herein as defined therein.
WHEREAS, the Borrower, MSC, the Banks and the Agent have entered into
the Credit Agreement;
WHEREAS, the parties hereto desire to amend the Credit Agreement as
hereinafter set forth; and
WHEREAS, concurrently herewith the Borrower, MSC and certain lenders
are entering into a term loan agreement (the "Term Loan Agreement") that will
provide for such lenders to make up to $50,000,000 of term loans to the Borrower
upon the satisfaction of certain conditions;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1 Amendments. Effective on (and subject to the occurrence of)
the Fourth Amendment Effective Date (as defined below), the Credit Agreement
shall be amended as set forth below:
.1.1 Amendments to Definitions. Section 1.1 shall be amended by:
(a) Amending the definitions of "Aggregate Available Commitment",
"Collateral", "Consolidated Net Worth", "Debt", "Eligible Inventory", "Eligible
Inventory Limit", "Fixed Charge Coverage Ratio", "Interest Expense", "Loan
Documents", "Permitted Liens", "Rent Expense" and "Senior Subordinated
Indenture" in their entireties to read as follows:
"Aggregate Available Commitment" means at any time the least
of (i) the aggregate amount of the Commitments of all Banks, (ii) the
Eligible Inventory Limit and (iii)(x) with respect to the period
prior to December 12, 1997, $275,000,000, (y) with respect to the
period from and including December 12, 1997 to and including February
15, 1998, $255,000,000 and (z) on and after February 16, 1998,
$245,000,000.
<PAGE>
"Collateral" means all collateral on which the Agent or the
Collateral Agent has a Lien pursuant to the Loan Documents.
"Consolidated Net Worth" means, at any time, the consolidated
stockholder's equity of MSC and its Consolidated Subsidiaries
(calculated without giving effect to (i) Restructuring Charges, (ii)
the valuation allowance resulting from GAAP treatment of deferred
taxes, (iii) the impact of changes, under GAAP, with respect to the
reclassification as Debt of any lease which as of December 31, 1996
was classified as an Operating Lease and (iv) in the case of any
calculation of consolidated stockholder's equity as of December 31,
1997 and December 31, 1998, any potential future tax benefit from net
operating losses which would increase stockholders' equity) plus
Preferred Stock (excluding any Preferred Stock which is required to
be redeemed, in whole or in part, at any time prior to the date which
is 91 days after the Termination Date).
"Debt" of any Person means at any date, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (iii) all obligations of such Person to
pay the deferred purchase price of property or services, other than
(x) trade accounts payable arising in the ordinary course of business
(provided that (A) trade accounts payable which bear interest shall
constitute Debt if, and to the extent that, the outstanding amount of
all trade accounts payable of MSC and its Subsidiaries which bear
interest exceeds $100,000,000 and (B) if at any time a Specified
Event (as defined below) exists, then all trade accounts payable of
MSC and its Subsidiaries which bear interest shall constitute Debt
until a Specified Event no longer exists) and (y) trade accounts
payable of such Person which are subject to a bona fide dispute
between such Person and the Person claiming payment, (iv) all
obligations of such Person as lessee under Capital Leases, (v) all
Debt of others secured by a Lien on any asset of such Person, whether
or not such Debt is assumed by such Person and (vi) all Debt of
others Guaranteed by such Person. For purposes of part (B) of the
proviso to clause (iii)(x) above, a Specified Event shall exist at
any time that the aggregate amount of all interest paid on trade
accounts payable of MSC and its Subsidiaries (calculated for the
period ending on the last day of the most recent month for which such
information is available) exceeds either (I) $5,000,000 for the
period of 12 consecutive months ending on the date of calculation or
(II) $2,000,000 for the period of three consecutive months ending on
the date of calculation.
"Eligible Inventory" means, as of any date, the value
(determined at the lower of cost or market on a first-in, first-out
basis) of all inventory owned by (and in the possession or under the
control of) the Borrower or any of its Subsidiaries to the extent
constituting readily marketable assets of a type sold by the Borrower
or such Subsidiary in the ordinary course of business
<PAGE>
(excluding any such inventory which is subject to any Lien other than
the Lien in favor of the Collateral Agent arising under the Security
Agreement for the benefit of the Banks and the "Banks" under and as
defined in the Term Loan Agreement), provided that the Required Banks
(through the Agent) may at any time exclude from Eligible Inventory
any type of inventory that the Required Banks reasonably determine not
to be readily marketable or returnable to the vendor as set forth,
from time to time, in one or more notices from the Agent to the
Borrower.
"Eligible Inventory Limit" means, as of any date, the lesser
of (a) the amount of Debt (as defined in the Senior Subordinated
Indenture) permitted to be incurred by the Borrower and its
Subsidiaries pursuant to Section 3.8(a)(i) (and, to the extent
applicable, Section 3.8(a)(vii)) of the Senior Subordinated Indenture
and (b) an amount equal to 60% of Eligible Inventory as of the last
day of the most recent fiscal month for which the Borrower has
delivered to the Agent an Eligible Inventory Certificate.
"Fixed Charge Coverage Ratio" means, for any period of four
consecutive fiscal quarters of MSC ending on the last day of a fiscal
quarter, the ratio of (a) the sum of EBITDA for such period
(calculated without giving effect to (i) the valuation allowance
resulting from GAAP treatment of deferred taxes and (ii) the impact
of changes, under GAAP, with respect to the reclassification as Debt
of any lease which as of December 31, 1996 was classified as an
Operating Lease) plus Rent Expense for such period to (b) Fixed
Charges for such period plus Restricted Payments made in such period.
"Interest Expense" means, for any period, the interest expense
of MSC and its Consolidated Subsidiaries determined on a consolidated
basis for such period. Notwithstanding the foregoing, Interest
Expense shall not include any amount payable in respect of any lease
which was classified as an Operating Lease as of December 31, 1996
if, and to the extent that, such amount is included in Rent Expense.
"Loan Documents" means this Agreement, the Notes, the
Subsidiary Guaranty, the Musicland Pledge Agreement, the Security
Agreement and each Subsidiary Pledge Agreement, in each case as
amended or otherwise modified from time to time.
"Permitted Liens" means Liens permitted by Section 5.14.
"Rent Expense" means, for any period, the aggregate amount
payable during such period by a lessee with respect to and pursuant
to the terms of all Operating Leases as would be required to be
reported in the financial statements of MSC and its Consolidated
Subsidiaries for such period as the total rent expense in accordance
with generally accepted accounting principles
<PAGE>
as in effect on the date of this Agreement; provided, however, that
any lease which was classified as an Operating Lease as of December
31, 1996 shall be treated as an Operating Lease for purposes of this
definition notwithstanding the reclassification under GAAP of such
lease as Debt after such date (and "Rent Expense" shall not include
the portion of any payment under such lease attributable to the
principal of the Debt under such lease as so reclassified).
"Senior Subordinated Indenture" means the Indenture dated as
of June 17, 1993 between MSC, the Borrower and Bank One, N.A.,
formerly known as Bank One, Columbus, N.A. (as successor to Harris
Trust and Savings Bank), as Trustee, pursuant to which the Senior
Subordinated Notes were issued, as amended or otherwise modified from
time to time.
(b) Adding the following definitions, each in the appropriate
alphabetical position:
"Base Rate Margin" means a per annum rate equal to (x) for the
period prior to April 30, 1998, 0.25% and (y) thereafter, 0.50%.
"Collateral Agent" means Morgan Guaranty Trust Company of New
York in its capacity as collateral agent for the Banks hereunder and
the lenders under the Term Loan Agreement, and its successors in such
capacity.
"Restructuring Charges" means (x) up to $75,000,000 of
liabilities recorded on the books of MSC in 1996 in connection with
facility closing decisions, termination of employees and costs
related to the foregoing, (y) up to $20,000,000 of liabilities (not
more than $10,000,000 of which may be cash charges) recorded on the
books of MSC after December 31, 1996 in connection with facility
closing decisions, termination of employees and costs related to the
foregoing and (z) up to $3,000,000 of non-recurring professional fees
recorded on the books of MSC in any fiscal quarter beginning with the
fiscal quarter ended March 31, 1997.
"Security Agreement" means a Security Agreement among the
Borrower, various Subsidiaries and the Collateral Agent substantially
in the form of Attachment 3 to the Fourth Amendment to this
Agreement, as amended or otherwise modified from time to time.
"Term Loan Agreement" means the Term Loan Agreement dated as
of June 16, 1997 among MSC, the Borrower, certain lenders and Morgan
Guaranty Trust Company of New York, as agent, as amended or otherwise
modified from time to time.
(c) Deleting the definitions of "Debt and Trade Payables to
Eligible Inventory Ratio", "Excess Amount" and "1996 Restructuring Charge".
<PAGE>
(d) Deleting clause (F) from the definition of "Net Income" and
inserting in lieu thereof "(F) Restructuring Charges and, if applicable,
non-recurring professional fees recorded on the books of MSC in the third and
fourth fiscal quarters of 1996".
(e) Deleting the words "one, two, three or six months" where they
appear in clause (1) of the definition of "Interest Period" and inserting in
lieu thereof "one, two or three months."
(f) Deleting the text of clauses (1)(c), (2)(b), (4)(c) and (5)(b) in
the definition of "Interest Period" and inserting in lieu thereof the following
new text in each of such clauses:
"the Borrower may not select any Interest Period which would
end after the Termination Date or which would result in the
aggregate principal amount of all Fixed Rate Loans having
Interest Periods ending after any date on which the
Commitments are to be reduced pursuant to clause (iii) of
the definition of Aggregate Available Commitment being in
excess of the amount of the maximum amount of the Aggregate
Available Commitment as so reduced on the applicable date."
.1.2 Amendments to Interest Rate Provisions. Section 2.8 shall be
amended by (i) adding the words "plus the Base Rate Margin" at the end of the
first sentence of Section 2.8(a), (ii) deleting the number "2%" where it appears
in the third sentence of Section 2.8(a) and inserting in lieu thereof "2.25%
(or, on and after April 30, 1998, 2.5%)", (iii) deleting the second sentence of
Section 2.8(c) and inserting in lieu thereof the following:
Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer
than one month, at intervals of one month after the first
day thereof.
and (iv) deleting the definition of "Euro-Dollar Margin" in Section 2.8(c) and
inserting in lieu thereof the following:
"Euro-Dollar Margin" means a rate per annum equal to (x) for
the period prior to April 30, 1998, 1.75% and (y)
thereafter, 2.00%.
.1.3 Amendments to Conditions Precedent to Credit Extensions.
Section 3.2 shall be amended by deleting clause (g) and inserting in lieu
thereof the following:
(g) in the case of any Credit Extension (other than a
Refunding Borrowing), the fact that, as of the most recent date
reported on by the Borrower, the aggregate amount of all trade
accounts payable of MSC and its
<PAGE>
Subsidiaries arising out of the purchase of inventory is not less than
the aggregate amount of all Outstanding Credit Extensions;
.1.4 Amendment to Material Adverse Change Representation. Section
4.4 shall be amended by deletingclause (c) and inserting in lieu thereof the
following:
"(c) Except as disclosed in MSC's Form 10-Q for the quarter
ended March 31, 1997 as filed with the Securities and
Exchange Commission, since December 31, 1996 there has been
no material adverse change in the business, financial
position or results of operations of MSC and its
Consolidated Subsidiaries, taken as a whole."
.1.5 Amendments to Reporting Covenants. Section 5.1 shall be
amended by deleting clauses (j) through (o) thereof and substituting the
following therefor.
(j) within 90 days after the end of each fiscal year of MSC,
(a) a consolidated financial forecast of the revenues, earnings and
cash flow of MSC and its Consolidated Subsidiaries for the following
fiscal year, with such forecast to be accompanied by supporting
schedules setting forth the material assumptions employed, all
prepared in reasonable detail, and (b) a monthly cash flow budget for
the following 12 months, substantially in the form of Exhibit N
hereto;
(k) bi-weekly not later than the Friday following the week
ended the previous Saturday, commencing June 27, 1997 and continuing
every two weeks thereafter, a certificate of the chief financial
officer or the Treasurer (or, in the absence of both of the
foregoing, an Assistant Treasurer) of MSC with respect to inventory
and trade accounts payable, available cash balances of MSC and its
Subsidiaries detailed by account, and receipts/disbursements cash
flow, all substantially in the form of Exhibit O hereto;
(l) monthly not later than 20 days after the end of each
month, a certificate of the chief financial officer or the Treasurer
(or, in the absence of both of the foregoing, an Assistant Treasurer)
of MSC with respect to cash flows for such month, substantially in
the form of Exhibit P hereto;
(m) monthly not later than 30 days (or (i) in the case of
January, 60 days, (ii) in the case of March, June and September, 45
days and (iii) in the case of December, 90 days) after the end of
each month, a monthly statement of operations of MSC and its
Subsidiaries substantially in the form delivered to the Banks prior
to the date of the Fourth Amendment to this Agreement; and
<PAGE>
(n) from time to time such additional information regarding
the financial position, results of operations or business of MSC or
any of its Subsidiaries as the Agent, at the request of any Bank, may
reasonably request.
1.6 Amendment of Fixed Charge Coverage Covenant.Section 5.7 shall be
amended and restated to read in its entirety as follows:
SECTION 5.7. Fixed Charge Coverage Ratio. MSC will not permit
the Fixed Charge Coverage Ratio as of the last day of any fiscal
quarter ending during any period set forth below to be less than the
ratio set forth for such period:
(a) 0.75 to 1.0 for the period from March 31, 1997 to December
30, 1997;
(b) 0.95 to 1.0 for the period from December 31, 1997 to March
30, 1998;
(c) 1.0 to 1.0 for the period from March 31, 1998 to June 29,
1998;
(d) 1.05 to 1.0 for the period from June 30, 1998 to September
29, 1998;
(e) 1.13 to 1.0 for the period from September 30, 1998 to
December 30, 1998; and
(f) 1.20 to 1.0 for the period on and after December 31, 1998.
.1.7 Amendment of Net Worth Covenant. Section 5.8 shall be amended
and restated to read in its entirety as follows:
SECTION 5.8. Consolidated Tangible Net Worth. MSC will not
permit Consolidated Tangible Net Worth at any time to be less than
the sum of
(a) with respect to any period set forth below, the amount set
forth across from such period
Period Amount
------ ------
3/31/97 - 6/29/97 ($10,000,000)
6/30/97 - 9/29/97 ($30,000,000)
9/30/97 - 12/30/97 ($50,000,000)
12/31/97 - 3/30/98 ($ 5,000,000)
3/31/98 - 6/29/98 ($15,000,000)
6/30/98 - 9/29/98 ($30,000,000)
9/30/98 - 12/30/98 ($40,000,000)
<PAGE>
12/31/98 - 3/30/99 ($10,000,000)
3/31/99 - 6/29/99 ($25,000,000)
6/30/99 and thereafter ($35,000,000)
plus (b) 50 percent of the Net Securities Proceeds received by MSC on
or after December 31, 1995 from issuance of its Capital Stock or any
rights in respect thereof plus (c) 50 percent of any excess of (x) the
Net Securities Proceeds received by the Borrower or any Wholly-Owned
Subsidiary of the Borrower from the sale or other disposition of the
Capital Stock of any Subsidiary over (y) the book value of such Capital
Stock, without giving effect to any write-up or writedown of such book
value after March 29, 1996.
For purposes of computing changes in MSC's Consolidated
Tangible Net Worth resulting from any consolidated after-tax net income
or loss for any period other than a full fiscal year, MSC's tax
liability or tax benefit for such period shall be computed using an
effective combined federal, state and local income tax rate of 42% on
the consolidated net income or loss of MSC through such date in lieu of
the tax liability or tax benefit prescribed by GAAP.
1.8 Amendment of Debt to Capitalization Covenant. Section 5.9
shall be amended and restated to read in its entirety as follows:
SECTION 5.9. Debt to Total Capitalization Ratio. MSC will not
permit the ratio of (a) the consolidated Debt of MSC and its
Consolidated Subsidiaries to (b) the sum of (i) the consolidated Debt
of MSC and its Consolidated Subsidiaries plus (ii) Consolidated Net
Worth (without giving effect to any writedown of goodwill after
December 31, 1996) as of the last day of any fiscal quarter ending
during any of the periods set forth below to be greater than the ratio
set forth for such period:
(a) .70 to 1.0 for the period from March 31, 1997 to June 29
1997;
(b) .75 to 1.0 for the period from June 30, 1997 to September
29, 1997;
(c) .80 to 1.0 for the period from September 30, 1997 to
December 30, 1997;
(d) .70 to 1.0 for the period from December 31, 1997 to June
29, 1998;
(e) .72 to 1.0 for the period from June 30, 1998 to September
29, 1998;
(f) .75 to 1.0 for the period from September 30, 1998 to
December 30, 1998;
<PAGE>
(g) .70 to 1.0 for the period from December 31, 1998 to March
30, 1999; and
(h) .75 to 1.0 thereafter.
.1.9 Amendments to Debt Covenant. Section 5.11 shall be amended by (i)
deleting the words "Intentionally deleted" after the designation (e) and
inserting in lieu thereof "Debt under the Term Loan Agreement in an aggregate
principal amount not exceeding $50,000,000", (ii) deleting the word "and"
following clause (g) thereof, (iii) changing the designation of clause (h) from
"(h)" to "(j)" and, within such new clause (j), substituting the words "clause
(j)" for the reference to "clause (h)" and (iv) inserting the following clauses
(h) and (i):
(h) intercompany debt up to $10,000,000 resulting solely from
the non-cash impact of accounting for stock contributions related to
the Borrower's existing KSOP; and
(i) Debt resulting from any reclassification, under GAAP, as
Debt of any lease which at any time prior to January 1, 1997 was a
Synthetic Lease or an Operating Lease and any refinancings of such Debt
(provided that the amount of Debt so refinanced shall not be greater
than the original amount of Debt under the applicable lease as so
reclassified); and
1.10 Amendments to Synthetic Lease Covenant. Section 5.12 shall be
amended by (i) deleting each reference in clause (a) thereof to "clause (h)" and
inserting in lieu of each thereof the words "clause (j)" and (ii) inserting the
following clause (c) at the end thereof:
(c) MSC will not, and will not permit any Subsidiary to, enter
into any amendment to or other modification of any document relating to
any Synthetic Lease Transaction (as defined in Section 2 of the Fourth
Amendment to this Agreement) which would (i) permit any additional Lien
to secure any obligation thereunder, (ii) provide for any payment of
fees, increase in interest rates or other material benefit which is
more favorable than corresponding terms included in the Third and
Fourth Amendments (or any subsequent amendment) to this Agreement or
(iii) provide for any payment of any Synthetic Lease Obligation which
would result in the lenders thereunder having received payment of a
greater percentage of the original amount of the Synthetic Lease
Obligations thereunder than the percentage in the reductions in the
amount of the original Commitments hereunder which have been made since
December 1, 1996.
<PAGE>
.1.11 Amendments to Lien Covenant. Section 5.14 shall be amended by (i)
deleting the word "and" following clause (f) thereof; (ii) changing the
designation of clause (g) from "(g)" to "(i)"; (iii) inserting the following
clauses (g) and (h) therein:
(g) Liens securing the obligations under the Term Loan
Agreement and any guaranty thereof;
(h) Liens securing Debt permitted by Section 5.11(i);
(iv) deleting the words "clauses (a) through (g)" in the final paragraph of such
Section and inserting in lieu thereof the words "clauses (a) through (i)"; and
(v) deleting clause (ii) of the final paragraph of such Section and inserting in
lieu thereof the following:
(ii) the Borrower will not at any time permit the aggregate
amount of all obligations secured by Liens on inventory of the Borrower
and its Subsidiaries (other than Liens described in clauses (a) and (g)
above) to exceed $5,000,000.
.1.12 Amendments to Capital Expenditure Covenant. (a) Clause (a) of
Section 5.16 shall be amended and restated to read in its entirety as follows:
(a) MSC will not, and will not permit any of its Subsidiaries
(other than the Borrower and its Subsidiaries) to, make any Capital
Expenditure. The Borrower will not, and will not permit any of its
Subsidiaries to, make any Capital Expenditure in any fiscal year of MSC
in excess, in the aggregate for the Borrower and its Subsidiaries, of
the amount set forth below for such fiscal year (provided that the
amount permitted, for the 1998 fiscal year shall be increased by the
amount, if any, by which $20,000,000 exceeds the actual Capital
Expenditures made by the Borrower and its Subsidiaries in the 1997
fiscal year).
Fiscal year ended Amount
12/31/97 $20,000,000
12/31/98 $22,000,000.
For purposes of calculating the amount of Capital Expenditures in any
year, the reclassification, under GAAP, as Debt of any lease which at
any time prior to January 1, 1997 was a Synthetic Lease or an Operating
Lease shall be disregarded, except that any increase in the amount of
the annual payments under any lease which is so reclassified or is
refinanced shall constitute a Capital Expenditure; and
(b) Section 5.16 is further amended by deleting the
definitions of "Excess Amount" and "Carryover Amount" therein.
<PAGE>
.1.13 Amendments to Guarantee Covenant. Section 5.18 shall be
amended by deleting clause (d) and inserting in lieu thereof the following:
(d) Guarantees by MSC and Subsidiaries of the Borrower of the
obligations of the Borrower under the Term Loan Agreement.
.1.14 Revision of Certain Covenants. Sections 5.23 and 5.24 shall
be amended and restated to read in their entireties as follows:
SECTION 5.23. Security Agreement. So long as the combined
Commitments of all Banks, or the Outstanding Credit Extensions, exceed
$245,000,000, the Borrower will, and will cause each Subsidiary to,
take such actions as are necessary or as the Agent (acting at the
request of any Bank) may reasonably request from time to time to ensure
that the Collateral Agent has, pursuant to the Security Agreement, a
perfected, first-priority Lien (subject only to Permitted Liens) on
substantially all inventory of the Borrower and its Subsidiaries
(excluding inventory of TMG U.K.-Delaware located outside the United
States) securing any portion of the Outstanding Credit Extensions in
excess of $245,000,000.
SECTION 5.24. [Intentionally Deleted.]
.1.15 Amendment to Default Provisions. Clause (a) of Section 6.1 shall
be amended by adding a comma and the following language before the semicolon at
the end thereof: "and, solely in the case of any mandatory prepayment due on
December 12, 1997 as a result of the scheduled reduction in the Aggregate
Available Commitment on such date, such failure shall continue for one Domestic
Business Day."
.1.16 Amendment of Trade Payable Defaults. Clauses (o) and (p)
of Section 6.1 shall be amended in their entirety to read as follows:
(o) the aggregate amount of all trade accounts payable of MSC
and its Subsidiaries arising out of the purchase of inventory shall be
less than 85% of the Outstanding Credit Extensions as of any date for
which trade accounts payable are reported pursuant to Section 5.1(k);
or
(p) the aggregate amount of all trade accounts payable of MSC
and its Subsidiaries arising out of the purchase of inventory shall be
less than the Outstanding Credit Extensions as of any two consecutive
dates for which trade payables are reported pursuant to Section 5.1(k);
1.17 Pricing Schedule. The Pricing Schedule shall be amended by
deleting all references therein to "Euro-Dollar Margin" and "CD Margin".
<PAGE>
.1.18 Amendments of Exhibits. Exhibits M, N, O, P and Q shall be
deleted and replaced by Exhibits M, N, O and P hereto, respectively.
SECTION 2 Waiver. Effective on (and subject to the occurrence of) the
Fourth Amendment Effective Date, the Required Lenders waive any Event of Default
arising under Section 6.1(f) of the Credit Agreement with respect to any
Synthetic Lease Transaction; provided that (i) such waiver shall only be
effective until the date of the initial loans under the Term Loan Agreement and
(ii) notwithstanding such waiver, an Event of Default shall exist immediately if
any event or condition shall occur which results in the acceleration of any
Synthetic Lease Obligations in excess of the maximum amount permitted to be paid
pursuant to Section 5.12(c) of the Credit Agreement. For purposes of the
foregoing, "Synthetic Lease Transaction" means each of (a) the Participation
Agreement dated as of May 12, 1995 among NatWest Leasing Corporation, Media Play
Trust, Yasuda Bank and Trust Company, National Westminster Bank Plc, various
other lenders and Media Play, Inc., and the Master Lease and other documents
referred to therein and (b) the Participation Agreement dated as of March 31,
1994 among Musicland Retail, Inc., Shawmut Bank Connecticut, National
Association, Kleinwort Benson Limited, The Long-Term Credit Bank of Japan, Ltd.,
Chicago Branch, Credit Lyonnais Cayman Island Branch and The Fuji Bank, Limited,
and the Master Lease and other documents referred to therein.
SECTION 3 Representations and Warranties. The Borrower and MSC represent
and warrant to the Agent and the Banks that (a) except to the extent disclosed
in annual and quarterly filings filed by MSC or the Borrower with the Securities
and Exchange Commission since October 7, 1994, each representation and warranty
set forth in Section 4 of the Credit Agreement, as amended hereby (as so
amended, the "Amended Credit Agreement"), is true and correct as of the date of
the execution and delivery of this Fourth Amendment by the Borrower and MSC (and
assuming the effectiveness hereof), with the same effect as if made on such
date; (b) the execution and delivery by the Borrower and MSC of this Fourth
Amendment, the execution and delivery by the Borrower and each applicable
Subsidiary of the Security Agreement (as defined below) and the execution and
delivery by the Borrower, MSC and each applicable Subsidiary of the other
documents to be executed by such entity pursuant hereto, the performance by the
Borrower and MSC of their respective obligations under the Amended Credit
Agreement and the performance by the Borrower and each applicable Subsidiary of
their respective obligations under the Security Agreement (i) are within the
corporate powers of the Borrower, MSC and each applicable Subsidiary, (ii) have
been duly authorized by all necessary corporate action on the part of the
Borrower, MSC and each applicable Subsidiary, (iii) have received all necessary
governmental and regulatory approval and (iv) do not and will not contravene or
conflict with, or result in or require the creation or imposition of any Lien
(other than Liens arising under the Security Agreement) under, any provision of
Applicable Law or of the respective certificate of incorporation or by-laws of
the Borrower, MSC or any applicable Subsidiary or of any agreement, instrument,
order or decree which is binding upon the Borrower, MSC or any applicable
Subsidiary; (c) the Amended Credit
<PAGE> Agreement is the legal, valid and binding obligation of each of the
Borrower and MSC, enforceable against the Borrower and MSC in accordance with
its terms; and (d) when duly executed and delivered, the Security Agreement will
be the legal, valid and binding obligation of the Borrower and each applicable
Subsidiary, enforceable against each such entity in accordance with its terms.
SECTION 4 Effectiveness. The amendments set forth in Section 1 and the waiver
set forth in Section 2 above shall become effective on the date (the "Fourth
Amendment Effective Date") when (a) the Agent shall have received
(i) counterparts of this Fourth Amendment executed by the
Borrower, MSC and the Required Banks (it being understood that, in the
case of any Bank, the Agent may rely upon facsimile confirmation of the
execution of a counterpart hereof by such Bank for purposes of
determining the effectiveness hereof);
(ii) for the account of each Bank, an amendment fee equal to
0.375% of such Bank's Commitment (it being understood that the Agent
shall distribute the applicable fee to each Bank promptly upon receipt
thereof);
(iii) opinions of Linda Alsid Ruehle, Assistant General
Counsel of the Borrower, substantially in the form of Attachment 1
hereto, and Latham & Watkins, substantially in the form of Attachment 2
hereto;
(iv) counterparts of a Security Agreement in substantially the
form of Attachment 3 hereto (the "Security Agreement") executed by the
Borrower, each Subsidiary of the Borrower and Morgan Guaranty Trust
Company of New York, in its capacity as collateral agent for the Banks
and the lenders under the Term Loan Agreement (the "Collateral Agent");
(v) evidence that the Borrower and its Subsidiaries have
executed and delivered to the Collateral Agent such UCC-1 Financing
Statements and such other documents, instruments and certificates as
the Collateral Agent may deem necessary or desirable to perfect the
Collateral Agent's Lien in the property subjected to a security
interest by the Security Agreement, together with evidence of the due
filing of such financing statements in all jurisdictions deemed
necessary or desirable by the Collateral Agent;
(vi) evidence satisfactory to the Agent that the required
majority of the holders of the Senior Subordinated Notes have waived
all provisions of the Senior Subordinated Indenture that would prohibit
the incurrence of the Debt contemplated under the Term Loan Agreement
or would prohibit, or require that an equal and ratable Lien be granted
in
<PAGE>
connection with, the Liens in favor of the Collateral Agent under
the Security Agreement; and
(vii) all documents the Agent may reasonably request relating
to the existence of the Borrower and the other Loan Parties, the
corporate authority for and the validity of this Agreement and the
other Loan Documents, and any other matters relevant hereto, all in
form and substance satisfactory to the Agent; and
(b) the Borrower shall have received amendments to existing synthetic
leases acceptable to the Borrower, it being understood that the Borrower may, in
its sole discretion, waive this clause (b).
SECTION 5 Miscellaneous.
5.1 Continuing Effectiveness, etc. As herein amended, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. After the Fourth Amendment Effective Date, all
references in the Credit Agreement and the other Loan Documents to "Credit
Agreement", "Agreement" or similar terms shall refer to the Amended Credit
Agreement.
5.2 Counterparts. This Fourth Amendment may be executed in any number
of counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Fourth Amendment.
5.3 Governing Law. This Fourth Amendment shall be a contract made under
and governed by the internal laws of the State of New York applicable to
contracts made and to be performed entirely within such State.
5.4 Successors and Assigns. This Fourth Amendment shall be binding upon
the Borrower, MSC, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrower, MSC, the Banks and the
Agent and the respective successors and assigns of the Banks and the Agent.
5.5 Limitation on CD Loans. Notwithstanding anything to the contrary in
the Credit Agreement or in any other Loan Document, the Borrower may no longer
borrow CD Loans or maintain or convert any Borrowing into CD Loans.
5.6 Collateral Agent. (a) The Required Banks hereby authorize the Agent
to act as Collateral Agent under the Security Agreement. The Required Banks, the
Company and the Agent hereby agree that (i) in so acting, the Collateral Agent
shall be entitled to all rights, exculpations, immunities, benefits and
privileges accorded to the "Agent" under the Credit Agreement and (ii) each
reference in Article VII and Sections 10.3 and 10.8 of the Credit Agreement to
the "Agent" shall be deemed to include the Agent acting in its capacity as the
Collateral Agent.
<PAGE>
(b) Without limiting clause (a) above, the Collateral Agent is
authorized on behalf of all Banks, without the necessity of any notice to or
further consent from the Banks, from time to time to take any action with
respect to the Security Agreement and any collateral thereunder which may be
necessary to perfect and maintain perfected the Liens upon the collateral
granted pursuant to the Security Agreement.
5.7 Costs and Expenses. Without limiting the provisions of Section 10.3
of the Credit Agreement, the Borrower agrees to pay (i) the reasonable fees and
charges of Mayer, Brown & Platt, Zalkin, Rodin & Goodman LLP and Ernst & Young
LLP, professional advisors to the Agent and the Banks, in connection with the
Credit Agreement, this Fourth Amendment and matters relating thereto (including
the monitoring and administration of the provisions hereof and thereof), and any
additional amendments to or waivers under the Credit Agreement (such fees and
charges to be billed monthly and paid, without application of any deposit, not
later than 20 days after receipt by the Borrower) and (ii) the reasonable
out-of-pocket expenses of the Banks (excluding professional fees other than (x)
those described above and (y) those provided for in Section 10.3 of the Credit
Agreement; it being understood and agreed that the Banks are not entitled to
payment of any professional fees under Section 10.3(a)(ii) of the Credit
Agreement based on any Event of Default occurring prior to the Fourth Amendment
Effective Date) in connection with the Credit Agreement.
5.8 Going Concern Qualification. The Required Banks hereby agree that a
"going concern" qualification shall be an acceptable qualification in MSC's
audit reports for the years ending December 31, 1996 and December 31, 1997
delivered pursuant to Section 5.1(a) of the Credit Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed by their respective authorized officers as of the
day and year first above written.
THE MUSICLAND GROUP, INC.
By
--------------------------
Title:
MUSICLAND STORES CORPORATION
By
--------------------------
Title:
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By
--------------------------
Title:
FIRST BANK NATIONAL ASSOCIATION
By
--------------------------
Title:
THE BANK OF TOKYO-MITSUBISHI,
LTD.
By
--------------------------
Title:
THE BANK OF NOVA SCOTIA
By
-------------------------
Title:
CITIBANK, N.A.
By
-------------------------
Title:
CREDIT AGRICOLE
By
-------------------------
Title:
CREDIT LYONNAIS NEW YORK BRANCH
<PAGE>
By
-------------------------
Title:
WELLS FARGO BANK
By
-------------------------
Title:
THE FUJI BANK, LIMITED
By
------------------------
Title:
THE HOKKAIDO TAKUSHOKU BANK,
LTD., NEW YORK BRANCH
By
------------------------
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., CHICAGO BRANCH
By
------------------------
Title:
NBD BANK, N.A.
By
------------------------
Title:
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By
------------------------
Title:
SOCIETE GENERALE
By
------------------------
Title:
BEAR, STEARNS INVESTMENT
PRODUCTS INC.
By
------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATION
By
------------------------
Title:
BANK OF AMERICA ILLINOIS
By
------------------------
Title:
DLJ CAPITAL FUNDING, INC.
By
------------------------
Title:
<PAGE>
MORGENS WATERFALL DOMESTIC
PARTNERS, L.L.C.
By
------------------------
Title:
NATIONSBANK, N.A.
By
------------------------
Title:
FERNWOOD RESTRUCTURINGS LTD.
By
------------------------
Title:
HALCYON DISTRESSED SECURITIES,
L.P.
By
------------------------
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By
------------------------
Title:
<PAGE>
EXHIBIT M
---------
NOTICE OF COMMITTED BORROWING1
Date: , 199
------ --
To: Morgan Guaranty Trust Company of New York, as Agent for the
Banks under the Credit Agreement dated as of October 7, 1994
(as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement") among The Musicland Group, Inc.,
Musicland Stores Corporation, the Banks party thereto and
Morgan Guaranty Trust Company of New York, as Agent.
Ladies/Gentlemen:
Please refer to the Credit Agreement. Capitalized terms used herein
have the meanings ascribed to such terms in the Credit Agreement.
The Borrower hereby gives you notice irrevocably, pursuant to Section
2.2 of the Credit Agreement, of the Borrowing specified below:
() The date of the proposed Borrowing is , 199 .
-------- --
() The aggregate amount of the proposed Borrowing is $ .
-------
() The Borrowing is to be comprised of $------- of [Base Rate
Loans][Euro-Dollar Loans] having an Interest Period of -------
[days/months].
The Borrower hereby certifies that the following statements will be
true on the date of the proposed Borrowing, before and after giving effect
thereto and to the application of the proceeds thereof:
() The representations and warranties of the Borrower
contained in the Credit Agreement will be true on as of such date
(except (i) in the case of a Refunding Borrowing, the representations
and warranties set forth in Section 4.4(c) and 4.6 as to any matter
which has theretofore been disclosed in writing by the Borrower or MSC
to the Banks, and (ii) in the case of any Borrowing before March 31,
1997, the representation and warranty set forth in Section 4.4(c)).
- -----------
1 Revise appropriately for other types of Credit Extensions.
<PAGE>
() No Default (or, in the case of a Refunding Borrowing, no
Event of Default) has occurred and is continuing, or would result from
such proposed Borrowing.
() The proposed Borrowing will not cause the aggregate
Outstanding Credit Extensions to exceed the Aggregate Available
Commitment.
() Not more than ten separate Borrowings will be outstanding
after giving effect to such Borrowing.
[(e) As of the most recent reporting date pursuant to Section
--- of the Credit Agreement, the aggregate amount of all trade payables
of MSC and its Subsidiaries arising out of the purchase of inventory is
not less than the aggregate amount of all Credit Extensions.]2
THE MUSICLAND GROUP, INC.
By:
------------------------
Title:
---------------------
- -----------
2 Clause (e) is not required in the case of a Refunding Borrowing.
$50,000,000
TERM LOAN AGREEMENT
dated as of
June 16, 1997
among
THE MUSICLAND GROUP, INC.,
MUSICLAND STORES CORPORATION,
VARIOUS FINANCIAL INSTITUTIONS
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS................................1
1.1. Definition...........................................................1
1.2. Accounting Terms and Determinations.................................12
1.3. Types of Borrowings.................................................13
ARTICLE II
THE CREDITS................................13
2.1. Commitments to Lend.................................................13
2.2. Notice of Borrowing.................................................13
2.3. Notice to Banks; Funding of Loans...................................14
2.4. Conversion and Continuation Elections for Borrowings................15
2.5. Notes...............................................................15
2.6. Amortization of Loans...............................................16
2.7. Interest Rates......................................................16
2.8. Upfront Fee.........................................................17
2.9. Optional Prepayments................................................17
2.10. General Provisions as to Payments...................................17
2.11. Funding Losses......................................................18
2.12. Computation of Interest and Fees....................................18
2.13. Regulation D Compensation...........................................19
ARTICLE III
CONDITIONS................................19
3.1. Conditions to Effectiveness.........................................19
3.2. Conditions to First Borrowing.......................................20
3.3. Conditions to Second Borrowing......................................21
3.4. Conditions to Both Borrowings.......................................21
ARTICLE IV
REPRESENTATIONS AND WARRANTIES.....................22
4.1. Corporate Existence and Power.......................................22
4.2. Corporate and Governmental Authorization; No
Contravention.......................................................22
4.3. Binding Effect......................................................22
4.4. Financial Information...............................................22
4.5. Subsidiaries........................................................23
4.6. Litigation..........................................................23
4.7 Compliance with ERISA...............................................23
4.8. Taxes...............................................................24
4.9. Not an Investment Company...........................................24
<PAGE>
4.10. Compliance with Laws, etc...........................................24
4.11. Possession of Franchises, Licenses, etc.............................24
4.12. Environmental Matters...............................................25
4.13. Undisclosed Liabilities.............................................25
4.14. Title to Properties.................................................25
4.15. Retail Store Leases.................................................25
4.16. Full Disclosure.....................................................26
ARTICLE V
COVENANTS................................26
5.1. Information.........................................................26
5.2. Maintenance of Property; Insurance..................................29
5.3. Conduct of Business and Maintenance of Existence....................29
5.4. Compliance with Laws................................................29
5.5. Inspection of Property, Books and Records...........................30
5.6. Liens...............................................................30
5.7. Consolidations, Mergers and Sales of Assets.........................31
5.8. Use of Proceeds.....................................................32
5.9. Further Assurances..................................................32
5.10. Amendments to Senior Subordinated Indenture.........................32
5.11. EBITDA..............................................................32
5.12. Inventory...........................................................32
ARTICLE VI
DEFAULTS 33................................33
6.1. Events of Default...................................................33
6.2. Notice of Default...................................................35
ARTICLE VII
THE AGENT................................36
7.1. Appointment and Authorization.......................................36
7.2. Agent and Affiliates................................................36
7.3. Action by Agent.....................................................36
7.4. Consultation with Experts...........................................36
7.5. Liability of Agent..................................................36
7.6. Indemnification.....................................................37
7.7. Credit Decision.....................................................37
7.8. Successor Agent.....................................................37
7.9. Agent's Fee.........................................................38
ARTICLE VIII
CHANGE IN CIRCUMSTANCES.........................38
8.1. Basis for Determining Interest Rate Inadequate
or Unfair...........................................................38
8.2. Illegality..........................................................38
<PAGE>
8.3. Increased Cost and Reduced Return...................................39
8.4. Taxes...............................................................40
8.5. Base Rate Loans Substituted for Euro-Dollar Loans...................42
ARTICLE IX
GUARANTY..................................42
9.1. The Guaranty........................................................42
9.2. Guaranty Unconditional..............................................43
9.3. Discharge Only Upon Payment in Full; Reinstatement in
Certain Circumstances...............................................43
9.4. Waiver..............................................................44
9.5. Delay of Subrogation................................................44
9.6. Stay of Acceleration................................................44
9.7. Subordination of Indebtedness.......................................44
ARTICLE X
MISCELLANEOUS..............................44
10.1. Notices.............................................................44
10.2. No Waivers..........................................................45
10.3. Expenses; Indemnification...........................................45
10.4. Sharing of Set-Offs.................................................46
10.5. Amendments and Waivers..............................................46
10.6. Successors and Assigns..............................................47
10.7. Margin Stock........................................................48
10.8. Limitation on Liability.............................................48
10.9. Survival of Obligations.............................................49
10.10. Independence of Covenants...........................................49
10.11. Severability of Provisions..........................................49
10.12. Governing Law; Submission to Jurisdiction...........................49
10.13. Counterparts; Integration...........................................50
10.14. WAIVER OF JURY TRIAL................................................50
10.15. Collateral Agent....................................................50
<PAGE>
Schedule 1.1......-........Commitments and Commitment Percentages
Schedule 3.1(d)...-........Warrants
Schedule 4.5......-........Subsidiaries of MSC
Schedule 4.8......-........Taxes
Schedule 4.10.....-........Compliance with Laws
Schedule 5.6......-........Liens
Exhibit A.........-........Form of Note
Exhibit B.........-........Form of Subsidiary Guaranty
Exhibit C.........-........Form of Security Agreement
Exhibit D.........-........Form of Opinion of Linda Alsid Ruehle
Exhibit E.........-........Form of Opinion of Special Counsel to the
..................Borrower and the other Loan Parties
Exhibit F.........-........Form of Opinion of Special Securities Counsel
..................to MSC
Exhibit G.........-........Form of Warrant Certificate
Exhibit H.........-........Form of Warrant and Registration Rights
..................Agreement
Exhibit I.........-........Form of Notice of Borrowing
Exhibit J.........-........Form of Notice of Conversion/Continuation
Exhibit K.........-........Form of Assignment and Assumption Agreement
Exhibit L.........-........Form of Bi-Weekly Inventory Report
<PAGE>
TERM LOAN AGREEMENT
TERM LOAN AGREEMENT dated as of June 16, 1997 among THE MUSICLAND GROUP,
INC., MUSICLAND STORES CORPORATION, the financial institutions which are from
time to time parties hereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Agent.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have the
following meanings:
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person.
"Agent" means Morgan in its capacity as agent for the Banks hereunder, and
its successors in such capacity.
"Applicable Law" means, anything in Section 10.12 to the contrary
notwithstanding, (a) all applicable common law and principles of equity and (b)
all applicable provisions of all (i) constitutions, statutes, rules,
regulations, ordinances and orders of governmental bodies, (ii) authorizations,
consents, approvals, licenses or exemptions of, registrations or filings with,
or reports or notices to, governmental bodies and (iii) orders, decisions,
judgments and decrees of all courts, administrative agencies and arbitrators.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of
its Euro-Dollar Loans, its Euro Dollar Lending Office.
"Assignee" - see Section 10.6(c).
"Bank" means each bank listed on the signature pages hereof, each Assignee
which becomes a Bank pursuant to Section 10.6, and their respective successors.
"Base Rate" means, for any day, a rate per annum equal to the higher of (i)
the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds
Rate for such day.
"Base Rate Loan" means a Loan which bears interest by reference to the Base
Rate.
<PAGE>
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by any member of the ERISA
Group.
"Borrower" means The Musicland Group, Inc., a Delaware corporation, and its
successors.
"Borrowing" - See Section 1.3.
"Capital Lease" means any lease of property the liability under which, in
accordance with generally accepted accounting principles as in effect on the
date of this Agreement, is required to be capitalized on the lessee's balance
sheet.
"Capital Stock" means, with respect to any Person, the beneficial ownership
interests in said Person, including, without limitation, the capital stock of
any Person that is a corporation and the partnership interests (general and
limited) in any Person that is a partnership.
"Change of Control" means the occurrence of any of the following events:
(x) (i) any "Person" or "group" (within the meaning of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other (A)
than members of management ("Management") of MSC and (B) Donaldson, Lufkin and
Jenrette Securities Corporation ("DLJ"), is or becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of 3O% or more of the fully
diluted Voting Securities of MSC or (ii) management or DLJ is or becomes the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of at least
50t of the fully diluted Voting Securities of MSC or (y) individuals who at the
beginning of any period of two consecutive calendar years constituted the board
of directors of MSC (together with any new directors whose election by the board
of directors of MSC or whose nomination for election by MSC's shareholders was
approved by the members of the board of directors of MSC then still in office
who either were members of the board of directors of MSC at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of the
board of directors of MSC.
"Collateral" means all collateral on which the Collateral Agent has a Lien
pursuant to the Security Agreement.
"Collateral Agent" means Morgan in its capacity as collateral agent for the
Banks hereunder and for the lenders under the Credit Agreement, and its
successors in such capacity.
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages Schedule 1.1, as such
amount may be changed pursuant to assignments pursuant to Section 10.6. The
original amount of the Commitment of each Bank is set forth on Schedule 1.1.
"Commitment Percentage" means, with respect to each Bank, the percentage
which the amount of such Bank's Commitment is of the aggregate amount of all
Commitments. The original Commitment Percentages of the Banks are set forth on
Schedule 1.1.
<PAGE>
"Commitment Period" means the period commencing on the 91st day after the
Effective Date and ending at the close of business on October 31, 1997.
"Consolidated Subsidiary" means, as to any Person at any date, any
Subsidiary or other entity the accounts of which would be consolidated with
those of such Person in such Person's consolidated financial statements prepared
in accordance with generally accepted accounting principles as in effect on the
date of this Agreement.
"Credit Agreement" means the Credit Agreement dated as of October 7, 1994
among MSC, the Borrower, various financial institutions and Morgan, as Agent, as
such Credit Agreement is amended or otherwise modified from time to time.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase price of property or
services, other than (x) trade accounts payable arising in the ordinary course
of business (provided that (A) trade accounts payable which bear interest shall
constitute Debt if, and to the extent that, the outstanding amount of all trade
accounts payable of MSC and its Subsidiaries which bear interest exceeds
$100,000,000 and (B) if at any time a Specified Event (as defined below) exists,
then all trade accounts payable of MSC and its Subsidiaries which bear interest
shall constitute Debt until a Specified Event no longer exists) and (y) trade
accounts payable of such Person which are subject to a bona fide dispute between
such Person and the Person claiming payment, (iv) all obligations of such Person
as lessee under Capital Leases, (v) all Debt of others secured by a Lien on any
asset of such Person, whether or not such Debt is assumed by such Person and
(vi) all Debt of others Guaranteed by such Person. For purposes of part (B) of
the proviso to clause (iii)(x) above, a Specified Event shall exist at any time
that the aggregate amount of all interest paid on trade accounts payable of MSC
and its Subsidiaries (calculated for the period ending on the last day of the
most recent month for which such information is available) exceeds either (I)
$5,000,000 for the period of 12 consecutive months ending on the date of
calculation or (II) $2,000,000 for the period of three consecutive months ending
on the date of calculation.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Derivatives Obligations" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or other similar transaction (including any option with respect to any of the
foregoing transactions) or any combination of the foregoing transactions.
"Designated Affiliate" means, as to any Bank, an Affiliate of such Bank
designated by such Bank to hold some or all of the Warrants issuable pursuant to
Section 3.1(v)(d).
"Domestic Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in New York City are authorized by law to close.
<PAGE>
"Domestic Lending Office" means, as to each Bank, its office located at its
address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent.
"EBITDA" means, for any period, Net Income for such period plus to the
extent deducted in determining such Net Income, depreciation and amortization
expense, interest on Debt, and all Federal, state or foreign income taxes plus
any excess of Rent Expense over actual cash payments for rent or minus any
excess of actual cash payments for rent over Rent Expense.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 3.1.
"Eligible Assignee,, means a bank, savings and loan association, insurance
company, pension fund, mutual fund, commercial finance company or similar
financial institution having capital and surplus of not less than $200,000,000.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, plans, injunctions, permits, concessions, grants, franchises,
licenses, agreements and other governmental restrictions relating to the
environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means MSC, any Subsidiary of MSC and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with MSC or any Subsidiary of
MSC, are treated as a single employer under Section 414 of the Internal Revenue
Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Euro-Dollar Lending
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Agent.
"Euro-Dollar Loan" means a Loan which bears interest by reference to the
London Interbank Offered Rate.
<PAGE>
"Euro-Dollar Reserve Percentage" means, for any day for any Euro-Dollar
Loan of any Bank, that percentage (expressed as a decimal) which is in effect on
such day, as prescribed by the Board of Governors of the Federal Reserve System
(or any successor), for determining the maximum reserve requirement for such
Bank in respect of "Eurocurrency liabilities" (or in respect of any other
category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
such Bank to United States residents).
"Event of Default" has the meaning set forth in Section 6.1.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan on such day on such transactions
as determined by the Agent.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or other obligation (whether arising by virtue of partnership or joint
venture arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain net worth or other
financial conditions, or otherwise) or (b) entered into for the purpose of
assuring in any other manner the obligee of such Debt or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part). The term "Guarantee" shall not include endorsements of checks
for collection or deposit in the ordinary course of business. The term
"Guarantee" or "Guaranteed" used as a verb has a corresponding meaning.
"Guaranteed Obligations" means all indebtedness, liabilities, obligations,
covenants and duties of, and all terms and conditions to be observed by, the
Borrower due or owing to, or in favor or for the benefit of, the Agent and the
Banks under the Loan Documents, or any of them, of every kind, nature and
description, direct or indirect, absolute or contingent, due or not due,
contractual or tortious, liquidated or unliquidated, arising by operation of law
or otherwise, now existing or hereafter arising, and whether or not (a) for the
payment of money or the performance or non-performance of any act, (b) arising
or accruing before or after the filing by or against the Borrower of a petition
under the Bankruptcy Code or (c) allowable under Section 502(b)(2) of the
Bankruptcy Code.
"Guaranty" means the guarantee set forth in Article IX hereof.
<PAGE>
"Hazardous Substances" means any toxic, radioactive, caustic or otherwise
hazardous substance, including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics. "Indemnitee" has the meaning set forth in Section
10.3(b).
"Interest Expense" means, for any period, the interest expense of MSC and
its Consolidated Subsidiaries determined on a consolidated basis for such
period. Notwithstanding the foregoing, Interest Expense shall not include any
amount payable in respect of any lease which was classified as an Operating
Lease as of December 31, 1996 if, and to the extent that, such amount is
included in Rent Expense.
"Interest Period" means, with respect to each Euro-Dollar Borrowing, the
period commencing on the date of such Borrowing and ending one month thereafter,
as the Borrower may elect in the applicable Notice of Borrowing or Notice of
Conversion/ Continuation; Provided that:
(a) any Interest Period which would otherwise end on a day which is not
a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on
the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last EuroDollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Euro-Dollar Business Day of a calendar
month; and
(c) the Borrower may not select any Interest Period which would end
after the Maturity Date or which would result in the aggregate
principal amount of all Euro-Dollar Loans having Interest Periods
ending after December 14, 1998 being in excess of the amount of the
Loans scheduled to be outstanding after giving effect to the payment of
the installment of the Loans payable pursuant to Section 2.6 on such
date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Inventory" means, with respect to the Borrower or any Subsidiary, all
goods of such Person which are of a type sold by such Person in the ordinary
course of business.
"Investment" means, with respect to any Person, any direct or indirect
purchase or other acquisition by such Person of, or any beneficial interest in,
stock or other ownership interests in any other Person, or any direct or
indirect loan, advance (other than advances to employees for moving and travel
expenses and similar expenditures in the ordinary course of business) or capital
contribution by such Person to any other Person (including any Debt or account
receivable owed by such other Person which did not arise from sales to such
other Person in the ordinary course of business).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of
<PAGE>
this Agreement, a Person shall be deemed to own subject to a Lien any asset
which such Person has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Loan" means a loan made by a Bank to the Borrower pursuant to Section
2.1. A Loan may be a Base Rate Loan or a Euro-Dollar Loan.
"Loan Documents" means this Agreement, the Notes, the Subsidiary
Guaranty and the Security Agreement.
"Loan Party" means MSC, the Borrower and each other Subsidiary of MSC which
is a party to any Loan Document.
"London Interbank Offered Rate" has the meaning set forth in Section
2.7(b).
"Material Financial Obligation" means a principal or face amount of
Debt and/or payment obligations in respect of Derivatives Obligations or
Synthetic Lease Obligations of MSC and/or one or more of its Subsidiaries,
arising in one or more related or unrelated transactions, exceeding in the
aggregate $2,500,000.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $2,000,000.
"Maturity Date" means February 15, 1999.
"Morgan" means Morgan Guaranty Trust Company of New York.
'"MSC" means Musicland Stores Corporation, a Delaware corporation.
'"MSC Common Stock" - see Section 3.1(v)(d).
'"MSC's 1996 Form 10-K" means MSC's annual report on Form 10-K for
1996, as filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
'"MSC's Latest Form 10-Q" means MSC's quarterly report on Form 10-Q for
the quarter ended March 31, 1997, as filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"Net Income" means for any period the net income of MSC and its
Consolidated Subsidiaries on a consolidated basis for such period minus all
dividends paid on Preferred Stock; provided that, in calculating such net
income, there shall be excluded (A) any net gains or net losses on the sale or
other disposition, not in the ordinary course of business, of
<PAGE>
Investments and other capital assets, together with any related charges for,
reduction of or provisions for taxes thereon; (B) net gains arising from the
collection of the proceeds of insurance policies; (C) any income or loss from
any Subsidiary that is not a Consolidated Subsidiary; (D) any net gains or net
losses resulting from the defeasance of Debt; (E) earnings from discontinued
businesses; (F) Restructuring Charges and, if applicable, non-recurring
professional fees recorded on the books of MSC in the third and fourth fiscal
quarters of 1996; (G) any adjustment of intangible assets pursuant to the
application of Financial Accounting Standards Board Statement No. 121; and (H)
any other extraordinary gains or losses.
"Notes" means promissory notes of the Borrower substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the
Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" - see Section 2.2.
"Notice of Conversion/Continuation" - see Section 2.4.
"Operating Lease" means, as applied to any Person, any lease (including
any Synthetic Lease) of any property (whether real, personal or mixed) by such
Person as lessee which is not a Capital Lease.
"Parent" means, with respect to any Bank, any Person controlling such
Bank.
"Participant" - see Section 10.6(b).
""PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means Liens permitted by Section 5.6.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"Preferred Stock" means preferred stock of MSC.
"Prime Rate" means the rate of interest publicly announced by Morgan in
New York City from time to time as its Prime Rate.
"Registration Rights Agreement" - see Section 3. 1 (v) (e).
<PAGE>
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Rent Expense" means, for any period, the aggregate amount payable during
such period by a lessee with respect to and pursuant to the terms of all
Operating Leases as would be required to be reported in the financial statements
of MSC and its Consolidated Subsidiaries for such period as the total rent
expense in accordance with generally accepted accounting principles as in effect
on the date of this Agreement; provided, however, that any lease which was
classified as an operating Lease as of December 31, 1996 shall be treated as an
Operating Lease for purposes of this definition notwithstanding the
reclassification under GAAP of such lease as Debt after such date (and "Rent
Expense" shall not include the portion of any payment under such lease
attributable to the principal of the Debt under such lease as so reclassified).
"Replacement Credit Agreement" means, at any time the Credit Agreement
is no longer in effect, any credit facility (whether a revolving facility, a
term facility or a combination thereof) pursuant to which MSC or any Subsidiary
thereof may obtain loans or other financial accommodations in the amount of
$100,000,000 or more (or, if no credit facility is available in such amount, the
credit facility pursuant to which MSC or any Subsidiary may then obtain the
largest amount of loans and other financial accommodations).
"Required Banks" means at any time Banks having more than 50% of the
aggregate amount of the Commitments or, if the Commitments shall have expired or
been terminated, holding Notes evidencing more than 50% of the aggregate unpaid
principal amount of the Loans.
"Restructuring Charges" means (x) up to $75,000,000 of liabilities
recorded on the books of MSC in 1996 in connection with facility closing
decisions, termination of employees and costs related to the foregoing, (y) up
to $20,000,000 of liabilities (not more than $10,000,000 of which may be cash
charges) recorded on the books of MSC after December 31, 1996 in connection with
facility closing decisions, termination of employees and costs related to the
foregoing and (z) up to $3,000,000 of non-recurring professional fees recorded
on the books of MSC in any fiscal quarter beginning with the fiscal quarter
ended March 31, 1997.
"Retail Store Lease" means any lease under which the Borrower or any
Wholly-Owned Consolidated Subsidiary of the Borrower is the tenant and pursuant
to which the Borrower or such Subsidiary leases space for one of its retail
stores.
"Security Agreement" - see Section 3.1(v)(c).
"Senior Subordinated Indenture" means the Indenture dated as of June
17, 1993 between MSC, the Borrower and Bank One, N.A., formerly known as Bank
One, Columbus, N.A. (as successor to Harris Trust and Savings Bank), as Trustee,
pursuant to which the Senior Subordinated Notes were issued, as amended or
otherwise modified from time to time.
"Senior Subordinated Notes" means $110,000,000 aggregate principal
amount of the Borrower's 9% senior subordinated notes due 2003 issued pursuant
to the Senior Subordinated Indenture.
<PAGE>
"Subordinated Debt" means (a) the Debt evidenced by the Senior
Subordinated Notes, (b) other Debt of the Borrower having subordination terms no
less favorable to the Banks than those contained in the Senior Subordinated
Indenture, covenants and defaults no more burdensome to the Borrower and its
Subsidiaries than those contained in the Senior Subordinated Indenture and no
required payments of principal earlier than 91 days after the Maturity Date and
(c) other Debt of the Borrower having maturities and other terms, and which is
subordinated to the obligations of the Borrower hereunder in a manner,
satisfactory to the Agent and the Required Banks.
"Subordinated Debt Guarantee" means MSC's guarantee of the obligations
of the Borrower under the Senior Subordinated Notes.
"Subsidiary" means, as to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person; unless
otherwise specified, "Subsidiary" means a Subsidiary of MSC.
"Subsidiary Guaranty" - see Section 3.1(v)(b).
"Synthetic Lease" means a lease transaction under which the parties
intend that (i) the lease will be treated as an "operating lease" by the lessee
pursuant to Statement of Financial Accounting Standards No. 13, as amended, and
(ii) the lessee will be entitled to various benefits ordinarily available to
owners (as opposed to lessees) of like property.
"Synthetic Lease Obligations" means, with respect to any Person, the
sum of (a) all rental obligations of such Person as lessee under Synthetic
Leases which are attributable to principal and (b) all payment obligations of
such Person under Synthetic Leases assuming such Person exercises the option to
purchase the leased property at the end of the lease term.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of America, including the
States and the District of Columbia, but excluding its territories and
possessions.
"Voting Securities" means any securities having ordinary power to vote
for the election of directors.
"Warrant" means a right to purchase a share of Common Stock of MSC as
evidenced by a Warrant Certificate.
<PAGE>
"Warrant Certificate" means a Warrant Certificate substantially in the
form of Exhibit G hereto, with appropriate insertions, as amended or otherwise
modified from time to time.
"Wholly-Owned Consolidated Subsidiary" means, with respect to any
Person, any Consolidated Subsidiary of such Person all of the shares of capital
stock or other ownership interests of which (except directors' qualifying
shares) are at the time directly or indirectly owned by such Person.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by MSC's independent
public accountants) with the most recent audited consolidated financial
statements of MSC and its Consolidated Subsidiaries delivered to the Banks;
provided that, if MSC notifies the Agent that MSC wishes to amend any covenant
in Article V to eliminate the effect of any change in generally accepted
accounting principles on the operation of such covenant (or if the Agent
notifies MSC that the Required Banks wish to amend Article V for such purpose),
then MSC's compliance with such covenant shall be determined on the basis of
generally accepted accounting principles in effect immediately before the
relevant change in generally accepted accounting principles became effective,
until either such notice is withdrawn or such covenant is amended in a manner
satisfactory to MSC and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
aggregation of the Loans of the Banks to be made, continued or converted to the
Borrower pursuant to Article II on a single date and for a single Interest
Period. Borrowings are classified for purposes of this Agreement by reference to
the pricing of the Loans comprising such Borrowing (e.g., a "EuroDollar
Borrowing" is a Borrowing comprised of Euro-Dollar Loans).
ARTICLE II
THE CREDITS
SECTION 2.1. Commitments to Lend. Each Bank severally agrees, on the
terms and conditions set forth in this Agreement, (a) to make a loan to the
Borrower at any time during the Commitment Period in an amount equal to such
Bank's Commitment Percentage of $25,000,000 (or such lesser amount as the
Borrower may request) and (b) to make an additional loan to the Borrower at any
time during the Commitment Period (but not before September 15, 1997) in an
amount equal to such Bank's Commitment Percentage of $25,000,000 (or such lesser
amount as the Borrower may request). Amounts borrowed which are repaid or
prepaid may not be reborrowed (it being understood that continuations and
conversions pursuant to Section 2.4 are not repayments or prepayments), and the
Commitments shall expire concurrently with the Borrowing pursuant to clause (b)
above (or, if such Borrowing is not requested, on October 31, 1997).
SECTION 2.2. Notice of Borrowing. The Borrower shall give the Agent a
notice in the form of Exhibit I hereto (a "Notice of Borrowing") of each
Borrowing not later than (x) 12:00 P.M. (New York City time) on the date of such
Borrowing if such Borrowing initially is to be a
<PAGE>
Base Rate Borrowing and (y) 1:00 P.M. (New York City time) on the third
Euro-Dollar Business Day before such Borrowing if such Borrowing initially is to
be a Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day in
the case of a Base Rate Borrowing and a Euro-Dollar Business Day in the case of
a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing (which shall be an integral
multiple of $1,000,000), and
(c) whether the Loans comprising such Borrowing are to be Base Rate Loans
or Euro-Dollar Loans.
SECTION 2.3. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify
each Bank of the contents thereof and of such
Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter
be revocable by the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank shall make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Agent at
its address referred to in Section 10.1. Unless the Agent determines that any
applicable condition specified in Article III has not been satisfied, the Agent
will promptly make the funds so received from the Banks available to the
Borrower at the Agent's aforesaid address.
(c) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing (or, if such Borrowing initially is to be a Base Rate
Borrowing, prior to 1:00 p.m. (New York City time) on the date of such
Borrowing) that such Bank will not make available to the Agent such Bank's share
of such Borrowing, the Agent may assume that such Bank has made such share
available to the Agent on the date of such Borrowing in accordance with
subsection (b) of this Section 2.3 and the Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Bank shall not have so made such share available
to the Agent, such Bank and the Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Agent, at (i) in the case of the Borrower,
a rate per annum equal to the higher of the Federal Funds Rate and the interest
rate applicable thereto pursuant to Section 2.7 and (ii) in the case of such
Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such
corresponding amount, such amount so repaid shall constitute such Bank's Loan
included in such Borrowing for purposes of this Agreement.
SECTION 2.4. Conversion and Continuation Elections for Borrowinqs. (a) The
Borrower may, upon irrevocable written notice to the Agent in accordance with
subsection (b) of this Section 2.4:
<PAGE>
(I) elect, as of any Euro-Dollar Business Day, to convert a Euro-Dollar
Borrowing to a Base Rate Borrowing or to convert a Base Rate Borrowing
to a Euro-Dollar Borrowing; or
(ii) elect, as of the last day of the applicable Interest Period, to
continue a Euro-Dollar Borrowing expiring on such day for another
Interest Period.
(b) The Borrower shall deliver a notice in the form of Exhibit J hereto
(a "Notice of Conversion/Continuation") to be received by the Agent not later
than (i) 12:00 P.M. (New York City time) on the date of any conversion into a
Base Rate Borrowing and (ii) 1:00 P.M. (New York City time) on the third
Euro-Dollar Business Day before the date of any conversion into or continuation
of a Euro-Dollar Borrowing, in each case specifying the Borrowing to be
converted or continued and the proposed date of such conversion or continuation.
(c) If, upon the expiration of any Interest Period for a Euro-Dollar
Borrowing, the Borrower has failed to give timely notice of continuation of such
Borrowing for a new Interest Period, such Borrowing shall automatically convert
into a Base Rate Borrowing.
(d) Notwithstanding any other provision of this Agreement, the Borrower
may not convert into a Euro-Dollar Loan, or continue a Euro-Dollar Loan for a
new Interest Period, at any time a Default exists.
SECTION 2.5. Notes. (a) The Loans of each Bank shall be evidenced by a
single Note payable to the order of such Bank for the account of its Applicable
Lending Office in an amount equal to the aggregate unpaid principal amount of
such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type be evidenced by a separate Note in an amount
equal to the aggregate unpaid principal amount of such Loans. Each such Note
shall be in substantially the form of Exhibit A hereto with appropriate
modifications to reflect the fact that it evidences solely Loans of the relevant
type. Each reference in this Agreement to the "Note" of such Bank shall be
deemed to refer to and include any or all of such Notes, as the context may
require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.2(e), the
Agent shall forward such Note to such Bank. Each Bank shall record the date,
amount, type and maturity of each Loan made by it and the date and amount of
each payment of principal made by the Borrower with respect thereto, and may, if
such Bank so elects in connection with any transfer or enforcement of its Note,
endorse on the schedule forming a part thereof appropriate notations to evidence
the foregoing information with respect to each such Loan then outstanding;
provided that the failure of any Bank to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder or under
the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to
endorse its Note and to attach to and make a part of its Note a continuation of
any such schedule as and when required.
SECTION 2.6. Amortization of Loans. The Loans shall be repaid in
installments as follows: 50% of the aggregate original principal amount of each
Bank's Loans shall be due and
<PAGE>
payable on December 14, 1998; and the balance of each Bank's Loans shall be due
and payable on the Maturity Date.
SECTION 2.7. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from the date
such Loan is made until it becomes due, at a rate per annum equal to the sum of
1% plus the Base Rate for such day. Such interest shall be payable on the first
Domestic Business Day of each month. Any overdue principal of or interest on any
Base Rate Loan shall bear interest, payable on demand, for each day until paid
at a rate per annum equal to the sum of 3% plus the Base Rate for such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of 2% plus the London Interbank
Offered Rate applicable to such Interest Period. Such interest shall be payable
for each Interest Period on the last day thereof.
The "London Interbank Offered Rate" applicable to any Interest Period
means the rate per annum at which deposits in dollars are offered by Morgan to
prime banks in the London interbank market at approximately 11:00 A.M. (London
time) two Euro-Dollar Business Days before the first day of such Interest Period
in an amount approximately equal to the principal amount of the Euro-Dollar Loan
of Morgan to which such Interest Period is to apply and for a period of time
comparable to such Interest Period.
(c) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day until paid at a rate per annum
equal to (i) during the remainder of the then-applicable Interest Period for
such Loan, the higher of (x) the sum of 4% plus the London Interbank Offered
Rate applicable to such Loan and (y) the sum of 3% plus the Base Rate for such
day and (ii) thereafter, the sum of 3% plus the Base Rate for such day.
(d) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
Banks of each rate of interest so determined, and its determination thereof
shall be conclusive in the absence of manifest error.
SECTION 2.8. Up front Fee. On the Effective Date, the Borrower shall
pay to the Agent for the account of each Bank a closing fee in an amount equal
to 1% of such Bank's Commitment.
SECTION 2.9. Optional Prepayments. (a) Subject in the case of any
Euro-Dollar Borrowing to Section 2.11, the Borrower may, upon notice to the
Agent not later than 12:00 P.M. (New York City) on any Domestic Business Day,
prepay any Base Rate Borrowing, or upon at least three Euro-Dollar Business
Days' notice to the Agent, prepay any Euro-Dollar Borrowing, in each case in
whole at any time, or from time to time in part in amounts aggregating
$1,000,000 or any larger multiple thereof, by paying the principal amount to be
prepaid together with accrued interest thereon to the date of prepayment. Each
such optional prepayment shall be applied to prepay ratably the Loans of the
Banks.
(b) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share of such prepayment and such notice shall not thereafter be
revocable by the Borrower.
<PAGE>
(c) Any prepayment shall be applied to the unpaid installments of the Loans
in the inverse order of the maturity of such installments.
SECTION 2.10. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and (subject to Section 2.13) interest on,
the Loans and of fees hereunder, not later than 12:00 Noon (New York City time)
on the date when due, in Federal or other funds immediately available in New
York City, to the Agent at its address referred to in Section 10.1. The Agent
will promptly distribute to each Bank its ratable share of each such payment
received by the Agent for the account of the Banks. Whenever any payment of
principal of, or interest on, the Base Rate Loans or of fees shall be due on a
day which is not a Domestic Business Day, the date for payment thereof shall be
extended to the next succeeding Domestic Business Day. Whenever any payment of
principal of, or interest on, the Euro-Dollar Loans shall be due on a day which
is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar
Business Day falls in another calendar month, in which case the date for payment
thereof shall be the next preceding Euro-Dollar Business Day. If the date for
any payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior to
the date on which any payment is due to any Bank hereunder that the Borrower
will not make such payment in full, the Agent may assume that the Borrower has
made such payment in full to the Agent on such date and the Agent may, in
reliance upon such assumption, cause to be distributed to such Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment, each Bank shall repay to the
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Agent, at the Federal
Funds Rate.
SECTION 2.11. Funding Losses. If the Borrower makes any payment of
principal with respect to any Euro-Dollar Loan (pursuant to Article II, VI or
VIII or otherwise) on any day other than the last day of an Interest Period
applicable thereto, or the last day of an applicable period fixed pursuant to
Section 2.7(c), or if the Borrower fails to borrow or prepay any Euro-Dollar
Loans after notice has been given to any Bank in accordance with Section 2.4(a)
or 2.9(b), the Borrower shall reimburse each Bank within 15 days after demand
for any resulting loss or expense incurred by it (or by an existing or
prospective Participant in the related Loan), including (without limitation) any
loss incurred in obtaining, liquidating or employing deposits from third
parties, but excluding loss of margin for the period after any such payment or
failure to borrow or prepay, provided that such Bank shall have delivered to the
Borrower a certificate as to the amount of such loss or expense, which
certificate shall be conclusive in the absence of manifest error.
SECTION 2.12. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last
<PAGE>
day). All other interest and fees shall be computed on the basis of a year of
360 days and paid for the actual number of days elapsed (including the first day
but excluding the last day).
SECTION 2.13. Regulation D Compensation. Each Bank that incurs reserve
requirements under Regulation D of the Board of Governors of the Federal Reserve
System (or any successor), as in effect from time to time, may require the
Borrower to pay, contemporaneously with each payment of interest on the
EuroDollar Loans, additional interest on the related Euro-Dollar Loan of such
Bank at a rate per annum determined by such Bank up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the applicable Euro-Dollar Reserve Percentage over (ii) the applicable
London Interbank Offered Rate. Any Bank wishing to require payment of such
additional interest (x) shall so notify the Borrower and the Agent, in which
case such additional interest on the Euro-Dollar Loans of such Bank shall be
payable to such Bank at the place indicated in such notice with respect to each
Euro-Dollar Loan having an Interest Period commencing at least three Euro-Dollar
Business Days after the giving of such notice and (y) shall notify the Borrower
at least five Euro-Dollar Business Days prior to each date on which interest is
payable on the Euro-Dollar Loans of the amount then due it under this Section.
ARTICLE III
CONDITIONS
SECTION 3.1. Conditions to Effectiveness. This Agreement shall become
effective on the date (the "Effective Date") on which the Agent shall have
received (i) the up front fees payable pursuant to Section 2.8, (ii)
confirmation that the Borrower has paid all reasonable fees, costs and expenses
payable to the Agent and to Mayer, Brown & Platt, Zalkin, Rodin & Goodman LLP
and Ernst & Young LLP, professional advisors to the Agent and the Banks, to the
extent then billed, (iii) confirmation that the Fourth Amendment to the Credit
Agreement has become effective in accordance with its terms, (iv) evidence
reasonably satisfactory to the Agent that the required majority of the holders
of the Senior Subordinated Notes have waived all provisions of the Senior
Subordinated Indenture that would prohibit the incurrence of the Debt
contemplated under this Agreement or would prohibit, or require that an equal
and ratable Lien be granted in connection with, the Liens in favor of the
Collateral Agent under the Security Agreement and (v) each of the following
documents:
(a) counterparts of this Agreement signed by each of the
parties hereto (it being understood that, in the case of any Bank, the
Agent may rely on facsimile confirmation of the execution of a
counterpart hereof by such Bank);
(b) a Subsidiary Guaranty substantially in the form of Exhibit
B hereto (as amended or otherwise modified from time to time, the
"Subsidiary Guaranty"), executed by each Subsidiary of the Borrower;
(c) a Security Agreement substantially in the form of Exhibit
C hereto (as amended or otherwise modified from time to time, the
"Security Agreement"), executed by the Borrower and each Subsidiary
thereof, together with such UCC financing
<PAGE>
statements and other documents deemed necessary or desirable by the
Collateral Agent to perfect the Collateral Agent's Lien in the Collateral
thereunder;
(d) a Warrant Certificate duly executed by MSC for each Bank (or, as to any
Bank, its Designated Affiliate) representing the right to purchase that number
of shares of common stock, par value $0.01 per share, of MSC ("MSC Common
Stock") set forth across from such Bank's name on Schedule 3.1(d) hereto;
(e) a Warrant and Registration Rights Agreement substantially in the form
of Exhibit H hereto (as amended or otherwise modified from time to time, the
"Registration Rights Agreement") duly executed by the parties thereto;
(f) an opinion of Linda Alsid Ruehle, Assistant General Counsel of
theBorrower, substantially in the form of Exhibit D hereto;
(g) an opinion of Latham & Watkins, special counsel for the Borrower and
the other Loan Parties, substantially in the form of Exhibit E hereto;
(h) an opinion of Moss & Barnett, special securities counsel to MSC,
substantially in the form of Exhibit F hereto; and
(i) all documents the Agent may reasonably request relating to the
existence of the Borrower and the other Loan Parties, the corporate authority
for and the validity of this Agreement and the other Loan Documents, and any
other matters relevant hereto, all in form and substance satisfactory to the
Agent.
The Agent shall promptly notify the Borrower and the Banks of the
occurrence of the Effective Date.
SECTION 3.2. Conditions to First Borrowing. The obligation of the Banks
to make Loans in connection with the first Borrowing hereunder is subject to the
conditions precedent that (a) more than 90 days have elapsed since the Effective
Date, (b) the Borrower shall have delivered to the Agent and the Banks copies of
the most recent statement of operations required to be delivered under Section
5.1(m) of the Credit Agreement and such statement of operations shall show that
EBITDA for the three months ending on the day as of which such statement was
prepared was not less than negative $9,500,000, (c) the Borrower shall have
delivered to the Agent and the Banks copies of the most recent report on trade
payables required to be delivered under Section 5.1(k) of the Credit Agreement
and such report (which report shall be as of a date not be more than 14 days
prior to the date of such Borrowing) shall show that the aggregate amount of all
trade payables arising out of the purchase of inventory of the Borrower and its
Subsidiaries was not less than $300,000,000, (d) the conditions precedent set
forth in Section 3.4 shall be satisfied and (e) the Agent shall have received a
duly executed Note for the account of each Bank dated on or before the date of
such Borrowing and otherwise complying with the provisions of Section 2.5.
SECTION 3.3. Conditions to Second Borrowing. The obligation of the
Banks to make Loans in connection with the second Borrowing hereunder is subject
to the conditions precedent that (a) the first Borrowing has occurred, (b) the
Borrower shall have delivered to the Agent and the Banks copies of the most
recent statement of operations required to be
<PAGE>
delivered under Section 5.1(m) of the Credit Agreement and such statement
of operations shall show that EBITDA for the three months ending on the day as
of which such statement was prepared was not less than negative $9,500,000, (c)
the Borrower shall have delivered to the Agent and the Banks copies of the most
recent report on trade payables required to be delivered under Section 5.1(k) of
the Credit Agreement and such report (which report shall not be more than 14
days prior to the date of such Borrowing) shall show that the aggregate amount
of all trade payables of the Borrower and its Subsidiaries arising out of the
purchase of inventory was not less than $275,000,000 and (d) the conditions
precedent set forth in Section 3.4 shall be satisfied.
SECTION 3.4. Conditions to Both Borrowings. The obligation of each Bank to
make any Loan is subject to the satisfaction of the following conditions:
(a) the Agent shall have received a Notice of Borrowing as
required by Section 2.2;
(b) the fact that, immediately before and after the making of
such Loan, (i) no Default shall have occurred and be continuing, (ii)
no "Default" under and as defined in the Credit Agreement shall have
occurred and be continuing and (iii) no event or condition shall exist
which would permit the holder or holders of any Material Financial
Obligation (or any trustee or agent therefor) to accelerate the
maturity thereof or otherwise to cause such Material Financial
Obligation to become due and payable prior to its scheduled maturity;
and
(c) the fact that the representations and warranties of the
Borrower and MSC contained in this Agreement shall be true on and as of
the date of such Loan.
Each Notice of Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrower on the date of such Borrowing as to the facts specified
in clauses (b) and (c) of this Section. The Borrower will provide such
information as the Agent or the Required Banks may reasonably request to
demonstrate the accuracy of such representation and warranty.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each of the Borrower and MSC represents and warrants that:
SECTION 4.1. Corporate Existence and Power. Each of MSC and each of its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and is duly
qualified as a foreign corporation and authorized to do business in all
jurisdictions wherein the character of the properties owned or held under lease
by it or the nature of the business transacted by it makes such qualification
necessary, except for those jurisdictions in which the failure so to qualify or
be authorized, singly or in the aggregate, have not had and will not have a
materially adverse effect upon the business, financial position or results of
operations of MSC and its Subsidiaries taken as a whole, or the ability of any
Loan Party to perform its obligations under any Loan Document, and each of MSC
and each of its Subsidiaries has all corporate powers, and all material
<PAGE>
governmental licenses, authorizations, consents and approvals, required to carry
on its respective businesses as presently conducted.
SECTION 4.2. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each Loan Party of
each Loan Document to which such Loan Party is a party are within the corporate
powers of such Loan Party, have been duly authorized by all necessary corporate
action, require no action by or in respect of, or filing or recording with, any
governmental body, agency or official (other than the filing of Uniform
Commercial Code financing statements in various jurisdictions pursuant to the
Security Agreement) and do not (a) contravene, or constitute a default under,
any provision of Applicable Law or of the respective certificate of
incorporation or by-laws of such Loan Party or of any agreement, judgment,
injunction, order, decree or other instrument binding upon such Loan Party, or
(b) result in the creation or imposition of any Lien on any asset of any Loan
Party or any of their respective Subsidiaries other than the security interests
created under the Loan Documents.
SECTION 4.3. Binding Effect. Each of the Loan Documents is a valid and
binding obligation of each Loan Party that is a party thereto.
SECTION 4.4. Financial Information. (a) The consolidated statement of
financial position of MSC and its Consolidated Subsidiaries as of December 31,
1996 and the related consolidated statements of income, cash flow and changes in
stockholders' equity for the fiscal year then ended, reported on by Arthur
Andersen & Co. and set forth in MSC's 1996 Form 10-K, a copy of which has been
delivered to each of the Banks, fairly present, in conformity with generally
accepted accounting principles, the consolidated financial position of MSC and
its Consolidated Subsidiaries as of such date and their consolidated results of
operations and changes in financial position for such fiscal year.
(b) The consolidated statement of financial position of MSC and its
Consolidated Subsidiaries as of March 31, 1997 and the related consolidated
statements of income, cash flows and changes in stockholders' equity for the
fiscal quarter then ended, as set forth in MSC's Latest Form 10-Q, a copy of
which has been delivered to each of the Banks, fairly present, in conformity
with generally accepted accounting principles applied on a basis consistent with
the financial statements referred to in subsection (a) of this Section, the
consolidated financial position of MSC and its Consolidated Subsidiaries as of
such date and their consolidated results of operations and cash flows for the
quarter and three-month period then ended (subject to normal year-end
adjustments).
(c) Except as disclosed in MSC's Latest Form 10-Q, since December 31,
1996 there has been no material adverse change in the business, financial
position or results of operations of MSC and its Consolidated Subsidiaries,
taken as a whole.
SECTION 4.5. Subsidiaries. The Subsidiaries of MSC and their respective
jurisdictions of incorporation
are listed on Schedule 4.5 hereto.
SECTION 4.6. Litigation. There are no actions, suits or proceedings
pending against, or to the knowledge of MSC or any Subsidiary of MSC threatened
against or affecting, MSC or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which, singly or in the
<PAGE>
aggregate,could materially and adversely affect the business, consolidated
financial position or consolidated results of operations of MSC and its
Consolidated Subsidiaries taken as a whole, or which in any manner draws into
question the validity of any Loan Document.
SECTION 4.7. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Internal Revenue Code or (iii)
incurred any liability under Title IV of ERISA other than a liability to the
PBGC for premiums under Section 4007 of ERISA.
SECTION 4.8. Taxes. Except as set forth on Schedule 4.8, all United
States Federal income tax returns and all other material tax returns which are
required to be filed by or with respect to MSC and its Subsidiaries have been
filed and all taxes due pursuant to such returns or pursuant to any assessment
received by MSC or any such Subsidiary have been paid. The charges, accruals and
reserves on the books of MSC and each of its Subsidiaries in respect of taxes
(excluding any provision for deferred income taxes) are, in the opinion of MSC,
adequate. MSC does not know of any proposed tax assessment against it or any of
its Subsidiaries that would be material to the business, results of operation or
financial position of MSC and its Consolidated Subsidiaries, taken as a whole,
except any such proposed assessment which has been disclosed in writing to the
Banks and which is being contested in good faith by appropriate proceedings.
SECTION 4.9. Not an Investment Company. Neither MSC nor any of its
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
SECTION 4.10. Compliance with Laws, etc. Except as set forth in
Schedule 4.10, each of MSC and each of its Subsidiaries is in compliance with
all Applicable Laws and all agreements and other instruments binding upon MSC or
such Subsidiary, except for failures to comply which, singly or in the aggregate
would not have a materially adverse effect on the business, results of
operations or financial position of MSC and its Consolidated Subsidiaries taken
as a whole or on the ability of any Loan Party to perform all of its obligations
under the Loan Documents.
SECTION 4.11. Possession of Franchises, Licenses, etc. Each of MSC and
each of its Subsidiaries owns or possesses all franchises, certificates,
licenses, permits and other authorizations from governmental or political
subdivisions or regulatory authorities, and each of MSC and each of its
Subsidiaries is licensed or otherwise has lawful right to use, all patents,
trademarks, service marks, trade names, copyrights, licenses and other rights,
in each case free from burdensome restrictions, which are necessary in any
material respect for the ownership, maintenance and operation of its properties
and assets, and neither MSC nor any of its Subsidiaries is in violation of any
provision thereof in any material respect.
<PAGE>
SECTION 4.12. Environmental Matters. In the ordinary course of its
business, MSC conducts an ongoing review of the effect of Environmental Laws on
the business, operations and properties of MSC and its Subsidiaries, in the
course of which it identifies and evaluates associated liabilities and costs
(including, without limitation, any capital or operating expenditures required
for clean-up or closure of properties presently or previously owned, any capital
or operating expenditures required to achieve or maintain compliance with
environmental protection standards imposed by law or as a condition of any
license, permit or contract, any related constraints on operating activities,
including any periodic or permanent shutdown of any facility or reduction in the
level of or change in the nature of operations conducted thereat, any costs or
liabilities in connection with off-site disposal of wastes or Hazardous
Substances, and any actual or potential liabilities to third parties, including
employees, and any related costs and expenses). On the basis of this review, MSC
has reasonably concluded that such associated liabilities and costs, including
the costs of compliance with Environmental Laws, are unlikely to have a material
adverse effect on the business, financial condition, results of operations or
prospects of MSC and its Consolidated Subsidiaries, taken as a whole.
SECTION 4.13. Undisclosed Liabilities. Neither MSC nor any of its
Subsidiaries has any material liability or liabilities of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise,
and there is no existing condition, situation or set of circumstances which
could be reasonably expected to result in such a liability, in each case, that
is not reflected in the most recent balance sheet delivered pursuant to Section
4.4 or Section 5.1 or otherwise disclosed in writing to the Banks.
SECTION 4.14. Title to Properties. Each of MSC and each of its
Subsidiaries has good, marketable and legal title to, or a valid leasehold
interest in, its properties and assets, free and clear of all Liens, other than
Permitted Liens, and not subject to any agreements which would, singly or in the
aggregate, be reasonably likely to have a material adverse effect on the
business, financial condition, results of operations or prospects of MSC and its
Consolidated Subsidiaries, taken as a whole.
SECTION 4.15. Retail Store Leases. Each retail store operated by the
Borrower or any of its Subsidiaries is the subject of a lease under which the
Borrower or such Subsidiary is the tenant which is legal, valid and binding in
all material respects, and is in full force and effect in accordance with its
terms, and under which the Borrower or such Subsidiary enjoys peaceful and
undisturbed possession. The Borrower and each of its Subsidiaries is in
compliance with all Retail Store Leases to which it is a party and no default by
the Borrower or any such Subsidiary or, to the best of the Borrower's knowledge,
by the landlord, has occurred under any Retail Store Lease except for failures
to comply or defaults which singly or in the aggregate would not have a
materially adverse effect on the business, results of operations or financial
position of the Borrower.
SECTION 4.16. Full Disclosure. All information heretofore furnished by
any Loan Party to the Agent or any Bank for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all such
information hereafter furnished by any Loan Party to the Agent or any Bank will
be, true and accurate in all material respects on the date as of which such
information is stated or certified. MSC has disclosed to the Banks in writing
any and all facts which materially and adversely affect or may affect (to the
extent MSC can now reasonably foresee), the business, operations or financial
condition of MSC and its
<PAGE>
Consolidated Subsidiaries, taken as a whole, or the ability of any Loan
Party to perform its obligations under this Agreement or any other Loan
Document.
ARTICLE V
COVENANTS
MSC and the Borrower agree that, so long as any Bank has any Commitment
hereunder, or any amount payable hereunder or under any Note remains unpaid:
SECTION 5.1. Information. MSC will deliver to each Bank:
(a) as soon as available and in any event within 90 days after the end
of each fiscal year of MSC, a consolidated statement of financial position of
MSC and its Consolidated Subsidiaries as of the end of such fiscal year and the
related consolidated statements of income, cash flow and changes in
stockholders' equity for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, all reported on in a
manner acceptable to the Securities and Exchange Commission by Arthur Andersen &
Co. or other independent public accountants of nationally recognized standing,
which report shall be without qualifications other than a "going concern"
qualification and other qualifications acceptable to the Required Banks;
(b) as soon as available and in any event within 45 days after the end
of each of the first three quarters of each fiscal year of MSC, the consolidated
statement of financial position of MSC and its Consolidated Subsidiaries as of
the end of such quarter and the related consolidated statement of income of MSC
and its Consolidated Subsidiaries for such quarter and the related consolidated
statements of income and cash flow of MSC and its Consolidated Subsidiaries for
the portion of MSC's fiscal year ended at the end of such quarter, setting forth
in each case in comparative form the figures for the corresponding quarter, and
the corresponding portion, of MSC's preceding fiscal year, all certified
(subject, in the case of such quarterly financial statements, to normal year-end
auditing adjustments) by the chief financial officer of MSC as to fairness of
presentation and preparation in accordance with generally accepted accounting
principles applied on a basis consistent with those used in preparing the
financial statements referred to in Section 5.1(a) hereof (subject to such
changes in accounting principles as shall be described in such certificate and
shall have been approved in writing attached to such certificate by MSC's
independent accountants);
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the chief
financial officer or the Treasurer of MSC (i) setting forth in reasonable detail
the calculations required to establish whether MSC is in compliance with the
requirements of Sections 5.10 and 5.11 on the date of such financial statements,
and (ii) stating whether there exists on the date of such certificate any
Default and, if any Default then exists, setting forth the details thereof and
the action which MSC is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements as to (i)
whether anything has come to their attention to cause them to believe
<PAGE>
that there existed on the date of such statements any Default, (ii)
confirming the calculations set forth in the officer's certificate delivered
simultaneously therewith pursuant to clause (c) above and (iii) confirming that
MSC is authorized by such firm of independent public accountants to deliver its
statement to the Banks pursuant to this Agreement and that it is its
understanding that the Banks are relying on such statement;
(e) forthwith upon the occurrence of any Default, a certificate of the
chief financial officer or the Treasurer of MSC setting forth the details
thereof and the action which MSC or the relevant Subsidiary is taking or
proposes to take with respect thereto;
(f) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and all annual, quarterly, monthly and other reports
and proxy statements which MSC or the Borrower shall file with the Securities
and Exchange Commission;
(g) if and when any member of the ERISA Group (i) gives or is required
to give notice to the PBGC of any "reportable event" (as defined in Section 4043
of ERISA) with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of
such notice; (iv) applies for a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of
such notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could result
in the imposition of a Lien or the posting of a bond or other security, a
certificate of the president or chief financial officer of MSC setting forth
details as to such occurrence and action, if any, which MSC or applicable member
of the ERISA Group is required or proposes to take with respect thereto;
(h) bi-weekly not later than the Friday following the week ended the
previous Saturday, commencing June 27 and continuing every two weeks thereafter,
a certificate of the chief financial officer or the Treasurer (or, in the
absence of both of the foregoing, an Assistant Treasurer) of MSC with respect to
inventory, substantially in the form of Exhibit L hereto; and
(i) from time to time such additional information regarding the
financial position, results of operations or business of MSC or any of its
Subsidiaries as the Agent, at the request of any Bank, may reasonably request.
Documents filed by MSC or the Borrower with the Securities and Exchabge
Commission and provided to the Baniks shall, to the extent that they contain the
preceding information, be deemed to satisfy the delivery requirements se forth
above.
<PAGE>
SECTION 5.2. Insurance. MSC will maintain, and will cause each of its
Subsidiaries to maintain (either in the name of MSC or the Borrower or in such
Subsidiary's own name), insurance (which may include self-insurance) on all of
its inventory in at least such amounts and against such risks as is usually
insured against in the same general area by companies of established repute
engaged in the same or a similar business; and will furnish to the Banks, upon
written request from the Agent, full information as to the insurance carried.
SECTION 5.3. Conduct of Business and Maintenance of Existence. MSC will
keep, and will cause each of its subsidiaries to keep, in full force and effect
its corporate existence and the rights, privileges and franchises necessary or
desirable in tyhe normal conduct of its business, except to the extent failure
to do any of the foregoing will not have a material adverse effect on MSC and
its Subsidiaries taken as a whole. MSC will not engage in any busienss other
than holding all the outstanding Capital Stock of the Borrower and providing all
the outstanding Capital Stock of the Borrower and providing all the outstanding
Capital Stock of the Borrower and providing services and management activities
for the Borrower. The Borrower and its Subsidiaries will continue to engage
primarily in the same general businwesses engaged in by the Borrower and its
Subsidiaries on the date of this Agreement.
SECTION 5.4. Compliance with Laws. MSC will comply, and will couse each
of its Subsidiaries to comply, with all Applicable Laws (including, without
limitation, ERISA and the rules and regulations thereunder) except where the
necessity of compliance therewith is being vontested in good faith by
appropriate proceedings and except where failure to so comply, simgly or in the
agtgregate with all other failures to comply, would not have a materially
adverse effect on MSC and its Subsidiaries, taken as a whole, or on the ability
of MSC or any other Loan Party to perform its obligations under any Loan
Document.
SECTION 5.5. Inspection of Property, Books and Records. MSC will keep,
and will cause each of its Subsidiaries to keep, proper books of record and
account in which full, true and correct entries shall be made of all dealings an
transactions in relation to their respective businesses and activities. The
Borrower and each Subsidiary will at all times keep correct and accurate records
of its inventory. Each of MSC and the Borrower will, after notice by the Agent
(of, if an Event of Default exists, any Bank) to MSC or the Borrower, as the
case may be, permit representatives or the Agent (or, if an Event of Default
exists, any Bank) to visit and inspect any of its properties, to examine and
make abstracts from and copies of any of its books and records and to discuss
its affairs, finances and accounts with its officers, employees (so long as, to
the extent that an officer of MSC or the Borrower I reasonably made available by
MSC or the Borrower, such officer is present) and independent public accountants
(whose fees and expenses shall be paid by MSC or the Borrower, and by this
provision each of MSC and the Borrower authorizes such accountants to discuss
such affairs, finances and accounts so long as, to the extent that an officer or
MSC or the Borrower is reasonably made available by MSC or the Borrower, such
officer is present), all at such reasonable times and as often as may reasonably
be desired and to the extent that the foregoing is reasonably related to the
monitoring of the covenants herein or the security granted pursuant hereto or
the ability of the Loan Parties to comply with their obligations (including
payment obligations) hereunder and under the other Loans Documents.
<PAGE>
SECTION 5.6. Liens. MSC will not, and will not permit any Subsidiary to,
create, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired by it, except for:
(a)......any Liens created by this Agreement and the Loan Documents:
(b) Liens of the Borrower or any of its Subsidiaries existing on the date
of this Agreement set forth on Schedule 5.6;
(c) any Lien on any asset of the Borrower or any of its Subsidiaries
securing Debt of the Borrower or such Subsidiary incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such asset,
provided that (I) such Lien attaches to such asset concurrently with or within
180 days after the acquisition thereof, (ii) the aggregate principal amount of
the Debt so secured by such Lien at no time exceeds an amount equal to 80% of
the lesser of the cost to the Borrower or such Subsidiary of the asset subject
to such Lien and the fair market value of such asset at the time of such
acquisition and (iii) the aggregate amount of all Debt secured by Liens
permitted by this clause (c) shall not any time exceed $20,000,000;
(d) any Lien existing on any asset prior to the acquisition thereof by the
Borrower or any of its Subsidiaries and not created in contemplation of such
acquisition;
(e) any Lien arising out of the refinancing, extension, renewal or
refunding of any Debt secured by any Lien permitted by any of the foregoing
clauses of this Section, provided that the amount of such Debt is not increased
and such Debt is not secured by any additional assets; and
(f) Liens on assets of MSC and its Subsidiaries arising in the ordinary
course of its business which (i) do not secure Debt and (ii) do not in the
aggregate materially detract from the value of such assets or materially impair
the use thereof in the operation of the business of MSC or the applicable
Subsidiary;
(g) Liens securing the Outstanding Credit Extensions (and guaranties
thereof) under and as defined in the Credit Agreement to the extent such
Outstanding Credit Extensions exceed $245,000,000;
(h) Liens securing Debt permitted by Section 5.11(i) of the Credit
Agreement as in effect after the effectiveness of the Fourth Amendment thereto;
and
(i) other Liens securing Debt in an aggregate principal amount not in
excess of $10,000,000.
Notwithstanding the foregoing clauses (a) through (i), (i) MSC will
not, and will not permit any Subsidiary to, create, assume or suffer to exist
any Lien on the Capital Stock of any Subsidiary of MSC other than Liens securing
obligations under the Credit Agreement and (ii) the Borrower will not at any
time permit the aggregate amount of all obligations secured by Liens on
inventory of the Borrower and its Subsidiaries (other than Liens described in
clauses (a) and (g) above) to exceed $5,000,000.
<PAGE>
SECTION 5.7. Use of Proceeds. The Borrower will use the proceeds of the
Loans for working capital and other general corporate purposes. None of such
proceeds will be used, directly or indirectly, for the purpose, whether
immediate, incidental or ultimate, of buying or carrying any "margin stock"
within the meaning of Regulation U.
SECTION 5.8. Further Assurances. MSC will, and will cause each
Subsidiary to, take such actions as are necessary or as the Agent (acting at the
request of any Bank) may reasonably request from time to time to ensure that (a)
the obligations of the Borrower hereunder and under the other Loan Documents are
guaranteed by MSC and all Subsidiaries of MSC pursuant to the Guaranty or the
Subsidiary Guaranty, as the case may be, and (b) the obligations of the Borrower
hereunder and under the other Loan Documents and the obligations of each
Subsidiary under the Subsidiary Guaranty are secured by perfected,
first-priority security interests (subject only to Permitted Liens) in
substantially all of the Inventory of the Borrower and its Subsidiaries
(excluding Inventory of TMG U.K.-Delaware located outside the United States).
SECTION 5.9. Amendments to Senior Subordinated Indenture. The Borrower
will not consent to any amendment, modification, supplement or waiver of any of
the provisions of the Senior Subordinated Indenture or any other document
governing any Subordinated Debt that, in any such case, would have a material
adverse impact on the Banks.
SECTION 5.10. EBITDA. MSC will not permit EBITDA for any period of 12
consecutive months to be less than $25,000,000.
SECTION 5.11. Inventory. The Borrower will not at any time permit the
value of all Inventory of the Borrower and its Subsidiaries (excluding (i)
Inventory which is subject to any Lien other than Liens arising under the
Security Agreement and (ii) Inventory of TMG U.K.-Delaware, Inc. located outside
the United States) to be less than $150,000,000.
ARTICLE VI
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the following events
("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of or interest on
any Loan, any fees or any other amount payable hereunder;
(b) MSC or the Borrower shall fail to observe or perform any covenant
contained in Sections 5.5 to 5.11, inclusive, or any Loan Party shall fail to
perform any obligation under any other Loan Document;
(c) MSC or the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a) or
(b) above) and such failure shall continue for 30 days after written notice
thereof has been given to MSC by the Agent at the request of any Bank;
<PAGE>
(d) any material representation, warranty, certification or statement made
by any Loan Party in this Agreement, in any other Loan Document or in any
certificate, financial statement or other document delivered pursuant to this
Agreement (including any amendment or modification hereof or thereof) shall
prove to have been incorrect in any material respect when made (or deemed made);
(e) MSC and/or any Subsidiary shall fail to make any payment in respect of
the Credit Agreement or any Replacement Credit Agreement at the scheduled
maturity thereof;
(f) the maturity of the Credit Agreement or any Replacement Credit
Agreement shall be accelerated;
(g) MSC or any Subsidiary shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced against MSC
or any Subsidiary seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for relief shall
be entered against MSC or any Subsidiary under the federal bankruptcy laws as
now or hereafter in effect;
(I) any Loan Document shall at any time for any reason be declared null and
void, invalid or unenforceable (except to the extent permitted by the terms
hereof or thereof), or the validity or enforceability of any Loan Document shall
at any time be contested by any Loan Party, or a proceeding shall be commenced
by any Loan Party or any Affiliate of any Loan Party seeking to establish the
invalidity or unenforceability thereof;
(j) any court of competent jurisdiction shall have determined that the
subordination of the Senior Subordinated
Notes or the Subordinated Debt Guarantee to the obligations of MSC and the
Borrower to the Banks and the Agent under the Loan Documents shall not be in
accordance in any material respect with the terms and conditions set forth in
the Senior Subordinated Indenture, or the validity or enforceability of any
provision of such subordinations shall at any time be contested by any Loan
Party, or any Affiliate of any Loan Party, or a proceeding shall be
<PAGE>
commenced by any Loan Party or any Affiliate of any Loan Party seeking to
establish the invalidity or unenforceability thereof;
(k) except to the extent permitted by the terms hereof or thereof and
other than as a result of any default by or agreement of the Collateral Agent,
the Security Agreement and related UCC filings shall fail or cease to create a
valid, perfected and first priority lien on or security interest in
substantially all inventory of the Borrower and the Subsidiaries; or
(1) (i) the Borrower shall at any time cease to be the Wholly-Owned
Consolidated Subsidiary of MSC (other than as a result of the merger of MSC and
the Borrower) or (ii) a Change of Control shall occur;
then, and in every such event, the Agent shall (i) if requested by the Required
Banks, by notice to the Borrower terminate the Commitments (if they have not
previously expired or been terminated) and they shall thereupon terminate,
and/or (ii) if requested by the Required Banks, by notice to the Borrower
declare the Notes (together with accrued interest thereon) to be, and the Notes
shall thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; provided that in the case of any of the Events of Default specified in
clause (g) or (h) above with respect to the Borrower, without any notice to the
Borrower or any other act by the Agent or the Banks, the Commitments (if they
have not previously expired or been terminated) shall thereupon terminate and
the Notes (together with accrued interest thereon) shall become immediately due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Borrower.
SECTION 6.2. Notice of Default. The Agent shall give notice to the
Borrower under Section 6.1(c) promptly upon being requested to do so by any Bank
and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE AGENT
SECTION 7.1. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under this Agreement and the other Loan Documents as are
delegated to the Agent by the terms hereof or thereof, together with all such
powers as are reasonably incidental thereto.
SECTION 7.2. Agent and Affiliates. Morgan shall have the same rights
and powers under this Agreement as any other Bank and may exercise or refrain
from exercising the same as though it were not the Agent, and Morgan and its
affiliates may accept deposits from, lend money to, and generally engage in any
kind of business with MSC or any Subsidiary or affiliate of MSC as if it were
not the Agent hereunder.
SECTION 7.3. Action by Agent. The obligations of the Agent hereunder
are only those expressly set forth herein. Without limiting the generality of
the foregoing, the Agent shall not be required to take any action with respect
to any Default, except as expressly provided in Article VI.
<PAGE>
SECTION 7.4. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for any Loan Party), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.5. Liability of Agent. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or not taken by it in connection herewith
(i) with the consent or at the request of the Required Banks (or, if required
under Section 10.5, all Banks) or (ii) in the absence of its own gross
negligence or willful misconduct. Neither the Agent nor any of its affiliates
nor any of their respective directors, officers, agents or employees shall be
responsible for or have any duty to ascertain, inquire into or verify (i) any
statement, warranty or representation made in connection with this Agreement or
any other Loan Document; (ii) the performance or observance of any of the
covenants or agreements of any Loan Party; (iii) the satisfaction of any
condition specified in Article III, except receipt of items required to be
delivered to the Agent; or (iv) the validity, effectiveness or genuineness of
this Agreement, any other Loan Document or any other instrument or writing
furnished in connection herewith. The Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex, facsimile transmission or similar
writing) believed by it to be genuine or to be signed by the proper party or
parties.
SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance
with its Commitment (or, after the Commitments have expired or been terminated,
its pro rata share of the unpaid principal amount of the Notes), indemnify the
Agent, its affiliates and their respective directors, officers, agents and
employees (to the extent not reimbursed by the Borrower) against any cost,
expense (including counsel fees and disbursements), claim, demand, action, loss
or liability (except such as result from such indemnities' gross negligence or
willful misconduct) that such indemnities may suffer or incur in connection with
this Agreement or any action taken or omitted by such indemnities hereunder.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.8. Successor Agent. The Agent may resign at any time by
giving notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right (subject to the consent of the Borrower
so long as no Default exists) to appoint a successor Agent. If no successor
Agent shall have been so appointed by the Required Banks, and shall have
accepted such appointment, within 30 days after the retiring Agent gives notice
of resignation, then the retiring Agent may (subject to the consent of the
Borrower so long as no Default exists), on behalf of the Banks, appoint a
successor Agent, which shall be a commercial bank organized or licensed under
the laws of the United States or of any State thereof and having a combined
capital and surplus of at least $200,000,000. Upon the acceptance of its
appointment as Agent hereunder by a successor Agent, such successor
<PAGE>
Agent shall thereupon succeed to and become vested with all the rights and
duties of the retiring Agent, and the retiring Agent shall be discharged from
its duties and obligations hereunder. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Article shall inure to its benefit as
to any actions taken or omitted to be taken by it while it was Agent.
SECTION 7.9. Agent's Fee. The Borrower shall pay to the Agent for its own
account fees in the amounts and at the times previously agreed upon between the
Borrower and the Agent.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If
on or prior to the first day of any Interest Period for any Euro-Dollar
Borrowing:
(a) the Agent determines that deposits in dollars (in the
applicable amount) are not being offered to Morgan in the London
interbank eurodollar market for such Interest Period, or
(b) Banks having 50% or more of the aggregate amount of the
Loans comprising such Borrowing advise the Agent that the London
Interbank Offered Rate as determined by the Agent will not adequately
and fairly reflect the cost to such Banks of funding their Euro-Dollar
Loans for such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, the obligations of the Banks to make,
convert into or continue Euro-Dollar Loans shall be suspended (and each Loan
which was to be made as, converted into or continued as a Euro-Dollar Loan shall
be made as, remain or be converted into a Base Rate Loan).
SECTION 8.2. Illegality. If, on or after the date of this Agreement, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall make it unlawful or impossible for any Bank (or its
EuroDollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and
such Bank shall so notify the Agent, the Agent shall forthwith give notice
thereof to the other Banks and the Borrower, whereupon until such Bank notifies
the Borrower and the Agent that the circumstances giving rise to such suspension
no longer exist, the obligation of such Bank to make and maintain Euro-Dollar
Loans shall be suspended. Before giving any notice to the Agent pursuant to this
Section, such Bank shall designate a different Euro-Dollar Lending Office if
such designation will avoid the need for giving such notice and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank
shall determine that it may not lawfully continue
<PAGE>
to maintain any outstanding Euro-Dollar Loan to the last day of the current
Interest Period therefor and shall so specify in such notice, such Loan shall
(on the date specified in such notice) convert into a Base Rate Loan (on which
interest and principal shall be payable contemporaneously with the related
Euro-Dollar Loans of the other Banks).
SECTION 8.3. Increased Cost and Reduced Return.
(a) If, on or after the date hereof, the adoption of any applicable
law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Applicable Lending Office) with any request or directive (whether or not having
the force of law) of any such authority, central bank or comparable agency shall
impose, modify or deem applicable any reserve (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System, but excluding any such requirement with respect to which such Bank is
entitled to compensation during the relevant Interest Period under Section
2.13), special deposit, insurance assessment or similar requirement against
assets of, deposits with or for the account of, or credit extended by, any Bank
(or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or on the London interbank market any other condition
affecting its Euro-Dollar Loans, its Note or its obligation to make or maintain
Euro-Dollar Loans and the result of any of the foregoing is to increase the cost
to such Bank (or its Applicable Lending Office) of making or maintaining any
Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by
such Bank (or its Applicable Lending Office) under this Agreement or under its
Note with respect thereto, by an amount deemed by such Bank to be material,
then, within 15 days after demand by such Bank (with a copy to the Agent), the
Borrower shall pay to such Bank such additional amount or amounts as will
compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on capital
of such Bank (or its Parent) as a consequence of such Bank's obligations
hereunder to a level below that which such Bank (or its Parent) could have
achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time, within 15 days after demand
by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank
such additional amount or amounts as will compensate such Bank (or its Parent)
for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section and will designate a
different Applicable Lending Office if such designation will avoid the need for,
or reduce the amount of, such compensation and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank
claiming compensation under this Section and setting forth the
<PAGE>
additional amount or amounts to be paid to it hereunder shall be conclusive
in the absence of manifest error. In determining such amount, such Bank may use
any reasonable averaging and attribution methods.
SECTION 8.4. Taxes. (a) For purposes of this Section 8.4, the following
terms have the following meanings:
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by the
Borrower pursuant to this Agreement or under any Note, and all liabilities with
respect thereto, excluding (i) in the case of each Bank and the Agent, taxes
imposed on its net income, and franchise or similar taxes imposed on it, by a
jurisdiction under the laws of which such Bank or the Agent (as the case may be)
is organized or in which its principal executive office is located or, in the
case of each Bank, in which its Applicable Lending Office is located and (ii) in
the case of each Bank, any United States withholding tax imposed on such
payments but only to the extent that such Bank is subject to United States
withholding tax at the time such Bank first becomes a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary taxes
and any other excise or property taxes, or similar charges or levies, which
arise from any payment made pursuant to this Agreement or under any Note or from
the execution or delivery of, or otherwise with respect to, this Agreement or
any Note.
(b) Any and all payments by the Borrower to or for the account of any
Bank or the Agent hereunder or under any Note shall be made without deduction
for any Taxes or Other Taxes; provided that, if the Borrower shall be required
by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum
payable shall be increased as necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 8.4) such Bank or the Agent (as the case may be) receives an amount
equal to the sum it would have received had no such deductions been made, (ii)
the Borrower shall make such deductions, (iii) the Borrower shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall furnish to the Agent,
at its address referred to in Section 10.1, the original or a certified copy of
a receipt evidencing payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.4) paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, excluding any of the foregoing which result solely from the
gross negligence or willful misconduct of such Bank or the Agent (as the case
may be). This indemnification shall be paid within 15 days after such Bank or
the Agent (as the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
and from time to time thereafter if requested in writing by the Borrower (but
only so long as such Bank remains lawfully able to do so), shall provide the
<PAGE>
Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any
successor form prescribed by the Internal Revenue Service, certifying that such
Bank is entitled to benefits under an income tax treaty to which the United
States is a party which exempts the Bank from United States withholding tax or
reduces the rate of withholding tax on payments of interest for the account of
such Bank or certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the United
States.
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which such form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.4(b) or (c) with
respect to Taxes imposed by the United States; provided that if a Bank, which is
otherwise exempt from or subject to a reduced rate of withholding tax, becomes
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrower shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Bank pursuant to this Section 8.4, then such Bank will change the
jurisdiction of its Applicable Lending Office if, in the judgment of such Bank,
such change (i) will eliminate or reduce any such additional payment which may
thereafter accrue and (ii) is not otherwise disadvantageous to such Bank.
SECTION 8.5. Base Rate Loans Substituted for Euro-Dollar Loans. If (i)
the obligation of any Bank to make or maintain Euro-Dollar Loans has been
suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation
under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and the Borrower
shall, by at least five Euro-Dollar Business Days, prior notice to such Bank
through the Agent, have elected that the provisions of this Section shall apply
to such Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist:
(a) all Loans which would otherwise be made or maintained by
such Bank as Euro-Dollar Loans shall be made instead as Base Rate Loans
(on which interest and principal shall be payable contemporaneously
with the related EuroDollar Loans of the other Banks), and
(b) after each of its Euro-Dollar Loans, has been converted
into Base Rate Loans, all payments of principal which would otherwise
be applied to repay such Euro-Dollar Loans shall be applied to repay
its Base Rate Loans instead.
ARTICLE IX
GUARANTY
SECTION 9.1. The Guaranty. (a) MSC hereby unconditionally and irrevocably
guarantees to the Banks and the Agent, and to each of them, the due and punctual
payment, observance and performance of all of the Guaranteed Obligations when
and as due, whether at maturity, by acceleration, mandatory prepayment or
otherwise, according to the terms hereof and
<PAGE>
thereof, and MSC hereby unconditionally and irrevocably agrees to cause
payment or performance of the Guaranteed Obligations to be made punctually as
and when the same shall become due upon demand. This Guaranty shall be of
payment and performance and not of collection merely.
SECTION 9.2. Guaranty Unconditional. The obligations of MSC under this
Article IX shall be continuing, unconditional and absolute and, without limiting
the generality of the foregoing, shall not be released, discharged or otherwise
affected by:
(a) any extension, renewal, settlement, compromise, waiver or release in
respect of any Guaranteed Obligation, by operation of law or otherwise;
(b) any modification or amendment of or supplement to any Loan Document;
(c) any modification, amendment, waiver, release, nonperfection or
invalidity of any direct or indirect security, or of any Guarantee or other
liability of any third party, for any Guaranteed Obligation;
(d) any change in the corporate existence, structure or ownership of the
Borrower or any other Loan Party, or any insolvency, bankruptcy, reorganization
or other similar proceeding affecting the Borrower or any other Loan Party or
its assets or any resulting release or discharge of any Guaranteed Obligation;
(e) the existence of any claim, setoff or other right which MSC may have at
any time against the Borrower, the Agent, any Bank or any other Person, whether
or not arising in connection with the Loan Documents; provided that nothing
herein shall prevent the assertion of any such claim by separate suit or
compulsory counterclaim;
(f) any invalidity or unenforceability relating to or against the Borrower
or any other Loan Party for any reason of the whole or any provision of any Loan
Document, or any provision of Applicable Law purporting to prohibit the payment
or performance by the Borrower of the Guaranteed Obligations; or
(g) any other act or omission to act or delay of any kind by the Borrower,
any other Loan Party, the Agent, any Bank or any other Person or any other
circumstance whatsoever that might, but for the provisions of this Section 9.2,
constitute a legal or equitable discharge of the obligations of MSC under this
Article IX.
SECTION 9.3. Discharge Only Upon Payment in Full; Reinstatement in
Certain Circumstances. MSC's obligations under this Article IX shall remain in
full force and effect until all of the Commitments shall have expired or been
terminated and all of the Guaranteed Obligations shall have been paid in full in
cash. If at any time all or any part of any payment previously applied to any
Guaranteed Obligation is rescinded or must be otherwise restored or returned
upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise,
MSC's obligations under this Article IX with respect to such payment shall be
reinstated at such time as though such payment had become due but not been made
at such time.
<PAGE>
SECTION 9.4. Waiver. MSC irrevocably waives acceptance hereof,
presentment, demand, protest and any notice not provided for herein, as well as
any requirement that at any time any action be taken by any Person against the
Borrower or any other Person or any collateral.
SECTION 9.5. Delay of Subrogation. Notwithstanding any payment made by
or for the account of MSC pursuant to this Article IX, MSC shall not be
subrogated to any right of the Agent or any Bank until such time as the Agent
and each Bank shall have received final payment in cash of the full amount of
the Guaranteed Obligations.
SECTION 9.6. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrower under any Loan Document is stayed
upon the insolvency, bankruptcy or reorganization of the Borrower, all such
amounts otherwise subject to acceleration under the terms the Loan Documents
shall nonetheless be payable by MSC hereunder forthwith on demand by the Agent
made at the request of the Required Banks.
SECTION 9.7. Subordination of Indebtedness. Any indebtedness of the
Borrower for borrowed money now or hereafter owed to MSC is hereby subordinated
in right of payment to the payment of the Guaranteed Obligations, and if a
default in the payment of any amount owing under the Loan Documents shall have
occurred and be continuing, any such indebtedness of the Borrower owed to MSC,
if collected or received by MSC, shall be held in trust by MSC for the Banks and
be paid over to the Agent for application in accordance with this Agreement.
<PAGE>
ARTICLE X
MISCELLANEOUS
SECTION 10.1. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including facsimile transmission or similar
writing) and shall be given to such party: (x) in the case of MSC, the Borrower
or the Agent, at its address or facsimile number set forth on the signature
pages hereof, (y) in the case of any Bank, at its address or facsimile number
set forth in its Administrative Questionnaire or (z) in the case of any party,
at such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the Agent, MSC and the Borrower. Each such notice,
request or other communication shall be effective (i) if given by facsimile
transmission, when transmitted to the facsimile number specified in this Section
and confirmation of receipt is received, (ii) if given by mail, three Domestic
Business Days after such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid, or (iii) if given by any other
means, when delivered at the address specified in this Section; provided that
notices to the Agent under Article II or Article VIII shall not be effective
until received.
SECTION 10.2. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 10.3. Expenses; Indemnification. (a) The Borrower shall pay (i)
the reasonable fees and charges of Mayer, Brown & Platt, Zalkin, Rodin & Goodman
LLP and Ernst & Young LLP, professional advisors to the Agent and the Banks, in
connection with the preparation and administration of this Agreement and the
other Loan Documents and matters relating thereto (including the monitoring and
administration of the provisions hereof and thereof), any waiver or consent
hereunder or any amendment hereof or any Default or alleged Default hereunder
(such fees and charges to be billed monthly and paid, without application of any
deposit, not later than 20 days after receipt by the Borrower), (ii) the
reasonable out-of-pocket expenses of the Banks in connection with this Agreement
and the other Loan Documents (excluding professional fees other than (x) those
described above and (y) those described in clause (iii) below) and (iii) if an
Event of Default occurs, all out-of-pocket expenses incurred by the Agent and
each Bank, including (without duplication) the reasonable fees and disbursements
of outside counsel and the allocated cost of inside counsel, in connection with
such Event of Default and collection, bankruptcy, insolvency and other
enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank, their
respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnity in connection
with any investigative, administrative or judicial proceeding (whether or not
such Indemnity shall be designated a party thereto) brought or threatened
relating to or arising out of this Agreement or any other Loan Document or any
actual or proposed use of proceeds of any Loan hereunder; provided that no
Indemnity shall have the right to be indemnified hereunder
<PAGE>
for such Indemnity's own gross negligence or willful misconduct as
determined by a court of competent jurisdiction.
SECTION 10.4. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive payment
of a proportion of the aggregate amount of principal and interest due with
respect to the Loans held by it which is greater than the proportion received by
any other Bank in respect of the aggregate amount of principal and interest due
with respect to the Loans held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participation's in the Loans
held by the other Banks, and such other adjustments shall be made, as may be
required so that all such payments of principal and interest with respect to the
Loans held by the Banks shall be shared by the Banks pro rata; provided that
nothing in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness hereunder. The Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in
the Loans, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation.
SECTION 10.5. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or waiver
is in writing and is signed by the Borrower and the Required Banks (and, if the
rights or duties of the Agent are affected thereby, by the Agent); provided that
no such amendment or waiver shall, unless signed by all the Banks, (i) increase
or decrease the Commitment of any Bank (except for a ratable decrease in the
Commitments of all Banks) or subject any Bank to any additional obligation, (ii)
reduce the principal of or rate of interest on any Loan or any fees hereunder,
(iii) postpone the date fixed for any payment of principal of or interest on any
Loan or any fees hereunder or for any expiration or termination of any
Commitment, (iv) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Notes which shall be required for the Banks or
any of them to take any action under this Section or any other provision of this
Agreement or (v) release all or substantially all of the collateral or any
guaranty except as expressly permitted hereunder.
SECTION 10.6. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that neither MSC nor the
Borrower may assign or otherwise transfer any of its rights under this Agreement
without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of the
Borrower hereunder, including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such
<PAGE>
participation agreement may provide that such Bank will not agree to any
modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii), (iv) or (v) of Section 10.5 without the consent of the Participant.
The Borrower agrees that each Participant shall, to the extent provided in its
participation agreement, be entitled to the benefits of Article VIII with
respect to its participating interest. An assignment or other transfer which is
not permitted by subsection (c) or (d) below shall be given effect for purposes
of this Agreement only to the extent of a participating interest granted in
accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more Eligible Assignees
(each an "Assignee") all, or a proportionate part (equivalent to an initial
Commitment of not less than $5,000,000 (or, in the case of an assignment between
Banks, such lesser amount as the Borrower and the Agent may agree)) of all, of
its rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit K hereto executed by
such Assignee and such transferor Bank, with (and subject to) the written
consent of the Borrower and the Agent, which consents shall not be unreasonably
withheld; provided that if an Assignee is an affiliate of such transferor Bank,
no such consent shall be required. Upon execution and delivery of such
instrument and payment by such Assignee to such transferor Bank of an amount
equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment (unless the
Commitments have expired or been terminated) as set forth in such instrument of
assumption, and the transferor Bank shall be released from its obligations
hereunder to a corresponding extent, and no further consent or action by any
party shall be required. Upon the consummation of any assignment pursuant to
this subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, a new Note is issued to the
Assignee. In connection with any such assignment, the transferor Bank shall pay
to the Agent an administrative fee for processing such assignment in the amount
of $3,500. If the Assignee is not incorporated under the laws of the United
States of America or a state thereof, it shall deliver to the Borrower and the
Agent certification as to exemption from deduction or withholding of any United
States federal income taxes in accordance with Section 8.4.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.3 or 8.4 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
SECTION 10.7. Margin Stock. Each of the Banks represents to the Agent and
each of the other Banks that it in good faith is not relying upon any "margin
stock" (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
<PAGE>
SECTION 10.8. Limitation on Liability. No claim may be made by the
Borrower or any Bank or the Agent against the Agent or any other Bank or the
affiliates, directors, officers, employees, attorneys or agents of the Agent or
any other Bank for any special, consequential or indirect damages in respect of
any breach or wrongful conduct (whether the claim is based on contract or tort
or duty imposed by law) arising out of or related to the transactions
contemplated hereby, or any act, omission or event occurring in connection
therewith; and the Borrower and each Bank hereby waives, releases and agrees not
to sue upon any claim for any such damages, whether or not accrued and whether
or not known or suspected to exist in its favor; provided that the limitation on
liability and waiver provided herein shall not apply with respect to any claim
against such party resulting from such party's gross negligence or willful
misconduct.
SECTION 10.9. Survival of Obligations. The obligations of MSC and the
Borrower and the rights of the Agent and the Banks under Sections 7.5 and 7.6,
Article VIII, Article IX and Sections 10.2 and 10.3 shall survive any
termination of this Agreement; provided that any claim for amounts owing
pursuant to Article VIII must be made by the applicable Bank no later than 180
days after such termination.
SECTION 10.10. Independence of Covenants. All covenants hereunder shall
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the effectiveness of the first covenant.
SECTION 10.11. Severability of Provisions. Any provision of this
Agreement that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 10.12. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. Each of MSC and the Borrower hereby submits
to the nonexclusive jurisdiction of the United States District Court for the
Southern District of New York and of any New York State court sitting in New
York City for purposes of all legal proceedings arising out of or relating to
this Agreement or the transactions contemplated hereby. Each of MSC and the
Borrower irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
SECTION 10.13. Counterparts; Integration. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 10.14. WAIVER OF JURY TRIAL. EACH OF MSC, THE BORROWER, THE
AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
<PAGE>
SECTION 10.15. Collateral Agent. (a) The Banks hereby authorize Morgan
to act as Collateral Agent under the Security Agreement. The Banks, the Company
and the Agent hereby agree that (i) in so acting, the Collateral Agent shall be
entitled to all rights, exculpation's, immunities, benefits and privileges
accorded to the Agent hereunder and (ii) each reference in Article VII and
Sections 10.3 and 10.8 hereof to the Agent shall be deemed to include Morgan
acting in its capacity as the Collateral Agent.
(b) Without limiting clause (a) above, the Collateral Agent is
authorized on behalf of all Banks, without the necessity of any notice to or
further consent from the Banks, from time to time to take any action with
respect to the Security Agreement and any collateral thereunder which may be
necessary to perfect and maintain perfected the Liens upon the collateral
granted pursuant to the Security Agreement.
(c) Without limiting clause (a) above, the Banks irrevocably authorize
the Collateral Agent, at its option and in its discretion, to release any Lien
granted to or held by the Collateral Agent under the Security Agreement (i) upon
termination of the Commitments and payment in full of all Loans and all other
obligations payable by any Loan Party under this Agreement and any other Loan
Document; (ii) constituting property sold or to be sold or disposed of as part
of or in connection with any disposition expressly permitted hereunder; or (iii)
subject to Section 10.5, if approved, authorized or ratified in writing by the
Required Banks. Upon request by the Collateral Agent at any time, the Banks will
confirm in writing the Collateral Agent's authority pursuant to this Section
10.15(c) to release particular types or items of collateral granted under the
Security Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
THE MUSICLAND GROUP, INC.
By:
Title:
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Facsimile number: (612) 931-8288
<PAGE>
MUSICLAND STORES CORPORATION
By:
Title:
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Facsimile number: (612) 931-8288
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By:
Title:
CITIBANK, N.A.
By:
Title:
BANK OF AMERICA ILLINOIS
By:
Title:
PNC BANK, N.A.
By:
Title:
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., CHICAGO BRANCH
By:
Title:
SOCIETE GENERALE
By:
Title:
DLJ CAPITAL FUNDING, INC.
By:
Title:
FERNWOOD RESTRUCTURINGS LTD.
By:
Title:
NATIONSBANK, N.A.
By:
Title:
CREDIT AGRICOLE
By:
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:
Title:
NBD BANK
By:
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Agent
By:
Title:
60 Wall Street
New York, New York 10260-0060 Attention:
Houston Stebbins
Facsimile number: (212) 648-5005
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement") dated as of June 16, 1997 is
among THE MUSICLAND GROUP, INC., a Delaware corporation ("Borrower"); the
subsidiaries of the Borrower listed on the signature pages hereof (the
"Subsidiaries"); such other persons or entities which from time to time become
parties hereto (collectively, including the Borrower and the Subsidiaries, but
excluding the Collateral Agent, the "Debtors" and individually each a "Debtor");
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, in its capacity as collateral
agent for the Lender Parties referred to below (in such capacity, the
"Collateral Agent").
W I T N E S S E T H
WHEREAS, Musicland Stores Corporation, a Delaware corporation ("MSC"),
and the Borrower have entered into a Credit Agreement dated as of October 7,
1994 (as amended or otherwise modified from time to time, the "Credit
Agreement") with various financial institutions and Morgan Guaranty Trust
Company of New York, as agent (in such capacity, the "Credit Agent"), pursuant
to which such financial institutions have made available to the Borrower a
revolving credit facility with a letter of credit subfacility;
WHEREAS, MSC and the Borrower have entered into a Term Loan Agreement
dated as of the date hereof (as amended or otherwise modified from time to time,
the "Term Loan Agreement") with various financial institutions and Morgan
Guaranty Trust Company of New York, as agent (in such capacity, the "Term
Agent"), pursuant to which such financial institutions have committed to extend
term loans to the Borrower;
WHEREAS, each of the Subsidiaries has executed and delivered a
subsidiary guaranty (as amended or otherwise modified from time to time, the
"Subsidiary Credit Guaranty") of the obligations of the Borrower under the
Credit Agreement;
WHEREAS, each of the Subsidiaries has executed and delivered a
subsidiary guaranty (as amended or otherwise modified from time to time, the
"Subsidiary Term Guaranty") of the obligations of the Borrower under the Term
Loan Agreement; and
WHEREAS, the obligations of the Borrower under the Credit Agreement and
the Term Loan Agreement and the obligations of each other Debtor under the
Subsidiary Credit Guaranty and the Subsidiary Term Guaranty are to be secured
pursuant to, and subject to the limitations of, this Agreement;
<PAGE>
NOW, THEREFORE, for and in consideration of any loan, advance or other
financial accommodation heretofore or hereafter made to the Borrower under or in
connection with the Credit Agreement or the Term Loan Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Definitions. When used herein, the following terms have the following
meanings (such definitions to be applicable to both the singular and plural
forms of such terms):
Collateral means, with respect to any Debtor, all property and rights
of such Debtor in which a security interest is granted hereunder.
Default means the occurrence of: (a) any Event of Default under and as
defined in Section 6.1(a), (g) or (h) of the Credit Agreement; or (b) any Event
of Default under and as defined in Section 6.1(a), (f), (g) or (h) of the Term
Loan Agreement.
Inventory means, with respect to any Debtor, all goods of such Debtor
which are of a type sold by such Debtor in the ordinary course of business.
Lender Party means the Agent and each Bank under and as defined in the
Credit Agreement and the Agent and each Bank under and as defined in the Term
Loan Agreement.
Liabilities means, as to each Debtor, (i) all obligations (monetary or
otherwise) of such Debtor under the Term Loan Agreement, any Note (under and as
defined in the Term Loan Agreement) or the Subsidiary Term Guaranty, howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, now or hereafter existing, or due or to become due, (ii) all
obligations of such Debtor under the Credit Agreement, any Note (under and as
defined in the Credit Agreement) or the Subsidiary Guaranty to pay all or any
portion of the Secured Amount, whether direct or indirect, absolute or
contingent, or due or to become due, and (iii) all obligations of such Debtor
hereunder.
Lien means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, a Person
shall be deemed to own subject to a Lien any asset which such Person has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such asset.
Permitted Liens means any Lien expressly permitted by Section 5.6 of
the Term Loan Agreement and, so long as there is any Secured Amount (or any
obligation under the Credit Agreement to make loans or other extensions of
credit which would result in a Secured Amount), Section 5.14 of the Credit
Agreement.
<PAGE>
Person means an individual, a corporation, a partnership, an
association, a trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
Required Lender Parties means the Required Banks as defined in the
Credit Agreement and the Required Banks as defined in the Term Loan Agreement.
Secured Amount means the amount (if any) by which the Outstanding
Credit Extensions (as defined in the Credit Agreement) exceed $245,000,000. The
Secured Amount does not include interest, fees or other amounts payable under
the Credit Agreement or any other Loan Document (as defined in the Credit
Agreement) other than principal of Loans (as defined in the Credit Agreement)
and Letter of Credit Liabilities (as defined in the Credit Agreement) to the
extent set forth in the foregoing sentence.
Uniform Commercial Code means the Uniform Commercial Code as in effect
in the State of New York on the date of this Agreement.
Grant of Security Interest. As security for the payment of all
Liabilities, each Debtor hereby assigns to the Collateral Agent for the benefit
of the Lender Parties, and grants to the Collateral Agent for the benefit of the
Lender Parties a continuing security interest in, all of such Debtor's right,
title and interest in any Inventory, whether now or hereafter existing or
acquired, together with all proceeds thereof.
Warranties. Each Debtor warrants that: (i) no financing statement
(other than any which may have been filed on behalf of the Collateral Agent or
in connection with Permitted Liens) covering any of the Collateral is on file in
any public office; (ii) such Debtor is and will be the lawful owner of all of
its Collateral, free of all Liens and claims whatsoever, other than the security
interest hereunder and Permitted Liens, with full power and authority to execute
this Agreement and perform such Debtor's obligations hereunder, and to subject
the Collateral to the security interest hereunder; (iii) all information with
respect to Collateral set forth in any schedule, certificate or other writing at
any time heretofore or hereafter furnished by such Debtor to the Collateral
Agent or any Lender Party is and will be true and correct in all material
respects as of the date furnished; (iv) such Debtor's chief executive office and
principal place of business are as set forth on Schedule I hereto (and such
Debtor has not maintained its chief executive office and principal place of
business at any other location at any time after January 1, 1997); (v) each
other location where such Debtor maintains a place of business or where
Inventory of such Debtor is located is set forth on Schedule II hereto; (vi)
except as set forth on Schedule III hereto, such Debtor is not now known and
during the five years preceding the date hereof has not previously been known by
any trade name; (vii) except as set forth on Schedule III hereto, during the
five years preceding the date hereof such Debtor has not been known by any legal
name different from the one set forth on the signature pages of this Agreement
nor has such Debtor been the
<PAGE>
subject of any merger or other corporate reorganization; (viii) such Debtor is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation; (ix) the execution and delivery of this
Agreement and the performance by such Debtor of its obligations hereunder are
within such Debtor's corporate powers, have been duly authorized by all
necessary corporate action, have received all necessary governmental approval
(if any shall be required), and do not and will not contravene or conflict with
any provision of law or of the charter or by-laws of such Debtor or of any
material agreement, indenture, instrument or other document, or any material
judgment, order or decree, which is binding upon such Debtor; and (x) this
Agreement is a legal, valid and binding obligation of such Debtor, enforceable
in accordance with its terms, except that the enforceability of this Agreement
is limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and by equitable principles relating to enforceability.
4. Agreements of the Debtors. Each Debtor: (a) will, upon request of
the Collateral Agent, execute such financing statements and other documents (and
pay the cost of filing or recording the same in all public offices deemed
appropriate by the Collateral Agent) and do such other acts and things, all as
the Collateral Agent may from time to time reasonably request, to establish and
maintain a valid security interest in the Collateral (free of all other Liens,
claims and rights of third parties whatsoever, other than Permitted Liens) to
secure the payment of the Liabilities; (b) will keep all its Inventory at, and
will not maintain any place of business at any location other than, its
addresses shown on Schedules I and II hereto or at such other addresses of which
such Debtor shall have given the Collateral Agent not less than five business
days' prior written notice; (c) will furnish the Collateral Agent such
information concerning such Debtor and the Collateral as the Collateral Agent
may from time to time reasonably request; (d) will permit the Collateral Agent
and its designees, from time to time, on reasonable notice and at reasonable
times and intervals during normal business hours (or at any time without notice
after the occurrence and during the continuance of a Default) to inspect such
Debtor's Inventory, and to inspect, audit and make copies of and extracts from
all records and other papers in the possession of such Debtor pertaining to the
Collateral, and will, upon request of the Collateral Agent after the occurrence
and during the continuance of a Default, deliver to the Collateral Agent all of
such records and papers; (e) without limiting the provisions of Section 5.3 of
the Credit Agreement and Section 5.3 of the Term Loan Agreement, will at all
times keep all of its Inventory insured under policies maintained with
reputable, financially sound insurance companies against loss, damage, theft and
other risks to such extent as is customarily maintained by companies similarly
situated, and cause all such policies to provide that loss thereunder shall be
payable to the Collateral Agent as its interest may appear in an amount equal to
100% of such insurance proceeds (or other similar recoveries) net of any
collection expenses (provided that, so long as no Default exists, such proceeds
may be paid directly to the applicable Debtor) and such policies or certificates
thereof shall, if the Collateral Agent so requests, be deposited with or
furnished to the Collateral Agent; and (f) will reimburse the Collateral Agent
for all reasonable expenses, including reasonable fees and charges of counsel,
incurred by the Collateral Agent in seeking to
<PAGE>
collect or enforce any rights in respect of such Debtor's Collateral.
Notwithstanding the foregoing provisions of this Section 4 or any other
provision of this Agreement, TMG U.K. Delaware may keep Inventory at locations
in Europe not listed on the Schedules hereto and shall have no obligation to
perfect the Collateral Agent's interest in such Inventory.
5. Proceeds of Collateral. Upon request by the Collateral Agent after
the occurrence and during the continuance of a Default, each Debtor will
forthwith, upon receipt, transmit and deliver to the Collateral Agent, in the
form received, all cash and instruments (properly endorsed, where required, so
that such items may be collected by the Collateral Agent) which may be received
by such Debtor at any time in full or partial payment or otherwise as proceeds
of any of the Collateral. Except as the Collateral Agent may otherwise consent
in writing, any such cash and instruments which may be so received by any Debtor
will not be commingled with any other of its funds or property, but will be held
separate and apart from its own funds or property and upon express trust for the
Collateral Agent until delivery is made to the Collateral Agent. Each Debtor
will comply with the terms and conditions of any consent given by the Collateral
Agent pursuant to the foregoing sentence.
The Collateral Agent is authorized to endorse, in the name of the
applicable Debtor, any item, however received by the Collateral Agent,
representing any payment on or other proceeds of any of the Collateral.
6. Default. Whenever a Default shall have occurred and be continuing,
the Collateral Agent may exercise from time to time any right or remedy
available to it under applicable law. Each Debtor agrees, in case of the
occurrence and during the continuance of a Default, to assemble, at its expense,
all its Inventory at a convenient place or places reasonably acceptable to the
Collateral Agent. Any notification of intended disposition of any of the
Collateral required by law shall be deemed reasonably and properly given if
given at least ten days before such disposition. Any and all proceeds of
disposition or other realization on the Collateral received by the Collateral
Agent in connection with any enforcement, sale, collection (including judicial
or non-judicial foreclosure) or similar proceedings with respect to the
Collateral shall be applied by the Collateral Agent as follows:
FIRST: To the payment of the reasonable costs and expenses of such
disposition, collection or other realization, including the reasonable fees and
charges of counsel to the Collateral Agent, and all reasonable expenses,
liabilities and advances made or incurred by the Collateral Agent in connection
therewith;
SECOND: To the ratable payment of the Liabilities then due and owing to the
Lender Parties under the Term Loan Agreement and the Loan Documents (as defined
in the Term Loan Agreement);
<PAGE>
THIRD: To the ratable payment of the Liabilities then due and owing to the
Lender Parties under the Credit Agreement and the Loan Documents (as defined in
the Credit Agreement); and
FOURTH: After payment in full of all Liabilities, any surplus then
remaining from such proceeds shall be paid to the applicable Debtor or to
whomsoever may be lawfully entitled to receive the same or paid as a court of
competent jurisdiction may direct.
Until such proceeds are so applied, the Collateral Agent shall hold
such proceeds in its custody in accordance with its regular procedures for
handling deposited funds.
7. General. The Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral in its
possession if it takes such action for that purpose as the applicable Debtor
requests in writing, but failure of the Collateral Agent to comply with any such
request shall not of itself be deemed a failure to exercise reasonable care, and
no failure of the Collateral Agent to preserve or protect any right with respect
to such Collateral against prior parties, or to do any act with respect to the
preservation of such Collateral not so requested by any Debtor, shall be deemed
of itself a failure to exercise reasonable care in the custody or preservation
of such Collateral.
Any notice from the Collateral Agent to any Debtor, if mailed, shall be
deemed given on the third Domestic Business Day (as defined in the Credit
Agreement) after the date mailed, postage prepaid, addressed to such Debtor
either at such Debtor's address shown on Schedule I hereto or at such other
address as such Debtor shall have specified in writing to the Collateral Agent
as its address for notices hereunder.
Each of the Debtors agrees to pay all reasonable expenses (including,
without limitation, reasonable fees and charges of counsel) paid or incurred by
the Collateral Agent or any Lender Party in endeavoring to collect the
Liabilities of such Debtor, or any part thereof, and in enforcing this Agreement
against such Debtor, and such obligations will themselves be Liabilities.
No delay on the part of the Collateral Agent in the exercise of any
right or remedy shall operate as a waiver thereof, and no single or partial
exercise by the Collateral Agent of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other right or remedy.
No provision of this Agreement may be amended or waived unless such
amendment or waiver is in writing and is signed by the Collateral Agent (acting
with the consent of the Required Lender Parties) and the Debtors.
<PAGE>
This Agreement shall remain in full force and effect until all
Liabilities (other than Liabilities in the nature of continuing indemnification
obligations) have been paid in full and all commitments to create Liabilities
have terminated (at which time the Agent shall, at the expense of the Debtors,
execute and deliver such documents (including UCC termination statements) as the
Debtors may reasonably request to release the security interest granted herein).
If at any time all or any part of any payment theretofore applied by the
Collateral Agent or any Lender Party to any of the Liabilities is or must be
rescinded or returned by the Collateral Agent or such Lender Party for any
reason whatsoever (including, without limitation, the insolvency, bankruptcy or
reorganization of any Debtor), such Liabilities shall, for the purposes of this
Agreement, to the extent that such payment is rescinded or returned, be deemed
to have continued in existence, notwithstanding such application by the
Collateral Agent or such Lender Party, and this Agreement shall continue to be
effective or be reinstated, as the case may be, as to such Liabilities, all as
though such application by the Collateral Agent or such Lender Party had not
been made.
This Agreement shall be construed in accordance with and governed by
the laws of the State of New York applicable to contracts made and to be
performed entirely within such State, subject, however, to the applicability of
the Uniform Commercial Code of any jurisdiction in which any Inventory of any
Debtor may be located at any given time. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
The rights and privileges of the Collateral Agent hereunder shall inure
to the benefit of its successors and assigns.
The Collateral Agent may resign at any time by giving notice to the
Lender Parties and the Borrower. Upon any such resignation, the Required Lender
Parties shall have the right (subject to the consent of the Borrower so long as
no Default exists) to appoint a successor Collateral Agent. If no successor
Collateral Agent shall have been so appointed by the Required Lender Parties,
and shall have accepted such appointment, within 30 days after the retiring
Collateral Agent gives notice of resignation, then the retiring Collateral Agent
may (subject to the consent of the Borrower so long as no Default exists), on
behalf of the Lender Parties, appoint a successor Collateral Agent, which shall
be a commercial bank organized or licensed under the laws of the United States
or any State thereof and having a combined capital and surplus of at least
$50,000,000. Upon the acceptance of its appointment as Collateral Agent
hereunder by a successor Collateral Agent, such successor Collateral Agent shall
thereupon succeed to and become vested with all the rights and duties of the
retiring Collateral Agent, and the retiring Collateral Agent shall be discharged
from its duties and obligations hereunder. After any retiring Collateral Agent's
resignation hereunder as Collateral Agent, the provisions of Section 7 of each
of the Credit
<PAGE>
Agreement and the Term Loan Agreement shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Collateral Agent.
This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute one and the same Agreement. At any time after the date of this
Agreement, one or more additional Persons may become parties hereto by executing
and delivering to the Collateral Agent a counterpart of this Agreement.
Immediately upon such execution and delivery (and without any further action),
each such additional Person will become a party to, and will be bound by all the
terms of, this Agreement.
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE
SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT,
EACH OF THE UNDERSIGNED, AND BY ACCEPTING THE BENEFITS HEREOF, THE COLLATERAL
AGENT AND EACH LENDER PARTY, CONSENTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS; PROVIDED, HOWEVER,
THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY
BE BROUGHT, AT THE COLLATERAL AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION
WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH OF THE DEBTORS, THE
COLLATERAL AGENT AND EACH LENDER PARTY IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION
OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT
RELATED HERETO. THE DEBTORS, THE COLLATERAL AGENT AND EACH LENDER PARTY EACH
WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE
MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW.
EACH OF THE UNDERSIGNED, AND (BY ACCEPTING THE BENEFITS HEREOF) EACH OF
THE COLLATERAL AGENT AND EACH LENDER PARTY, WAIVES ITS RIGHT TO A TRIAL BY JURY
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY ACTION, PROCEEDING OR
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS OR OTHERWISE. THE
DEBTORS, THE COLLATERAL AGENT AND THE LENDER PARTIES AGREE THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT
LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR
<PAGE>
RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO
ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART,
TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT HEREOF.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
THE MUSICLAND GROUP, INC.
By:
Title:
MEDIA PLAY, INC.
By:
Title:
ON CUE, INC.
By:
Title:
TMG CARIBBEAN, INC.
By:
Title:
TMG U.K. - DELAWARE, INC.
By:
Title:
<PAGE>
TMG-VIRGIN ISLANDS, INC.
By:
Title:
REQUEST MEDIA, INC.
By:
Title:
MUSICLAND RETAIL, INC.
By:
Title:
MSC BOOKSTORE, INC.
By:
Title:
TMG-DIRECT MARKETING, INC.
By:
Title:
MG FINANCIAL SERVICES, INC.
By:
Title:
<PAGE>
ORCHARD LANE MUSIC, INC.
By:
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Collateral
Agemt
By:
Title:
<PAGE>
Additional signature page to the Security Agreement dated as of June 16,
1997 among The Musicland Group, Inc., various other debtors and Morgan Guaranty
Trust Company of New York, as Collateral Agent.
The undersigned is executing a counterpart hereof for purposes of becoming
a party hereto:
By:
Title:
<PAGE>
SCHEDULE I
TO SECURITY AGREEMENT
CHIEF EXECUTIVE OFFICES
The Chief Executive Office of each Debtor is located at 10400 Yellow Circle
Drive, Minnetonka, Minnesota 55343
<PAGE>
SCHEDULE II
TO SECURITY AGREEMENT
ADDRESSES
- See attached list -
<PAGE>
SCHEDULE III
TO SECURITY AGREEMENT
TRADE NAMES, PRIOR LEGAL NAMES, ETC.
WARRANT AND REGISTRATION RIGHTS AGREEMENT
WARRANT AND REGISTRATION RIGHTS AGREEMENT, dated as of June 16, 1997
(this "Agreement"), is by MUSICLAND STORES CORPORATION, a Delaware corporation
(the "Company"), in favor of the holders from time to time of the Warrant
Certificates referred to below (the "Investors").
WHEREAS, in connection with that certain Term Loan Agreement, dated as
of the date hereof (as the same may be amended, supplemented or otherwise
modified from time to time, the "Loan Agreement"), by and among the Company,
certain lenders (the "Banks") and Morgan Guaranty Trust Company of New York, as
Agent, the Company has agreed to issue certain Warrants (the "Warrants")
evidenced by Warrant Certificates in the form of Exhibit G to the Loan Agreement
(together with any certificates issued in replacement or substitution therefor,
the "Warrant Certificates") to purchase shares of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), pursuant to the terms of such
Warrants; and
WHEREAS, in connection with the Loan Agreement, the Company has agreed
to register for sale by the Investors the shares of Common Stock received by the
Investors upon exercise of the Warrants.
NOW, THEREFORE, in consideration of the foregoing and the covenants of
the parties set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, subject to the terms
and conditions set forth herein, the parties hereby agree as follows:
Section 1. Certain Definitions. In this Agreement the following terms
shall have the following meanings:
"Accredited Investor" shall have the meaning set forth in Rule 501 of
the General Rules and Regulations promulgated under the Securities Act.
"Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
"Applicable Law" means (a) all applicable common law and principles of
equity and (b) all applicable provisions of all (i) constitutions, statutes,
rules, regulations, ordinances and orders of governmental bodies, (ii)
authorizations, consents, approvals, licenses or exemptions of, registrations or
filings with, or reports or notices to, governmental bodies and (iii) orders,
decisions, judgments and decrees of all courts, administrative agencies and
arbitrators.
<PAGE>
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Designated Affiliate" means, as to any Bank, an Affiliate of such Bank
designated by such Bank to hold some or all of the Warrants issuable hereunder.
"Effective Date" has the meaning assigned thereto in the Loan Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the relevant time.
"Holders" shall mean (i) the Investors and (ii) each Person holding
Registrable Shares as a result of a transfer or assignment to that Person of
Registrable Shares other than pursuant to an effective registration statement or
Rule 144 (or any successor provision) under the Securities Act.
"Indemnified Party" shall have the meaning ascribed to it in Section
6(c) of this Agreement.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset.
"Indemnifying Party" shall have the meaning ascribed to it in Section
6(c) of this Agreement.
"Person" shall mean an individual, corporation, partnership, estate,
trust, association, private foundation, joint stock company or other entity.
The terms "Register," "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act providing for the sale by the Holders of
Registrable Shares in accordance with the method or methods of distribution
designated by the Holders, and the declaration or ordering of the effectiveness
of such registration statement by the Commission.
"Registrable Shares" shall mean the shares of Common Stock issued or
issuable upon exercise of the Warrants; provided, however, that any such shares
of Common Stock shall cease to be Registrable Shares when (A) a registration
statement with respect to the sale of such shares shall have become effective
under the Securities Act and such shares shall have been disposed of in
accordance with such registration statement; (B) such shares shall have been
sold in accordance with Rule 144; (C) such
<PAGE>
shares shall have been otherwise transferred and new certificates not subject to
transfer restrictions under the Securities Act and not bearing any legend
restricting further transfer shall have been delivered by the Company, and no
other applicable and legally binding restriction on transfer under the federal
securities laws shall exist; or (D) such shares may be sold in accordance with
Rule 144(k) under the Securities Act.
"Registration Expenses" shall mean all out-of-pocket expenses
(excluding Selling Expenses) incurred by the Company in complying with Section 4
hereof, including, without limitation, the following: (a) all registration and
filing fees; (b) fees and expenses of compliance with federal and state
securities laws (including, without limitation, reasonable fees and
disbursements of counsel in connection with state securities qualifications of
the Registrable Shares under the laws of such jurisdictions as the Holders may
reasonably designate); (c) printing (including, without limitation, expenses of
printing or engraving certificates representing the Registrable Shares in a form
eligible for deposit with The Depository Trust Company and otherwise meeting the
requirements of any securities exchange on which they are listed and of printing
registration statements and prospectuses), messenger, telephone, shipping and
delivery expenses; (d) fees and disbursements of counsel for the Company; (e)
fees and disbursements of all independent public accountants of the Company
(including without limitation the expenses of any annual or special audit and
"cold comfort" letters reasonably required by the managing underwriter); (f)
Securities Act liability insurance if the Company so desires; (g) fees and
expenses of other Persons reasonably necessary in connection with the
registration, including any experts, retained by the Company; (h) fees and
expenses incurred in connection with the listing of the Registrable Shares on
each securities exchange on which securities of the same class are then listed;
and (i) fees and expenses associated with any filing with the National
Association of Securities Dealers, Inc. required to be made in connection with
the registration statement.
"Rule 144" shall mean Rule 144 promulgated by the Commission under the
Securities Act, or any successor thereto, as the same shall be in effect at the
relevant time.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder, all as the same shall be
in effect at the relevant time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to any sale of Registrable
Shares.
"Subsidiary" means, as to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person.
<PAGE>
Section 2. Issuance of Warrants. On the Effective Date, in
consideration for the Banks entering into the Loan Agreement, the Company shall
issue to each Bank (or its Designated Affiliate) a Warrant Certificate
representing Warrants to purchase the number of shares of Common Stock set forth
across from such Bank's name on Schedule 3.1(d) to the Loan Agreement.
Section 3. Representations and Warranties. The Company represents
and warrants to the Banks and their Designated Affiliates that:
(a) Corporate Existence and Power. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and is duly qualified as a foreign corporation and authorized to do
business in all jurisdictions wherein the character of the properties owned or
held under lease by it or the nature of the business transacted by it makes such
qualification necessary, except for those jurisdictions in which the failure so
to qualify or be authorized, singly or in the aggregate, have not had and will
not have a materially adverse effect upon the business, financial position or
results of operations of the Company and its Subsidiaries taken as a whole, and
each of the Company and each of its Subsidiaries has all corporate powers, and
all material governmental licenses, authorizations, consents and approvals,
required to carry on its respective businesses as presently conducted.
(b) Corporate and Governmental Authorization; No Contravention. The
execution, delivery and performance by the Company of this Agreement and each
Warrant Certificate are within the Company's corporate powers, have been duly
authorized by all necessary corporate action, require no action by or in respect
of, or filing or recording with, any governmental body, agency or official and
do not (i) contravene, or constitute a default under, any provision of
Applicable Law or of the certificate of incorporation or by-laws of the Company
or of any agreement, judgment, injunction, order, decree or other instrument
binding upon the Company, or (ii) result in the creation or imposition of any
Lien on any asset of the Company or any of its Subsidiaries.
(c) Binding Effect. Each of this Agreement and each Warrant Certificate is
a valid and binding obligation of the Company.
(d) Capitalization of the Company; Reservation of Shares; Other Matters
Relating to Capital Stock.
(i) As of the Effective Date, the authorized capital stock of
the Company consists solely of 75,000,000 shares of Common Stock and 5,000,000
shares of preferred stock, par value $0.01 per share ("Preferred Stock"), of
which (assuming no Bank or Designated Affiliate exercises any Warrant)
34,301,956 shares of Common Stock and no shares of Preferred Stock are issued
and outstanding. All of such outstanding capital stock is validly issued, fully
paid and nonassessable and has been issued in compliance with all applicable
securities laws. As of the Effective Date,
<PAGE>
except as set forth on Schedule 3(d) and except for the Warrants, there are no
existing options, convertible securities, warrants, calls, pledges, transfer
restrictions (except restrictions imposed by federal and state securities laws),
liens, rights of first offer, rights of first refusal, antidilution provisions
or commitments of any character relating to any issued or unissued shares of
capital stock of the Company. Except for the Warrants or as set forth on
Schedule 3(d), there are no preemptive or other preferential rights applicable
to the issuance and sale of equity securities (or securities convertible or
exercisable into or exchangeable for equity securities) of the Company.
(ii) As of the Effective Date, sufficient shares of authorized
but unissued shares of Common Stock have been reserved by appropriate corporate
action in connection with the prospective exercise of the Warrants. The issuance
of the Warrants will not (x) require any further corporate action by the
stockholders or directors of the Company, (y) be subject to any statutory or
contractual preemptive rights of any present or future stockholders of the
Company or (z) conflict with any provision of any agreement to which the Company
is a party or by which the Company is bound. All shares of Common Stock issuable
upon exercise of the Warrants in accordance with their terms will be validly
authorized, fully paid and nonassessable.
(iii) Neither the Company nor any of its Subsidiaries has
violated any applicable federal or state securities laws in connection with the
offer, sale and issuance of any of its capital stock or securities. The offer,
sale and issuance of the Warrants and the shares of Common Stock issuable upon
exercise thereof do not require registration under the Securities Act or any
applicable federal or state securities laws.
Section 4. Registration.
(a) Company Registration.
(i) If the Company shall determine to Register any of its
equity securities either for its own account or for the account of any
other Person, other than a Registration relating solely to benefit
plans, or a Registration relating solely to a Commission Rule 145
transaction, or a Registration on any registration form which does not
permit secondary sales or does not include substantially the same
information as would be required to be included in a registration
statement covering the sale of Registrable Shares, the Company will:
(A) promptly give to each of the Holders a written
notice thereof (which shall include a list of the
jurisdictions, if any, in which the Company intends to attempt
to qualify such securities under applicable state securities
laws); and
(B) include in such Registration (and any related
qualification under state securities laws or other
compliance), and in any underwriting
<PAGE>
involved therein, all the
Registrable Shares specified in a written request or requests,
made by the Holders within ten (10) business days after the
giving of the written notice from the Company described in
clause (i) above, except as set forth in Section 4(a)(ii)
below. Such written request shall specify the amount of
Registrable Shares intended to be disposed of by a Holder and
may specify all or a part of the Holder's Registrable Shares.
Notwithstanding the foregoing, if, at any time after giving such
written notice of its intention to effect such Registration and prior
to the effective date of the registration statement filed in connection
with such Registration, the Company shall determine for any reason not
to Register such equity securities the Company may, at its election,
give written notice of such determination to the Holders and thereupon
the Company shall be relieved of its obligation to Register such
Registrable Shares in connection with the Registration of such equity
securities (but not from its obligation to pay Registration Expenses to
the extent incurred in connection therewith as provided herein).
(ii) Underwriting. If the Registration of which the Company gives
notice is for a Registered public offering involving an underwriting,
the Company shall so advise each of the Holders as a part of the
written notice given pursuant to Section 4(a)(i)(A). In such event, the
right of each of the Holders to Registration pursuant to this Section
4(a) shall be conditioned upon such Holders' participation in such
underwriting and the inclusion of such Holders' Registrable Shares in
the underwriting to the extent provided herein. The Holders whose
shares are to be included in such Registration shall (together with the
Company and any other Person distributing their securities through such
underwriting) enter into an underwriting agreement in customary form
with the representative of the underwriter or underwriters selected for
the underwriting by the Company or such other Persons, as the case may
be. Such underwriting agreement will contain such representations and
warranties by the Company and such other terms and provisions as are
customarily contained in underwriting agreements with respect to
secondary distributions, including, without limitation, indemnities and
contribution to the effect and to the extent provided in Section 6
hereof. Notwithstanding any other provision of this Section 4(a), if
the representative determines that marketing factors require a
limitation on the number of shares to be underwritten, the Company
shall so advise all holders of securities requesting Registration, and
the number of shares of securities that are entitled to be included in
the Registration and underwriting shall be allocated in the following
manner: the number of shares that may be included in the Registration
and underwriting by each of the Holders and by each stockholder of the
Company (other than the Holders) that on the date hereof has rights to
piggyback registration upon a Company Registration shall be reduced, on
a pro rata basis (based on the number of shares held by such Holder or
stockholder), by such minimum number of shares as is necessary to
comply with such limitation. If any
<PAGE>
of the Holders or any officer,
director or stockholder of the Company other than a Holder disapproves
of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter. Any
Registrable Shares or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such Registration.
(b) Shelf Registration. (i) On or before April 30, 1998 the Company
shall file a "shelf" registration statement pursuant to Rule 415 under the
Securities Act (the "Shelf Registration") permitting a continuous or delayed
offering of the Registrable Shares. The Company shall (A) use its best efforts
to have the Shelf Registration declared effective on or before May 15, 1998 and
(B) subject to the Company's Suspension Right (defined below), use its best
efforts to keep the Shelf Registration continuously effective from the date such
Shelf Registration is declared effective until the date when all shares of
Common Stock issued or issuable upon exercise of the Warrants cease to be
Registrable Shares in accordance with the definition thereof in order to permit
the prospectus forming a part thereof to be usable by Holders during such
period.
(ii) Subject to the Company's Suspension Right, the Company shall
supplement or amend the Shelf Registration (A) as required by the registration
form utilized by the Company or by the instructions applicable to such
registration form or by the Securities Act or the rules and regulations
promulgated thereunder and (B) to permit the disposition of Registrable Shares
in the manner requested by any Holder. The Company shall furnish to the Holders
of the Registrable Shares to which the Shelf Registration relates copies of any
such supplement or amendment sufficiently in advance (but in no event less than
five business days in advance) of its use and/or filing with the Commission to
allow the Holders a meaningful opportunity to comment thereon.
(c) Suspension Right. Notwithstanding the provisions of Sections 4(a)
and (b), if the Board of Directors of the Company determines in good faith that
the filing of a registration statement or any supplement or amendment thereto
would interfere with the negotiation or completion of a material transaction or
event being contemplated by the Company, the Company shall have the right to
(the "Suspension Right"), by notice to the Holders in accordance with Section
9(d), defer the filing of a registration statement to effect the Shelf
Registration or suspend the rights of the Holders to make sales pursuant to the
Shelf Registration for such a period of time as the Board of Directors may
determine; provided that no such period of deferral or suspension may exceed 30
consecutive days and that all such periods of deferral or suspension may not
exceed 60 days in the aggregate during any period of 12 consecutive months.
(d) Notices. The Company shall promptly notify the Holders of Registrable
Shares covered by the Shelf Registration of the occurrence of the following
events:
<PAGE>
(i) when the Shelf Registration or post-effective amendment thereto filed
with the Commission has become effective:
(ii) the issuance by the Commission of any stop order suspending the
effectiveness of the Shelf Registration;
(iii) the suspension of sales under the Shelf Registration by the Company
in accordance with Section 4(c) above;
(iv) the Company's receipt of any notification of the suspension of the
qualification of any Registrable Shares covered by the Shelf Registration for
sale in any jurisdiction; and
(v) the existence of any event, fact or circumstance that results in the
registration statement evidencing the Shelf Registration or prospectus relating
to Registrable Shares or any document incorporated therein by reference
containing an untrue statement of material fact or omitting to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading during the distribution of securities.
The Company agrees to use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of any such registration statement or any state
qualification at the earliest possible moment.
(e) Registration Statement; Amendments and Supplements. The Company
shall provide to the Holders of Registrable Shares covered by the Shelf
Registration, at no cost to such Holders, a copy of the related registration
statement and any amendment thereto used to effect the Registration of the
Registrable Shares, each prospectus contained in such registration statement or
post-effective amendment and any amendment or supplement thereto and such other
documents as the requesting Holders may reasonably request in order to
facilitate the disposition of the Registrable Shares covered by such
registration statement. The Company consents to the use of each such prospectus
and any supplement thereto by the Holders in connection with the offering and
sale of the Registrable Shares covered by such registration statement or any
amendment thereto. The Company shall also file a sufficient number of copies of
the prospectus and any post-effective amendment or supplement thereto with The
New York Stock Exchange, Inc. (or, if the Common Stock is no longer listed
thereon, with such other securities exchange or market on which the Common Stock
is then listed) so as to enable the Holders to have the benefits of the
prospectus delivery provisions of Rule 153 under the Securities Act.
(f) State Securities Laws. The Company agrees to use its best efforts
to cause the Registrable Shares covered by a registration statement to be
registered with or approved by such state securities authorities as may be
necessary to enable the Holders to consummate the disposition of such shares
pursuant to the plan of
<PAGE>
distribution set forth in the registration statement;
provided, however, that the Company shall not be obligated to take any action to
effect any such Registration, qualification or compliance pursuant to this
Section 4 in any particular jurisdiction in which the Company would be required
to execute a general consent to service of process in effecting such
Registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction.
(g) Remediation of Misstatements or Omissions. Subject to the Company's
Suspension Right, if any event, fact or circumstance requiring an amendment to a
registration statement relating to the Registrable Shares or supplement to a
prospectus relating to the Registrable Shares shall exist, immediately upon
becoming aware thereof the Company agrees to notify the Holders and prepare and
furnish to the Holders a post-effective amendment to the registration statement
or supplement to the prospectus or any document incorporated therein by
reference or file any other required document so that, as thereafter delivered
to the purchasers of the Registrable Shares, the prospectus will not contain an
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 not misleading.
(h) Listing on Exchange. The Company agrees to use its best efforts
(including the payment of any listing fees) to obtain the listing of all
Registrable Shares covered by the registration statement on each securities
exchange on which securities of the same class are then listed.
(i) Compliance with Securities Laws. The Company agrees to use its best
efforts to comply with the Securities Act and the Exchange Act in connection
with the offer and sale of Registrable Shares pursuant to a registration
statement, and, as soon as reasonably practicable following the end of any
fiscal year during which a registration statement effecting a Registration of
the Registrable Shares shall have been effective, to make available to its
security holders an earnings statement satisfying the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder.
(j) Share Certificates.The Company agrees to: (x) cooperate with the
selling Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Shares to be sold pursuant to a
Registration and not bearing any Securities Act legend; and (y) enable
certificates for such Registrable Shares to be issued for such numbers of shares
and registered in such names as the Holders may reasonably request at least two
business days prior to any sale of Registrable Shares. Each Holder requesting
delivery of certificates not bearing any Securities Act legend shall provide
appropriate representations to the Company of such Holder's intent to comply
with all conditions necessary for sale pursuant to a Registration, including
prospectus delivery requirements.
Section 5. Expenses of Registration. The Company shall pay all
Registration Expenses incurred in connection with the registration,
qualification or compliance
<PAGE>
pursuant to Section 4 hereof. All Selling Expenses
incurred in connection with the offer and sale of Registrable Shares by any of
the Holders shall be borne by the Holder offering or selling such Registrable
Shares. The Company shall pay up to $20,000 of the fees and expenses of one
counsel to the Holders in connection with the preparation of the Shelf
Registration.
Section 6. Indemnification.
(a) The Company will indemnify each Holder, each Holder's officers and
directors, each person controlling such Holder within the meaning of Section 15
of the Securities Act and each underwriter, if any, of the Company's securities
covered by any Registration hereunder against all expenses, claims, losses,
damages and liabilities (including reasonable legal fees and expenses), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or prospectus relating to
the Registrable Shares, or any amendment or supplement thereto, or based on 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,
provided, however, that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with information furnished in
writing to the Company by such Holder or underwriter for inclusion therein.
(b) Each Holder will indemnify the Company, each of its directors and
each of its officers who signs the registration statement and each person who
controls the Company within the meaning of Section 15 of the Securities Act
against all claims, losses, damages and liabilities (including reasonable legal
fees and expenses) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement or prospectus, or any amendment or supplement thereto, or based on 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, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement or prospectus in reliance upon and in conformity with
information furnished in writing to the Company by such Holder for inclusion
therein.
(c) Each party entitled to indemnification under this Section 6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
omission to so notify the Indemnifying Party shall not relieve it from any
liability which it may have to the Indemnified Party pursuant to the provisions
of this Section 6 except to the extent of the actual damages suffered by such
delay in notification. The Indemnifying Party shall assume the defense of such
action, including the employment of counsel to be chosen by the Indemnifying
Party, which counsel must be reasonably satisfactory to the
<PAGE>
Indemnified Party, and payment of expenses. The Indemnified Party shall
have the right to employ its own counsel in any such case, but the legal fees
and expenses of such counsel shall be at the expense of the Indemnified Party,
unless the employment of such counsel shall have been authorized in writing by
the Indemnifying Party in connection with the defense of such action, or the
Indemnifying Party shall not have employed counsel to take charge of the defense
of such action, or the Indemnified Party shall have reasonably concluded that
there may be defenses available to it or them 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 direct the defense of such action
on behalf of the Indemnified Party), in any of which events such fees and
expenses shall be borne by the Indemnifying Party. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation.
(d) If the indemnification provided for in this Section 6 is
unavailable to a party that would have been an Indemnified Party under this
Section 6 in respect of any expenses, claims, losses, damages and liabilities
referred to herein, then each party that would have been an Indemnifying Party
hereunder shall, in lieu of indemnifying such Indemnified Party, contribute to
the amount paid or payable by such Indemnified Party as a result of such
expenses, claims, losses, damages and liabilities in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the one
hand and such Indemnified Party on the other in connection with the statement or
omission which resulted in such expenses, claims, losses, damages and
liabilities, as well as any other relevant equitable considerations. The
relative fault 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
Indemnifying Party or such Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and each holder of Registrable Shares agrees
that it would not be just and equitable if contribution pursuant to this Section
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 6(d).
(e) No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(f) In no event shall any Holder be liable for any expenses, claims,
losses, damages or liabilities pursuant to this Section 6 in excess of the net
proceeds to such Holder of any Registrable Shares sold by such Holder.
<PAGE>
Section 7. Information to be Furnished by Holders. Each Holder shall
furnish to the Company such information as the Company may reasonably request
and as shall be required in connection with the Registration and related
proceedings referred to in Section 4 hereof. If any Holder fails to provide the
Company with such information within three weeks of the Company's request, the
Company's obligations under Section 4 hereof with respect to such Holder or the
Registrable Shares owned by such Holder shall be suspended until such Holder
provides such information.
Section 8. Rule 144 Sales.
(a) The Company covenants that it will file any and all reports
required to be filed by the Company under the Exchange Act so as to enable any
Holder to sell Registrable Shares pursuant to Rule 144 under the Securities Act.
(b) In connection with any sale, transfer or other disposition by any
Holder of any Registrable Shares pursuant to Rule 144 under the Securities Act,
the Company shall cooperate with such Holder to facilitate the timely
preparation and delivery of certificates representing Registrable Shares to be
sold and not bearing any Securities Act legend, if deemed appropriate, and
enable certificates for such Registrable Shares to be for such number of shares
and registered in such names as the selling Holder may reasonably request,
provided that such request is made at least two business days prior to any sale
of Registrable Shares.
Section 9. Miscellaneous.
(a) Governing Law. This Agreement shall be governed in all respects by the
laws of the State of New York.
(b) Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.
(c) Amendment. No supplement, modification, waiver or termination of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby.
(d) Notices, etc. Each notice, demand, request, request for approval,
consent, approval, disapproval, designation or other communication (each of the
foregoing being referred to herein as a notice) required or desired to be given
or made under this Agreement shall be in writing (except as otherwise provided
in this Agreement), and shall be effective and deemed to have been received ()
when delivered in person, () when sent by fax with receipt acknowledged, () five
(5) days after having been mailed by certified or registered United States mail,
postage prepaid, return receipt requested, or () the next business day after
having been sent by a nationally recognized overnight mail or courier service,
receipt requested. Notices shall be addressed as follows: (x) if to any Holder,
at such address or fax number as such
<PAGE>
Holder shall have furnished the Company in writing (or, if such Holder is a
Bank, at such Holder's address set forth in the Loan Agreement), or (y) if to
the Company, at the address or fax number of its principal executive offices set
forth below its signature hereon or at such other address or fax number as the
Company shall have furnished to the Investors. Any notice or other communication
required to be given hereunder to a Holder in connection with a registration may
instead be given to the designated representative of such Holder.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by fewer than all of the parties
hereto, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
(f) Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
(g) Captions. Captions are for descriptive purposes only and shall not
control or alter the meaning of this Agreement as set forth in the text.
(h) Successors and Assigns. This Agreement shall be binding upon the
parties hereto and their respective successors and assigns. Whether or not any
express assignment has been made in this Agreement, the provisions of this
Agreement that are for the Banks as holders of Registrable Shares are also for
the benefit of, and shall be enforceable by, all subsequent holders of
Registrable Shares.
(i) Remedies. The Company and the Investors acknowledge that there
would be no adequate remedy at law if any Person fails to perform any of its
obligations hereunder, and accordingly agree that the Company and each Holder,
in addition to any other remedy to which it may be entitled at law or in equity,
shall be entitled to compel specific performance of the obligations of another
party under this Agreement in accordance with the terms and conditions of this
Agreement in any court of the United States or any State thereof having
jurisdiction.
(j) Attorneys' Fees. If the Company or any Holder brings an action to
enforce its rights under this Agreement, the prevailing party in the action
shall be entitled to recover its costs and expenses, including, without
limitation, reasonable attorneys' fees and expenses, incurred in connection with
such action, including any appeal of such action.
(k) No Inconsistent Agreements. The Company will not hereafter enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the Holders of Registrable Shares in this Agreement.
<PAGE>
(l) Survival of Representations and Warranties. All representations and
warranties contained herein shall survive the execution and delivery of this
Agreement and any transfer of any Warrant or Common Stock issued upon exercise
thereof.
IN WITNESS WHEREOF, the Company has executed this Agreement as of the
date first above written.
MUSICLAND STORES CORPORATION
By:
Name:
Title:
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Attention: General Counsel and Corporate
Secretary Facsimile: (612)931-8047
AMENDMENT NO.1 TO
LEASE AGREEMENT
AMENDMENT NO. 1 TO LEASE AGREEMENT dated as of June 16, 1997
(the "Amendment"), between FLEET NATIONAL BANK, formerly known as SHAWMUT BANK
CONNECTICUT, NATIONAL ASSOCIATION, a national banking association, not in its
individual capacity, but solely as Owner Trustee, as Lessor, and MUSICLAND
RETAIL, INC., a Delaware corporation, as Lessee.
W I T N E S S E T H:
WHEREAS, Lessor and Lessee are parties to a certain Lease Agreement, dated
as of March 31, 1994 (the "Lease Agreement");
WHEREAS, the parties hereto desire to consummate the transactions
contemplated hereby;
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows;
Section 1. Definitions. Capitalized terms used herein, but not otherwise
defined herein, shall have the meanings assigned thereto in Appendix A to the
Lease Agreement for all purposes hereof.
Section 2. Amendment to Lease Agreement. Subject to the terms and
conditions set forth in Section 5 of this Amendment, Section 4.1 of the Lease
Agreement is hereby amended by inserting the following text at the end of such
Section:
"In addition, Lessee shall make the following prepayments of final
Supplemental Rent payable under this Lease in amounts equal to: (a)
$3,214,290 not later than 91 days after the earlier of (i) the
"Effective Date," as such term is defined in Amendment No. 1 and Waiver
to Participation Agreement, dated as of June 16, 1997, and (ii) the
effective date of the amendment to the Credit Agreement referred in
Section 6 (j) of such Amendment No. 1 and Waiver to Participation
Agreement, (b) $1,714,290 on December 16, 1997, and (c) $857,130 on
February 16, 1998. Lessee shall make additional prepayments of final
Supplemental Rent under this Lease at the time of, and in percentage
amounts equal to, any percentage reductions of the revolver commitment
or under the Credit Agreement, other than scheduled commitment
reductions for the revolver pursuant to the Credit Agreement as in
effect on the Effective Date, as such term is defined in that certain
Amendment No. 1 and Waiver to the Participation Agreement, or any
identical reductions under a replacement senior Credit
<PAGE>
Agreement. Each such prepayment shall be accompanied by a prepayment of any
accrued and unpaid Basic Rent attributable to the amount of such prepayment of
Supplemental Rent."
Section 3. Ratification. This Amendment is limited as
specified and shall not constitute a modification, amendment, acceptance or
waiver of any other provision of the Lease Agreement or any other Operative
Document. The Lease Agreement as modified and amended by this Amendment is
hereby ratified and confirmed in all respects.
Section 4. Notices. Unless otherwise specifically provided
herein, all notices, consents, directions, approvals, instructions, requests and
other communications required or permitted by the terms hereof to be given to
any Person shall be given in writing by certified or registered mail, by
nationally recognized courier service or by hand, or by facsimile communication
followed by such courier service delivery and any such notice shall become
effective when received or when delivery is refused, and shall be directed to
the Address of such Person. From time to time any party may designate a new
Address for purposes of notice hereunder by notice to each of the other parties
hereto.
Section 5. Effective Date. This Amendment shall become effective on the
Effective Date, as such term is defined in that certain Amendment No. 1 and
Waiver to Participation Agreement, dated as of June 16, 1997.
Section 6. Counterparts. This Amendment may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
Section 7. Headings, etc. The headings of the various Sections of this
Amendment are for convenience of reference only and shall not modify, define,
expand or limit any of the terms or provisions hereof.
Section 8. Parties in Interest. Except as expressly provided herein, none
of the provisions of this Amendment are intended for the benefit of any Person
except the parties hereto, their successors and permitted assigns.
Section 9. Governing Law. The terms and provisions of Section 19.8 of the
Lease Agreement are incorporated herein by reference as though fully set forth
herein.
Section 10. Lease Agreement. From and after the date hereof, all references
in the Lease Agreement and each of the other Operative Documents shall
(2)
<PAGE>
be deemed to be references to the Lease Agreement after giving effect to
this Amendment.
IN WITNESS WHEREOF, the parties
hereto have caused this Amendment to be duly executed
by their respective officers thereunto duly
authorized as of the day and year first above
written.
FLEET NATIONAL BANK, not in its individual
capacity, but solely as Owner Trustee, as
Lessor
By:
Title:
MUSICLAND RETAIL, INC., as Lessee
By: Jack W. Eugster
Title: Chairman, President & CEO
(3)
<PAGE>
IN WITNESS WHEREOF, the parties
hereto have caused this Amendment to be duly executed
by their respective officers thereunto duly
authorized as of the day and year first above
written.
FLEET NATIONAL BANK, not in its individual
capacity, but solely as Owner Trustee, as
Lessor
By:
Title: Vice President
MUSICLAND RETAIL, INC., as Lessee
By:
Title:
AMENDMENT NO.1 AND WAIVER TO
PARTICIPATION AGREEMENT
AMENDMENT NO. 1 AND WAIVER TO PARTICIPATION AGREEMENT dated as
of June 16, 1997 (the "Amendment") , among MUSICLAND RETAIL, INC., a Delaware
corporation, as Lessee; FLEET NATIONAL , formerly known as SHAWMUT BANK
CONNECTICUT, NATIONAL ASSOCIATION, a national banking association, not in its
individual capacity except as expressly stated herein, but solely as owner
Trustee; KLEINWORT BENSON LIMITED, a corporation organized under the laws of
England, as Owner Participant, Lender and Agent; and THE LONG-TERM CREDIT BANK
OF JAPAN, LTD. CHICAGO BRANCH, CREDIT LYONNAIS NEW YORK BRANCH, as successor to
CREDIT LYONNAIS CAYMAN ISLAND BRANCH, and THE FUJI BANK, LIMITED, as Lenders.
WITNESSETH:
WHEREAS, Lessee, Owner Trustee, Owner Participant, Agent and Lenders are
parties to a certain Participation Agreement, dated as of March 31, 1994 (the
"Participation Agreement',);
WHEREAS, the parties hereto desire to consummate the transactions
contemplated hereby;
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows;
Section 1. Definitions. Capitalized terms used herein, but not otherwise
defined herein, shall have the meanings assigned thereto in Appendix A to the
Participation Agreement for all purposes hereof.
Section 2. Waiver. Subject to the terms and conditions set forth in Section
6 of this Amendment, the Agent and Lenders hereby waive any Loan Event of
Default or Loan Default, and the Owner Trustee hereby waives any Lease Event of
Default or Lease Default, which may have arisen from a breach of Section 5.10 of
the Participation Agreement before the date hereof or from delivery of an audit
report containing a "going concern" qualification for Guarantor's fiscal year
ending December 31, 1996. On the Effective Date, the Owner Trustee shall release
any funds remaining in the trust escrow to be dispersed to Lessee.
<PAGE>
Section 3. Amendments to Participation Agreement. Subject to the terms and
conditions set forth in Section 6 of this Amendment, the Participation Agreement
is hereby amended as follows:
(a) Section 5.10 of the Participation Agreement is hereby amended and
restated in its entirety as follows:
"SECTION 5.10. Total Liabilities to Shareholder Equity. The Lessee shall
not permit the ratio of Total Liabilities to Shareholder Equity of MSC as of the
end of each fiscal year of MSC to be greater than 2.75 to 1.0, without giving
effect to (a) Lessee's adoption of FASB 121 or (b) restructuring reserves for
Lessee's fiscal year ending December 31, 1996 not to exceed $75 million and for
Lessee's fiscal year ending December 31, 1997 not to exceed $20 million (but not
more than $10 million of cash charges for Lessee's fiscal year ending December
31, 1997)."
(b) The following text is inserted as Section 5.15 of the Participation
Agreement:
"SECTION 5.15. Other Information. The Lessee shall deliver to the Agent and
the Lenders all information as and when provided to the Agent and Banks under
the Credit Agreement."
(c) Section 5.8(i) of the Participation Agreement is hereby amended by
adding the following text after the word "Participants" at the end of such
Section:
"and a "going concern" qualification for the fiscal years ending December
31, 1996 and December 31, 1997;"
Section 4. Ratification. This Amendment is limited as specified and shall
not constitute a modification, amendment, acceptance or waiver of any other
provision of the Participation Agreement or any other Operative Document. The
Participation Agreement as modified and amended by this Amendment is hereby
ratified and confirmed in all respects.
Section 5. Notices. Unless otherwise specifically provided herein, all
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by certified or registered mail, by nationally
recognized courier service or by hand, or by facsimile communication followed by
such courier service delivery and any such notice shall become effective when
received or when delivery is refused, and shall be directed to the Address of
such Person. From time to time any party may designate a new Address for
purposes of notice hereunder by notice to each of the other parties hereto.
<PAGE>
Section 6. Effective Date. This Amendment shall become effective upon
satisfaction of the following conditions on or before June 30, 1997 (the date of
such satisfaction shall be the "Effective Date"):
(a) Lessee, Owner Trustee, Owner Participant, Agent and each Lender shall
have executed and delivered a counterpart of this Amendment.
(b) Owner Trustee, Agent and each Lender shall have executed and delivered
a counterpart of an Amendment No. 1 to the Loan Agreement, substantially in the
form of Exhibit A attached hereto.
(c) Lessee and Owner Trustee shall have executed and delivered a
counterpart of an Amendment No. 1 to the Lease Agreement, substantially in the
form of Exhibit B attached hereto.
(d) Guarantor shall have executed and delivered a counterpart of an
Amendment No. 1 to the Guaranty, substantially in the form of Exhibit C attached
hereto.
(e) Agent shall have received a certificate from the corporate secretaries
of each of Lessee and Guarantor in form and substance satisfactory to Agent and
its counsel and certifying that (A) attached to such certificate are true and
correct copies of resolutions of the applicable entity's board of directors
authorizing the execution, delivery and performance of this Amendment and the
documents and transactions contemplated herein and (B) the officers of such
entity executing this Amendment and the other documents to be executed by such
entity pursuant hereto are authorized to execute such documents on behalf of
such entity.
(f) Agent shall have received opinions of counsel for each of Lessee and
Guarantor, in form and substance satisfactory to Agent and its counsel.
(g) Lessee shall have prepaid a portion of the final rent under the Lease
in an amount equal to $3,214,290, together with a partial payment of the next
scheduled Basic Rent payment in an amount equal to $59,601.98, to be applied as
a prepayment pursuant to clause third of Section 3.3(a) of the Loan Agreement.
(h) Lessee shall have paid an amendment fee as Supplemental Rent in an
amount equal to $167,411, which fee shall be irrevocable and fully earned upon
payment.
<PAGE>
(i) Lessee shall have paid the fees and out-of-pocket costs and expenses of
counsel for the Agent and the Owner Trustee incurred in connection with the
negotiation, preparation, execution and delivery of this Amendment.
(j) The Credit Agreement shall have been amended, in form and substance
satisfactory to Agent and its counsel.
Section 7. Representations and Warranties. The Lessee represents and
warrants to each of the other parties hereto that:
(a) The execution, delivery and performance by Lessee of this Amendment and
those transactions and documents contemplated hereby to which Lessee is a party
have been duly authorized by all necessary corporate action and each constitutes
a legal, valid and binding obligation of Lessee enforceable against Lessee in
accordance with its terms, except as the enforcement thereof may be subject to
(i) the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors, rights generally and (ii) general
principles of equity (regardless of whether such enforcement is sought in a
proceeding in equity or at law);
(b) Except as disclosed in MSC,s Form 10-K for the year ended December 31,
1996 or in MSC's Form 10-Q for the quarter ended March 31, 1997, each of
Lessee's representations and warranties contained in the Operative Documents is
true and correct in all material respects on and as of the date hereof as if
made on the date hereof;
(c) Neither the execution, delivery and performance of this Amendment nor
the consummation of the transactions and documents contemplated hereby does or
shall contravene, result in a breach of, or violate (i) any provision of
Lessee's certificate or articles of incorporation or bylaws, (ii) any law or
regulation, or any order or decree of any court or government instrumentality or
(iii) indenture, mortgage, deed of trust, lease, agreement or other instrument
to which Lessee is a party or by which Lessee or any of its property is bound,
except in any such case to the extent such conflict or breach has been waived by
a written waiver document a copy of which has been delivered to Agent on or
before the date hereof;
(d) Since the Closing Date, no provisions of Lessee's certificate or
articles of incorporation or by-laws have been amended or changed; and
(e) After giving effect to this Amendment, no Loan Default, Loan Event of
Default, Lease Default or Lease Event of Default has occurred and is continuing.
<PAGE>
Section 8. Counterparts. This Amendment may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have
caused this Amendment to be duly executed by their respective
officers thereunto duly authorized as of the day and year
first above written.
MUSICLAND RETAIL, INC., as Lessee
By: Jack W. Eugster
Title: Chairman, President & CEO
FLEET NATIONAL BANK, not in its
individual capacity except as
expressly stated herein, but
solely as owner Trustee
By:
Title:
KLEINWORT BENSON LIMITED, as
Owner Participant, Agent and
Lender
By:
Title:
<PAGE>
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD. CHICAGO, as Lender
By:
Title:
CREDIT LYONNAIS NEW YORK
BRANC:H, as successor to CREDIT
LYONNAIS CAYMAN ISLAND BRANCH, as
Lender
By:
Title:
THE FUJI BANK, LIMITED, as Lender
By:
Title:
IN WITNESS WHEREOF, the parties
hereto have caused this Amendment to be duly executed
by their respective officers thereunto duly
authorized as of the day and year first above
written.
MUSICLAND RETAIL, INC., as Lessee
By:
Title:
<PAGE>
FLEET NATIONAL BANK, not in its
individual capacity except as
expressly stated but solely as
Owner Trustee
By:
Title: Vice President
KLEINWORT BENSON LIMITED, as
Owner Participant, Agent and
Lender
By:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN,LTD. CHICAGO BRANCH, as
Lender
By:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
as successor to CREDIT LYONNAIS
CAYMAN ISLAND BRANCH, as Lender
By:
Title:
THE FUJI BANK, LIMITED, as Lender
By:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have
caused this Amendment to be duly executed by their respective
officers thereunto duly authorized as of the day and year
first above written-
MUSICLAND RETAIL, INC., as Lessee
By:
Title:
FLEET NATIONAL BANK, not in its
individual capacity except as
expressly stated herein, but
solely as Owner Trustee
By:
Title:
KLEINWORT BENSON LIMITED,as Owner
Participart, Agent and Lender
By:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN,LTD., CHICAGO BRANCH, as
Lender
By:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
as successor to CREDIT LYONNAIS
CAYMAN ISLAND BRANCH, as Lender
By:
Title:
(8)
<PAGE>
THE FUJI BANK, LIMITED, as Lender
By:
Title:
IN WITNESS WHEREOF, the parties hereto have
caused this Amendment to be duly executed by their
respective officers thereunto duly authorized as of
the day and year first above written.
MUSICLAND RETAIL, INC., as Lessee
By:
Title:
FLEET NATIONAL BANK, not in its
individual capacity except as
expressly stated herein, but
solely as Owner Trustee
By:
Title:
KLEINWORT BENSON LIMITED, as
Owner Participant, Agent and
Lender
By:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD. CHICAGO BRANCH, as
Lender
By:
Title: Vice President and Deputy
General Manager
(9)
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH,
as successor to CREDIT LYONNAIS
CAYMAN ISLAND BRANCH, as Lender
By:
Title:
THE FUJI BANK, LIMITED, as Lender
By:
Title:
IN WITNESS WHEREOF, the parties
hereto have caused this Amendment to be duly executed
by their respective officers thereunto duly
authorized as of the day and year first above
written.
MUSICLAND RETAIL, INC., as Lessee
By:
Title:
FLEET NATIONAL BANK, not in its
individual capacity except as
expressly stated herein, but
solely as Owner Trustee
By:
Title:
KLEINWORT BENSON LIMITED. as
Owner Participant,
Agent and Lender
By:
Title:
(10)
<PAGE>
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD. CHICAGO
BRANCH, as Lender
By:
Title:
CREDIT LYONNAIS NEW YORK BRANCH
as successor to CREDIT LYONNAIS
CAYMAN ISLAND BRANCH, as Lender
By: Alan Sidrune
Title: First Vice President
THE FUJI BANK, LIMITED, as Lender
By:
Title:
Section 9. Headings, etc. The headings of the various Sections of this
Amendment are for convenience of reference only and shall not modify, define,
expand or limit any of the terms or provisions hereof.
Section 10. Parties in Interest. Except as expressly provided herein, none
of the provisions of this Amendment are intended for the benefit of any Person
except the parties hereto, their successors and permitted assigns.
Section 11. Governing Law; Jurisdiction; Waivers. The terms and provisions
of Sections 8.8 and 8.13 of the Participation Agreement are incorporated herein
by reference as though fully set forth herein.
(11)
<PAGE>
Section 12. Participation Agreement. From and after the date hereof,
all references in the Participation Agreement and each of the other Operative
Documents shall be deemed to be references to the Participation Agreement after
giving effect to this Amendment No. 1 and Waiver to Participation Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
MUSICLAND RETAIL, INC., as Lessee
By:
Title:
FLEET NATIONAL BANK, not in its
individual capacity except as
expressly stated herein, but solely
as Owner Trustee
By:
Title:
KLEINWORT BENSON LIMITED, as Owner
Participant, Agent and Lender
By:
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD. CHICAGO BRANCH, as Lender
By:
Title:
(12)
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH, as
successor to CREDIT LYONNAIS CAYMAN
ISLAND BRANCH, as Lender
By:
Title:
THE FUJI BANK, LIMITED, as Lender
By: Tetsuo Kamatsu (K-219)
Title: Joint General Manager
AMENDMENT NO. 1 TO
GUARANTY
AMENDMENT NO. 1 TO GUARANTY dated as of June 16, 1997 (the
"Amendment"), by MUSICLAND GROUP, INC., a Delaware corporation, as Guarantor,
for the benefit of each party to that certain Participation Agreement among
KLEINWORT BENSON LIMITED, a corporation organized under the laws of England, as
Owner Participant, Lender and Agent; THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
CHICAGO BRANCH, CREDIT LYONNAIS NEW YORK BRANCH, as successor to CREDIT LYONNAIS
CAYMAN ISLAND BRANCH and THE FUJI BANK, LIMITED, as Lenders; and FLEET NATIONAL
BANK, formerly known as SHAWMUT BANK CONNECTICUT, NATIONAL ASSOCIATION, a
national banking association, individually and as Owner Trustee, and their
respective successors and their permitted assigns (collectively, but excluding
Musicland Retail, Inc. and its affiliates, the "Beneficiaries").
W I T N E S S E T H:
WHEREAS, Guarantor executed the Guaranty, dated as of March 31, 1994 (the
"Guaranty");
WHEREAS, Guarantor and the Beneficiaries hereto desire to
consummate the transactions contemplated hereby and by the amendments to the
other Operative Documents being executed in connection herewith;
NOW, THEREFORE, in consideration of the mutual agreements
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Definitions. Capitalized terms used herein, but not otherwise
defined herein, shall have the meanings assigned thereto in the Guaranty for all
purposes hereof.
Section 2. Amendment to Guaranty. Subject to the terms and
conditions set forth in Section 5 of this Amendment, Section 6(a)(i) of the
Guaranty is hereby amended by adding the following text after the word
"Participants" at the end of such Section:
"and a "going concern" qualification for the fiscal years ending December
31, 1996 and December 31, 1997;"
<PAGE>
Section 3. Ratification. This Amendment is limited as specified and shall
not constitute a modification, amendment, acceptance or waiver of any other
provision of the Guaranty or any other Operative Document. The undersigned
acknowledges receipt of a copy of that certain Amendment No.1 and Waiver to
Participation Agreement, that certain Amendment No. 1 to Lease Agreement and
that certain Amendment No. 1 to Loan Agreement (the "Amendments") , each of even
date hereof and consents to the terms of the Amendments. Each of the Operative
Documents, as modified and amended by the Amendments, and the Guaranty, as
modified and amended by this Amendment, are hereby ratified and confirmed in all
respects.
Section 4. Notices. Unless otherwise specifically provided herein, all
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by certified or registered mail, by nationally
recognized courier service or by hand, or by facsimile communication followed by
such courier service delivery and any such notice shall become effective when
received or when delivery is refused, and shall be directed to the Address of
such Person. From time to time any party may designate a new Address for
purposes of notice hereunder by notice to each of the other parties hereto.
Section 5. Effective Date. This Amendment shall become effective on the
Effective Date, as such term is defined in that certain Amendment No. 1 and
Waiver to Participation Agreement, dated as of June 16, 1997:
Section 6. Representations and Warranties. The Guarantor represents and
warrants to each of the other parties hereto that:
(a) The execution, delivery and performance by Guarantor of this
Amendment and those transactions and documents contemplated hereby to
which Guarantor is a party have been duly authorized by all necessary
corporate action and each constitutes a legal, valid and binding
obligation of Guarantor enforceable against Guarantor in accordance
with its terms, except as the enforcement thereof may be subject to (i)
the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors, rights generally and
(ii) general principles of equity (regardless of whether such
enforcement is sought in a proceeding in equity or at law);
(b) Except as disclosed in MSC,s Form 10-K for the year ended December
31, 1996 or in MSC's Form 10-Q for the quarter ended March 31, 1997,
each of Guarantor's representations and warranties contained in the
Operative Documents is true and correct in all material respects on and
as of the date hereof as if made on the date hereof;
(2)
<PAGE>
(c) Neither the execution, delivery and performance of this Amendment
nor the consummation of the transactions and documents contemplated
hereby does or shall contravene, result in a breach of, or violate (i)
any provision of Guarantor's certificate or articles of incorporation
or bylaws, (ii) any law or regulation, or any order or decree of any
court or government instrumentality or (iii) indenture, mortgage, deed
of trust, lease, agreement or other instrument to which Guarantor is a
party or by which Guarantor or any of its property is bound, except in
any such case to the extent such conflict or breach has been waived by
a written waiver document a copy of which has been delivered to Agent
on or before the date hereof;
(d) Since the Closing Date, no provisions of Guarantor's certificate or
articles of incorporation or by-laws have been amended or changed; and
(e) After giving effect to this Amendment, no Lease Default or Lease Event
of Default has occurred and is continuing.
Section 7. Counterparts. This Amendment may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
Section 8. Headings, etc. The headings of the various Sections
of this Amendment are for convenience of reference only and shall not modify,
define, expand or limit any of the terms or provisions hereof.
Section 9. Parties in Interest. Except as expressly provided
herein, none of the provisions of this Amendment are intended for the benefit of
any Person except the parties hereto, their successor and permitted assigns.
Section 10. Governing Law; Jurisdiction; Waivers. The terms and provisions
of Sections 8(e) and 8(f) of the Guaranty are incorporated herein by reference
as though fully set forth herein.
Section 11. Guaranty. From and after the date hereof, all
references in the Guaranty and each of the other Operative Documents shall be
deemed to be references to the Guaranty after giving effect to this Amendment.
[signature page follows]
(3)
<PAGE>
IN WITNESS WHEREOF, the Guarantor has caused
this Amendment to be duly executed by its officer thereunto
duly authorized as of the day and year first above written.
THE MUSICLAND GROUP, INC.
By: Jack W. Eugster
Title: Chairman, President & CEO
SECOND LIMITED WAIVER AND AMENDMENT OF
CERTAIN LOAN DOCUMENTS AND KEY AGREEMENTS
WHEREAS, pursuant to the terms of that certain Lease Guaranty dated as
of May 12, 1995, executed and delivered by The Musicland Group, Inc., a Delaware
corporation, as guarantor ("Guarantor") in favor of Media Play Trust, a trust
existing under the laws of the State of New York ("Trust")(the "Guaranty"), in
connection with (i) that certain Master Lease dated as of May 12, 1995, by and
between Trust, as landlord, and Media Play, Inc., a Delaware corporation as
tenant ("Tenant")(the "Master Lease"), (ii) that certain Construction Loan
Agreement dated as of May 12, 1995, by and among Trust, as borrower
("Borrower"), National Westminster Bank Plc, as Agent and a Lender, and such
other Lenders parties thereto (collectively the "Lenders")(the "Loan Agreement")
and (iii) that certain Participation Agreement dated as of May 12, 1995, among
NatWest Markets Leasing Corporation (formerly known as NatWest Leasing
Corporation), Trust, Yasuda Bank and Trust Company U.S.A.) ("Owner Trustee")(the
"Participation Agreement"), the Lender and Tenant, as the foregoing have been
supplemented or amended, certain Financial Covenants (as defined in the Guaranty
and the Master Lease) were incorporated into the Guaranty and the Master Lease
by reference;
WHEREAS, pursuant to the Guaranty and the Master Lease, certain waivers
of compliance by Guarantor and Tenant with, and amendments of, the Financial
Covenants shall be effective with respect to the Guaranty and the Master Lease
only if the Trust agrees and the Required Lenders (as defined in the Loan
Agreement) and the Owner Participant consent; and
WHEREAS, Guarantor and Tenant have requested that the Trust agree and
the Lenders and the Owner Participant consent that the Fourth Amendment and
Waiver of and with respect to the Credit Agreement (as defined in the Loan
Agreement) as set forth in Exhibit "A" hereto (the "Credit Waiver"), of and with
respect to certain of the Financial Covenants, be effective with respect to the
Guaranty and the Master Lease, to the limited extent and from the effective date
of the Credit Waiver set forth in such Exhibit "A"; and
WHEREAS, the Trust, the undersigned Lenders and the Owner Participant,
subject to the terms, conditions, and agreements hereof, desire to consent to
the effectiveness of the Credit Waiver; and
Second Limited Waiver and Amendment
(Media Play) - Page I
<PAGE>
WHEREAS the Trust, the undersigned Lenders, the Tenant, the Owner
Trustee, the Owner Participant and the Guarantor desire to amend certain
provisions of certain of the Loan Documents and the Key Agreements (as such
terms are defined in the Loan Agreement) in connection with and to consent to
the effectiveness of the Credit Waiver, and to execute this Second Limited
Waiver and Amendment of Certain Loan documents and Key Agreements (this "Second
Limited Waiver and Amendment") to evidence the same;
NOW, THEREFORE:
1. The Trust agrees, and the undersigned Lenders and the Owner
Participant consent, that, subject to the satisfaction of each term and
condition hereof, the payments provided herein, and the payment of all amounts
otherwise required to be paid by Guarantor or Tenant as of the date hereof
pursuant to the Loan Documents or the Key Agreements: (i) the limited waiver of
Guarantor's and Tenants obligations, respectively, to comply with certain of the
Financial Covenants set forth in the Credit Waiver shall be effective with
respect to the Guaranty and the Master Lease, respectively, from and after the
later of the date hereof and the date the waiver set forth in the Credit Waiver
is effective with respect to the Credit Agreement, and through and including the
earliest date on which such waiver ceases to be effective with respect to.the
Credit Agreement, and to the extent such limited waiver is effective with
respect to the Financial Covenants pursuant to the Credit Agreement; and (ii)
the amendments to the Incorporated Provisions shall be effective with respect to
the Guaranty and the Master Lease from and after the later of the date hereof
and the date the amendments set forth in the Credit Waiver are effective with
respect to the Credit Agreement.
2. The Borrower and the Lenders agree and the Owner Participant, Tenant and
Guarantor consent that the Loan Agreement is amended in the following respects:
(a) Section 1.1 is amended;
(i) by amending the definitions of
"Applicable Rate", "Construction Advance Limit", "Tranche "A"
Commitment" and "Tranche "B" Commitment" in their entirety to read as follows:
"Applicable Rate" means, for any Interest Period
and with respect to each Note the rate per annum of the applicable of: (a)
except to the extent clause (b) or (c) shall apply to all or a portion of the
Loan, the rate set forth below in each circumstance so indicated the sum of (i)
the LIBO Rate for such period, plus (ii) a Margin of (A)(1) with respect to
Tranche "A" Loans:
Second Limited Waiver and Amendment
(Media Play) - Page 2
<PAGE>
Level I^ Level 2^ Level 3^ Level 4^ Level 5^
BBB and BIB- or BB+ or BB or BB- or
--- -- -- -- --
Baa2 Baa3 Ba1 Ba2 Ba3
or better or lower*
- ------------------------------------------------------------------------------
0.30% 0.4375% 0.50% 0.875% 1.50%
*If TMGI's implied senior unsecured non-credit-enhanced
long-term debt is unrated by either rating agency, Level 5
will be applicable.
^Any change in the committed pricing shall be effective as of
the date on which the applicable rating agency announces the
applicable change in ratings.
Rating by Standard & Poors Ratings Group ("S&P") for TMGI's
implied senior unsecured non-credit-enhanced long-term debt
Rating by Moody's Investors Service,Inc.("Moody's")for TMGI's
implied senior unsecured non-credit-enhanced long-term debt
or, (2) with respect to Tranche "B" Loans, as set out in the Tranche "B"
Schedule, plus (in the case of both (A)(1) And (A)(2) preceding), (B)(1) from
and after June 16, 1997, through April 29, 1998, 0.25%, and (2) from and after
April 30, 1998, 0.50%, or (b)(i) from the date hereof until another rate is
requested by Borrower in compliance with the requirements of this Agreement or
(ii) from a date subsequent to the date hereof to a future date until another
rate is requested by Borrower in compliance with the requirements of this
Agreement, provided the Borrower has so requested with respect to all or a
portion of the Loan, the Base Rate, or (c) with respect to any Lender's
Proportionate Share of the Loan following a Notice of Change in Legality, from
and after the date provided pursuant to Section 2.2(k), the rate provided in
such Section."
"Construction Advance Limit" means, for (1) Parcel Costs and/or (ii)
Improvements Costs, the greater of (A) the then applicable of (1) prior to
December 12, 1997, $12,076,000, or (2) from and after December 12, 1997, but
prior to December 14, 1998, $11,076,000, plus the product of the Payment Portion
and the Reduction Amount as of December 12, 1997, or (3) from and after December
14, 1998, $10,276,000, plus the product of the Payment Portion and the Reduction
Amount as of December 14, 1998, less, in the case of each of (1) - (3)
preceding, the Debt Portion of the aggregate of the Construction Amount of all
of the Parcels described in Exhibits "A-I", "A-2" or "A-3" to the Master Lease
and the Improvements thereon which have then been sold, or (B) such greater
amount as may be determined hereunder pursuant to the provisions of Section
2.2(1) hereof."
Second Limited Waiver and Amendment
(Media Play) - Page 3
<PAGE>
"Tranche "A" Commitment" means, with respect to each Lender, the amount set
out in Schedule I with respect to such Lender, as adjusted from time to time:
(i) pursuant to the terms of such Schedule I, or (ii) with the written agreement
of such Lender, an increase in the Construction Advance Limit."
""Tranche "B" Commitment" means, with respect to each Tranche "B" Lender,
the amount set out in Schedule I with respect to such Lender, as adjusted from
time to time: (i) persuant to the terms of such Schedule I, or (ii) with the
written agreement of such Lender, an increase in the Construction Advance
Limit."; and
(ii) by adding the following definitions:
""Adjustment Amount" means, (i) with respect to the Tranche "A" Commitment,
82%; (ii) with respect to the Tranche "B" Commitment, 15%, and (iii) with
respect to the Owner Participant Amount, 3%, of the product of the Payment
Portion and the Reduction Amount."
""Payment Portion" means, as of any date on or after the Closing Date of
the sale of any of the Parcels described in Exhibits "A-1 ", "A-2" or "A-3" to
the Master Lease and the Improvements thereon, the total of the Appraised Value
of all such Properties sold divided by $14,680,000."
""Reduction Amount" means (i) on December 12, 1997, $1,000,000, and (ii) on
December 14, 1998, $800,000."
(b) Section 2.1(a) is amended by amending the first sentence thereof in its
entirety to read as follows:
"Section 2.1 Advance of Loan. (a) By their execution hereof, and in each
case subject to the terms and conditions hereof, the Tranche "A" Lenders
severally agree to lend to Borrower (in the respective proportion of and up to
each such Lender's Tranche "A" Commitment) and the Tranche "B" Lenders severally
agree to lend to Borrower (in the respective portion of and up to each such
Tranche "B" Lender's Tranche "B" Commitment, respectively), and Borrower agrees
to borrow from Lenders amounts up to the Debt Portion of the Construction
Advance Limit, but never, with respect to any Lender, in excess of its then
Tranche "A" Commitment or Tranche "B" Commitment (the then applicable of such
amounts the "Facility Amount"), in Advances strictly in accordance with this
Agreement."
(c) Section 2.2(i)(ii)(E) is amended in its entirety to read as follows:
Second Limited Waiver and Amendment
(Media Play) - Page 4
<PAGE>
"(E) the amount by which the balance of the Loans exceeds the aggregate of
the Commitments from time to time; such prepayments to be made on or before any
date on which the aggregate balance of the Commitments is reduced, provided,
however, that with respect to the reduction of the aggregate balance of the
Commitments provided for on December 12, 1997, such prepayment shall be made
before the earlier of (1) 3:30 p.m. New York time on December 15, 1997, or (2)
the payment of any amount due on December 15, 1997, of, or with respect to,
Subordinated Debt, as defined in the Lease Guaranty."
(d) The first sentence of Section 11.26 is amended in its entirety to read
as follows:
"Section 11-26 Assignees; Participation Lenders Borrower acknowledges and
agrees that Lenders may, from time to time, sell or offer to sell interests in
the Loan and the Loan Documents, or assign Lender's rights and interests in the
Loan and the Loan Documents, to one or more participants or assignees, provided
that no Lender may sell or assign its interest or a portion thereof pursuant to
an Assignment Agreement without the written consent of Borrower and Tenant
(which consent shall not be unreasonably withheld), and provided further that no
Lender may sell or assign less than all of such Lender's Tranche "A" Commitment
or Tranche "B" Commitment."
(e) Schedule I is amended and restated as attached hereto.
3- The Lenders, the Owner Participant, the Owner Trustee, the Trust and
the Tenant agree, and the Guarantor consents, that the Participation Agreement
is amended as follows:
(a) Article I is amended by amending the definition of "Initial Owner
Participant Investment" in its entirety to read as follows:
""Initial Owner Participant Investment" means an amount not in excess of (i)
prior to December 12, 1997, $362,280, or (ii) from and after December 12, 1997,
but prior to December 14, 1998, $332,280, plus the Adjustment Amount on December
12, 1997, or (3) from and after December 14, 1998, $308,280, plus the Adjustment
Amount on December 14, 1998, less, in the case of each of (1) - (3) preceding,
three percent (3.0%) of the aggregate of the Construction Amount of all of the
Parcels described in Exhibits 'A-1', 'A-2' or "A-3" to the Master @ and the
Improvements thereon which have then been sold.'
(b) Section 10.5 is amended by amending the paragraph immediately preceding
the last paragraph thereof to read as follows:
Second Limited Waiver and Amendment
(Media Play) - Page 5
<PAGE>
"On June 16, 1997, and on or before any subsequent date on which the
Initial Owner Participant Investment is reduced, the outstanding balance of the
Owner Participant Amount shall be reduced (by a payment from or on behalf of
Tenant pursuant to clause A. (D) of Exhibit "C" to the Master Lease) to the
amount of the Initial Owner Participant Investment to be effective thereon,
provided, however, that with respect to the reduction of the Owner Participant
Investment provided for on December 12, 1997, such payment shall be made before
the earlier of (1) 3:30 p.m. New York time on December 15, 1997, or (2) the
payment of any amount due on December 15, 1997, of, or with respect to,
Subordinated Debt, as defined in the Lease Guaranty."
(c) The Owner Participant Schedule is amended by adding to each "Owner
Participant Margin" set forth therein (i) from and after June 16, 1997, through
April 29, 1998, 0.25%, and (ii) from and after April 30, 1998, 0.50%.
4. The Trust and the Tenant agree, and the Lenders, the Owner
Participant and the Guarantor consent, that the Master Lease is hereby amended
by amending Exhibit "C" by amending the last clause of the first paragraph of
clause A. thereof in its entirety to read as follows:
", plus (D) on June 16, 1997, and on or before any subsequent date on which the
Initial Owner Participant Investment is reduced or the aggregate balance of the
Commitments is reduced, the amount by which the outstanding balance of all
Construction Advances exceeds the aggregate of the Owner Participant Amount and
the Commitments to be effective, thereon, provided that each such payment of Net
Rent on or after March 27, 1997, shall reduce the Offer Price of one or more of
the Parcels and the improvements thereon then subject to this Lease as follows:
(1) prior to the Closing Date of the sale of any of the Parcels described in
Exhibits "A-1", "A-2" or "A-3" to this Lease and the Improvements thereon, such
payment shall be so applied in the following respective proportions: (x) 38.68 %
of the aggregate thereof to the Parcel in Exhibit "A-1" and the Improvements
thereon; (y) 25.50% of the aggregate thereof to the Parcel described in Exhibit
"A-2" and the Improvements thereon; and (z) 35.82 % of the aggregate thereof to
the Parcel described in Exhibit "A-3" and the Improvements thereon, and (2) on
or after the Closing Date of the sale of any of the Parcels described in
Exhibits "A-1", "A-2" or "A-3" to this Lease and the Improvements thereon, such
payment shall be so applied to reduce the Offer Purchase Price of each of the
Parcels and the Improvements thereon still subject to this Lease in the
respective proportions of the Appraised Value thereof to $14,680,000."
5. The Trust and the Guarantor agree, and the Lenders, the Owner
Participant and the Tenant consent, that the Lease Guaranty is hereby amended by
amending Section 14(a)(viii)(A) by adding the following clause following the
semicolon at the end:
Second Limited Waiver and Amendment (Media Play) - Page 6
<PAGE>
"provided, however, that such report may contain a "going concern" qualification
for the years ending December 31, 1996, and December 31, 1997;".
6. To induce the Lenders, the Trust, the Owner Trustee and the Owner
Participant to enter into this Second Limited Waiver and Amendment: (i) the
Tenant agrees to pay to Agent on the date hereof, for the ratable benefit of
each Lender and the Owner Participant pursuant to the Amendment Fee Schedule
attached hereto, an amendment fee of $45,285, (ii) the Tenant and the Guarantor
agree that, in addition to any other payments which may be required pursuant to
the terms of the Loan Documents and Key Agreements, the Tenant shall, pursuant
to the terms of the amendments contained in Paragraphs 2 and 3 of this Second
Limited Waiver and Amendment, make payments, in the manner provided by the Loan
documents and the Key Agreement, of. (A) on the date hereof, $506,850; (B)
before the earlier of (1) 3:30 p.m. New York time on December 15, 1997, or (2)
the payment of any amount due on December 15, 1997, of, or with respect to,
Subordinated Debt, as defined in the Lease Guaranty, an additional $1,000,000,
less the product of the Payment Portion and the Reduction Amount on such date;
and (C) on or before December 14, 1998, an additional $800,000, less the product
of the Payment Portion and the Reduction Amount on such date, and (iii) the
Tenant and Guarantor hereby reaffirm, as of the date hereof, their
representations and warranties in their entirety contained in the Loan Documents
and Key Agreements (except to the extent such representations and warranties
relate solely to an earlier date) and additionally represent and warrant that
(A) this Second Limited Waiver and Amendment has been duly authorized and duly
and validly executed and delivered by each of them and is valid, binding and
enforceable against them in accordance with its terms; and (B) the execution and
delivery by each of does not, and the performance or observance by each of the
terms, conditions or provisions hereof will not, conflict with, violate or
result in the breach of any agreement or instrument to which either is a party
or by which either, or any of its respective properties is bound, or constitute
a default thereunder.
7. The Loan Documents and Key Agreements, as amended hereby, are hereby
ratified, approved and confirmed in each and every respect. All references to
the Loan documents and Key Agreements herein and in any other document,
instrument, agreement.or writing shall hereafter refer to the Loan Documents and
Key Agreements as amended hereby.
8. Except as amended hereby, terms used herein when defined in the Loan
Documents and Key Agreements shall have the same meanings therein unless the
context otherwise requires.
9. This Second Limited Waiver and Amendment may be executed in any number
of counterparts each executed counterpart constituting an original but all
together only one document.
Second Limited Waiver and Amendment
(Media Play) - Page 7
<PAGE>
10. THIS SECOND LIMITED WAIVER AND AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE THAT WOULD CAUSE THE
APPLICATION OF THE DOMESTIC SUBSTANTIVE LAWS OF ANY OTHER JURISDICTION.
IN WITNESS WHEREOF, the parties hereto have caused this Second Limited
Waiver and Amendment to be duly executed as of June 16, 1997.
NATWEST MARKETS LEASING CORPORATION,
as Owner Participant
By:
Gary Greendale
Director
MEDIA PLAY TRUST
as Landlord and Borrower
By: Yasuda Bank and Trust Company (U.S.A.), not in its individual capacity,
but solely in its capacity as Owner Trustee of the Media Play Trust
By:
Anthony Bocchino
Vice President
Second Limited Waiver and Amendment
(Media Play) - Page 8
<PAGE>
YASUDA BANK AND TRUST COMPANY
(U.S.A.), as Owner Trustee
BY:
Anthony Bocchimo
Vice President
NATIONAL WESTMINSTER BANK Plc, as
Agent and Lender
By:
Christoper M. Walker
Vice President
MEDIA PLAY, INC.,
as Tenant
By:
Timothy J. Scully
Assistant Treasurer
OTHER LENDERS
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., Chicago Branch
By:
Armund Schoen, Jr.
Vice President
Second Limited Waiver and Amendment
(Media Play) - Page 9
<PAGE>
THE YASUDA TRUST & BANKING COMPANY,
LTD., Chicago Branch
By:
Douglas B. Warren
Vice President
Second Limited Waiver and Amendment
(Media Play) - Page 10
<PAGE>
SCHEDULE I
LENDERS AND COMMITMENTS
LENDER:
The Long-Term Credit Bank of Japan, Ltd.
Chicago Branch
190 South LaSalle Street, Ste. 800
Chicago, IL 60603
Attention: David Miller, Assistant Vice President
Tel.No. (312) 704-5494
Fax No. (312) 704-8717
Account Information:
Credit: The First National Bank of Chicago, Chicago
ABA No.: 0710-0001-3
For further credit to: For the account of
The Long-Term Credit Bank of Japan, Ltd.
Chicago Branch
Account No.: 15-20547
Reference: Media Play Trust
Prior to December 12, 1997:
Tranche "A" Commitment: $4,025,293.08 Tranche "A" Commitment Percentage:
40.65%
Tranche "B" Commitment: $-0- Tranche "B" Commitment Percentage:
0%
On and after December 12, 1997, and prior to December 14, 1998:
Tranche "A" Commitment: $3,691,963.08^ Tranche "A" Commitment Percentage:
40.65%
Tranche "B" Commitment: $-0- Tranche "B" Commitment Percentage:
0%
On and after December 14, 1998:
Tranche "A" Commitment: $3,425,299.08 Tranche "A" Commitment Percentage:
40.65%
Tranche "B" Commitment: $0 Tranche "B" Commitment Percentage:
0%
Second Limited Waiver and Amendment
(Media Play) - Page 11
<PAGE>
LENDER:
The Yasuda Trust & Banking Company, Ltd.
Chicago Branch
181 West Madison St., Ste. 4500
Chicago, IL 60602
Attention: Mary Blochberger, Loan Operations
Tel.No. (312) 683-3852
Fax No. (312) 693-3899
Account Information:
Credit: Citibank N.A.
ABA No.: 0210-00089
Account of: Yasuda Trust New York
Account No.: 36001531
In favor of: Yasuda Trust-Chicago
Account No.: 0000108
Reference: Media Play
Prior to December 12, 1997:
Tranche "A" Commitment: $4,025,293,08 Tranche "A" Commitment Percentage:
40.65%
Tranche "B" Commitment: $-0- Tranche "B" Commitment Percentage:
0%
On or after December 12, 1997, and prior to December 14, 1998:
Tranche "A" Commitment: $3,691,963.08^ Tranche "A" Commitment Percentage:
40.65%
Tranche "B" Commitment: $-0- Tranche "B" Commitment Percentage:
0%
On and after December 14, 1998:
Tranche "A" Commitment: $3,425,299.08 Tranche "A" Commitment Percentage:
40.65%
Tranche "B" Commitment: $-0- Tranche "B" Commitment Percentage:
0%
Second Limited Waiver and Amendment
(Media Play) - Page 12
<PAGE>
LENDER:
National Westminster Bank Plc
175 Water Street, 26th Floor
New York, New York 10038
Attention: Christopher M. Walker, Vice President
Tel. No. (212) 602-4899
Fax No. (212) 602-4511
Prior to December 12, 1997:
Tranche "A" Commitment: $1,851,733.84 Tranche "A" Commitment Percentage:
18.7%
Tranche "B" Commitment: $1,811,400 Tranche "B" Commitment Percentage:
100%
On and after December 12, 1997 and prior to December 14, 1998:
Tranche "A" Commitment: $1,698,393.84^ Tranche "A" Commitment Percentage:
18.7%
Tranche "B" Commitment: $1,661,400 Tranche "B" Commitment Percentage:
100%
On and after December 14, 1998:
Tranche "A" Commitment: $1,575,721.84 Tranche "A" Commitment Percentage:
18.7%
Tranche "B" Commitment: $1,541,400 Tranche "B" Commitment Percentage:
100%
A - Plus the Adjustment Amount as of December 12, 1997, and less the Debt
Portion of the aggregate of the Construction Amount of all of the Parcels
described in Exhibits "A-1", "A-2" or "A-3" to the Master Lease and the
Improvements thereon which have then been sold.
B - Plus the Adjustment Amount as of December 14, 1998, and less the Debt
Portion of the aggregate of the Construction Amount of all of the Parcels
described in Exhibits "A-1", "A-2" or "A-3" to the Master Lease and the
Improvements thereon which have then been sold.
Second Limited Waiver and Amendment
(Media Play) - Page 13
THIS DOCUMENT CONSTITUTES PART OF THE PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
STOCK OPTION PLAN FOR UNAFFILIATED
DIRECTORS OF MUSICLAND STORES CORPORATION
Effective November 29, 1988 as amended January 1, 1991, as amended January
22, 1992, as amended January 25, 1993, and as amended June 12, 1997
<PAGE>
STOCK OPTION PLAN FOR UNAFFILIATED
DIRECTORS OF MUSICLAND STORES CORPORATION
Table of Contents
SECTION 1. Purpose of the Plan; Definitions 1
SECTION 2. Shares of Common Stock Subject to the Plan 2
SECTION 3. Administration of the Plan 2
SECTION 4. Eligible Participants 3
SECTION 5. Grant of Stock Options 3
SECTION 6. Terms and Conditions of Stock Options 4
SECTION 7. Antidilution Adjustments 5
SECTION 8. General Provisions 5
SECTION 9. Amendment and Discontinuation 6
SECTION 10. Unfunded Status of the Plan 6
SECTION 11. Delivery of Stock Certificates 6
SECTION 12. Applicable Restrictions on Common Stock 7
SECTION 13. Effective Date and Duration of the Plan 7
<PAGE>
STOCK OPTION PLAN FOR UNAFFILIATED
DIRECTORS OF MUSICLAND STORES CORPORATION
SECTION 1. Purpose of the Plan; Definitions.
(a) The purpose of Musicland Stores Corporation Directors Stock Option Plan
(the "Plan") is to promote the interests of the Company and its stockholders by
strengthening the Company's ability to attract, motivate and retain directors
with experience and ability by providing directors with a proprietary interest
in the Company.
(b) For purposes of the Plan, the following terms shall have the meanings
set forth below:
(i) "Board of Directors" means the Board of Directors of the Company.
(ii) "Code" means the Internal Revenue Code of 1986, as amended.
(iii) "Common Stock" means the common stock (par value $.01) of Musicland
Stores Corporation.
(iv) "Company" means Musicland Stores Corporation, a corporation organized
under the laws of the State of Delaware, or any successor corporation.
(v) "Disability" means the inability of a director to perform the services
normally rendered by such director due to any physical or mental impairment that
can be expected to be of either permanent or indefinite duration as determined
on the basis of appropriate medical evidence.
(vi) "Fair Market Value" as of any date means, during any time when the
Common Stock is not publicly traded, the fair market value of the Common Stock
as determined by the Board of Directors in good faith (which determination shall
be conclusive) and, during any time when the Common Stock is publicly traded,
the closing price of the Common Stock on the last trading day immediately
preceding such date (as reported by a national stock exchange or quoted on
NASDAQ), or if no sale was made on such trading day, the closing market price on
the first preceding trading day on which there was a sale.
(vii) "Operating Company" means the Company's operating subsidiary, The
Musicland Group, Inc., a corporation organized under the laws of the State of
Delaware.
1.
<PAGE>
(viii) "Participant' means any Director of the Company who is an
eligible participant as defined in Section 4 of the Plan.
(ix) "Stock Option" means any option to purchase shares of Common Stock
granted hereunder and all such options shall be nonqualified options
not entitled to special tax treatment under Section 422A of the Code.
(x) "Vested" means that the time has been reached when any portion of a
Stock Option, including the shares purchased pursuant to exercise of a
Stock Option, is no longer subject to the forfeiture provisions
contained in Section 6 herein.
SECTION 2. Shares of Common Stock Subject to the Plan.
(a) Subject to the provisions of Section 7 herein, the aggregate number
of shares of Common Stock that are reserved and available for distribution under
this Plan pursuant to the exercise of Stock Options granted hereunder shall not
exceed 200,000 shares. Such shares may be either authorized and unissued shares
or shares issued and thereafter acquired by the Company.
(b) If any shares that have been optioned hereunder cease to be subject
to such Stock Option because of termination or forfeiture of the Stock Option
before or after its exercise, then such shares shall again be available for
distribution in connection with future awards under the Plan.
SECTION 3. Administration of the Plan.
(a) The Plan shall be administered by the Board of Directors, either as
a whole or by a designated committee thereof (hereafter the administrating body
whether it be the Board of Directors as a whole or a committee thereof is
referred to as the "Committee").
(b) The Committee shall have the power to interpret the Plan and,
subject to its provisions, to prescribe, amend and rescind rules and to make all
other determinations necessary for the Plan's administration. All actions taken
by the Committee in the administration and interpretation of the Plan shall be
final and binding on all concerned.
(c) Pursuant to the provisions of this Plan, the Committee will
exercise no discretion in determining the amount and price of options to be
awarded pursuant to the Plan or the timing of such awards.
2.
<PAGE>
SECTION 4. Eligible Participants.
Only "Unaffiliated Directors", defined as those members of the Board of
Directors who are not employed by the Company or Operating Company or any of
their Subsidiaries, or by Primerica Corporation, Donaldson, Lufkin & Jenrette,
Inc. (including its affiliates), The Equitable Life Assurance Society of the
United States, Equitable Deal Flow Fund, L.P., Acadia Partners, L.P., or any
successor institutional equity investor, are eligible to participate in the
Plan.
SECTION 5. Grant of Stock Options.
(a) Each Unaffiliated Director as of January 22, 1992 shall have
received a grant as of November 29, 1988, said grant effective on January 31,
1989, of a Stock Option to purchase 60,000 shares of Common Stock at an exercise
price of $2.50 per share.
(b) Each Unaffiliated Director who commenced service as a Director
after January 22, 1992 but prior to February 1, 1993 shall have received a grant
of a Stock Option to purchase 10,000 shares of Common Stock, said grant
effective thirty days after the Unaffiliated Director's service as a Director
commenced. The exercise price of each such grant is the Fair Market Value of the
Common Stock as of the effective date of the grant.
(c) Each Unaffiliated Director who commenced service as a Director on
or after February 1, 1993 but prior to June 12, 1997 shall have received a grant
of a Stock Option to purchase 5,000 shares of Common Stock, said grant to be
effective thirty days after the Unaffiliated Director's service as a Director
commenced. The exercise price of each such grant is the Fair Market Value of the
Common Stock as of the effective date of the grant.
(d) At any time which is prior to February 1, 1993 that all grants
under this Plan to an Unaffiliated Director (who was still serving on the Board)
shall have become fully Vested, and subject to the availability of shares under
Section 2 above, the Unaffiliated Director shall have received a new grant of a
Stock Option to purchase 10,000 shares of Common Stock. The exercise price of
each such grant is the Fair Market Value of the Common Stock as of the date of
the grant.
3.
<PAGE>
(e) Effective June 12, 1997 and subject to the availability of shares
under Section 2 above, each Unaffiliated Director then serving shall receive an
annual grant of a Stock Option to purchase 3,000 shares of Common Stock. The
first such grant shall be effective June 12, 1997, and each annual grant
thereafter shall be effective January 1st of each year. The exercise price of
all such grants shall be the Fair Market Value of the Common Stock as of the
effective date of the grant.
SECTION 6. Terms and Conditions of Stock Options.
(a) Any Stock Option granted hereunder may not be exercised for a period of
six months after the effective date of the grant and thereafter shall become
immediately exercisable in its entirety, whether Vested or not, subject to
forfeiture as provided below.
(b) Any Stock Option hereunder granted prior to June 12, 1997, whether
exercised or not, shall become Vested in five equal installments on the first,
second, third, fourth and fifth anniversaries of the effective date of the
grant. Any Stock Option granted on or after June 12, 1997 shall become Vested in
its entirety six months after the effective date of the grant.
(c) The unexercised Vested portion of any Stock Option granted hereunder
will expire upon the earliest of:
(i) ten years after the effective date of the grant;
(ii) one year after the death or Disability (as determined by the Board of
Directors) of Participant occurring while serving as a member of the Board of
Directors;
(iii) three months after the Participant's resignation from the Board of
Directors (or failure to stand for reelection), if such resignation was due to a
possible conflict of interest, failing health of the Participant or a
Participant's family member or any other significant personal circumstance; or
(iv) immediately upon the effective date of termination of the service of
the Participant as a Director for any other reason, including the removal of the
Director by the Company's stockholders.
4.
<PAGE>
(d) Any unexercised or exercised portion of a Stock Option granted
hereunder which is not Vested shall be forfeited upon the termination of the
service of the Participant as a Director for any reason. In the case of an
exercised Stock Option such forfeiture shall be at the option of the Company. A
Participant who exercises all or any portion of a Stock Option that is not
Vested shall agree to sell, at the Company's option, the shares purchased
thereunder back to the Company at the exercise price paid by the Participant.
The Participant shall also agree that until the Stock Option is vested with
respect to any shares purchased thereunder, said shares will not be transferred,
sold, assigned, pledged or hypothecated.
(e) Stock Options granted hereunder are not transferable other than by
will or by the laws of descent and distribution and shall be exercisable during
the Participant's lifetime only by the Participant or by his/her guardian or
legal representative.
(f) Shares purchased upon the exercise of a Stock Option, or portion
thereof, granted hereunder must be paid for in full at the time of exercise in
cash or, in whole or in part, in shares of the Company's Common Stock (valued at
Fair Market Value as of the date of exercise) which have been owned by the
Participant for at least six months.
SECTION 7. Antidilution Adjustments.
At or after the time of grant, the Committee may determine any
equitable adjustments that are to be made in the number and kind of shares
covered by the Stock Options granted hereunder and in the exercise price of such
Stock Options in the event of a reorganization, recapitalization, stock split,
stock dividend, combination of shares, merger, consolidation, rights offering or
any change in the corporate structure or shares of the Company where such
adjustment would be appropriate. In the event of any such change, the aggregate
number and kind of shares available under the Plan pursuant to Section 2 herein
shall also be appropriately adjusted.
SECTION 8. General Provisions.
(a) Nothing in this Plan or in any instrument executed pursuant to this
Plan will be deemed to confer upon any Participant any right to continue as a
member of the Board of Directors.
(b) Each Stock Option granted hereunder shall be evidenced by a written
Stock Option Agreement dated as of the date of grant and executed by the Company
and by the Participant.
5.
<PAGE>
(c) No Participant, or anyone claiming under or through a Participant,
shall have any right, title or interest in or to any shares of Common Stock
allocated or reserved under the Plan, or subject to any unexercised Stock Option
granted under the Plan, except as to such shares of Common Stock, if any, as may
have been actually issued or transferred to such Participant.
SECTION 9. Amendment and Discontinuation.
(a) The Board of Directors may, in its discretion, amend, suspend, or
discontinue the Plan at any time, provided that, without the approval of the
Company's stockholders, no amendment may be made which:
(i increases the maximum number of shares available under the Plan;
(ii) materially increases the benefits accruing to Participants;
(iii) changes the class of persons eligible to participate; or
(iv) amends this provision requiring stockholder approval.
(b) Notwithstanding the foregoing to the contrary, no amendment or
discontinuance may adversely affect, except with the consent of the holder, any
outstanding Stock Option and an amendment of the formula provisions of the Plan
may not be made more than once every six months, unless necessary to comport
with changes in the Code, the Employee Retirement Income Security Act, or the
rules thereunder.
SECTION 10. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any grants hereunder nothing contained
herein shall give any such Participant any rights that are greater than those of
a general creditor of the Company.
SECTION 11. Delivery of Stock Certificates.
The Company shall not be required to issue or deliver any certificates
for shares of Common Stock purchased upon the exercise of any Stock Option, or
portion thereof, granted hereunder prior to the fulfillment of all of the
following conditions:
6.
<PAGE>
(a) Payment in full for the shares;
(b) The completion of any registration or other qualification of such
shares under any federal or state laws or under the rulings or regulations of
the Securities and Exchange Commission ("SEC") or any other regulating body
which the Committee in its sole discretion shall deem necessary or advisable;
(c) The admission of such shares to listing on all stock exchanges on which
the Common Stock is so listed;
(d) In the event the Common Stock is not registered under the Securities
Act of 1933, qualification of the exercise of the Stock Option as a private
placement under said Act; and
(e) The obtaining of any approval or other clearance from any federal or
state governmental agency which the Committee shall in its sole discretion
determine to be necessary or advisable.
SECTION 12. Applicable Restrictions on Common Stock.
(a) Shares of Common Stock purchased upon the exercise of any Stock Option
may be subject to such stock transfer orders and other restrictions as the
Committee may determine necessary or advisable under the rules, regulations and
other requirements of the SEC, any stock exchange upon which the Common Stock is
then listed, and any applicable Federal or state securities law.
(b) Said shares of Common Stock shall include any restrictive legends the
Committee may deem appropriate to include.
SECTION 13. Effective Date and Duration of the Plan.
This Plan, as approved by the Company's stockholders, became effective
as of November 29, 1988. No Stock Option may be granted under the Plan on or
after November 29, 1998, or after such earlier termination of the Plan as may be
determined by the Board of Directors, but Stock Options theretofore granted may
extend beyond such date.
7.
The Musicland Group
1997 Executive Officer Short Term Incentive Plan
I. PURPOSE
The 1997 Executive Officer Short Term Incentive Plan (the "Plan") is
designed to incent the Executive Officers of The Musicland Group, Inc.
(the "Company") to extraordinary performance during a particularly
critical period for the Company by allowing these officers to earn a
special bonus based upon aggressive earnings targets for the Company.
II. TERM
This Plan covers the second quarter of 1997 (April 1 - June 30, 1997)
(the "Second Quarter") and the third quarter of 1997 (July 1 -
September 30, 1997) (the "Third Quarter").
III. ADMINISTRATION
This Plan is administered by the Compensation Committee of the
Company's Board of Directors (the "Compensation Committee").
IV. PARTICIPATION
Participation in this Plan is limited to those officers who were
designated by the Board of Directors as the Executive Officers of the
Company on March 10, 1997 (the "Participants").
V. BONUS AWARDS
Participants are eligible to earn an award for each quarter of the Plan
period independently. If the threshold target for the quarter is met,
participants will earn a bonus equal to 10% of their base salary. If
the maximum target for the quarter is met or exceeded, participants
will earn a bonus equal to 15% of their base salary. If Company
performance falls between the threshold and maximum, the percentage of
base salary earned will be interpolated between 10% and 15% on a
straight line basis. Bonuses, if earned, will be paid out in a lump sum
one week after the Company's books are closed for the applicable
quarter.
<PAGE>
VI. TARGET COMPANY PERFORMANCE LEVELS
Target levels for Company performance will be based upon the Company's
earnings (or loss) before interest, taxes, depreciation and
amortization but after taking into account payment of bonuses under
this Plan and adding back average minimum rent and special professional
fees ("EBITDA"), as follows:
Threshold EBITDA Maximum EBITDA
Second Quarter ($5.0 million) ($1.8 million)
Third Quarter ($3.0 million) $1.0 million
VII. PLAN CONDITIONS
A. Generally, Participants must be employed by the Company on the last day
of the applicable quarter to be eligible to receive an award for that quarter.
Participants whose employment terminates prior to the end of a quarter may
receive a pro-rated award for that quarter in the sole discretion of the
Compensation Committee, taking into account the reason for termination and the
Participant's contribution to the Company's performance for the quarter.
B. This Plan does not guarantee, explicitly or implicitly, the right to
continued employment for Participants.
C. Awards under this Plan will be pensionable earnings under the Company's
defined benefit pension plan. Legislation in effect at the time the award is
paid will govern how much of the award is pensionable or non-pensionable
earnings. Awards will be included in pensionable earnings in the year they are
paid.
D. This Plan may be terminated or its provisions changed at any time by the
Board of Directors.
Exhibit 15
Letter re unaudited interim financial information
August 13, 1997
To Musicland Stores Corporation:
We are aware that Musicland Stores Corporation has incorporated by reference in
its Registration Statements Nos. 33-50520, 33-50522, 33-50524, 33-82130 and
33-99146, its Form 10-Q for the quarter ended June 30, 1997, which includes our
report dated July 22, 1997, covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933, that
report is not considered a part of those registration statements prepared or
certified by our firm or reports prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF MUSICLAND STORES CORPORATION AND SUBSIDIARIES AS
OF JUNE 30, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000832995
<NAME> MUSICLAND STORES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,210
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 452,696
<CURRENT-ASSETS> 486,353
<PP&E> 421,278
<DEPRECIATION> 156,525
<TOTAL-ASSETS> 761,156
<CURRENT-LIABILITIES> 604,179
<BONDS> 142,255
0
0
<COMMON> 343
<OTHER-SE> (36,189)
<TOTAL-LIABILITY-AND-EQUITY> 761,156
<SALES> 718,826
<TOTAL-REVENUES> 718,826
<CGS> 471,935
<TOTAL-COSTS> 471,935
<OTHER-EXPENSES> 270,968
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,231
<INCOME-PRETAX> (39,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,308)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> 0
</TABLE>
