<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 333-54035
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
NOTE EXCHANGE OFFER
ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ORIGINALLY FILED ON JUNE 1, 1998
AND AMENDED JULY 1, 1998
------------------------
MTS, INCORPORATED
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 5735 94-1500342
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
2500 DEL MONTE STREET
WEST SACRAMENTO, CA 95691
TEL: 916-373-2500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
DEVAUGHN D. SEARSON
CHIEF FINANCIAL OFFICER
MTS, INCORPORATED
2500 DEL MONTE STREET
WEST SACRAMENTO, CA 95691
TEL: 916-373-2500
(Name, address, including zip code, and telephone number, including
area code, of agent for service for Registrant)
--------------------------
COPIES TO:
STEVEN L. BERSON, ESQ.
ANDREW J. HIRSCH, ESQ.
ERIC JOHN FINSETH, ESQ.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Tel: 650-493-9300
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN THE PROSPECTUS
- --------------------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.......................... Cover of Registration Statement; Outside Front Cover
Page of Prospectus; Cross Reference Sheet
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front and Outside Back Covers of Prospectus;
Available Information.
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................. Prospectus Summary; Risk Factors;
4. Terms of the Transaction............................ Prospectus Summary; Risk Factors; The Exchange
Offer; Description of the Notes; Certain Federal
Income Tax Considerations
5. Pro Forma Financial Information..................... Prospectus Summary; Selected Historical and Pro
Forma Financial Information; Consolidated Financial
Statements
6. Material Contacts with the Company Being Acquired... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be
Underwriters...................................... Not Applicable
8. Interests of Named Experts and Counsel.............. Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANTS
10. Information with Respect to S-3 Registrants......... Not Applicable
11. Incorporation of Certain Information by
Reference......................................... Not Applicable
12. Information with Respect to S-2 or
S-3 Registrants................................... Not Applicable
13. Incorporation of Certain Information
by Reference...................................... Not Applicable
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants............................ Available Information; Prospectus Summary; Business;
Selected Historical and Pro Forma Consolidated
Financial Information; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Consolidated Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies........... Not Applicable
16. Information with Respect to S-2 or
S-3 Companies..................................... Not Applicable
17. Information with Respect to Companies Other Than S-3
or S-2 Companies.................................. Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited............................... Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange
Offer............................................. The Exchange Offer; Management; Ownership of Captal
Stock; Certain Transactions
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 23, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS
$110,000,000
MTS, INCORPORATED
OFFER TO EXCHANGE NEW 9 3/8% SENIOR SUBORDINATED NOTES DUE 2005 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT FOR ALL OUTSTANDING 9 3/8% SENIOR
SUBORDINATED NOTES DUE 2005 [LOGO]
THE NEW 9 3/8% SENIOR SUBORDINATED NOTES DUE 2005 WILL BE EFFECTIVELY
SUBORDINATE TO ALL OTHER OUTSTANDING INDEBTEDNESS OF MTS, INCORPORATED AND MTS,
INCORPORATED HAS NOT ISSUED AND HAS NO CURRENT PLANS, ARRANGEMENTS OR AGREEMENTS
TO ISSUE ANY ADDITIONAL INDEBTEDNESS TO WHICH THE NEW 9 3/8% SENIOR SUBORDINATED
NOTES WOULD BE JUNIOR, PARI PASSU, OR SENIOR.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON
, 1998, UNLESS EXTENDED. THERE WILL BE NO EXTENSION OF THE
EXCHANGE OFFER BEYOND 5:00 P.M. NEW YORK CITY TIME ON , 1998.
MTS, INCORPORATED, a California corporation (the "Company"), hereby offers upon
the terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal") (the offering pursuant to the Prospectus together with the Letter
of Transmittal herein the "Exchange Offer") to exchange up to an aggregate
principal amount of $110,000,000 of its New 9 3/8% Senior Subordinated Notes due
2005 (the "New Notes") for up to an aggregate principal amount of $110,000,000
of the Company's outstanding 9 3/8% Senior Subordinated Notes due 2005 (the
"Existing Notes"). The terms of the New Notes are substantially identical in all
material respects to those of the Existing Notes, except that the New Notes (i)
will have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and therefore will not be subject to certain restrictions on
transfer applicable to the Existing Notes, and (ii) will not be entitled to
registration or other rights under the Registration Rights Agreement (as
defined), including the provision in the Registration Rights Agreement for
payment of Additional Interest (as defined in the Registration Rights Agreement)
upon failure by the Company to consummate the Exchange Offer or the occurrence
of certain other events. See "Description of the Existing Notes." The New Notes
will be issued pursuant to, and the Holders thereof (the "New Holders") will be
entitled to the benefit of, the Indenture (as defined below) governing the
Existing Notes. In the event that the Exchange Offer is consummated, any
Existing Notes which remain outstanding after consummation of the Exchange Offer
will vote together as a single class with the New Notes issued in the Exchange
Offer for purposes of determining whether Holders of the requisite percentage in
outstanding principal amount of Notes (as defined below) have taken certain
actions or exercised certain rights under the Indenture. See "Description of New
Notes", "The Exchange Offer." Holders of Existing Notes are referred to herein
as "Existing Holders", and Existing Holders together with New Holders are
referred to herein collectively as "Holders." The New Notes together with the
Existing Notes are referred to herein collectively as the "Notes." The Indenture
dated as of April 23, 1998 between the Company and State Street Bank and Trust
Company of California, N.A., as Trustee (the "Trustee"), is hereinafter referred
to as the "Indenture." Unless otherwise indicated or defined herein, capitalized
terms followed by the parenthetical remark "(as defined)" shall have the
meanings given to them in the Indenture.
CONTINUED ON FOLLOWING PAGE
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING SENT TO EXISTING
HOLDERS ON OR ABOUT , 1998.
- --------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH EXISTING HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1998
<PAGE>
(CONTINUATION OF COVER PAGE)
Interest on the Notes will be payable semi-annually on May 1 and November 1
of each year, commencing November 1, 1998.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after May 1, 2002, at the redemption prices (expressed
as a percentage of principal amount) set forth herein, plus accrued and unpaid
interest and Additional Interest, if any, thereon to the date of redemption. In
addition, at any time and from time to time on or prior to May 1, 2001, the
Company may, in its discretion, redeem up to 35% of the original aggregate
principal amount of the Notes at a redemption price equal to 109.375% of the
principal amount thereof, plus accrued and unpaid interest and Additional
Interest, if any, thereon to the date of redemption, with the net proceeds of
one or more Equity Offerings (as defined); PROVIDED that at least 65% of the
original aggregate principal amount of the Notes remains outstanding immediately
after each such redemption.
Upon the occurrence of a Change of Control (as defined), the Holders of the
Notes will have the right to require the Company to repurchase their Notes, in
whole or in part, at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Additional Interest, if any,
thereon to the date of repurchase. See "Description of Notes--Offer to Purchase
upon Change of Control." If a Change of Control were to occur, there can be no
assurance that the Company would be able to repurchase any of the Notes tendered
for repurchase. See "Risk Factors--Change of Control."
The Notes are unsecured and are subordinate in right of payment to all
existing and future Senior Indebtedness (as defined) of the Company which
constitutes all of the Indebtedness of the Company other than the Notes. The
Company has no indebtedness junior to the Notes and has no current plans,
arrangements or agreements to issue indebtedness junior to, pari passu with, or
senior to, the Notes. As of April 30, 1998, the Company had approximately $131.1
million of Senior Indebtedness outstanding on a consolidated basis and had
unused availability under its New Credit Facility (as defined), of up to $154.4
million, of which approximately $124.5 million was available under the borrowing
base formula contained in the New Credit Facility. See "Capitalization,"
"Description of New Credit Facility" and "Description of Notes--Subordination."
On April 23, 1998, the Company issued $110.0 million in aggregate principal
amount of Existing Notes. The Existing Notes were issued pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The New Notes are being
offered under this Prospectus, which is part of a registration statement of the
Company on Form S-4 (the "Exchange Offer Registration Statement", which term
shall encompass all amendments, exhibits, annexes and schedules thereto), in
order to satisfy certain obligations of the Company under the Registration
Rights Agreement (as defined). Once the Exchange Offer is consummated, the
Company generally will have no further obligations to register any of the
Existing Notes not tendered by Existing Holders for exchange. See "Risk
Factors--Consequences of Failure to Exchange."
The New Notes generally will be issued in the form of Global Securities (as
defined) which will be deposited with, or on behalf of, the Depositary (as
defined) and registered in its name or in the name of a nominee of the
Depositary. Beneficial interests in the Global Securities representing the New
Notes will be shown on, and transfers thereof will be effected through, records
maintained by the Depositary. See "Book-Entry; Delivery and Form."
The Company will accept for exchange any and all Existing Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on , 1998 (30 days after this Prospectus was sent to Existing Holders),
unless extended by the Company in its sole discretion (the "Expiration Date").
The Company will not extend the Expiration Date beyond 5:00 p.m., New York City
time, on , 1998 (60 days after this Prospectus was sent to Existing
Holders). Tenders of Existing Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. In the event the Company
terminates the Exchange Offer and does not accept for exchange any
ii
<PAGE>
(CONTINUATION OF COVER PAGE)
Existing Notes with respect to the Exchange Offer, the Company will promptly
return the Existing Notes to the Holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Existing Notes being tendered
for exchange, but is subject to certain events and conditions that may be waived
by the Company and to the terms and provisions of the Registration Rights
Agreement. The Existing Notes may be tendered in whole or in part solely in
integral multiples of $1,000.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance (the "Staff") of the Securities and
Exchange Commission (the "Commission") as set forth in the Staff's EXXON CAPITAL
HOLDINGS CORPORATION no-action letter (available May 13, 1988) (the "Exxon
Capital No-Action Letter"), MORGAN STANLEY & CO. INCORPORATED no-action letter
(available June 5, 1991) (the "Morgan Stanley No-Action Letter"), SHEARMAN &
STERLING no-action letter (available July 2, 1993) (the "Shearman & Sterling
No-Action Letter"), and other interpretive letters addressed to third parties in
other transactions. However, the Company has not sought its own interpretive
letter addressing such matters and there can be no assurance that the Staff
would make a similar determination with respect to the Exchange Offer as it has
in such interpretive letters to third parties. Based on these interpretations by
the Staff, and subject to the two immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Existing Notes may be offered for resale, resold and otherwise transferred by a
Holder thereof (other than a Holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such Holder's business and that such Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Notes. However, any
Holder of Existing Notes who (i) is an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act), (ii) does not acquire such New
Notes in the ordinary course of its business, (iii) intends to participate in
the Exchange Offer for the purpose of distributing New Notes, or (iv) is a
broker-dealer who purchased such Existing Notes directly from the Company, (a)
will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Existing Notes in the Exchange Offer, and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Existing Notes unless such
sale is made pursuant to an exemption from such requirements. In addition, as
described below, if any broker-dealer holds Existing Notes acquired for its own
account as a result of market-making or other trading activities and exchanges
such Existing Notes for New Notes in the Exchange Offer (an "Exchanging
Dealer"), then such Exchanging Dealer may be deemed a statutory "underwriter"
within the meaning of the Securities Act and must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
New Notes.
Each Holder of Existing Notes who wishes to exchange Existing Notes for New
Notes in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in the distribution of such New
Notes, and (iv) it is not engaged in, and does not intend to engage in, a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it acquired
the Existing Notes for its own account as a result of market-making activities
or other trading activities (and not directly from the Company) and must agree
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, such an
Exchanging Dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. Based on the position taken by the Staff in
the interpretive letters referred to above, the Company believes that Exchanging
Dealers may fulfill their prospectus delivery requirements with respect to the
New Notes received upon exchange of such Existing Notes with a prospectus
meeting the requirements
iii
<PAGE>
(CONTINUATION OF COVER PAGE)
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by an Exchanging
Dealer during the period referred to below in connection with resales of New
Notes received in exchange for Existing Notes where such Existing Notes were
acquired by such Exchanging Dealer for its own account as a result of
market-making or other trading activities. Subject to certain provisions set
forth in the Registration Rights Agreement, the Company has agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by an Exchanging Dealer in connection with resales of such New Notes for a
period of 180 days following effectiveness of the Exchange Offer Registration
Statement. See "Plan of Distribution." Any Exchanging Dealer who is an affiliate
of the Company may not rely on such interpretive letters and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of New
Notes."
In that regard, each Exchanging Dealer who surrenders Existing Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not
misleading, or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Exchanging Dealer will suspend the sale of
New Notes pursuant to this Prospectus until the Company has amended or
supplemented this Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such Exchanging
Dealer or the Company has given notice that the sale of the New Notes may be
resumed, as the case may be.
The New Notes will be a new issue of securities for which there currently is
no market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the New Notes, they are not obligated to do
so, and any such market making may be discontinued at any time without notice.
As the Existing Notes were issued, and the New Notes are being issued, to a
limited number of institutions who typically hold similar securities for
investment, the Company does not expect that an active public market for the New
Notes will develop. Accordingly, there can be no assurance as to the
development, liquidity or maintenance of any market for the New Notes. The
Company does not currently intend to apply for listing of the New Notes on any
securities exchange or for quotation through the Nasdaq Stock Market.
Any Existing Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Indenture (except
for those rights which terminate upon consummation of the Exchange Offer).
Following consummation of the Exchange Offer, the Holders of Existing Notes will
continue to be subject to the existing restrictions upon transfer thereof and
the Company will have no further obligation to such Existing Holders (except for
limited instances involving the Initial Purchasers and Existing Holders that are
not eligible to participate in the Exchange Offer) to provide for registration
under the Securities Act of the Existing Notes held by them. To the extent that
Existing Notes are tendered and accepted in the Exchange Offer, an Existing
Holder's ability to sell untendered Existing Notes could be adversely affected.
See "Risk Factors--Consequences of Failure to Exchange."
Each New Note will bear interest from the most recent date to which interest
has been paid or duly provided for on the Existing Note surrendered in exchange
for such New Note or, if no such interest has been paid or duly provided for on
such Existing Note, from April 23, 1998. Holders of the Existing Notes
iv
<PAGE>
(CONTINUATION OF COVER PAGE)
whose Existing Notes are accepted for exchange will not receive accrued interest
on such Existing Notes for any period from and after the last Interest Payment
Date to which interest has been paid or duly provided for on such Existing Notes
prior to the original issue date of the New Notes or, if no such interest has
been paid or duly provided for, will not receive any accrued interest on such
Existing Notes, and will be deemed to have waived the right to receive any
interest on such Existing Notes accrued from and after such Interest Payment
Date or, if no such interest has been paid or duly provided for, from and after
April 23, 1998.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. The Company has agreed to pay all required expenses of the
Exchange Offer. See "The Exchange Offer--Fees and Expenses." No dealer-manager
is being used in connection with this Exchange Offer. See "Use of Proceeds" and
"Plan of Distribution."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF EXISTING NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UP THROUGH AND INCLUDING , 1998 (90 DAYS AFTER THIS PROSPECTUS WAS
SENT TO EXISTING HOLDERS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A
PROSPECTUS IN CONNECTION WITH SUCH TRANSACTION.
EACH PROSPECTIVE PURCHASER OF THE NEW NOTES MUST COMPLY WITH ALL LAWS AND
REGULATIONS APPLICABLE TO IT IN FORCE IN ANY JURISDICTION IN WHICH IT PURCHASES,
OFFERS OR SELLS THE NEW NOTES OR POSSESSES OR DISTRIBUTES THIS PROSPECTUS AND
MUST OBTAIN ANY CONSENT, APPROVAL OR PERMISSION REQUIRED TO BE OBTAINED BY IT
FOR THE PURCHASE, OFFER OR SALE BY IT OF THE NEW NOTES UNDER THE LAWS AND
REGULATIONS APPLICABLE TO IT IN FORCE IN ANY JURISDICTION TO WHICH IT IS SUBJECT
OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND THE COMPANY SHALL NOT
HAVE ANY RESPONSIBILITY THEREFOR.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS
"ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "INTENDS," "PLANS" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS SET FORTH HEREIN. SUCH
FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE CAUTIONARY STATEMENTS SET
v
<PAGE>
(CONTINUATION OF COVER PAGE)
FORTH UNDER THE CAPTIONS "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" HEREIN. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION: (1) COMPETITION;
(2) INCREASED COSTS; (3) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4)
INCREASES IN THE COMPANY'S COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF
ADDITIONAL DEBT OR EQUITY CAPITAL OR OTHER FORMS OF FINANCING (SUCH AS TRADE
CREDIT, EQUIPMENT LEASE TERMS, AND COOPERATIVE ADVERTISING ALLOWANCES); (5)
CHANGES IN TECHNOLOGY FOR THE DELIVERY OF RECORDED MUSIC, INCLUDING NEW FORMS OF
DISTRIBUTION OF RECORDED MUSIC SUCH AS THE INTERNET AND DIRECT DOWN LOADING OF
RECORDED MUSIC BY CONSUMERS; AND (6) CHANGES IN GENERAL ECONOMIC CONDITIONS IN
THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH
FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR
FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF
THE COMPANY AND SUCH FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS."
MARKET AND INDUSTRY DATA
THE INFORMATION CONTAINED HEREIN INCLUDES CERTAIN DEMOGRAPHIC AND ECONOMIC
INFORMATION FOR THE UNITED STATES AND INTERNATIONALLY. ALTHOUGH THE COMPANY HAS
OBTAINED THIS INFORMATION FROM SOURCES IT BELIEVES TO BE RELIABLE, THE COMPANY
HAS NOT INDEPENDENTLY VERIFIED THIS INFORMATION AND THERE CAN BE NO ASSURANCE AS
TO ITS ACCURACY. FURTHER, BECAUSE COMPETITORS OF THE COMPANY GENERALLY DO NOT
MAKE AVAILABLE INFORMATION REGARDING THEIR SALES IN SPECIFIC REGIONS, MARKET
SHARE INFORMATION, CERTAIN OPERATING INFORMATION AND CERTAIN OTHER INFORMATION
IS SUBJECT TO A NUMBER OF ESTIMATES AND ASSUMPTIONS. WHILE THE COMPANY BELIEVES
SUCH INFORMATION TO BE RELIABLE, THERE CAN BE NO ASSURANCE AS TO ITS ACCURACY.
UNLESS OTHERWISE STATED, ALL REFERENCES TO U.S. INDUSTRY DATA AND U.S.
INDUSTRY TRENDS ARE BASED ON INFORMATION FROM THE RECORDING INDUSTRY ASSOCIATION
OF AMERICA ("RIAA") AND ALL REFERENCES TO INTERNATIONAL INDUSTRY DATA AND
INTERNATIONAL INDUSTRY TRENDS ARE BASED ON INFORMATION FROM THE 1998 MUSIC
BUSINESS INTERNATIONAL WORLD REPORT (THE "MBI REPORT"). U.S. DATA IS REPORTED AS
THE RETAIL VALUE OF PRODUCTS SHIPPED TO MUSIC RETAILERS BY SUPPLIERS.
INTERNATIONAL DATA IS REPORTED AS RETAIL SALES.
------------------------
"TOWER," "TOWER RECORDS-VIDEO-BOOKS," and "WOW!" are among the trademarks of
the Company. This Prospectus contains other trade names and trademarks of the
Company and of other organizations.
The Company maintains a website at HTTP://WWW.TOWERRECORDS.COM and an online
store on America Online at keyword "TOWER." Information contained on the
Company's website or on America Online shall not be deemed to constitute a part
of this Prospectus.
vi
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, RISK FACTORS AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE REFERRED TO HEREIN OR THE CONTEXT OTHERWISE
REQUIRES, REFERENCES TO "MTS," "TOWER" OR THE "COMPANY" SHALL MEAN MTS,
INCORPORATED AND ITS CONSOLIDATED SUBSIDIARIES. ALL INFORMATION IN THIS
PROSPECTUS, INCLUDING FINANCIAL INFORMATION, REFLECTS THE REORGANIZATION (AS
DEFINED BELOW). ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS ARE TO THE
FISCAL YEARS ENDED ON JULY 31 OF EACH YEAR. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS AND, IN
PARTICULAR, SHOULD EVALUATE THE SPECIFIC FACTORS SET FORTH UNDER "RISK FACTORS"
FOR RISKS INVOLVED WITH AN INVESTMENT IN THE NEW NOTES.
THE COMPANY
OVERVIEW
Founded in 1960, Tower is the second largest specialty retailer of recorded
music headquartered in the United States in terms of revenues and is one of the
largest and most widely-recognized music retailers in the world. The Company
operates a total of 183 stores worldwide, consisting of 119 U.S. stores in 20
states and 64 international stores in 11 countries. Management believes that
Tower is one of the leading music retailers in each of the U.S. major
metropolitan areas in which it operates (many of which are the fastest growing
markets in the United States). The Company offers a diversified line of music
products including compact discs, recorded audio cassettes, recorded video
cassettes, laser discs, digital video discs ("DVD") and other complementary
products, including books, magazines, blank tapes, software titles, and
accessories. As of April 30, 1998, Tower's aggregate outstanding indebtedness
was $241.1 million, and for the nine month period ended April 30, 1998 Tower's
ratio of earnings to fixed charges was 1.6x and net revenues were $771.4
million.
Tower attracts and retains customers who buy music on a year-round basis by
providing an extensive product selection in an interactive, entertaining
environment. Tower stores feature extended store hours, in-store listening
stations and knowledgeable and motivated sales personnel. These factors,
combined with the Company's competitive pricing, make Tower stores a preferred
shopping destination. Tower offers one of the broadest selections of recorded
music, including recent releases, older releases and various other music formats
primarily in stand-alone locations in densely populated urban and suburban
areas. Tower stores are typically larger in square footage and have lower rents
as a percentage of revenues than comparable mall-based music specialty
retailers. Most of the Company's domestic stores exceed 10,000 square feet and
carry at least 50,000 music titles. Flagship stores, which are located in major
metropolitan areas such as Boston, Buenos Aires, Chicago, Glasgow, Hong Kong,
Honolulu, London, Los Angeles, New Orleans, New York, Osaka, Philadelphia, San
Francisco, Seattle, Singapore, Taipei, Tokyo, Toronto and Washington, D.C.,
typically exceed 20,000 square feet and carry between 80,000 and 120,000 music
titles. In addition to the BILLBOARD Top 50, Tower offers competitive pricing on
the full range of its product offerings. Management believes that Tower's
success in attracting loyal customers increases store traffic and sales
throughout the year and has been a factor in making the Company less dependent
upon the success of new music releases and calendar fourth quarter sales than
many of its U.S. competitors.
Due to Tower's high sales volume and long-standing relationships with
vendors and music manufacturers, the Company receives substantial cooperative
advertising allowances, beneficial purchasing terms, short lead times on
inventory fulfillment, product return rights, and drop shipments of orders
directly to its stores. Tower monitors the quantity and mix of inventory in each
of its stores through a central inventory management system. However, unlike
many of its competitors (who purchase and distribute from a central location),
Tower's store managers are given discretion in managing the level and mix of the
inventory in their stores in order to most effectively market to each store's
demographic customer base. The Company believes that this policy has been an
important factor in Tower's strategy
1
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to minimize its product return levels, thereby reducing restocking fees,
improving operating margins and sustaining favorable vendor relations.
In order to increase and diversify its revenue base, Tower became the first
U.S.-based music retailer to implement an international growth strategy. This
expansion, which commenced in 1979, initially focused on the Japanese market
(which is currently the world's second largest market for recorded music, with
net sales of approximately $6.8 billion in 1996) and enabled Tower to become a
market leader in Japan for recorded music. Tower implemented a similar expansion
strategy in the United Kingdom beginning in 1986. The Company currently has more
international locations than any other U.S.-based music retailer and, for the
1997 fiscal year, derived approximately 40% of its total net revenues from
international sales. Tower currently operates 41 stores in Japan; six in
England; three each in Hong Kong, Israel and Singapore; two each in Mexico and
Taiwan; and one each in Argentina, Canada, Ireland and Scotland. In addition,
the Company has entered into franchise agreements with local operators in
Colombia, Malaysia, South Korea and Thailand.
The Company was incorporated in California in 1960 and maintains its
principal executive office at 2500 Del Monte Street, West Sacramento, California
95691. Its telephone number is (916) 373-2500.
INDUSTRY
The worldwide market for recorded music has grown from approximately $29.4
billion in calendar 1992 to approximately $40.2 billion in calendar 1996. The
top five markets, North America, Western Europe, Japan, Latin America and Asia
(outside of Japan), individually accounted for approximately 32.9%, 32.8%,
17.0%, 6.2% and 5.6%, respectively, and collectively accounted for approximately
94.5%, of the global market in calendar 1996. Management believes that the
following factors are the primary drivers of growth in the industry globally:
(i) overall population growth in major markets, (ii) technological innovations
in the delivery of recorded music, (iii) continued compact disc format
penetration and (iv) the success of new music releases.
In the United States, there are four primary channels of recorded music
distribution: specialty music retail stores, discount and consumer electronics
stores, record clubs, and mail order and other channels, which accounted for
approximately 49.9%, 31.5%, 14.3% and 4.3% of unit shipments, respectively, in
calendar 1996. The U.S. market for recorded music has grown from approximately
$9.0 billion in calendar 1992 to approximately $12.2 billion in calendar 1997.
However, beginning in 1995, the volume of recorded music shipped to retailers
slowed and then declined by approximately 2.0% in 1997 primarily due to: (i)
overshipment of product by manufacturers to certain retailers in 1995 and 1996,
(ii) store rationalization by certain mall-based and discount music retailers
following an aggressive overexpansion of music retail square footage from 1992
to 1994, (iii) a lack of new technological innovations influencing the delivery
of recorded music, (iv) continued maturation of the compact disc format, and (v)
disappointing new releases. Management believes that the market and the outlook
for music retailers improved in the United States starting in the second half of
calendar 1997, primarily due to a reduction in domestic music retail square
footage as certain electronics retailers reduced music store selling space and
narrowed their catalog selections in response to difficulties in successfully
implementing "loss leader" music retail sales strategies, continued store
consolidation of mall-based music retailers, the release of several successful
new titles and positive demographic trends. The Company believes that it is
well-situated in the industry because of its store base, merchandising strategy
and long-standing supplier relationships. See "Market and Industry Data."
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THE RECAPITALIZATION
Prior to April 1998, substantially all of the capital stock of the Company
was owned by a revocable trust established by the Company's founder, Russell M.
Solomon (the "Russell Solomon Trust"). In April 1998, the Company consummated
certain transactions designed to consolidate substantially all of the Tower
business operations in the Company (the "Reorganization," as described more
fully in "Certain Transactions--The Reorganization"), and also, apart from the
Reorganization, transferred certain assets to the Trusts (as defined in "Certain
Transactions--Prior Transfer of Certain Assets to Trusts"), which were
established for the benefit of Mr. Solomon's sons, Michael Solomon and David
Solomon. As a result of the Reorganization, the Company is now a wholly-owned
subsidiary of a recently formed holding company, TOWER RECORDS, INCORPORATED
("Parent"). The Reorganization included an exchange by the Company's
shareholders of their common shares in the Company for a controlling equity
interest in Parent. As part of the Reorganization, the Trusts and certain
Solomon family members contributed to Parent certain business assets (subject to
certain liabilities), including wholesale distribution operations, in exchange
for the remaining equity interest in Parent. Separately, Parent contributed such
assets and liabilities received from the Trusts and such Solomon family members
to the Company. See "The Recapitalization--The Reorganization," "Certain
Transactions--The Reorganization," and Note 2 to "Consolidated Financial
Statements."
In April 1998 the Company refinanced previously outstanding indebtedness of
approximately $168.0 million under its former $195.0 million senior revolving
credit facility (the "Former Credit Facility") and approximately $64.3 million
of other previously outstanding indebtedness by consummating the Existing Notes
Offering and entering into certain new senior secured revolving credit
facilities (such new secured credit facilities, collectively, the "New Credit
Facility" and, together with the Existing Notes Offering, the "Refinancing")
(the Refinancing and the Reorganization are hereinafter collectively referred to
as the "Recapitalization"). The New Credit Facility provides for an aggregate
$275.0 million commitment, of which approximately $150.0 million can be borrowed
in Japanese yen and a portion in British pounds. Aggregate borrowings are
subject to compliance with a borrowing base formula. As of April 30, 1998, an
aggregate of approximately $245.1 million was available under the New Credit
Facility based upon the borrowing base formula, of which approximately $120.6
million had been drawn. See "The Recapitalization--The Refinancing,"
"Capitalization" and "Description of New Credit Facility."
3
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THE EXCHANGE OFFER
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SECURITIES OFFERED................ $110,000,000 in aggregate principal amount of New 9 3/8%
Senior Subordinated Notes due 2005.
THE EXCHANGE OFFER................ $1,000 principal amount of the New Notes in exchange for
each $1,000 principal amount of Existing Notes. As of
the date hereof, $110,000,000 aggregate principal amount
of Existing Notes are outstanding. The Company will
issue the New Notes to New Holders on or promptly after
the Expiration Date.
Based on an interpretation by the Staff set forth in
no-action letters issued to third parties, the Company
believes that New Notes issued pursuant to the Exchange
Offer in exchange for Existing Notes may be offered for
resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an
affiliate of the Company or is a broker-dealer which
acquired such Existing Notes directly from the Company)
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that
(i) such New Notes are acquired in the ordinary course
of such Holder's business, (ii) such Holder has no
arrangement or understanding with any person to
participate in the distribution of such New Notes, and
(iii) such Holder is not engaged in, and does not intend
to engage in the, or a, distribution of the New Notes.
Each Exchanging Dealer that acquired such Existing Notes
as a result of market making or other trading activity
and that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of
such New Notes. The Company has agreed that this
Prospectus, as it may be amended or supplemented from
time to time, may be used, subject to certain provisions
of the Registration Rights Agreement, by such an
Exchanging Dealer in connection with such resales for a
period of 180 days following effectiveness of the
Exchange Offer Registration Statement. See "The Exchange
Offer--Resales of New Notes" and "Plan of Distribution."
Any Existing Holder who (i) is an affiliate of the
Company, (ii) does not acquire such New Notes in the
ordinary course of its business, (iii) tenders in the
Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the
New Notes, or (iv) is a broker-dealer which acquired
such Existing Notes directly from the Company, could not
rely on the position of the Staff enunciated in the
Exxon Capital No-Action Letter, the Morgan Stanley
No-Action Letter or similar no-action letters and, in
the absence of an exemption therefrom, must comply with
the registration and prospectus delivery requirements of
the Securities Act in connection with the resale of the
New Notes. Failure to comply with such requirements in
such instance may result in such Holder
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4
<PAGE>
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incurring liability under the Securities Act for which
the Holder is not indemnified by the Company.
No federal or state regulatory requirements must be
complied with or approval obtained in connection with
the Exchange Offer, other than registration requirements
under the Securities Act and compliance with the
registration or comparable provisions of applicable
state securities laws.
EXPIRATION DATE................... 5:00 p.m., New York City time, on , 1998 (30 days
after this Prospectus was sent to Existing Holders),
unless the Exchange Offer is extended by the Company in
its sole discretion, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended. The Company will not extend
the Expiration Date beyond 5:00 p.m., New York City
time, on , 1998 (60 days after this
Prospectus was sent to Existing Holders).
INTEREST ON THE NEW NOTES AND THE
EXISTING NOTES.................. Each New Note will bear interest from the most recent
date to which interest has been paid or duly provided
for on the Existing Note surrendered in exchange for
such New Note or, if no such interest has been paid or
duly provided for on such Existing Note, from April 23,
1998. Holders of the Existing Notes whose Existing Notes
are accepted for exchange will not receive accrued
interest on such Existing Notes for any period from and
after the last Interest Payment Date to which interest
has been paid or duly provided for on such Existing
Notes prior to the original issue date of the New Notes
or, if no such interest has been paid or duly provided
for, will not receive any accrued interest on such
Existing Notes, and will be deemed to have waived the
right to receive any interest on such Existing Notes
accrued from and after such Interest Payment Date or, if
no such interest has been paid or duly provided for,
from and after April 23, 1998.
AMENDMENT OR TERMINATION OF THE
EXCHANGE OFFER.................. The Company is not required to accept any Existing Notes
for exchange, and may amend or terminate the Exchange
Offer in its sole discretion at any time before
acceptance of such Existing Notes for exchange. By way
of example, the following constitute some, but not all,
of the reasons the Company might choose to amend or
terminate the Exchange Offer: (i) the Exchange Offer
would violate applicable law, (ii) a judicial or
administrative action or proceeding might materially
impair the Company's ability to proceed with the
Exchange Offer, (iii) any necessary governmental
approvals are not obtained, (iv) a stock market or
banking moratorium has occurred, or (v) a stop order has
been issued or threatened which would suspend
effectiveness of the Exchange Offer Registration
Statement. See "The Exchange Offer--Amendments;
Termination."
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5
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PROCEDURES FOR TENDERING EXISTING
NOTES........................... Each Existing Holder wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver the Letter of
Transmittal, or such facsimile, together with the
Existing Notes and any other required documentation to
the Exchange Agent (as defined below) at the address set
forth in the Letter of Transmittal. PERSONS HOLDING
EXISTING NOTES THROUGH THE DEPOSITARY (INITIALLY THE
DEPOSITORY TRUST COMPANY ("DTC")) AND WISHING TO ACCEPT
THE EXCHANGE OFFER MUST DO SO PURSUANT TO DTC'S
AUTOMATED TENDER OFFER PROGRAM ("ATOP"), BY WHICH EACH
TENDERING PARTICIPANT WILL AGREE TO BE BOUND BY THE
LETTER OF TRANSMITTAL. By executing or agreeing to be
bound by the Letter of Transmittal, each Existing Holder
will represent to the Company that, among other things,
such Holder (i) is not an affiliate of the Company, (ii)
is acquiring the New Notes in the ordinary course of
business, (iii) has no arrangement or understanding with
any person to participate in the distribution of such
New Notes, and (iv) is not engaged in, and does not
intend to engage in, a distribution of the New Notes.
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.......................... Any beneficial owner whose Existing Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered Holder promptly and instruct
such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering its Existing Notes, either
make appropriate arrangements to register ownership of
the Existing Notes in such owner's name or obtain a
properly completed bond power from the registered
Holder. The transfer of registered ownership may take
considerable time.
GUARANTEED DELIVERY PROCEDURES.... Existing Holders who wish to tender their Existing Notes
and whose Existing Notes are not immediately available
or who cannot deliver their Existing Notes, the Letter
of Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer) prior to
the Expiration Date must tender their Existing Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date pursuant to
the procedures described under "The Exchange Offer--
Withdrawals of Tenders."
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6
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ACCEPTANCE OF EXISTING NOTES AND
DELIVERY OF NEW NOTES........... The Company will accept for exchange any and all
Existing Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time,
on the Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
FEDERAL INCOME TAX
CONSIDERATIONS.................. The exchange of the New Notes for the Existing Notes
pursuant to the Exchange Offer will not be taxable to
the Holders thereof for federal income tax purposes.
However, no ruling has been obtained from the Internal
Revenue Service in connection with the Exchange Offer.
See "Federal Income Tax Considerations."
EFFECT ON HOLDERS OF EXISTING
NOTES........................... As a result of the making of this Exchange Offer, the
Company will have fulfilled certain of its obligations
under the Registration Rights Agreement, and Existing
Holders who do not tender their Existing Notes, except
for limited instances involving the Initial Purchasers
and Existing Holders that are not eligible to
participate in the Exchange Offer, will not have any
further registration rights under the Registration
Rights Agreement or otherwise. See "The Exchange
Offer--Purposes and Effect of Exchange Offer." Such
Existing Holders will continue to hold the untendered
Existing Notes and will be entitled to all the rights
and subject to all the limitations applicable thereto
under the Indenture, except to the extent such rights or
limitations, by their terms, terminate or cease to have
further effectiveness as a result of the Exchange Offer.
All untendered Existing Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, if any Existing Notes are tendered and
accepted in the Exchange Offer, the trading market for
the untendered Existing Notes could be adversely
affected.
EXCHANGE AGENT.................... State Street Bank and Trust Company of California, N.A.
</TABLE>
7
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SUMMARY OF TERMS OF NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Existing Notes (which they replace) except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (ii) the Holders of New Notes, except for
limited instances involving the Initial Purchasers and certain Holders that are
not eligible to participate in the Exchange Offer, will not be entitled to
further registration rights under the Registration Rights Agreement, which
rights will be satisfied when the Exchange Offer is consummated, and will not be
entitled to any payments of Additional Interest for failure to satisfy such
rights. The New Notes will evidence the same debt as the Existing Notes and will
be entitled to the benefits of the Indenture. See "Description of Notes."
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<S> <C> <C>
ISSUER............................ MTS, INCORPORATED
SECURITIES OFFERED.............................. $110,000,000 aggregate principal amount of New 9 3/8% Senior Subordinated Notes
due 2005.
MATURITY........................................ May 1, 2005.
INTEREST PAYMENT DATES.......................... May 1 and November 1, commencing November 1, 1998.
SINKING FUND.................................... None.
OPTIONAL REDEMPTION............................. Except as described below, the Company may not redeem the Notes prior to May 1,
2002. On or after such date, the Company may redeem the Notes, in whole or in
part, at the redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time
and from time to time on or prior to May 1, 2001, the Company may redeem up to
35% of the aggregate principal amount of the Notes with the net cash proceeds
of one or more private or public Equity Offerings received by the Company, at a
redemption price equal to 109.375% of the principal amount to be redeemed,
together with accrued and unpaid interest, if any, to the date of redemption,
provided that at least 65% of the originally issued aggregate principal amount
of the Notes remains outstanding after each such redemption. See "Description
of the Notes--Optional Redemption."
CHANGE OF CONTROL............................... Upon the occurrence of a Change of Control, the Company will be required to
make an offer to repurchase the Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase. The Company's ability to repurchase the Notes upon a Change of
Control is subject to a number of financial and legal limitations, including a
prohibition on most such repurchases under the New Credit Facility. Upon the
occurrence of a Change of Control, if it is prohibited by the terms of any
outstanding Indebtedness from making an Offer to Repurchase (as defined) or
from repurchasing the Notes, the Company is required to either (i) repay all
such Indebtedness and terminate all commitments outstanding thereunder or (ii)
obtain the requisite consents under any such Indebtedness required to permit
the Offer to Repurchase or the repurchase of the Notes. The New Credit Facility
provides for loans up to a
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8
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maximum amount of $275 million and, if the requisite consents from the lenders
thereunder are not forthcoming, it is unlikely that the Company would be able
to repay all of its obligations under the New Credit Facility and repurchase
the Notes unless it could obtain alternative financing. There can be no
assurance that the Company would be able to obtain any such financing on
commercially reasonable terms, or at all, and consequently no assurance can be
given that the Company would be able to repurchase any of the Notes tendered
pursuant to such an Offer to Purchase. See "Risk Factors-- Change of Control"
and "Description of the Notes--Offer to Purchase upon Change of Control."
RANKING......................................... The Notes are unsecured and are subordinated in right of payment to all
existing and future Senior Indebtedness of the Company. The Notes rank pari
passu in right of payment with any future senior subordinated indebtedness of
the Company and rank senior to all Subordinated Indebtedness of the Company.
The Notes are effectively subordinated to all indebtedness and other
obligations of the Company's existing and future subsidiaries. As of April 30,
1998, the aggregate principal amount of the Company's outstanding Senior
Indebtedness was approximately $131.1 million and had unused availability under
its New Credit Facility of up to $154.4 million, of which approximately $124.5
million was available under the Borrowing Base formula contained in the New
Credit Facility. As of April 30, 1998, the Company had no Subordinated
Indebtedness outstanding and no senior subordinated indebtedness outstanding
other than the Notes and has no current plans, arrangements or agreements to
issue indebtedness junior to, pari passu with, or senior to, the Notes. See
"Description of the Notes--Subordination of the Notes."
RESTRICTIVE COVENANTS........................... The Indenture, under which the Existing Notes were and the New Notes will be
issued, limits, among other things, (i) the incurrence of additional
indebtedness by the Company and its Restricted Subsidiaries (as defined), (ii)
the payment of dividends on, and redemption of, capital stock of the Company
and the redemption of certain subordinated obligations of the Company, (iii)
Investments (as defined), (iv) sales of assets and Restricted Subsidiary stock,
(v) transactions with Affiliates (as defined) and (vi) consolidations, mergers
and transfers of all or substantially all of the Company's assets. The
Indenture also prohibits certain restrictions on distributions from Restricted
Subsidiaries. However, all of these limitations and prohibitions are subject to
a number of important qualifications and exceptions. See "Description of the
Notes--Certain Covenants."
TRANSFER RESTRICTIONS........................... For restrictions on transfer of the New Notes, see "The Exchange Offer--Resale
of New Notes."
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USE OF PROCEEDS................................. All Existing Notes received and accepted by the Company, in its sole
discretion, for exchange in the Exchange Offer will be cancelled.
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RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" for risks involved with an investment in
the Notes. Such risks include: (i) the Company's substantial leverage consisting
of $241.1 million in total debt as of April 30, 1998 and debt service
obligations as defined by the ratio of earnings to fixed charges of 1.6x for the
nine-month period ended April 30, 1998 (for definition, please refer to Notes to
Selected Historical Consolidated Financial Information), (ii) the subordination
of the Notes to all existing and future Senior Indebtedness, which was $131
million as of April 30, 1998, and (iii) the impact of worldwide economic
conditions and cyclicality of the music industry.
10
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial information presented below as
of July 31, 1996 and 1997 and for each of the years in the three-year period
ended July 31, 1997 have been derived from and should be read in conjunction
with the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The summary historical consolidated financial
information presented below as of July 31, 1993, 1994 and 1995 and for each of
the years in the two-year period ended July 31, 1994 have been derived from the
audited consolidated financial statements of the Company not included elsewhere
in this Prospectus. The summary historical consolidated financial information as
of April 30, 1998 and for the nine months ended April 30, 1997 and 1998 have
been derived from and should be read in conjunction with the unaudited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The summary historical consolidated financial data as of April 30,
1997 have been derived from the unaudited financial statements of the Company
not included in this Prospectus. The summary historical consolidated financial
information has been retroactively restated to give effect to the
Reorganization. The unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial condition and
results of operations for those periods. Operating results for the nine months
ended April 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended July 31, 1998 or for any future period. This data
should be read in conjunction with the consolidated financial statements and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Selected Historical Consolidated Financial Information"
and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED JULY 31, APRIL 30,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
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INCOME STATEMENT DATA:
Net revenues........................................... $ 699.4 $ 808.5 $ 950.6 $ 1,001.0 $ 991.8 $ 752.5
Gross profit........................................... 225.4 264.6 310.0 324.9 322.5 244.1
Selling, general and administrative expenses........... 183.7 212.6 255.1 270.4 267.6 202.1
Depreciation and amortization.......................... 15.1 17.4 20.5 20.9 21.8 17.3
--------- --------- --------- --------- --------- ---------
Income from operations................................. 26.6 34.6 34.4 33.6 33.1 24.7
Interest expense....................................... 6.7 7.8 11.5 14.9 14.3 11.5
Net income............................................. 14.7 17.3 15.1 10.0 3.5 5.3
OTHER DATA:
Ratio of earnings to fixed charges(a).................. 2.4x 2.2x 1.8x 1.5x 1.3x 1.4x
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................................... $ 346.9 $ 412.7 $ 505.1 $ 528.8 $ 544.6 $ 541.9
Total debt (including current maturities).............. 116.2 140.5 199.6 202.8 211.3 222.9
Shareholders' equity................................... 95.0 112.1 127.5 135.1 134.0 135.4
<CAPTION>
1998
---------
<S> <C>
INCOME STATEMENT DATA:
Net revenues........................................... $ 771.4
Gross profit........................................... 248.8
Selling, general and administrative expenses........... 204.8
Depreciation and amortization.......................... 17.6
---------
Income from operations................................. 26.4
Interest expense....................................... 10.4
Net income............................................. 8.7
OTHER DATA:
Ratio of earnings to fixed charges(a).................. 1.6x
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................................... $ 533.5
Total debt (including current maturities).............. 241.1
Shareholders' equity................................... 128.6
</TABLE>
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(a) Ratio of earnings to fixed charges is computed by dividing (i) the sum of
income before taxes and fixed charges by (ii) fixed charges. Fixed charges
consist of the sum of interest expense, interest expense capitalized, the
amortization of deferred financing costs, and 35% of rental expense
representing management's determination of a reasonable approximation of
interest costs on rents.
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE NEW NOTES OFFERED HEREBY IS SPECULATIVE IN NATURE AND
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF THE NEW NOTES OFFERED
HEREBY SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PRIOR TO MAKING AN INVESTMENT IN
THE NEW NOTES. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. SEE THE COVER PAGE,
"FORWARD-LOOKING STATEMENTS."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
After giving effect to the Recapitalization, including the Existing Notes
Offering, the initial borrowings under the New Credit Facility and the
application of the proceeds therefrom, the Company is substantially leveraged.
On such a basis, the Company's aggregate outstanding indebtedness was $241.1
million and the Company's shareholders' equity was $128.6 million at April 30,
1998. The Company also has substantial rental obligations. The New Credit
Facility and the Indenture permit the Company and its subsidiaries to incur or
guarantee certain additional indebtedness, subject to certain limitations. The
New Credit Facility matures prior to the maturity of the Notes. In the event
that the Company is unable to refinance the New Credit Facility, its ability to
repay the principal and interest on the Notes would be adversely affected. See
"The Recapitalization--The Refinancing," "Use of Proceeds," "Capitalization,"
"Description of New Credit Facility" and "Description of the Notes."
The Company's substantial degree of leverage could have important
consequences to its lenders, including but not limited to, the following: (i)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired in the future, (ii) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing the funds available to the Company for
other purposes, (iii) certain of the Company's borrowings, including those under
the New Credit Facility, will be at variable rates of interest which exposes the
Company to interest rate fluctuation risk, (iv) the Company may be hindered in
its ability to adjust rapidly to changing market conditions and (v) the Company
could be more vulnerable in the event of a downturn in general economic
conditions or its business.
The Company's ability to repay or to refinance its obligations with respect
to its indebtedness and meet its other obligations (including substantial rental
obligations) will depend on its financial and operating performance, which, in
turn, is subject to prevailing economic and competitive conditions in the United
States and other countries where it operates and to certain financial, business
and other factors, many of which are beyond the Company's control. See the cover
page, "Forward-Looking Statements."
There can be no assurance that the Company's cash flow and capital resources
will be sufficient for payment of interest on and principal of its indebtedness
in the future. If the Company's cash flow and capital resources are insufficient
to fund its debt service obligations, the Company may be forced to reduce or
delay capital expenditures, sell assets, seek to obtain additional equity
capital, or restructure its debt. There can be no assurance that any such
alternative measures would be successful or would permit the Company to meet its
scheduled debt obligations. In the absence of sufficient cash flow and capital
resources, the Company could face substantial liquidity problems and could be
required to dispose of material assets or operations to meet its debt service
and other obligations, and there can be no assurance as to whether the Company's
lenders would consent to such actions, or as to the timing or amount of the
proceeds that the Company could realize from such actions.
SUBORDINATION OF NOTES
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes is subordinated to the prior payment in
full of all existing and future Senior Indebtedness of the
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<PAGE>
Company, including all amounts owing or guaranteed under the New Credit
Facility. Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company, assets of the
Company will be available to pay obligations on the Notes only after all Senior
Indebtedness of the Company has been paid in full, and there can be no assurance
that there will be sufficient assets to pay amounts due on any or all of the
Notes. The Notes are effectively subordinated to all indebtedness and other
obligations of the Company's existing and future subsidiaries. See "Description
of the Notes---Subordination of the Notes." At April 30, 1998, the Company had
approximately $131.1 million of Senior Indebtedness outstanding, of which
approximately $17.3 million constituted indebtedness of the Company's
subsidiaries.
CYCLICALITY OF THE MUSIC INDUSTRY AND THE IMPACT OF TECHNOLOGICAL INNOVATIONS
The Company's business is affected by the release of "hit" music titles,
which can create cyclical trends in sales distinctive to the music industry. It
is not possible to determine the timing of these cycles or the future
availability of hit titles. The Company's business may also be affected by
changes in music entertainment technology. While technological advances such as
compact discs have had a favorable impact on industry growth in the past, there
can be no assurance that future advances will continue to have a favorable
impact on music entertainment product retailers. In particular, Internet and
cable technologies coupled with high-quality digital recording technologies
could allow direct downloading of recorded music by consumers. If the industry
experiences a dearth of hit music titles or such technological changes were to
result in significant changes in existing distribution channels for prerecorded
music, the Company's business, financial condition or results of operations
could be materially and adversely affected.
COMPETITION
The retail music business is highly competitive. The Company competes with a
wide variety of music retailers, including regional and national mall-based
music chains, international chains, deep-discount retailers, mass merchandisers,
consumer electronics outlets, mail order, record clubs and independent
operators, some of which have greater financial and other resources than the
Company. In retail music sales, some of the Company's competitors have been
expanding into the Company's markets. Further, the Company expects continued
growth in competing home entertainment options, including the Internet and
larger numbers of television and music channels offered by cable companies. Such
competition may reduce sales at music stores, put pressure on gross margins,
increase operating expenses and decrease profit margins in specific markets.
There can be no assurances that the music retail business will continue to be a
viable business, that retail stores will continue to be a primary channel for
distribution of recorded music, or that the Company will continue to compete
successfully within the music retail store sector and within the music retail
business generally. See "Business-- Competition."
CONSUMER SPENDING
The Company's business is directly affected by the level of consumer
spending. One of the primary factors that affects consumer spending is the
general state of the local economies in which the Company operates. Lower levels
of consumer spending in regions in which the Company has significant operations
could have a material adverse effect on the Company's business, financial
condition or results of operations.
RISKS ASSOCIATED WITH EXPANSION
The Company's future financial prospects will depend in part on its ability
to open and operate new stores profitably. During the two year period ended July
31, 1997, the Company opened two new stores in the United States and 23 new
stores internationally. The Company intends to open additional stores in
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<PAGE>
both existing and new, U.S. and international geographic markets. However, the
opening of additional stores in an existing market could result in lower net
sales from existing Company stores in that market. The success of the Company's
planned expansion will be dependent upon many factors, including the
identification of suitable markets, the availability and leasing of suitable
store locations on acceptable terms, the hiring, training and retention of
qualified management and other store personnel, the availability of appropriate
financing and general economic conditions. To manage its planned expansion, the
Company must ensure the continuing adequacy of its existing product distribution
facilities, store management controls, financial controls and information
systems. There can be no assurance that the Company will be able to adequately
anticipate all of the demands which continuing expansion will impose on its
operating systems, that new stores will be effectively integrated into the
Company's existing operations or that such stores will be profitable.
In addition, the new geographic markets into which the Company is expanding
may present competitive and merchandising challenges that are different from
those currently faced by the Company in its existing geographic markets. The
Company may incur higher costs related to advertising and distribution in
connection with entering certain new markets. If the Company opens stores in new
markets that do not perform to the Company's expectations, if new stores do not
reach profitability as soon as expected or if stores openings are delayed, the
Company's business, financial condition or results of operations could be
materially adversely affected.
RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company has substantial operations and assets located outside the United
States, primarily in the United Kingdom and Japan. With respect to international
operations, principally all of Tower's revenues and costs (including borrowing
costs) are incurred in the local currency, except that certain inventory
purchases are tied to U.S. dollars. The Company's financial performance on a
U.S. dollar-denominated basis has historically been significantly affected by
changes in currency exchange rates. Changes in certain exchange rates could
adversely affect the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
International operations are also subject to a number of other special
risks, including trade barriers, exchange controls, governmental expropriation,
political risks and risks of increases in taxes. In addition, the laws of
certain foreign countries do not protect the Company's trademark, trade name,
copyright and other intellectual property rights to the same extent as do the
laws of the United States. Also, various jurisdictions outside the United States
have laws limiting the right and ability of non-U.S. subsidiaries and affiliates
to pay dividends and remit earnings to affiliated companies unless specified
conditions are met. Earnings of international subsidiaries are subject to income
taxes of non-U.S. jurisdictions that reduce cash flow available to meet required
debt service and other obligations of the Company.
RESTRICTIVE COVENANTS
The New Credit Facility contains a number of significant covenants that
restrict the manner in which the Company conducts its business, and require the
Company to comply with specified ratios and financial tests. See "Description of
New Credit Facility." The Indenture also contains certain restrictive covenants.
See "Description of the Notes--Certain Covenants." The Company's ability to
comply with these covenant requirements may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions could result in a default under the
relevant financing agreements that would permit the relevant lenders or debt
holders to declare all amounts outstanding thereunder to be due and payable,
together with accrued and unpaid interest, and the commitments of the lenders
under the New Credit Facility to make further extensions of credit thereunder
could be terminated.
14
<PAGE>
LIMITATION ON ABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control, the
Company will be required to make an offer to repurchase all of the Notes issued
and then outstanding under the Indenture at a purchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest thereon and other
amounts due with respect thereto through the date of repurchase. See
"Description of the Notes--Offer to Repurchase upon Change of Control." Any
Change of Control under the Indenture would constitute a default under the New
Credit Facility. Therefore, upon the occurrence of a Change of Control, the
lenders under the New Credit Facility would have the right to accelerate their
loans and the holders of the Notes would have the right to require the Company
to repurchase their Notes. Upon such event, such lenders would be entitled to
receive payment of all outstanding obligations under the New Credit Facility
before the Company may repurchase any of the Notes tendered pursuant to such an
offer. See "Description of New Credit Facility." If a Change of Control were to
occur, it is unlikely that the Company would be able to repay all of its
obligations under the New Credit Facility and the Notes unless it could obtain
alternative financing. There can be no assurance that the Company would be able
to obtain any such financing on commercially reasonable terms, or at all, and
consequently no assurance can be given that the Company would be able to
repurchase any of the Notes tendered pursuant to such an offer.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its future prospects depend to a significant
extent on the services of its executive officers, as well as its ability to
attract and retain additional key personnel with the skills and expertise
necessary to manage its planned growth. The loss or unavailability of the
services of certain of the Company's executive officers and other key management
personnel, including its founder, Russell M. Solomon, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management."
CONTROL BY PRINCIPAL SHAREHOLDER
Russell M. Solomon, President and Chief Executive Officer and a director of
the Company, beneficially owns a majority of Parent's outstanding voting
securities. Accordingly, Mr. Solomon has the ability to elect all of the members
of the Board of Directors of Parent and to determine the outcome of any matter
submitted to the shareholders for approval, including corporate transactions
such as mergers, consolidations and the sale of all or substantially all of the
assets of the Company. See "Ownership of Capital Stock."
DEPENDENCE ON INFORMATION SYSTEMS; YEAR 2000 TECHNOLOGY RISK
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, within the
next two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. The Company has
budgeted for and is currently utilizing in-house information technology staff
and outside consultants to analyze and upgrade its management systems software
to make it Year 2000 compliant, a process which the Company expects to complete
in late 1998. The Company also intends to implement its ISP system in Japan in
early 1999 which should make the Company's entire inventory management system
Year 2000 compliant. Failure by the Company to complete implementation of the
required changes to address Year 2000 requirements prior to the year 2000 might
result in significant difficulties in the Company's administration of corporate
and inventory software systems and consequently have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company has not conducted a review of the preparations of its major vendors,
distributors and shippers to meet the Year 2000 requirements and
15
<PAGE>
does not have a basis to assess the impact, if any, that the Year 2000
requirements will have on its vendors, distributors and shippers and
consequently on the Company. Failure by the Company's vendors, distributors,
shippers and other parties with which the Company does business to address Year
2000 requirements could adversely affect the Company's ability to distribute
products for some period of time and otherwise disrupt the Company's business
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Existing Notes are currently owned by a relatively small number of
beneficial owners. The Existing Notes have not been registered under the
Securities Act or any state securities laws and, unless so registered and to the
extent not exchanged for the New Notes, may not be offered or sold except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. Any Existing Notes tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of Existing Notes outstanding. Following
the consummation of the Exchange Offer, Existing Holders who did not tender
their Existing Notes generally will not have any further registration rights
under the Registration Rights Agreement, and such Existing Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for such Existing Notes could be adversely affected. The Existing
Notes are currently eligible for sale pursuant to Rule 144A through The Portal
Market of the National Association of Securities Dealers, Inc. ("Portal").
Because the Company anticipates that most Existing Holders will elect to
exchange such Existing Notes for New Notes in order to reduce restrictions on
the resale of New Notes under the Securities Act, the Company anticipates that
the liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
The New Notes will constitute a new issue of securities for which there is
currently no active trading market. If the New Notes are traded after their
initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities and other factors including general economic conditions and the
current financial condition, results of operations and business prospects of the
Company. Although the New Notes will generally be permitted to be resold or
otherwise transferred by non-affiliates of the Company without compliance with
the registration and prospectus delivery requirements of the Securities Act, the
Company does not intend to apply for a listing or quotation of the New Notes on
any securities exchange or stock market. The Initial Purchasers have informed
the Company that they currently intend to make a market in the New Notes.
However, the Initial Purchasers are not obligated to do so, and any such
market-making may be discontinued at any time without notice. In addition, such
market-making activity will be subject to the limits imposed under the Exchange
Act. Accordingly, there can be no assurance as to the development, liquidity or
maintenance of any market for the New Notes, or, in the case of non-tendering
Existing Holders, the trading market for the Existing Notes following the
Exchange Offer. If no trading market develops or is maintained, New Holders may
experience difficulty in reselling New Notes or may be unable to sell them.
The liquidity of, and trading market for, the Existing Notes or the New
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE
Existing Holders who do not exchange their Existing Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Existing Notes as set forth in the legend thereon as a
consequence of the original issuance of the Existing Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless (i) to a person
who
16
<PAGE>
the seller reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, in a transaction meeting the
requirements of Rule 144A under the Securities Act, (ii) in a transaction
occurring outside the United States to a foreign person, which transaction meets
the requirements of Rule 904 under the Securities Act, (iii) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (iv) to the
Company, or (v) pursuant to an effective registration statement, and, in each
case, in accordance with any applicable securities laws of any state of the
United States or any other applicable jurisdiction. The Company does not
currently anticipate that it will register the Existing Notes under the
Securities Act. Based on interpretations by the Staff, as set forth in no-action
letters issued to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Existing Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
Holder which is an affiliate of the Company or is a broker-dealer which acquired
such Existing Notes directly from the Company) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that (i) such New Notes are acquired in the ordinary course of such
Holder's business, (ii) such Holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes, (iii) such Holder
is not engaged in and does not intend to engage in a distribution of the New
Notes, and provided that Exchanging Dealers will be subject to prospectus
delivery requirements in connection with any resale. However, the Commission has
not considered the Exchange Offer in the context of a no-action letter
addressing such matters and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer.
17
<PAGE>
THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of the
Exchange Offer, including those set forth in the Letter of Transmittal
distributed with this Prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreement), which are
exhibits to the Exchange Offer Registration Statement.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Existing Notes were sold by the Company to the Initial Purchasers on
April 23, 1998, and were subsequently resold (i) to qualified institutional
buyers pursuant to Rule 144A under the Securities Act, and (ii) pursuant to
offers and sales that occurred outside the United States within the meaning of
Regulation S under the Securities Act. In connection with the offering of the
Existing Notes, the Company entered into the Registration Rights Agreement,
which requires, among other things, that the Company (i) file with the
Commission a registration statement under the Securities Act with respect to an
issue of new notes of the Company identical in all material respects (other than
transfer restrictions, registration rights and the requirement, under certain
circumstances, to pay Additional Interest) to the Existing Notes (which
obligation has been satisfied by the filing of the Exchange Offer Registration
Statement), (ii) use their best efforts to cause such registration statement to
become effective under the Securities Act and (iii) upon the effectiveness of
that registration statement, offer to the Holders of the Existing Notes the
opportunity to exchange their Existing Notes for a like principal amount of New
Notes, which would be issued without a restrictive legend and may generally be
reoffered and resold by the Holder without restrictions or limitations under the
Securities Act, subject to the terms and conditions of the Exxon Capital, Morgan
Stanley and Shearman & Sterling No-Action Letters. See the discussion set forth
on the cover page of this Prospectus and the information under the captions
"Prospectus Summary--The Exchange Offer" and "--Resale of New Notes."
Any Existing Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule 144A or outside the United
States pursuant to Regulation S. Because the Company anticipates that most
Existing Holders will elect to exchange such Existing Notes for New Notes due to
the reduction of restrictions on the resale of New Notes under the Securities
Act, the Company anticipates that the liquidity of the market for any Existing
Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Existing
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time
on the Expiration Date. The Company will issue $1,000 principal amount of New
Notes in exchange for each $1,000 principal amount of outstanding Existing Notes
accepted in the Exchange Offer. Existing Holders may tender some or all of their
Existing Notes pursuant to the Exchange Offer. However, Existing Notes may be
tendered only in integral multiples of $1,000. The form and terms of the New
Notes are the same as the form and terms of the Existing Notes except that (i)
the New Notes have been registered under the Securities Act and hence will not
bear legends restricting the transfer thereof, and (ii) New Holders generally
will not be entitled to certain rights under the Registration Rights Agreement
or Additional Interest, which rights generally will terminate upon consummation
of the
18
<PAGE>
Exchange Offer. The New Notes will evidence the same debt as the Existing Notes
and will be entitled to the benefits of the Indenture.
Existing Holders do not have any appraisal or dissenters' rights under the
California General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Existing Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Existing
Holders for the purpose of receiving the New Notes from the Company.
If any tendered Existing Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the tendered certificates, if any, for any such unaccepted Existing
Notes will be returned, without expense, to the tendering Existing Holder
thereof as promptly as practicable after the Expiration Date.
Existing Holders who tender Existing Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Existing Notes pursuant to the Exchange Offer. The Company will pay all required
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS
As defined above, the term "Expiration Date" shall mean 5:00 p.m., New York
City time, on , 1998 (30 days after this Prospectus was sent to
Existing Holders), unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. The Company will not
extend the Expiration Date beyond 5:00 p.m., New York City time, on ,
1998 (60 days after this Prospectus was sent to Existing Holders).
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Existing Notes, to extend the Exchange Offer or to terminate the
Exchange Offer by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. See "--Amendments; Termination."
INTEREST ON NEW NOTES
Each New Note will bear interest from the most recent date to which interest
has been paid or duly provided for on the Existing Note surrendered in exchange
for such New Note or, if no such interest has been paid or duly provided for on
such Existing Note, from April 23, 1998. Holders of the Existing Notes whose
Existing Notes are accepted for exchange will not receive accrued interest on
such Existing Notes for any period from and after the last Interest Payment Date
to which interest has been paid or duly provided for on such Existing Notes
prior to the original issue date of the New Notes or, if no such interest has
been paid or duly provided for, will not receive any accrued interest on such
Existing Notes, and will be deemed to have waived the right to receive any
interest on such Existing Notes accrued from and after such Interest Payment
Date or, if no such interest has been paid or duly provided for, from and after
April 23, 1998. Interest on the New Notes will be payable semi-annually on each
May 1 and November 1, commencing on November 1, 1998.
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<PAGE>
PROCEDURES FOR TENDERING
Only a Holder of Existing Notes may tender such Existing Notes in the
Exchange Offer. To tender in the Exchange Offer, an Existing Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile, together
with the Existing Notes and any other required documents, to the Exchange Agent
so as to be received by the Exchange Agent at the address set forth below prior
to 5:00 p.m., New York City time, on the Expiration Date. Delivery of the
Existing Notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the Company
the representation set forth below in the second paragraph under the heading
"--Resale of New Notes."
The tender by an Existing Holder and the acceptance thereof by the Company
will constitute an agreement between such Existing Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Existing Holder promptly and instruct
such registered Existing Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Existing Notes tendered pursuant thereto (i) are signed by the
registered Existing Holder, unless such Existing Holder has completed the box
entitled "Special Exchange Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal, or (ii) are tendered for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Existing Notes listed therein, such Existing Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Existing Holder as such registered Existing Holder's name appears on
such Existing Notes, with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
20
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Existing Notes and withdrawal of tendered
Existing Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Existing Notes not properly tendered or any Existing Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Existing Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Existing Holders
of defects or irregularities with respect to tenders of Existing Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of Existing Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Existing Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Existing Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
TENDER OF EXISTING NOTES HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Existing Notes to the Exchange Agent in accordance with DTC's ATOP procedures
for transfer. DTC will then send an Agent's Message (as defined below) to the
Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an expressed acknowledgment from a participant in DTC that
is tendering Existing Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such participant has received and
agrees to be bound by the applicable Notice of Guaranteed Delivery), and that
the Company may enforce such agreement against such participant.
PERSONS TENDERING EXISTING NOTES THROUGH ATOP THEREBY AGREE TO BE BOUND BY
THE LETTER OF TRANSMITTAL AND WILL BE DEEMED TO HAVE MADE THE REPRESENTATION SET
FORTH BELOW IN THE SECOND PARAGRAPH UNDER THE HEADING "--RESALE OF NEW NOTES."
BOOK-ENTRY DELIVERY PROCEDURES
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Existing Notes at DTC, for purposes of
the Exchange Offer. Any financial institution that is a participant in DTC may
make book-entry delivery of the Existing Notes by causing DTC to transfer such
Existing Notes into the Exchange Agent's account at DTC in accordance with DTC
procedures for such transfer. Timely book-entry delivery of Existing Notes
pursuant to the Exchange Offer, however, requires receipt of a Book-Entry
Confirmation prior to the Expiration Date. In addition, although delivery of
Existing Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, the Letter of Transmittal (or a manually signed
facsimile thereof), together with any required signature guarantees and any
other required documents, or an Agent's Message in connection with a book-entry
transfer, must, in any case, be delivered or transmitted to and received by the
Exchange Agent prior to the Expiration Date to receive New Notes for tendered
Existing Notes, or the guaranteed delivery
21
<PAGE>
procedure described below must be complied with. Tender will not be deemed made
until such documents or Agent's Message are received by the Exchange Agent.
Delivery of documents or information to DTC does not constitute delivery to the
Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Existing Holders who wish to tender their Existing Notes and (i) whose
Existing Notes are not immediately available, (ii) who cannot deliver their
Existing Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent, or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Existing Holder, the certificate
number(s) of such Existing Notes and the principal amount of Existing Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, on or prior to three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof), together
with the certificate(s) representing the Existing Notes (or a confirmation
of book-entry transfer of such Existing Notes into the Exchange Agent's
account at DTC) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Existing Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Existing Notes into the Exchange Agent's account at DTC)
and all other documents required by the Letter of Transmittal, are received
by the Exchange Agent within three New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Existing Holders who wish to tender their Existing Notes according to
the guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Existing Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Existing Notes to be withdrawn (the
"Depositor"), (ii) identify the Existing Notes to be withdrawn (including the
certificate number(s) and principal amount of such Existing Notes, or, in the
case of Existing Notes transferred by book-entry transfer, the name and number
of the account at DTC to be credited), (iii) be signed by the Existing Holder in
the same manner as the original signature on the Letter of Transmittal by which
such Existing Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee
register the transfer of such Existing Notes into the name of the person
withdrawing the tender, and (iv) specify the name in which any such Existing
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time or receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Existing Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Existing Notes so
22
<PAGE>
withdrawn are validly retendered. Any Existing Notes which have been tendered
but which are not accepted for exchange will be returned to the Holder thereof
without cost to such Existing Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Existing Notes may be retendered by following one of the procedures described
above under "--Procedures for Tendering" at any time prior to the Expiration
Date.
AMENDMENTS; TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange New Notes for any Existing
Notes, and may amend or terminate the Exchange Offer in its sole discretion
before the acceptance of such Existing Notes. By way of example, the following
constitute some, but not all, of the reasons for which the Company might choose
to amend or terminate the Exchange Offer:
(a) in the opinion of counsel to the Company or the Guarantors, if any,
the Exchange Offer or any part thereof contemplated herein violates any
applicable law or interpretation of the Staff;
(b) any action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development shall have occurred in any existing action or proceeding
with respect to either the Company or the Guarantors, if any;
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on the Nasdaq Stock Market or any exchange,
or any banking moratorium, shall have occurred, as a result of which the
Company is unable to proceed with the Exchange Offer; or
(e) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
In its sole discretion, the Company may (i) refuse to accept any Existing
Notes and return all tendered Existing Notes to the tendering Existing Holders,
(ii) extend the Exchange Offer and retain all Existing Notes tendered prior to
the expiration of the Exchange Offer, subject, however, to the rights of
Existing Holders to withdraw such Existing Notes (see "--Withdrawals of
Tenders"), or (iii) accept all properly tendered Existing Notes which have not
been validly withdrawn.
EXCHANGE AGENT
State Street Bank and Trust Company of California, N.A., will act as
Exchange Agent for the Exchange Offer with respect to the Existing Notes.
23
<PAGE>
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Existing Notes and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
<TABLE>
<S> <C>
By Hand, Overnight Courier State Street Bank and Trust Company
or Mail: of California, N.A. Exchange Agent
c/o State Street Bank and Trust Company
2 International Place, 4th Floor
Boston, MA 02110
Attention: Kellie Mullen, Corporate Trust
Dept.
Confirm by Telephone: 617-664-5587
By Facsimile: 617-664-5290
</TABLE>
FEES AND EXPENSES
The required expenses of soliciting Existing Notes for exchange will be
borne by the Company. The principal solicitation is being made by mail by the
Exchange Agent. However, additional solicitation may be made by telephone,
facsimile or in person by officers and regular employees of the Company and its
affiliates and by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees as
negotiated for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith and pay other registration
expenses, including fees and expenses, as negotiated, of the Trustee (as
defined), filing fees, blue sky fees and printing and distribution expenses.
RESALE OF NEW NOTES
The Company is making the Exchange Offer in reliance on the position of the
Staff as set forth in the Exxon Capital No-Action Letter, the Morgan Stanley
No-Action Letter and the Shearman & Sterling No-Action Letter, and other
interpretive letters addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter addressing such matters
and there can be no assurance that the Staff would make a similar determination
with respect to the Exchange Offer as it has in such interpretive letters to
third parties. Based on these interpretations by the Staff, and subject to the
two immediately following sentences, the Company believes that New Notes issued
pursuant to this Exchange Offer in exchange for Existing Notes may be offered
for resale, resold and otherwise transferred by a Holder thereof (other than a
Holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such Holder's business and that
such Holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any Holder of Existing Notes who (i)
is an "affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act), (ii) does not acquire such New Notes in the ordinary course of
its business, (iii) intends to participate in the Exchange Offer for the purpose
of distributing New Notes, or (iv) is a broker-dealer who purchased such
Existing Notes directly from the Company, (a) will not be able to rely on the
interpretations of the Staff set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to tender such Existing Notes in
the Exchange Offer, and (c) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or other
transfer of such Existing Notes unless such sale is made pursuant to an
exemption from such requirements. In addition, as described below, an Exchanging
Dealer may be deemed a statutory "underwriter" within the meaning of the
Securities Act and must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such New Notes.
24
<PAGE>
Each Holder of Existing Notes who wishes to exchange Existing Notes for New
Notes in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in, and (iv) it is not engaged in,
and does not intend to engage in, a distribution of the New Notes a distribution
(within the meaning of the Securities Act) of such New Notes. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Existing Notes for its own account as a result
of market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, such an Exchanging Dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. Based on
the position taken by the Staff in the interpretive letters referred to above,
the Company believes that Exchanging Dealers may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Existing Notes with a prospectus meeting the requirements of the Securities
Act, which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such New Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by an Exchanging Dealer during the
period referred to below in connection with resales of New Notes received in
exchange for Existing Notes where such Existing Notes were acquired by such
Exchanging Dealer for its own account as a result of market-making or other
trading activities. Subject to certain provisions set forth in the Registration
Rights Agreement, the Company has agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be used by an Exchanging Dealer
in connection with resales of such New Notes for a period of 180 days following
effectiveness of the Exchange Offer Registration Statement. See "Plan of
Distribution." Any Exchanging Dealer who is an affiliate of the Company may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. See "The Exchange Offer--Resales of New Notes."
In that regard, each Exchanging Dealer who surrenders Existing Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Exchanging Dealer will suspend the sale of New Notes
pursuant to this Prospectus until the Company has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to such Exchanging Dealer or the Company
has given notice that the sale of the New Notes may be resumed, as the case may
be.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Holders of Existing Notes who do not tender their Notes, except for certain
instances involving the Initial Purchasers or Existing Holders who are not
eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Additional Interest for failure to register. Accordingly, any
Holder of Existing Notes that does not exchange that Holder's Existing Notes for
New Notes will continue to hold the untendered Existing Notes and will be
entitled to all the rights and subject to all the limitations applicable thereto
under the Indenture, except to the extent that such rights or
25
<PAGE>
limitations, by their terms, terminate or cease to have further effectiveness as
a result of the Exchange Offer.
The Existing Notes that are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i) to a person who the seller reasonably believes is a
qualified institutional buyer in a transaction meeting the requirements of Rule
144A, in a transaction meeting the requirements of Rule 144A under the
Securities Act, (ii) in a transaction occurring outside the United States to a
foreign person, which transaction meets the requirements of Rule 904 under the
Securities Act, (iii) in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel if the
Company so requests), (iv) to the Company, or (v) pursuant to an effective
registration statement, and, in each case, in accordance with any applicable
securities laws of any State of the United States or any other applicable
jurisdiction.
OTHER
Participation in the Exchange Offer is voluntary and Existing Holders should
carefully consider whether to accept. Holders of the Existing Notes are urged to
consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Existing Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Existing
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Existing Notes.
26
<PAGE>
THE RECAPITALIZATION
THE REORGANIZATION
Prior to April 1998, substantially all of the capital stock of the Company
was owned by the Russell Solomon Trust. In April 1998, the Company consummated
the Reorganization, which consolidated substantially all of the Tower business
operations in the Company, and also, apart from the Reorganization, transferred
certain assets to the Trusts. As a result of the Reorganization, the Company is
now a wholly-owned subsidiary of Parent. The Reorganization included an exchange
by the Company's shareholders of their common shares in the Company for a
controlling equity interest in the Parent. As part of the Reorganization, the
Trusts and certain Solomon family members contributed to Parent certain business
assets (subject to certain liabilities), including wholesale distribution
operations, in exchange for the remaining equity interest in Parent. Separately,
Parent contributed such assets and liabilities to the Company. Prior to the
consummation of the Reorganization set forth above, the Company transferred
certain assets valued at approximately $2.9 million to the Trusts in exchange
for inventory with an equal value. The purchase price of these assets sold by
the Company to the Trusts was determined based upon independent appraisals or
estimates of the fair market value that the Company believes to be reasonable.
See "Certain Transactions--The Reorganization" and Note 2 to "Consolidated
Financial Statements." As a result of the Reorganization and the planned or
already consummated elimination by merger of certain domestic U.S. subsidiaries
of the Company, substantially all of the Company's U.S. store operations and
U.K. operations will be owned directly by the Company. The Company's other
international operations will be conducted by subsidiaries of the Company or, in
certain cases, joint ventures, and the Company's U.S. distribution operations
will be conducted by a subsidiary of the Company.
THE REFINANCING
The Company refinanced previously outstanding indebtedness of approximately
$168.0 million under its $195.0 million Former Credit Facility and approximately
$64.3 million of other previously outstanding indebtedness by consummating the
Existing Notes Offering and entering into the New Credit Facility. The New
Credit Facility provides for an aggregate $275.0 million commitment, of which
approximately $150.0 million can be borrowed in Japanese yen and a portion in
British pounds. Aggregate borrowings are subject to compliance with a borrowing
base formula. As of April 30, 1998, an aggregate of approximately $245.1 million
was available under the New Credit Facility based upon the borrowing base
formula, of which $120.6 million had been drawn. See "Capitalization" and
"Description of New Credit Facility."
The New Credit Facility is structured as two separate but interrelated
facilities: the Facility A Revolving Line and the Facility B Revolving Line. The
Facility A Revolving Line is a U.S. $125.0 million revolving credit facility
(which allows a portion to be borrowed in British pounds) and is available in
full to MTS and available in an amount not to exceed $25.0 million to Tower
Records Kabushiki Kaisha, the Company's Japanese operating subsidiary ("TRKK").
The Facility B Revolving Line is a Japanese yen revolving credit facility (which
also allows a portion to be borrowed in U.S. dollars) in an aggregate available
principal amount equal to the yen equivalent of U.S. $150.0 million and is
available to both MTS and TRKK in full. See "Description of New Credit
Facility."
27
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer. In
consideration for issuing the New Notes in exchange for Existing Notes as
described in this Prospectus, the Company will receive Existing Notes in like
principal amount. The Existing Notes surrendered in exchange for the New Notes
will be retired and canceled.
The terms and conditions of the Existing Notes to be retired and canceled in
the Exchange Offer are identical in all material respects to those of the New
Notes, except that the New Notes will be registered securities whereas the
Existing Notes are not, and except that holders of the New Notes will not be
entitled to registration rights and will not be entitled to Additional Interest
under the Registration Rights Agreement.
The $110.0 million of gross proceeds from the Existing Notes Offering
(before deductions of discounts and other expenses of the Existing Notes
Offering), together with borrowings under the New Credit Facility, which were
approximately $127.0 million initially, were used to (i) refinance the Company's
$168.0 million of borrowings under the Former Credit Facility, (ii) refinance
approximately $64.3 million of other existing indebtedness, and (iii) pay fees
and expenses of approximately $3.8 million, incurred in connection with the
Recapitalization. See "Summary--The Recapitalization" and "Description of New
Credit Facility."
The amounts previously outstanding under the Former Credit Facility
consisted of revolving loans for working capital purposes which would have
matured on May 1, 1998. Such loans bore interest at variable rates determined
from time to time by adding a margin to the Eurodollar Rate ("EURO") or the
prime rate. At January 31, 1998, the interest rate was approximately 6.98%. The
other existing senior indebtedness, as adjusted to give effect to the
Refinancing as if it had occurred on January 31, 1998, consisted of (i) a
yen-denominated senior note which would have matured on May 2, 1998 in the
amount of approximately $45.6 million, bearing interest at a rate per annum of
1.88%, which was incurred to refinance certain previously existing indebtedness,
(ii) a yen-denominated senior note which would have matured on November 1, 1998
in the amount of approximately $27.0 million, bearing interest at a rate per
annum of 1.42%, which was incurred for working capital purposes, (iii)
yen-denominated revolving loans which would have matured on November 1, 1998, in
the amount of approximately $13.4 million, bearing interest at variable rates
(1.62% as of January 31, 1998), which was incurred for working capital purposes,
(iv) a yen-denominated term loan note which would have matured on March 25,
1999, in the amount of approximately $7.9 million, bearing interest at a rate
per annum of 2.40%, which was incurred to refinance certain previously existing
indebtedness and (v) a yen-denominated term loan note which would have matured
on February 25, 2002, in the amount of approximately $3.9 million, bearing
interest at a rate per annum of 2.50%, which was incurred for working capital
purposes and equipment purchases.
28
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of April 30, 1998. This table should be read in conjunction with
"Selected Historical Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL
30, 1998
-----------
(DOLLARS IN
MILLIONS)
<S> <C>
Cash and cash equivalents............................................................................ $ 10.7
-----------
-----------
Total debt (including current maturities):
New Credit Facility(a)............................................................................. 120.6
Other existing indebtedness........................................................................ 10.5(b)
-----------
Total senior debt................................................................................ 131.1
Existing Notes..................................................................................... 110.0
-----------
Total debt....................................................................................... 241.1
Shareholders' equity............................................................................. 128.6
-----------
Total capitalization............................................................................. $ 369.7
-----------
-----------
</TABLE>
- ------------------------
(a) The New Credit Facility provides for an aggregate $275.0 million commitment,
of which approximately $150.0 million can be borrowed in Japanese yen (and a
portion in British pounds), subject to compliance with a borrowing base
formula. As of April 30, 1998, an aggregate of approximately $245.1 million
was available under the New Credit Facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of New Credit Facility."
(b) Other existing indebtedness which remains outstanding includes a $3.0
million 8.21% term loan note, a $3.7 million 8.50% real estate loan and $3.8
million of other obligations. See Note 7 to "Consolidated Financial
Statements."
29
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The selected historical consolidated financial information presented below
as of July 31, 1996 and 1997 and for each of the years in the three-year period
ended July 31, 1997 have been derived from and should be read in conjunction
with the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The selected historical consolidated financial
information presented below as of July 31, 1993, 1994 and 1995 and for each of
the years in the two-year period ended July 31, 1994 have been derived from the
audited consolidated financial statements of the Company not included elsewhere
in this Prospectus. The selected historical consolidated financial information
as of April 30, 1998 and for the nine months ended April 30, 1997 and 1998 have
been derived from and should be read in conjunction with the unaudited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The selected historical consolidated financial data as of April 30,
1997 have been derived from the unaudited financial statements of the Company
not included in this Prospectus. The selected historical consolidated financial
information has been retroactively restated to give effect to the
Reorganization. The unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial condition and
results of operations for those periods. Operating results for the nine months
ended April 30, 1998, are not necessarily indicative of the results that may be
expected for the year ended July 31, 1998 or for any future period. This data
should be read in conjunction with the consolidated financial statements and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Summary Historical Consolidated Financial Information"
and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
FISCAL YEAR ENDED JULY 31, APRIL 30,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues........................................... $ 699.4 $ 808.5 $ 950.6 $ 1,001.0 $ 991.8 $ 752.5
Cost of sales.......................................... 474.0 543.9 640.6 676.1 669.3 508.4
--------- --------- --------- --------- --------- ---------
Gross profit......................................... 225.4 264.6 310.0 324.9 322.5 244.1
Selling, general and administrative expenses........... 183.7 212.6 255.1 270.4 267.6 202.1
Depreciation and amortization.......................... 15.1 17.4 20.5 20.9 21.8 17.3
--------- --------- --------- --------- --------- ---------
Income from operations................................. 26.6 34.6 34.4 33.6 33.1 24.7
Other income (expense):
Interest expense....................................... 6.7 7.8 11.5 14.9 14.3 11.5
Foreign currency translation gain (loss)............... 4.3 1.0 5.6 (1.4) (3.6) (0.5)
Other income (expenses)................................ 0.5 (0.4) (2.3) (0.1) (5.7) (0.8)
--------- --------- --------- --------- --------- ---------
Income before taxes, minority interest, change in
accounting and extraordinary item.................... 24.7 27.4 26.2 17.2 9.5 11.9
Provision for income taxes............................. 9.8 10.7 10.9 7.0 4.5 5.3
--------- --------- --------- --------- --------- ---------
Income before minority interest, change in accounting
and extraordinary item............................... 14.9 16.7 15.3 10.2 5.0 6.6
Other items(a)......................................... (0.2) 0.6 (0.2) (0.2) (1.5) (1.3)
--------- --------- --------- --------- --------- ---------
Net income............................................. $ 14.7 $ 17.3 $ 15.1 $ 10.0 $ 3.5 $ 5.3
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
OTHER DATA:
Ratio of earnings to fixed charges(b).................. 2.4x 2.2x 1.8x 1.5x 1.3x 1.4x
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................................... $ 346.9 $ 412.7 $ 505.1 $ 528.8 $ 544.6 $ 541.9
Total debt (including current maturities).............. 116.2 140.5 199.6 202.8 211.3 222.9
Shareholders' equity................................... 95.0 112.1 127.5 135.1 134.0 135.4
<CAPTION>
1998
---------
<S> <C>
INCOME STATEMENT DATA:
Net revenues........................................... $ 771.4
Cost of sales.......................................... 522.6
---------
Gross profit......................................... 248.8
Selling, general and administrative expenses........... 204.8
Depreciation and amortization.......................... 17.6
---------
Income from operations................................. 26.4
Other income (expense):
Interest expense....................................... 10.4
Foreign currency translation gain (loss)............... (0.9)
Other income (expenses)................................ 0.1
---------
Income before taxes, minority interest, change in
accounting and extraordinary item.................... 15.2
Provision for income taxes............................. 6.4
---------
Income before minority interest, change in accounting
and extraordinary item............................... 8.8
Other items(a)......................................... (.1)
---------
Net income............................................. $ 8.7
---------
---------
OTHER DATA:
Ratio of earnings to fixed charges(b).................. 1.6x
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................................... $ 533.5
Total debt (including current maturities).............. 241.1
Shareholders' equity................................... 128.6
</TABLE>
See Notes to Selected Historical Consolidated Financial Information
30
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(a) Other items is comprised of minority interests in net income of
subsidiaries, cumulative effect of change in accounting principle and
extraordinary item.
(b) Ratio of earnings to fixed charges is computed by dividing (i) the sum of
income before taxes and fixed charges by (ii) fixed charges. Fixed charges
consist of the sum of interest expense, interest expense capitalized, the
amortization of deferred financing costs, and 35% of rental expense
representing management's determination of a reasonable approximation of
interest costs on rents.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical Consolidated Financial Information," and the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus. The results shown herein are not necessarily indicative of the
results to be expected in any future period. The following discussion contains
forward-looking statements that involve known and unknown risks and
uncertainties. Use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans" and similar expressions is intended to identify
forward-looking statements. The Company's actual results could differ materially
from those expressed or implied by such forward-looking statements as a result
of factors set forth herein. Such factors include, but are not limited to, the
cautionary statements set forth below and under the captions "Forward-Looking
Statements" (on the cover page), "Risk Factors" and "Business" herein. All
forward-looking statements included in this Prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements.
GENERAL
Founded in 1960, Tower is the second largest specialty retailer of recorded
music in the United States and is one of the largest and most widely-recognized
music retailers in the world. The Company operates a total of 183 stores
worldwide, consisting of 119 U.S. stores in 20 states and 64 international
stores in 11 countries. Over Tower's 38-year operating history, the Company has
closed only eight stores. Management believes that Tower is one of the leading
music retailers in each of the U.S. major metropolitan areas in which it
operates (many of which are the fastest growing markets in the United States).
The Company offers a diversified line of products including compact discs,
recorded audio cassettes, recorded video cassettes, laser discs, DVD and other
complementary products, including books, magazines, blank tapes, software
titles, and accessories. Management believes that Tower's highly recognizable
brand name, prime store locations, depth of music catalog, knowledgeable
customer service and entertaining, interactive store environments enable it to
effectively target a broad music consumer demographic and to continue to foster
strong customer loyalty. For the nine month period ended April 30, 1998, Tower's
net revenues were $771.4 million.
RESULTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30,
1997
NET REVENUES. Net revenues were $771.4 million for the nine months ended
April 30, 1998, an increase of $18.9 million or 2.5% (or 5.2% excluding the
unfavorable effects of U.S. dollar-Japanese yen exchange rate movements), from
$752.5 million for the nine months ended April 30, 1997. The Company's net
revenues were derived from U.S. sales of $479.5 million and international sales
of $291.9 million for the nine months ended April 30, 1998 compared to $454.2
million in the U.S. and $298.3 million internationally for the nine months ended
April 30, 1997. Record and tape sales for the period ended April 30, 1998
represented 88.9% of the Company's net revenues versus 89.8% for the period
ended April 30, 1997. Retail sales represented 97.6% of the Company's net
revenues for the nine-month period ended April 30,1998 versus 97.1% for the
nine-month period ended April 30, 1997. The increase in the Company's net
revenues was primarily due to (i) an increase in store sales, (ii) a decrease in
overall music retail square footage as many mall-based music retailers
consolidated store locations, (iii) a reduction in electronics music retailers'
music selling space and a narrowing of catalog selections in response to
difficulties in successfully implementing "loss leader" music retail sales
strategies, and (iv) an increase in the number of popular new releases.
32
<PAGE>
GROSS PROFIT. Gross profit was $248.8 million for the nine months ended
April 30, 1998, an increase of $4.7 million or 1.9%, from $244.1 million for the
nine months ended April 30, 1997. Gross profit as a percentage of net revenues
decreased slightly to 32.2% for the nine months ended April 30, 1998 as compared
to 32.4% for the nine months ended April 30, 1997. The Company believes that the
primary factor contributing to the slight decline was the rapidly weakening yen
and pricing in Japan not keeping pace with the increased cost of a
dollar-sensitive product. Pricing pressures in other Asian markets also resulted
in decreased margins in these regions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $204.8 million for the nine months ended April 30,
1998, an increase of $2.7 million or 1.3% from $202.1 million for the nine
months ended April 30, 1997. As a percentage of net revenues, selling, general
and administrative expenses declined slightly for the nine months ended April
30, 1998 as compared to the nine months ended April 30, 1997, primarily due to
the Company's success in containing wages and variable costs.
INCOME FROM OPERATIONS. Income from operations was $26.4 million for the
nine months ended April 30, 1998, an increase of $1.7 million or 6.7% from $24.7
million for the nine months ended April 30, 1997. As a percentage of net
revenues, income from operations increased to 3.4% for the nine months ended
April 30, 1998 from 3.3% for the nine months ended April 30, 1997.
NET INCOME. Net income was $8.7 million for the nine months ended April 30,
1998, an increase of $3.4 million or 65.5% from $5.3 million for the nine months
ended April 30, 1997.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
NET REVENUES. Net revenues were $991.8 million for the fiscal year ended
July 31, 1997, a decrease of $9.2 million or 0.9% (or a 2.5% increase excluding
the unfavorable effects of U.S. dollar-Japanese yen exchange rate movements)
from $1,001.0 million for the fiscal year ended July 31, 1996. The Company's
revenues were derived from U.S. sales of $596.9 million and international sales
of $394.9 million for the fiscal year ended July 31, 1997 compared to $584.7
million in the U.S. and $416.4 million internationally for the fiscal year ended
July 31, 1996. Record and tape sales for the period ended July 31, 1997
represented 89.6% of the Company's net revenues versus 88.8% for the period
ended July 31, 1996. Retail sales represented 97.0% of the Company's net
revenues for the fiscal year ended July 31, 1997 versus 95.8% for the fiscal
year ended July 31, 1996.
GROSS PROFIT. Gross profit was $322.5 million for the fiscal year ended
July 31, 1997, a decrease of $2.4 million or 0.7% from $324.9 million for the
fiscal year ended July 31, 1996. Gross profit as a percentage of net revenues
remained constant at 32.5% for the fiscal year ended July 31, 1997 compared to
the fiscal year ended July 31, 1996. The Company believes that the primary
factors contributing to its relatively stable gross profit during these periods
were Tower's focus on customers who purchase deep-catalog (and consequently
higher margin) product, strong inventory management and favorable purchasing
terms from vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $267.6 million for the fiscal year ended July 31,
1997, a decrease of $2.8 million or 1.0% from $270.4 million for the fiscal year
ended July 31, 1996. As a percentage of net revenues, selling, general and
administrative expenses remained constant at 27.0% for the fiscal years ended
July 31, 1997 and 1996.
INCOME FROM OPERATIONS. Income from operations was $33.1 million for the
fiscal year ended July 31, 1997, a decrease of $0.5 million or 1.4% from $33.6
million for the fiscal year ended July 31, 1996. As a percentage of net
revenues, income from operations decreased slightly to 3.3% for the fiscal year
ended July 31, 1997 from 3.4% for the fiscal year ended July 31, 1996.
33
<PAGE>
OTHER EXPENSE. Other Expense (net) increased $7.2 million for the fiscal
year ended July 31, 1997 compared to fiscal 1996, primarily due to costs
associated with a one time write-off of leasehold improvements of approximately
$4.6 million relating to the closure of a temporary location pending the
reconstruction of the Company's Lincoln Center store in New York City and due to
foreign currency transaction losses. There were no other material components of
Other Expense (net).
The Company was required by the landlord to temporarily vacate its existing
Lincoln Center location during renovations. It is the Company's consistent
practice to charge gains and losses on asset disposals to Other Income and
Expense.
The Company does significant business transactions in currencies other than
the U.S. dollar. Exchange losses result from the day to day fluctuations in
foreign currency exchange rates, due primarily to the weakening yen and other
Asian currencies against the U.S. dollar.
EXTRAORDINARY CHARGES. An extraordinary charge (net of tax) of $1.2 million
was incurred in total in fiscal 1997 as a result of the early repayment of
certain privately placed debt.
NET INCOME. Net income was $3.5 million for the fiscal year ended July 31,
1997, a decrease of $6.5 million or 64.7% from $10.0 million for the fiscal year
ended July 31, 1996.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
NET REVENUES. Net revenues were $1,001.0 million for the fiscal year ended
July 31, 1996, an increase of $50.5 million or 5.3% (or 8.9% after allowing for
the effect of U.S. dollar-Japanese yen exchange rate movements), from $950.6
million for the fiscal year ended July 31, 1995. The Company's revenues were
derived from U.S. sales of $584.7 million and international sales of $416.4
million for the fiscal year ended July 31, 1996 compared to $605.1 million in
the U.S. and $345.4 million internationally for the fiscal year ended July 31,
1995. Record and tape sales for the period ended July 31, 1996 represented 88.8%
of the Company's net revenues versus 87.8% for the period ended July 31, 1995.
Retail sales represented 95.8% of the Company's net revenues for the fiscal year
ended July 31, 1996 versus 95.4% for the fiscal year ended July 31, 1995. The
growth in revenues was primarily due to an increase in net revenues from the
Company's operations in Japan, which benefitted from the opening of ten new
stores and strong comparable same store sales.
GROSS PROFIT. Gross profit was $324.9 million for the fiscal year ended
July 31, 1996, an increase of $14.9 million or 4.8% from $310.0 million for the
fiscal year ended July 31, 1995. Gross profit as a percentage of revenues
decreased slightly to 32.5% for the fiscal year ended July 31, 1996 from 32.6%
for the fiscal year ended July 31, 1995. The Company believes that the primary
factors contributing to its relatively stable gross margins during these periods
were Tower's focus on customers who purchase deep-catalog (and consequently
higher margin) product, strong inventory management and favorable purchasing
terms from vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $270.4 million for the fiscal year ended July 31,
1996, an increase of $15.3 million or 6.0%, from $255.1 million for the fiscal
year ended July 31, 1995. As a percentage of net revenues, selling, general and
administrative expenses increased to 27.0% for the fiscal year ended July 31,
1996 from 26.8% for the fiscal year ended July 31, 1995. This slight increase
was primarily attributable to increased occupancy expense as more locations were
opened in Japan which commanded higher rents. The increase in occupancy expense
was partially offset by the Company's success in managing other operating
expenses, with reductions as a percentage of total revenues occurring in wages,
advertising and other variable expenses.
INCOME FROM OPERATIONS. Income from operations was $33.6 million for the
fiscal year ended July 31, 1996, a decrease of $0.8 million or 2.5%, from $34.4
million for the fiscal year ended July 31,
34
<PAGE>
1995. As a percentage of net revenues, income from operations decreased to 3.4%
for the fiscal year ended July 31, 1996 from 3.6% for the fiscal year ended July
31, 1995.
OTHER EXPENSE. Other expense (net) increased $8.2 million in the fiscal
year ended July 31, 1996, primarily due to a foreign currency translation loss
of $1.4 million compared to a $5.6 million foreign currency translation gain for
the fiscal year ended July 31, 1995. The Company does significant business
transactions in currencies other than the U.S. dollar. Exchange losses result
from the day to day fluctuations in currency exchange rates, due primarily to
the weakening yen and other Asian currencies against the U.S. dollar.
NET INCOME. Net income was $10.0 million for the fiscal year ended July 31,
1996, a decrease of $5.1 million or 33.6% from $15.1 million for the fiscal year
ended July 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $16.4 million and $28.0
million for the nine months ended April 30, 1998 and 1997, respectively, and
$52.2 million in fiscal 1997 and $48.2 million in fiscal 1996. For the nine
months ended April 30, 1998, inventory provided a source of cash due to minimal
store expansion and a continued focus on inventory management. Inventory
management continues to remain the same with POS reporting available at
headquarters and at the store level. In 1997 and 1996 cash used for inventory
purchases was $8.3 million and $26.6 million, respectively, and was primarily
related to inventory requirements associated with store expansion. The decrease
in cash flow from operations for the period ended April 30, 1998 compared to the
comparable period in fiscal 1997 was primarily due to payments reducing accounts
payable. The use of cash in 1995 for inventory needs was associated with a
one-time build up of catalog product.
Capital expenditures for the nine months ended April 30, 1998 as well as
fiscal 1997 and 1996 were primarily for store expansion and consisted primarily
of improvements to existing stores and new stores both domestically and in Asia.
Interest payments on the Notes and on the New Credit Facility will impose
significant liquidity demands upon the Company comparable to those of recent
years. In addition to its debt service obligations, the Company will require
liquidity for capital expenditures, lease obligations and general working
capital needs. Total capital expenditures for 1998 are expected to be
approximately $25.0 million, of which approximately $5.0 million will be related
to maintenance capital requirements.
The Company believes that the cash flow generated from its operations,
together with amounts available under the New Credit Facility, should be
sufficient to fund its debt service requirements, lease obligations, working
capital needs, its currently expected capital expenditures and other operating
expenses for the foreseeable future. The New Credit Facility provides the
Company with available borrowings up to an aggregate amount of $275.0 million,
of which approximately $150.0 million can be borrowed in Japanese yen and a
portion in British pounds, subject to compliance with the borrowing base
formula. As of April 30, 1998, approximately $245.1 million was available under
the New Credit Facility based upon the borrowing base formula, of which $120.6
million had been drawn. The Company's future operating performance and ability
to service or refinance the Notes and the New Credit Facility will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control. See "Risk Factors."
The New Credit Facility and the Notes impose certain restrictions on the
Company's ability to make capital expenditures and limit the Company's ability
to incur additional indebtedness. Such restrictions could limit the Company's
ability to respond to market conditions, to provide for unanticipated capital
investments or to take advantage of business or acquisition opportunities. The
covenants contained in the New Credit Facility and the Notes also, among other
things, limit the ability of the Company to dispose of assets, repay
indebtedness or amend other debt instruments, pay distributions, create liens
35
<PAGE>
on assets, enter into sale and leaseback transactions, make investments, loans
or advances and make acquisitions.
SEASONALITY
Retail music sales in the United States are typically higher during the
calendar fourth quarter as a result of consumer purchasing patterns due to
increased store traffic and impulse buying by holiday shoppers. As a result, the
majority of U.S. music retailers and, more specifically, the mall-based
retailers rely heavily on the calendar fourth quarter to achieve annual sales
and profitability results. Tower's deep-catalog approach to prerecorded music
appeals to customers who purchase music on a year-round basis. Consequently,
Tower has historically been able to maintain consistency with its gross margins,
has had reduced seasonal reliance and has more operating flexibility than its
mall-based competitors. In addition, international markets exhibit less fourth
quarter seasonality than U.S. markets and Tower's international presence has
historically further reduced this reliance on the U.S. holiday shopping season.
INFLATION
The Company believes that the recent low rates of inflation in the United
States, Japan and the United Kingdom, where it primarily operates, have not had
a significant effect on its net sales or operating results. The Company attempts
to offset the effects of inflation through price increases and control of
expenses.
FOREIGN EXCHANGE MANAGEMENT
The Company has substantial operations and assets located outside the United
States, primarily in the United Kingdom and Japan. With respect to international
operations, principally all of Tower's revenues and costs (including borrowing
costs) are incurred in the local currency, except that certain inventory
purchases are tied to U.S. dollars. The Company's financial performance on a
U.S. dollar-denominated basis has historically been significantly affected by
changes in currency exchange rates. The Company believes that the matching of
revenues and expenses in local currency, as well as its foreign exchange hedging
activities and borrowings in foreign currencies, mitigate the effect of
fluctuating currency exchange rates. Nonetheless, changes in certain exchange
rates could adversely affect the Company's business, financial condition and
results of operations. The Company believes that enhancement of its
international banking relationships under the New Credit Facility will provide
additional hedging opportunities for its foreign currency exposure management.
See "Risk Factors--Risks Relating to International Operations."
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, were issued in June 1997. The Company will
adopt both of the statements beginning July 31, 1999.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is a measure of all changes in the equity of the Company as a result of
recognized transactions and other economic events of the period other than
transactions with shareholders in their capacity as shareholders. Had the
provisions of SFAS No. 130 been applied for the years ended July 31, 1995, 1996
and 1997, comprehensive income would have consisted primarily of net income and
foreign currency translation adjustments.
SFAS No. 131 requires that the Company report financial and descriptive
information about its reportable operating segments using the "management
approach" model. Under the management
36
<PAGE>
approach model, segments are defined based on the way the Company's management
internally evaluates segment performance and decides how to allocate resources
to segments. The Company is in the process of evaluating the impact of this
pronouncement on its segment disclosures.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, within the
next two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
The Company has budgeted for and is currently utilizing in-house information
technology staff and outside consultants to analyze and upgrade its corporate
management software to make it Year 2000 compliant, a process which the Company
expects to complete in late 1998 at a cost of approximately $250,000. The
Company also intends to implement its ISP system in Japan in early 1999 which
should make the Company's entire inventory management system Year 2000
compliant. The Company has not completed a review of the preparations of its
major vendors, distributors and shippers to meet the Year 2000 requirements and
does not yet have a basis to assess the impact, if any, that the Year 2000
requirements will have on its vendors, distributors and shippers and
consequently on the Company. Because the Company is able to order directly from
its major vendors and some independent distributors and have product
drop-shipped directly to stores, any failure of such vendors and distributors or
of shippers to institute or complete their own programs to address Year 2000
requirements could adversely impact the Company's distribution system. Failure
by the Company to complete implementation of the required changes to address
Year 2000 requirements prior to the Year 2000 might result in significant
difficulties in the Company's administration of corporate and inventory tracking
software systems. Failure by the Company's vendors and distributors, shippers
and other parties with which the Company does business to address Year 2000
requirements could significantly impact the ability of the Company to distribute
products for some period of time and otherwise disrupt the Company's business
operations. Such problems could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors--Year
2000 Compliance."
37
<PAGE>
BUSINESS
OVERVIEW
Founded in 1960, Tower is the second largest specialty retailer of recorded
music headquartered in the United States in terms of revenues and is one of the
largest and most widely-recognized music retailers in the world. The Company
operates a total of 183 stores worldwide, consisting of 119 U.S. stores in 20
states and 64 international stores in 11 countries. Management believes that
Tower is one of the leading music retailers in each of the U.S. major
metropolitan areas in which it operates (many of which are the fastest growing
markets in the United States). The Company offers a diversified line of music
products including compact discs, recorded audio cassettes, recorded video
cassettes, laser discs, DVD and other complementary products, including books,
magazines, blank tapes, software titles, and accessories. As of April 30, 1998,
Tower's aggregate outstanding indebtedness was $241.1 million, and for the nine
month period ended April 30, 1998 Tower's ratio of earnings to fixed charges was
1.6x and net revenues were $771.4 million.
Tower attracts and retains customers who buy music on a year-round basis by
providing an extensive product selection in an interactive, entertaining
environment. Tower stores feature extended store hours, in-store listening
stations and knowledgeable and motivated sales personnel. These factors,
combined with the Company's competitive pricing, make Tower stores a preferred
shopping destination. Tower offers one of the broadest selections of recorded
music, including recent releases, older releases and various other music formats
primarily in stand-alone locations in densely populated urban and suburban
areas. Tower stores are typically larger in square footage and have lower rents
as a percentage of revenues than comparable mall-based music specialty
retailers. Most of the Company's domestic stores exceed 10,000 square feet and
carry at least 50,000 music titles. Flagship stores, which are located in major
metropolitan areas such as Boston, Buenos Aires, Chicago, Glasgow, Hong Kong,
Honolulu, London, Los Angeles, New Orleans, New York, Osaka, Philadelphia, San
Francisco, Seattle, Singapore, Taipei, Tokyo, Toronto and Washington, D.C.,
typically exceed 20,000 square feet and carry between 80,000 and 120,000 music
titles. In addition to the BILLBOARD Top 50, Tower offers competitive pricing on
the full range of its product offerings. Management believes that Tower's
success in attracting loyal customers increases store traffic and sales
throughout the year and has been a factor in making the Company less dependent
upon the success of new music releases and calendar fourth quarter sales than
many of its U.S. competitors.
Due to Tower's high sales volume and long-standing relationships with
vendors and music manufacturers, the Company receives substantial cooperative
advertising allowances, beneficial purchasing terms, short lead times on
inventory fulfillment, product return rights and drop shipments of orders
directly to its stores. Tower monitors the quantity and mix of inventory in each
of its stores through a central inventory management system. However, unlike
many of its competitors (who purchase and distribute from a central location),
Tower's store managers are given discretion in managing the level and mix of the
inventory in their stores in order to most effectively market to each store's
demographic customer base. The Company believes that this policy has been an
important factor in Tower's strategy to minimize its product return levels,
thereby reducing restocking fees, improving operating margins and sustaining
favorable vendor relations.
In order to increase and diversify its revenue base, Tower became the first
U.S.-based music retailer to implement an international growth strategy. This
expansion, which commenced in 1979, initially focused on the Japanese market
(which is currently the world's second largest market for recorded music, with
net sales of approximately $6.8 billion in 1996) and enabled Tower to become a
market leader in Japan for recorded music. Tower implemented a similar expansion
strategy in the United Kingdom beginning in 1986. The Company currently has more
international locations than any other U.S.-based music retailer and, for the
1997 fiscal year, derived approximately 40% of its total net revenues from
international sales. Tower currently operates 41 stores in Japan; six in
England; three
38
<PAGE>
each in Hong Kong, Israel and Singapore; two each in Mexico and Taiwan; and one
each in Argentina, Canada, Ireland and Scotland. In addition, the Company has
entered into franchise agreements with local operators in Colombia, Malaysia,
South Korea and Thailand.
INDUSTRY
The worldwide market for recorded music has grown from approximately $29.4
billion in calendar 1992 to approximately $40.2 billion in calendar 1996. The
top five markets, North America, Western Europe, Japan, Latin America and Asia
(outside of Japan), individually accounted for approximately 32.9%, 32.8%,
17.0%, 6.2% and 5.6%, respectively, and collectively accounted for approximately
94.5%, of the global market in calendar 1996. Management believes that the
following factors are the primary drivers of growth in the industry globally:
(i) overall population growth in major markets, (ii) technological innovations
in the delivery of recorded music, (iii) continued compact disc format
penetration and (iv) the success of new music releases.
In the United States, there are four primary channels of recorded music
distribution: specialty music retail stores, discount and consumer electronics
stores, record clubs, and mail order and other channels, which accounted for
approximately 49.9%, 31.5%, 14.3% and 4.3% of unit shipments, respectively, in
calendar 1996. The U.S. market for recorded music has grown from approximately
$9.0 billion in calendar 1992 to approximately $12.2 billion in calendar 1997.
However, beginning in 1995, the volume of recorded music shipped to retailers
slowed and then declined by approximately 2.0% in 1997 primarily due to: (i)
overshipment of product by manufacturers in 1995 and 1996 to certain retailers,
(ii) store rationalization by certain mall-based and discount music retailers
following an aggressive overexpansion of music retail square footage from 1992
to 1994, (iii) a lack of new technological innovations influencing the delivery
of recorded music, (iv) continued maturation of the compact disc format, and (v)
disappointing new releases. Management believes that the market and the outlook
for music retailers improved in the United States starting in the second half of
calendar 1997, primarily due to a reduction in domestic music retail square
footage as certain electronics retailers reduced music store selling space and
narrowed their catalog selections in response to difficulties in successfully
implementing "loss leader" music retail sales strategies, continued store
consolidation of mall-based music retailers, the release of several successful
new titles and positive demographic trends. The Company believes that it is
well-situated in the industry because of its store base, merchandising strategy
and long-standing supplier relationships. See "Market and Industry Data."
OPERATIONS
Tower currently operates a total of 183 stores worldwide, consisting of 119
U.S. retail stores in 20 states and 64 international stores in 11 countries. The
Company's operating structure consists of (i) its U.S. stores and wholesaling
operations, (ii) its Asian stores and wholesaling operations, and (iii) its U.K.
and Ireland stores and wholesaling operations. The Company's operations are
directed by an Executive Committee comprised of eight executive officers. See
"Management."
UNITED STATES. The Company's U.S. operations currently consist of 119
retail stores. In the United States, Tower has organized its operations into 12
geographic regions, each headed by a regional manager who has responsibility for
sales and merchandising, day-to-day operations and administration. Tower's
corporate headquarters provides central support to each region, including
systems, distribution, accounting and national marketing programs. The corporate
headquarters also gives final approval for all new store sites and store design
and oversees quality standards and other critical elements of the Tower concept.
The Company believes that by organizing its operations in this manner, it can
more effectively manage its business, thereby enhancing its ability to achieve
its expansion plans without compromising operating standards.
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<PAGE>
To pursue growth opportunities through new store formats and merchandising
strategies, Tower initiated an operating agreement with The Good Guys!, Inc.
("The Good Guys!"), a leading electronics retailer to open stores under the
"WOW!" name. The WOW! stores sell both recorded music and consumer electronics
equipment, offering the shopper both convenience and a broad product offering.
During calendar 1996, WOW! stores were opened in Las Vegas, Nevada and Long
Beach, California. Two additional WOW! stores are scheduled to open in Southern
California in calendar 1998. Under the WOW! store format, Tower and The Good
Guys! each manage, operate and lease from the landlord their respective sections
of the store.
ASIA. Tower's Asian operations consist of 41 stores in Japan, three in Hong
Kong, three in Singapore and two in Taiwan. All Asian store managers report to
the Director of Asian Operations located in Japan. A portion of the U.S.-sourced
product is shipped to the Asian stores through the Company's U.S. distribution
facilities. The balance of product is shipped through a variety of sources
worldwide.
UNITED KINGDOM AND IRELAND. The Company currently operates seven stores in
the United Kingdom and one store in Ireland. All store managers in the United
Kingdom and Ireland report to the Director of European Operations located in
London. A portion of U.S.-sourced product is shipped through the Company's U.S.
distribution operations. The balance of product is shipped through a variety of
sources worldwide.
JOINT VENTURES AND FRANCHISES
The Company has joint venture operations in Argentina, Israel and Mexico.
These arrangements enable Tower to enter into additional foreign markets and
obtain an improved understanding of local product demand and operating
procedures while benefiting from a sharing of capital commitments. Under joint
venture arrangements, Tower manages store operations, utilizing input from local
investors. Some product is sourced through Tower's distribution operations.
Joint venture operations are managed from Tower's corporate headquarters. The
Company anticipates that future expansion in most international markets will be
through wholly-owned subsidiaries or through franchises rather than joint
ventures.
The Company has entered into franchise agreements to operate stores in
Colombia, the Philippines, Malaysia, South Korea and Thailand. Additional
franchised stores are planned for other countries. The Company has focused its
franchising operations in developing markets where the operating environment
makes direct operations less desirable. Franchised stores are managed by the
local operator with input from the Company on store format and merchandising.
The Company benefits from these franchise agreements through the distribution of
products as well as through royalty income and trademark licensing fees.
STORE FORMAT AND LOCATIONS
Tower has differentiated itself from competing music retailers with its
strategic store locations, which generally feature a large, centrally-located
store in a densely populated urban area complemented by nearby urban and
suburban stand-alone stores. Tower's flagship stores in major markets typically
exceed 20,000 square feet, with the majority of all stores exceeding 10,000
square feet. Newer stores range from 15,000 to 25,000 square feet, depending on
the market and location. The Company's larger, stand-alone locations provide it
with various operating efficiencies, including lower rent expenses and lower per
unit costs than comparable mall-based retailers. The Company's large base of
high-volume, stand-alone stores enables it to receive drop-shipments of product
directly to store locations (thereby reducing the costs associated with
warehousing and distribution). Management believes that its portfolio of
strategically located stores would be difficult to replicate.
The Company believes that the selection of locations for its stores is
critical to the success of its operations. The site-selection process consists
of an in-depth analysis of regional demographics,
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<PAGE>
consumer purchasing habits and traffic within a specific area. Senior management
is actively involved in this process and grants all final site approval,
evidencing the Company's commitment to continued growth and its focus on
successful, long-lasting locations. Over Tower's 38-year operating history, the
Company has closed only eight stores.
Tower management has consistently identified and developed locations and
markets in the United States and internationally that have generated significant
sales growth and profitability. The Company has taken a disciplined approach to
new store growth, expanding from 135 stores worldwide in the fiscal year ended
July 31, 1992 to 183 stores worldwide as of April 30, 1998. During the two-year
period ended July 31, 1997, the Company opened two stores in the United States
and 23 stores internationally (including 17 in Japan), while closing or
combining four existing outlets. The Company plans to continue to leverage its
strong brand name and proven store format in new and existing markets in
locations that meet the Company's demographic and performance criteria.
PRODUCTS
The Company offers a diverse line of products including compact discs,
recorded audio cassettes, recorded video cassettes, laser discs, DVD and other
complementary products, including books, magazines, blank tapes, software
titles, and accessories.
RECORDED MUSIC. The Company's primary source of revenue is the sale of
recorded music on compact discs and audio cassettes. For fiscal years 1995, 1996
and 1997, and for the nine months ending April 30, 1997 and 1998, recorded music
sales accounted for approximately 87.6%, 88.5%, 89.2%, 89.4% and 88.5%,
respectively, of Tower's worldwide net revenues. The Company's stores carry a
wide selection of compact discs and audio cassettes purchased from all major and
most independent recording companies, which, except for new releases and special
promotions, are arranged in the stores by genre and alphabetically by artist or
group. Tower differentiates itself from its competitors through the breadth and
depth of its product selection. Tower's strategy is to offer the broadest
selection of recorded music for its customers, including recent BILLBOARD Top 50
releases as well as a comprehensive variety of older releases and diverse music
formats. Most of the Company's stores carry at least 50,000 music titles, while
flagship stores located in major markets, such as Boston, Buenos Aires, Chicago,
Glasgow, Hong Kong, Honolulu, London, Los Angeles, New Orleans, New York, Osaka,
Philadelphia, San Francisco, Seattle, Singapore, Taipei, Tokyo, Toronto and
Washington, D.C., usually carry between 80,000 and 120,000 music titles. By
contrast, management believes that the U.S. industry average for mall-based
music retailers is approximately 5,000 to 10,000 music titles per store (focused
primarily on deeply discounted, high-volume products from the BILLBOARD Top 50).
VIDEO PRODUCTS. In addition to recorded music, the majority of Tower stores
sell videocassette, laser disc and DVD products. For fiscal years 1995, 1996 and
1997, video sales accounted for approximately 7.1%, 6.6% and 6.1%, respectively,
and for the nine month periods ending April 30, 1997 and 1998, accounted for
6.1% and 7.4%, respectively, of Tower's worldwide net revenues. Selected stores
also offer video rentals. These video products generally command larger gross
margins than the Company's recorded music products. In late 1996, DVD was
introduced as an alternative medium that could eventually replace the laser
disc. DVD offers the consumer laser technology in a smaller disc format with
superior picture quality and audio fidelity. The Company anticipates that in the
next few years, sales of DVD players will begin to replace sales of laser disc
players and video cassette recorders as the new technology becomes more widely
available. The Company believes that it is well-positioned to capitalize on the
growing DVD market and is considered an industry leader in sales of this format.
COMPLEMENTARY PRODUCTS. To complement music buyers' interests, Tower stores
also sell books, magazines, blank tapes, software titles, and accessories. As of
April 30, 1998, the Company operated 13 stand-alone book stores. These
complementary products generally command larger gross margins than the Company's
recorded music products.
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MARKETING, ADVERTISING AND PROMOTION
Tower aggressively markets, advertises and promotes its products and its
brand image to generate customer awareness of its extensive selection of music
titles, knowledgeable customer service and interactive and entertaining store
environments. Tower advertises in a variety of national and local print and
broadcast media, including television, magazines, newspapers and billboards.
Tower targets a wide range of customers, from teenagers to senior citizens, who
purchase music on a year-round basis. The Company believes that its clustering
of stores in strategic markets allows it to maximize its use of marketing,
advertising and promotional U.S. dollars. In addition, Tower attracts large
corporate sponsors such as American Express, IBM and MasterCard for promotions
and events. Tower also produces several music publications under the names PULSE
(U.S.), BOUNCE (Japan), TOP (U.K.), PULSE LATINO (Latin America) and PASS
(Taiwan) with a combined annual circulation of approximately 625,000. Tower
maintains a reputation for unique marketing through in-store appearances and
live performances by recording artists, campaigns and promotions with suppliers
and other third parties, book signings, tie-ins with local music events (e.g.,
Nashville's Fan Fair and the Monterey Jazz Festival) as well as involvement in
national music events, such as sponsorship of the 1998 Lilith Tour.
Tower believes that its strong focus on localized marketing provides it with
a significant advantage over many of its competitors. The Company's localized
marketing approach includes local promotions of concerts and in-store
appearances by musicians, as well as providing Tower store managers discretion
(subject to parameters set by the Company's regional and national product
managers) to customize product inventory in their stores to the demographics and
buying patterns of their local market. Depending on local demographics,
merchandise mix and promotions can be shifted toward certain music genres. For
example, in New York City, Tower's Lincoln Center store places a greater
emphasis on its classical music selection than the downtown store, which
emphasizes the latest trends in rock music.
As one of the nation's largest music retailers and due to the diversity and
depth of its music selection, the Company has developed strong supplier
relationships. As a result, the Company receives substantial cooperative
advertising allowances, beneficial purchasing terms, short lead times on
inventory fulfillment, product return rights (subject to certain terms and
restocking fees), and drop shipments of orders directly to its stores, all of
which have contributed to Tower's historically favorable operating margins.
Cooperative advertising funds are provided to promote recorded music products of
a specific genre or on a label-wide basis. Tower advertises jointly with
recording companies worldwide in local and national media markets and receives
substantial financial support from them. Cooperative advertising offsets a
significant portion of the Company's advertising expenses.
The Company has also introduced an affinity MasterCard credit card which
capitalizes on the Tower brand name and enables the Company to track purchasing
patterns by cardholding customers.
SUPPLIERS
RECORDED MUSIC. The majority of Tower's music purchases come from six major
suppliers with which Tower has developed long-standing relationships. As a
result of these relationships and Tower's high sales volume, the Company
receives substantial cooperative advertising allowances, beneficial purchasing
terms, short lead times on inventory fulfillment, competitive pricing programs
and drop shipments of orders directly to its stores. In addition, the Company
purchases product from numerous independent distributors and labels. Unsold
music product may be returned to the manufacturer at any time that the title
remains in the current music catalog of a manufacturer; however, restocking fees
are assessed for returned product. Catalog changes are generally made only after
advance notice, allowing the Company to return excess inventory before a title
is discontinued. None of the Company's major suppliers limits returns of
inventory.
COMPLEMENTARY PRODUCTS. Book and magazine purchases require coordination
with a greater number of vendors than music purchases. Returned books and
magazines are not subject to restocking
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charges. Although management believes that its current book and magazine
purchasing procedures are efficient, it is considering various alternatives that
would allow Tower stores to order directly from publishers and shorten delivery
time.
Pre-recorded video cassettes, DVD products, laser discs and software titles
are purchased from a limited number of vendors for shipment through the
Company's U.S. distribution operations, or are drop-shipped directly to stores.
Unsold video products and software titles may be returned to distributors for
full refunds.
PURCHASING, INVENTORY MANAGEMENT AND DISTRIBUTION
The Company believes that it has developed state-of-the-art inventory
purchasing, management and distribution systems.
Unlike most of its competitors, Tower's purchasing is partly decentralized.
Tower store managers are given discretion to manage the levels and mix of
merchandise in their stores. These managers work closely with regional and
national product managers to customize product inventory in their stores to the
demographics and buying patterns of their local markets. The Company believes
that the skill of its store managers in merchandising to local tastes is an
important factor in Tower controlling its historical product return levels,
thereby reducing restocking fees and improving margins and maintaining favorable
vendor relations.
The Company's ISP system enables management to monitor up-to-the-moment
levels and mix of its inventory in each of its stores. The ISP system provides
instantaneous on-line information regarding quantities on hand, turns at the
store level and on a combined basis, historical movement reports by SKU, pricing
and cost data and customer service information. The ISP system also identifies
slow-moving and deleted titles and overstocked items, and provides suggested
replenishment information to store buyers. By utilizing the ISP system, store
managers are able to pre-set and adjust quantities on hand and establish
"just-in-time" reorder points. This system enables the store managers to carry
appropriate levels of deep-catalog product and to maintain sufficient inventory
levels for fast-moving product.
The Company's U.S. distribution operations distribute products that are not
drop-shipped to Tower stores, and distribute a portion of the product to the
Company's international subsidiaries, joint ventures and franchisees. The
Company also wholesales products, particularly independent label recorded music,
to other retailers in both the U.S. and international markets. In addition, the
Company has established export wholesaling branches in Japan and the United
Kingdom. This enables the Company to export international catalog product to
music retailers, taking advantage of the economies of scale, while providing
prompt delivery.
The Company also sells recorded music both via mail order and over the
Internet. The Company maintains a website at HTTP:/ /WWW.TOWERRECORDS.COM and an
online store on America Online at keyword "TOWER." Mail order and Internet sales
are fulfilled through the Company's U.S. distribution facility allowing
overnight delivery to customers in many cases.
COMPETITION
The retail music industry is highly competitive. In the United States there
are four primary channels of recorded music distribution: specialty music retail
stores, discount and consumer electronics stores, record clubs, and mail order
and other channels, which accounted for approximately 49.9%, 31.5%, 14.3% and
4.3% of unit shipments, respectively, in calendar 1996. The Company competes
with a wide variety of music retailers, including regional and national
mall-based music chains, international chains, deep-discount retailers, mass
merchandisers, consumer electronics outlets, record clubs, mail order, and
independent operators. The Company believes the principal competitive factors in
the retail music
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industry are brand name recognition, selection, pricing, inventory management,
marketing, store location and management expertise. The Company believes that it
competes favorably with respect to each of these factors.
MAJOR INTERNATIONAL CHAINS. In certain of its major, metropolitan markets,
the Company competes directly with HMV and Virgin-large, international music
retailers-that, like the Company, emphasize a broad selection of titles.
Management believes that HMV and Virgin tend to cater to a sophisticated and
less price-sensitive customer base; Tower's customer base includes not only such
customers but also extends to a much broader demographic. Further, management
believes that Tower's approach to localized marketing, advertising and
merchandising, coupled with its more competitive pricing, differentiates Tower
from HMV and Virgin. In 1997, HMV had 15 stores in the United States, primarily
on the East Coast, while Virgin had 11 stores in the United States, located
primarily in tourist destinations. HMV and Virgin also had 20 and eight stores,
respectively, in Japan, and 105 and 38 stores, respectively, in the United
Kingdom, the other major markets in which the Company competes. HMV and Virgin
are expected to open additional stores, some of which may be in locations that
would compete directly with Tower.
MALL-BASED MUSIC RETAILERS. The Company also competes with various
mall-based music retailers such as Musicland, Transworld Entertainment,
Wherehouse Entertainment and Camelot. These competitors tend to occupy mall
locations and, in the Company's judgment, often face significant competitive
disadvantages, such as reduced inventory selection due to size constraints on
mall retail space, larger overhead costs generated by higher rent and occupancy
costs, higher per unit costs, higher costs associated with warehousing and
distribution, and lack of an international infrastructure and savvy brand-name
identity. In recent years, many of the mall-based music retailers whose revenues
are heavily dependent upon BILLBOARD Top 50 sales have had difficulty competing
effectively with the selling tactics of the large discounters, and have been
closing unprofitable stores in an attempt to minimize operating losses. Several
mall-based music retailers, including Camelot Music, Peppermint, Record Giant,
Peaches Entertainment, Strawberries and Wherehouse Entertainment, have filed for
bankruptcy.
DISCOUNTERS AND CONSUMER ELECTRONICS STORES. Specialty music retailers have
experienced increased competition from the entrance into the retail music
industry of large discounters and consumer electronics stores such as Wal-Mart,
Kmart, Target, Circuit City, Best Buy, Barnes and Noble and Borders. The market
share of specialty music retailers dropped from 70% in 1990 to 50% in 1996 while
the market share of the large discounters and consumer electronics stores
increased over the same period. These large discounters and consumer electronics
stores typically feature BILLBOARD Top 50 recordings with minimal or no gross
margin with the intent of generating additional store traffic and cross-selling
other, higher margin products, such as consumer electronics. Tower believes that
its operations have been less adversely affected than mall-based music retailers
by the selling tactics of the large discounters and consumer electronics stores
because of its emphasis on deep-catalog merchandising.
OTHER. The Company expects continued growth in competing home entertainment
options, including the Internet and larger numbers of television and music
channels offered by cable companies. The further development of Internet and
cable technologies, coupled with high quality digital recording technologies,
could enable direct downloading of recorded music by consumers, which could
result in significant changes in existing distribution channels for prerecorded
music. Such a development could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk
Factors--Trends Affecting the Music Industry."
TRADEMARKS
Tower regards its trademarks and service marks as having significant
worldwide value and as being important to its marketing efforts and brand name
recognition. Tower has registered its TOWER
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RECORDS-VIDEO-BOOKS trademark and variations thereof, along with numerous other
trademarks, with the United States Patent and Trademark Office on the Principal
Register. The Company has applications pending for a number of additional marks.
The Company also has registered its TOWER trademark, or variations thereof, in
numerous foreign countries. The Company's policy is to pursue the registration
of its marks whenever possible and to vigorously oppose any infringement of its
trademarks and trade names.
PROPERTIES
The Company's headquarters are located in approximately 90,000 square feet
of leased facilities in West Sacramento, California. These facilities house the
Company's management, marketing and sales personnel. The lease for these
facilities terminates on April 30, 1999. The Company believes that there is
sufficient office space available at favorable leasing terms in the Sacramento
area to satisfy any additional needs of the Company that may result from future
expansion.
As of April 30, 1998, Tower's total leased space consisted of approximately
2.1 million square feet of space worldwide. As of April 30, 1998, the Company
was a party to approximately 200 real estate leases and subleases, relating to
nearly all of its store locations as well as its administrative and warehouse
facilities. Substantially all of these are recorded as operating leases. The
leases expire between 1998 and 2024, with renewal options varying between one
and 20 years. Lease terms typically provide a minimum payment plus modifications
for changes in the consumer price index and/or other specified increases. Most
of the U.S. stores operate as stand-alone locations.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 6,800 persons,
of whom approximately 965 were employed on a part-time basis. None of the
Company's employees is covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
The Company has received a document request in connection with an
investigation by the Federal Trade Commission into certain trade practices by
major recording companies involving the implementation of minimum advertised
price ("MAP") programs in response to the deep discounting tactics of large
discounters and consumer electronic stores and the threat of withdrawal of
cooperative advertising and promotional funds for retailers which fail to
observe the MAP guidelines. The Company does not believe it is a target of the
inquiry. The Company does not expect the outcome of this investigation to have a
material effect on its business, financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE POSITION TOWER
- ---------------------------- --- ---------------------------------------------------------------- ---------------
<S> <C> <C> <C>
Russell M. Solomon.......... 72 President, Chief Executive Officer and Director 38
Michael T. Solomon.......... 49 Executive Vice President, General Counsel and Director 11
DeVaughn D. Searson......... 53 Chief Financial Officer, Secretary, Treasurer and Director 10
Stanley L. Goman............ 49 Senior Vice President--Retail Operations 30
Christopher S. Hopson....... 45 Senior Vice President--Advertising/Marketing 28
Keith Cahoon................ 42 Managing Director--Far East Operations 19
Andy D. Lown................ 32 Managing Director--European Operations 12
</TABLE>
The Company's operations are directed by an Executive Committee comprised of
the following listed officers:
RUSSELL M. SOLOMON has served as President, Chief Executive Officer and a
Director of the Company since the Company's founding in 1960, and is a member of
the Company's Executive Committee. Mr. Solomon has served as President of the
National Association of Recording Merchandisers ("NARM") and as a Board member
of the Video Software Dealers Association. Mr. Solomon is also a member of the
Board of Directors of The Good Guys!. Mr. Solomon is the father of Michael T.
Solomon.
MICHAEL T. SOLOMON has served as a Director of the Company since 1982, as
Vice President and General Counsel of the Company since 1987 and as Executive
Vice President since May 1998, and is a member of the Company's Executive
Committee. Mr. Solomon has served on several NARM subcommittees and is a member
of the California Bar Association. Mr. Solomon is the son of Russell M. Solomon.
DEVAUGHN D. SEARSON has served as Chief Financial Officer of the Company
since 1988 and is a member of the Company's Executive Committee. Mr. Searson has
also served as a Director of the Company since May 1998. Prior to joining the
Company, Mr. Searson was President and Managing Partner of Searson & Company,
CPAs, the Company's outside accounting firm at the time, and served as the
Company's outside accountant for 11 years. Mr. Searson is a certified public
accountant.
STANLEY L. GOMAN has been an employee of the Company since 1967 and
currently serves as Senior Vice President-Retail Operations. Mr. Goman is a
member of the Company's Executive Committee. Mr. Goman presently serves as
Treasurer of NARM, and has also served as Chairman of the NARM Retail Advisory
Committee.
CHRISTOPHER S. HOPSON has been an employee of the Company since 1970 and has
served as Senior Vice President-Advertising/Marketing since 1989. Mr. Hopson is
a member of the Company's Executive Committee.
KEITH CAHOON has served as Managing Director of the Company's Far East
Operations since 1984. Mr. Cahoon is a member of the Company's Executive
Committee.
ANDY D. LOWN has been an employee of the Company since 1986 and currently
serves as Managing Director of the Company's European and Middle East
operations. Mr. Lown is a member of the Company's Executive Committee. Mr. Lown
also serves on the Executive Committee, Operations Committee and Supervisory
Committee of the British Association of Record Dealers and on the Board of the
British Photographic Association.
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The Company's directors are all employees of the Company and do not receive
separate compensation for their services as directors. Each director has been
elected to serve until his successor has been elected and qualified at the next
annual meeting of the shareholders of the Company.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES
The following table shows the total compensation of (i) the Chief Executive
Officer and (ii) the next four highest-earning executive officers of the Company
for the year ended December 31, 1997, based on combined salary plus bonuses (the
Chief Executive Officer and such executive officers are hereinafter referred to
as the "MTS Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(A)
- ---------------------------------------------- --------- ----------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Russell M. Solomon............................ 1997 $ 630,180 $ 300,000 -- $ 6,259
President and Chief Executive Officer
Walter S. Martin.............................. 1997 531,300 300,000 -- 6,259
Executive Vice President and
Secretary/Treasurer
Michael T. Solomon............................ 1997 334,972 86,000 -- 6,259
Vice President and General Counsel
Stanley L. Goman.............................. 1997 197,200 91,000 -- 6,259
Senior Vice President--Retail Operations
Keith Cahoon.................................. 1997 173,467(b) -- $ 184,714(b) 6,259
Managing Director--Far East Operations
</TABLE>
- ------------------------
(a) Represents Company contributions to the Company's retirement plan on behalf
of the MTS Named Executive Officers.
(b) Calculated at an exchange rate of 120 Japanese yen per U.S. dollar.
EMPLOYMENT AGREEMENTS
The Company does not currently have employment agreements with any of its
employees.
ADDITIONAL AGREEMENTS, ARRANGEMENTS AND UNDERSTANDINGS
The Company's Articles of Incorporation contain provisions that eliminate
the personal liability of its directors for monetary damages to the fullest
extent permitted by law and authorize the Company to indemnify its directors and
officers to the fullest extent permitted by law. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive relief
or rescission.
The Company has entered into indemnification agreements with its officers
and directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the California Corporations
Code, including advancement of expenses to the indemnitee, the indemnitee's
right to select counsel and continuation of indemnification after indemnitee's
separation from the Company. The indemnification agreements may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities arising from willful misconduct of a culpable nature and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
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<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information regarding ownership of
the Company's Common Stock as of the date of this Prospectus by: (i) each person
who is known by the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors, (iii) MTS Named
Executive Officers, and (iv) all directors and MTS Named Executive Officers as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Company's Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(A) OWNERSHIP(B)(C) OWNERSHIP
- ------------------------------------------------------------------------------------ ----------------- -------------
<S> <C> <C>
Russell M. Solomon(d)............................................................... 620 62.0%
Walter S. Martin.................................................................... -- --
Michael T. Solomon(e)............................................................... 372 37.2
Stanley L. Goman.................................................................... -- --
Keith Cahoon........................................................................ -- --
All executive officers and directors as a group (8 persons)......................... 992 99.2%
</TABLE>
- ------------------------
(a) The address of each named individual is the address of the principal
executive office of the Company as set forth herein.
(b) The numbers presented indicate the number of shares beneficially owned.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days are deemed to be beneficially
owned by the person holding such option or warrant for computing the
percentage ownership of such person, but are not treated as outstanding for
computing the percentage of any other person. As of the date hereof, the
Company had no such options or warrants outstanding.
(c) Such share amounts solely reflect indirect ownership of the Class B Common
Stock of the Company, the only outstanding class of capital stock of the
Company. There are 1,000 shares of Class B Common Stock of the Company
outstanding, all of which are owned by Parent, and Russell Solomon
beneficially owns 620 shares, or 62.0%, and Michael Solomon beneficially
owns 372 shares, or 37.2%, of the outstanding Common Stock of Parent.
(d) Russell Solomon has sole voting and investment power with respect to such
shares as Trustee of the Russell Solomon Trust.
(e) Michael Solomon has sole voting and investment power with respect to 364 of
such shares as Trustee of the Michael Solomon 1994 Trust (the "Michael
Solomon Trust"), the David Solomon 1994 Trust (the "David Solomon Trust"),
the Andrew C. Solomon Trust, and the Aaron O. Solomon Trust, which own 180,
180, 2 and 2 of such shares, respectively. Michael Solomon is also the
beneficiary of the Michael Solomon Trust.
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CERTAIN TRANSACTIONS
The following diagram presents graphically the transactions consummated in
the Prior Asset Exchange and the Reorganization, as discussed below:
[DIAGRAM]
THE REORGANIZATION
The Company recently reorganized its corporate structure to consolidate
substantially all of its business operations in the Company.
In March 1998, Russell M. Solomon and the Trusts caused Parent to be formed.
In April 1998, Parent issued shares of its Common Stock to the following persons
in the following final proportions: 62.4% to the Russell Solomon Trust and
certain trusts for the benefit of his grandchildren; 0.8% to Michael Solomon;
0.8% to David Solomon; 18.0% to the Michael Solomon Trust; and 18.0% to the
David Solomon Trust. In exchange for such shares of Common Stock, Parent
received the following assets: (i) from the Russell Solomon Trust and certain
trusts for the benefit of his grandchildren, 100% of the outstanding shares of
the Company; (ii) from Michael Solomon and David Solomon, the outstanding shares
of a corporation holding certain real estate on which a store facility is
located in San Francisco, California, and the outstanding shares of a
corporation holding certain real estate on which a store parking lot is located
in Los Angeles, California; (iii) from the Trusts, the following assets and
liabilities: (a) the Japanese Trademark Rights (including the rights to certain
unpaid royalties), (b) certain intercompany receivables owed to the Trusts in
the amount of $3.5 million and intercompany payables owed by the Trusts in the
amount of $14.2 million, (c) all of the equity interests in Three A's, Jeremy's
Holdings, LLC, a Delaware limited liability company, and Tower Domestic, Inc.,
which owns one Tower store, (d) the cash surrender value rights as of April 1998
of certain life insurance policies, and (e) a loan liability of $5.0 million
which constitutes part of the Existing Indebtedness. Parent subsequently
contributed to the
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Company all of the assets and liabilities received by Parent from the Trusts,
Michael Solomon and David Solomon.
PRIOR ASSET EXCHANGE AND OTHER TRANSACTIONS
Prior to the consummation of the transactions constituting the
Reorganization set forth in the previous paragraph, the Company transferred
certain assets valued at approximately $2.9 million to the Trusts in exchange
for inventory with an equal value (such transfers the "Prior Asset Exchange").
The purchase price of these assets sold from the Company to the Trusts was
determined based upon independent appraisals or estimates of the fair market
value that the Company believes to be reasonable. The principal business purpose
of the Prior Asset Exchange was to transfer certain primarily non-income
producing assets of a personal nature out of the Company and into the Trusts.
The Company currently anticipates that it will cause its wholly-owned
subsidiary, T.R. Services, Inc., a California corporation which operates the
Company's stores in the United Kingdom and wholly owns a subsidiary which
operates the Company's stores in Ireland, to transfer substantially all of its
assets to the Company.
The Company operated four stores through four separate subsidiaries in which
there existed minority interests. The Company recently bought out the minority
interests in each of these subsidiaries at fair market value, and each such
subsidiary was subsequently eliminated in an upstream merger.
The Company also conducted upstream mergers to eliminate Tower Domestic,
Inc. and Queen Anne Record Sales, subsidiaries of the Company.
1994 TRANSFER OF CERTAIN ASSETS TO TRUSTS
In July 1994, MTS transferred the assets of its U.S. wholesale and
distribution operations to Three A's Holdings, L.L.C., a Delaware limited
liability company ("Three A's"), which was at such time owned equally by the
Michael Solomon Trust and the David Solomon Trust (the "Trusts"), in exchange
for cash in the amount of approximately $280,000 and the assumption of certain
liabilities in the amount of approximately $3.8 million. Along with the purchase
of the distribution operations, the Trusts concurrently purchased certain
trademark and related rights to use the TOWER trademark in Japan (the "Japanese
Trademark Rights") from the Company for cash in the amount of $500,000 and a
promissory note in the amount of $11.5 million.
The $11.5 million promissory note from the Trusts to the Company bore
interest at a rate of 8.5% per annum. The largest aggregate amount of
indebtedness outstanding on such loan at any time since July 31, 1996 and the
amount outstanding on such loan as of April 20, 1998, was $9.5 million. Michael
Solomon is the trustee of both Trusts, and is the beneficiary of the Michael
Solomon Trust. As a result of the Reorganization, such promissory note was
cancelled and is no longer outstanding.
LIFE INSURANCE
The Company maintains split-dollar life insurance policies on the lives of
Russell M. Solomon and Doris E. Solomon for the benefit of certain family
trusts. The aggregate annual premiums on such policies paid by the Company are
approximately $3.6 million. The Company will receive the first proceeds of the
policies up to the aggregate premiums paid by the Company or the cash surrender
value, whichever is greater.
In addition, the Company maintains key-man life insurance policies on the
lives of certain executive officers of the Company. Aggregate annual premiums on
such policies are approximately $0.3 million. The Company is the beneficiary of
the key-man policies.
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INDEBTEDNESS OF CERTAIN PERSONS
As of April 30, 1998, Russell Solomon, the President, CEO and a director of
the Company, owed the Trusts the amounts of $244,211 and $94,055 under a loan
from and a merchandise account, respectively, with the Company, both of which
are interest-free. Before the Prior Asset Exchange, such amounts were owed by
Russell Solomon to the Company. In the Prior Asset Exchange, the Company
transferred the receivable to the Trusts. The largest amounts of such
indebtedness outstanding at any time since the beginning of fiscal 1997 were
$244,211 and $94,055, respectively.
As of April 30, 1998, Michael Solomon, the Executive Vice President, General
Counsel and a director of the Company, owed the Trusts the amounts of $729,972
and $78,018 under a loan from and a merchandise account, respectively, with the
Company, both of which are interest-free. Before the Prior Asset Exchange, such
amounts were owed by Michael Solomon to the Company. In the Prior Asset
Exchange, the Company transferred the receivable to the Trusts. The largest
amounts of such indebtedness outstanding at any time since the beginning of
fiscal 1997 were $729,972 and $78,108, respectively.
As of April 30, 1998, Stanley Goman, the Senior Vice President--Retail
Operations of the Company, owed the Company the amounts of $65,479 and $50,479
under a loan from the Company bearing interest at 9.5% per annum and an
interest-free merchandise account, respectively, with the Company. The largest
amounts of such indebtedness outstanding at any time since the beginning of
fiscal 1997 were $61,602 and $50,479, respectively.
As of April 30, 1998, Christopher Hopson, the Senior Vice
President--Advertising/Marketing of the Company, owed the Company the amounts of
$150,534 and $17,319 under a home loan from the Company bearing interest at 9.5%
per annum and an interest-free merchandise account, respectively, with the
Company. The largest amounts of such indebtedness outstanding at any time since
the beginning of fiscal 1997 were $150,534 and $17,319, respectively.
Prior to the Reorganization, the Trusts had, in increments over a number of
years, borrowed a total of $4,665,506 from the Company at interest rates
averaging approximately 8.5% in order to cover premium payments on certain life
insurance policies for the benefit of the Trusts. In the Reorganization, the
liability on such loans, including all accrued and unpaid interest thereon, was
first assumed by Parent from the Trusts, and then assumed by the Company from
Parent. Upon such assumption by the Company, such loan liability was cancelled
by offset against the related receivable held by the Company. The greatest
amount of such liability outstanding at any time since the beginning of fiscal
1997 was $4,665,506 plus accrued and unpaid interest.
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DESCRIPTION OF NEW CREDIT FACILITY
In connection with the Refinancing, the Company entered into a credit
agreement (the "Credit Agreement") with a syndicate of financial institutions
(the "Lenders") for which The Chase Manhattan Bank acts as administrative agent
(the "Administrative Agent") and Chase Securities Inc. acted as advisor and
arranger.
GENERAL. The New Credit Facility, which provides borrowing availability up
to a maximum aggregate principal amount of $275,000,000, consists of (i) a U.S.
dollar-based Facility A Revolving Line in the principal amount of up to
$125,000,000 (the "Facility A Commitment"), and (ii) a Japanese yen-based
Facility B Revolving Line in the principal amount of up to the equivalent in yen
(the "Yen Equivalent") on a date to be selected prior to the initial funding
date of $150,000,000, based on then-prevailing U.S. dollar-yen exchange rate
(the "Facility B Commitment").
A portion of the Facility A Commitment may be borrowed in British pounds
sterling ("Sterling"), such that the aggregate equivalent in U.S. dollars (the
"Dollar Equivalent") of all loans under the Facility A Revolving Line (the
"Facility A Loans") does not exceed U.S. $125,000,000. A portion of the Facility
B Commitment may be borrowed in U.S. dollars, such that the aggregate Yen
Equivalent of all loans under the Facility B Revolving Line (the "Facility B
Loans") does not exceed the Yen Equivalent of the Facility B Commitment. The
Dollar Equivalent of yen- and Sterling-denominated Facility A Loans, and the Yen
Equivalent of U.S. dollar-denominated Facility B Loans, will be calculated from
time to time, based on prevailing foreign exchange rates as of the end of each
calendar quarter, or more frequently, under certain circumstances. Prevailing
foreign exchange rates on any date will be determined with reference to the then
most recent fixing of exchange rates by (i) the Federal Reserve Bank of New
York, in the case of U.S. dollars, (ii) the Bank of Tokyo, in the case of yen,
and (iii) the Bank of England, in the case of Sterling.
Each of the Facility A Revolving Line and the Facility B Revolving Line will
be available to the Company and TRKK (collectively, the "Borrowers" and
individually, a "Borrower"). The Company may borrow up to the full principal
amount of the Credit Facilities. TRKK may borrow up to the full principal amount
of the Facility B Revolving Line and up to an aggregate of the Dollar Equivalent
of $25,000,000 under the Facility A Revolving Line.
INTEREST RATES; FEES. Interest on loans outstanding under the Credit
Facilities will accrue based on one or more rates selected by the applicable
Borrower, including (i) the alternate base rate (the "Alternate Base Rate") for
U.S. dollar-denominated loans, (ii) the money market rate (the "Money Market
Rate") for U.S. dollar-denominated loans, (iii) the yen base rate (the "Yen Base
Rate") for yen-denominated loans, (iv) a eurocurrency rate (the "LIBO Rate") for
U.S. dollar- or Sterling-denominated loans or a yen-based eurocurrency rate (the
"TIBO Rate") for yen-denominated loans, in each case plus an applicable margin
(the "Applicable Margin"), and (v) Sterling-denominated interest rate to be
agreed upon at the time the loan is made ("Special Sterling Rate") on
Sterling-denominated loans. The Alternate Base Rate is defined as, on any date,
the greatest of (x) the prime commercial lending rate of The Chase Manhattan
Bank, (y) the secondary market rate for certificates of deposit, adjusted for
reserves and assessments, plus 1%, and (z) the federal funds rate published from
time to time by the Federal Reserve Bank of New York, plus 1/2%. The Money
Market Rate is defined as the rate quoted from time to time by the
Administrative Agent and certain other Lenders designated as "Reference Banks"
for loans in U.S. dollars of a comparable principal amount and maturity. The Yen
Base Rate is the prime rate publicly announced from time to time in Tokyo, Japan
by the Facility B Swingline Lender. The LIBO Rate is defined as the rate for
eurocurrency deposits of U.S. dollars or Sterling, as applicable, for one, two,
three or six months, displayed on page 3740 or 3750 of Dow Jones Markets two
business days prior to the date the loan is to be made (or, if such rate is not
available, the rate at which such deposits are offered to the Administrative
Agent in the applicable interbank market). The TIBO Rate is defined as the rate
for eurocurrency deposits of yen for one, two, three or six months, displayed on
Reuters Screen Page TIBM
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for the average of five banks two business days prior to the date the loan is to
be made (or, if such rate is not available, the rate at which such deposits are
offered by the Facility B Swingline Lender in the Tokyo interbank market). The
Applicable Margin over the LIBO Rate and TIBO Rate will be based upon the ratio
of (x) earnings before interest expense, taxes, depreciation, amortization and
rental expense, to (y) the sum of interest expense plus rental expense plus cash
dividends paid with respect to preferred stock plus the current portion of
indebtedness for the Borrowers and their subsidiaries (the "Fixed Charge
Coverage Ratio"), and will range from 0.40% to 0.90% per annum. The initial
Applicable Margin is 0.60% per annum.
The Company will be charged a facility fee per annum on the average daily
amount of the Facility A Commitment and the Facility B Commitment, regardless of
whether such Commitments are used or unused. The amount of the facility fee will
be tied to the Fixed Charge Coverage Ratio, and will range from 0.225% to 0.35%
per annum. The initial facility fee is 0.275% per annum.
REPAYMENT. Loans under the Credit Facilities may be borrowed, repaid and
reborrowed from time to time until the third anniversary of the closing of the
Credit Agreement (the "Credit Facilities Maturity Date"), subject to certain
customary conditions on the date of any such loan. The Company may request an
extension of Credit Facilities Maturity Date prior to either or both of the
first and second anniversaries of the closing of the Credit Agreement (but in no
event beyond the fifth anniversary of the closing of the Credit Agreement).
Either or both of the Facility A Revolving Line or the Facility B Revolving Line
may be extended by the Company for a one year period if, and to the extent that,
Lenders holding at least 51% of the Facility A Commitment and/or the Facility B
Commitment, as applicable, approve such extension.
SECURITY. The obligations under the New Credit Facility and the related
documents are expected to be secured by (i) a first priority lien on the
inventory and accounts receivable of MTS, Three A's and certain other material
subsidiaries, and (ii) a pledge of 65% of the capital stock of each material
foreign subsidiary of MTS. In addition, the obligations of TRKK and each other
material foreign subsidiary under the New Credit Facility and the related
documents are expected to be secured by a first priority lien on the inventory
and receivables of TRKK and each other material foreign subsidiary. At such time
as (x) no default shall have occurred and be continuing under the New Credit
Facility and related documents, and (y) MTS shall have outstanding any senior
unsecured non-credit enhanced long-term indebtedness for borrowed money that
shall be rated BBB- or better by Standard & Poor's Rating Group and Baa3 or
better by Moody's Investors Service, Inc., such liens shall be released (the
"Collateral Release").
GUARANTEES. The obligations of TRKK under the New Credit Facility and the
related documents are expected to be guaranteed by MTS, Three A's and certain
other material subsidiaries.
PREPAYMENTS. The Borrowers may make prepayments on loans under the New
Credit Facility at any time, upon prior notice to the Administrative Agent. The
Company will be required to make prepayments on loans under the New Credit
Facility if and to the extent that, as of the end of any calendar quarter (or
more frequently, under certain circumstances), giving effect to prevailing
foreign exchange rates on such date, the Dollar Equivalent of outstanding
Facility A Loans is more than 105% of the Facility A Commitment, or the Yen
Equivalent of outstanding Facility B Loans is more than 105% of the Facility B
Commitment.
CONDITIONS AND COVENANTS. The obligations of the Lenders under the New
Credit Facility are subject to the satisfaction of certain conditions precedent
customary in similar credit facilities or otherwise appropriate under the
circumstances. MTS and its subsidiaries are subject to certain negative
covenants contained in the Credit Agreement, including without limitation
covenants that restrict, subject to specified exceptions, (i) the incurrence of
additional indebtedness and other obligations and the granting of additional
liens, (ii) mergers, acquisitions, investments and acquisitions and dispositions
of assets, (iii) investments, loans and advances, (iv) dividends, stock
repurchases and redemptions, (v) prepayment or repurchase of other indebtedness
and amendments to certain agreements governing
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indebtedness, including the Indenture and the Notes, (vi) engaging in
transactions with affiliates or subsidiaries, (vii) capital expenditures, and
(viii) sale and leaseback transactions. The Credit Agreement also contains
customary affirmative covenants, including compliance with ERISA and
environmental and other laws, payment of taxes, maintenance of corporate
existence and rights, maintenance of insurance, financial reporting, and use of
proceeds of loans. In addition, the Credit Agreement requires MTS and its
subsidiaries to maintain compliance with certain specified financial covenants,
including maximum capital expenditures, a minimum fixed charge coverage ratio
and a minimum tangible net worth. In addition, so long as the Collateral Release
shall not have occurred, the Borrowers and their subsidiaries will be required
to maintain a minimum ratio of (x) inventory and receivables with respect to
which the Lenders have a first priority lien (less reserves maintained in
accordance with GAAP (as defined)), to (y) aggregate indebtedness under the New
Credit Facility, less cash and cash equivalents (the "Balance Sheet Coverage
Ratio") of 1.25 to 1.00. Following the Collateral Release, the Balance Sheet
Coverage Ratio will no longer apply, but the Borrowers and their subsidiaries
will be required to maintain a maximum ratio of Senior Indebtedness (as defined
in the Credit Agreement) to earnings before interest expense, taxes,
depreciation and amortization. Certain of these financial, negative and
affirmative covenants are more restrictive than those set forth in the
Indenture.
EVENTS OF DEFAULT. The Credit Agreement also includes events of default
that are typical for senior credit facilities and appropriate in the context of
the Refinancing, including, without limitation, non-payment of principal,
interest or fees, violation of covenants, inaccuracy of representations and
warranties in any material respect, cross default to certain other indebtedness
and agreements, bankruptcy and insolvency events, material judgments and
liabilities, defaults or judgments under ERISA and change of control. The
occurrence of any of such events of default could result in acceleration of the
Borrowers' obligations under the Credit Agreement and foreclosure on the
collateral securing such obligations, which could have material adverse results
to holders of the Notes.
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DESCRIPTION OF THE NOTES
The Existing Notes were, and the New Notes will be, issued under the
Indenture, dated as of April 23, 1998, between the Company and State Street Bank
and Trust Company of California, N.A., as trustee. The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to all of the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the Trust Indenture
Act, as in effect on the date of the Indenture. The Notes are subject to all
such provisions, and Holders of Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The definitions of certain terms
used in the following summary are set forth below under "--Certain Definitions."
As used in this section, the term "Company" refers to MTS, INCORPORATED and not
to any of its Subsidiaries.
The Notes are issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. Initially, the Trustee
will serve as Registrar and Paying Agent for the Notes. The Notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office, in New
York, New York. No service charge will be made for any registration of transfer
or exchange of the Notes, except for any tax or other governmental charge that
may be imposed in connection therewith. The Company will pay principal (and
premium, if any) on the Notes at the Trustee's corporate trust office. At the
Company's option, interest may be paid at the Trustee's corporate trust office
or by check mailed to the registered addresses of the Holders as such addresses
appear in the Note register.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all current and future Senior Indebtedness,
including borrowings under the New Credit Facility. Borrowings under the New
Credit Facility are secured by the Company's accounts receivable and Inventory,
and a pledge of 65% of the capital stock of certain Foreign Subsidiaries. The
Notes rank pari passu in right of payment with all other senior subordinated
Indebtedness of the Company issued in the future, if any, and senior in the
right of payment to all subordinated Indebtedness of the Company issued in the
future, if any. To the extent the Company's future domestic Restricted
Subsidiaries meet certain materiality tests, such Restricted Subsidiaries will
guarantee the Notes on a senior subordinated basis. See "--Future Guarantees."
As of April 30, 1998, the Company had Senior Indebtedness of approximately
$131.1 million of which approximately $17.3 million constituted indebtedness of
the Company's Restricted Subsidiaries, (exclusive, in each case, of the unused
revolving loan availability of approximately $124.5 million under the New Credit
Facility).
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited to $110.0 million aggregate principal amount and will
mature on May 1, 2005. Interest on the Notes will accrue at a rate of 9 3/8% per
annum and will be payable semi-annually in arrears on each May 1 and November 1,
commencing on November 1, 1998, to the Holders of record of Notes at the close
of business on April 15 and October 15, respectively, immediately preceding such
interest payment date. Interest will accrue from the most recent interest
payment date to which interest has been paid or, if no interest has been paid,
from the date of issuance. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after May 1, 2002, at the redemption prices (expressed
as a percentage of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the redemption date (subject to the right of
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Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the twelve-month period
beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- ------------
<S> <C>
2002............................................................................ 104.688%
2003............................................................................ 102.344%
2004............................................................................ 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to May 1, 2001,
the Company may redeem in the aggregate up to 35% of the originally issued
aggregate principal amount of the Notes with the net cash proceeds of one or
more Equity Offerings received by the Company at a redemption price in cash
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of redemption (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); PROVIDED, HOWEVER, that at least 65% of the
originally issued aggregate principal amount of the Notes must remain
outstanding immediately after giving effect to each such redemption (excluding
any Notes held by the Company or any of its Affiliates). Notice of any such
redemption must be given within 60 days after the date of the closing of the
relevant Equity Offering received by the Company.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption will
be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
PROVIDED, HOWEVER, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; PROVIDED, FURTHER, HOWEVER, that if a partial redemption is
made with the net cash proceeds of an Equity Offering received by the Company,
selection of the Notes or portions thereof for redemption shall be made by the
Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to the procedures of DTC), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent for the
Notes funds in satisfaction of the applicable redemption price pursuant to the
Indenture.
SUBORDINATION OF THE NOTES
The payment of the principal of, premium, if any, and interest on the Notes
is subordinated in right of payment, to the extent and in the manner provided in
the Indenture, to the prior payment in full in cash or cash equivalents of all
Senior Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities, upon any
dissolution or winding up or total liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, (excluding any payment or distribution of Permitted Junior
Securities and excluding any payment from funds deposited in accordance with,
and held in trust for the benefit of Holders as set forth in "Legal Defeasance
and Covenant Defeasance" (a "Defeasance Trust Payment")), all Senior
Indebtedness then due shall first be paid in full in cash or cash equivalents
before the Holders of the Notes or the Trustee on behalf of such Holders shall
be entitled to receive any payment by the
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Company of the principal of, premium, if any, or interest on the Notes, or any
payment by the Company to acquire any of the Notes for cash, property or
securities, or any distribution by the Company with respect to the Notes of any
cash, property or securities (excluding any payment or distribution of Permitted
Junior Securities and excluding any Defeasance Trust Payment). Before any
payment may be made by, or on behalf of, the Company of the principal of,
premium, if any, or interest on the Notes upon any such dissolution or winding
up or total liquidation or reorganization, whether voluntary or involuntary or
in bankruptcy, insolvency, receivership or other proceedings, any payment or
distribution of assets or securities of the Company of any kind or character,
whether in cash, property or securities (excluding any payment or distribution
of Permitted Junior Securities and excluding any Defeasance Trust Payment), to
which the Holders of the Notes or the Trustee on their behalf would be entitled,
but for the subordination provisions of the Indenture, shall be made by the
Company or by any receiver, trustee in bankruptcy, liquidation trustee, agent or
other Person making such payment or distribution, directly to the holders of the
Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders) or their representatives or
to the trustee or trustees or agent or agents under any agreement or indenture
pursuant to which any of such Senior Indebtedness may have been issued, as their
respective interests may appear, to the extent necessary to pay all such Senior
Indebtedness in full in cash or cash equivalents after giving effect to any
prior or concurrent payment, distribution or provision therefor, to or for the
holders of such Senior Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment) by the
Company of principal of, premium, if any, or interest on the Notes, whether
pursuant to the terms of the Notes, upon acceleration, pursuant to an Offer to
Purchase, as a payment into the Defeasance Trust or otherwise, shall be made if,
at the time of such payment, there exists a default in the payment of all or any
portion of any Senior Indebtedness, whether at maturity, on account of mandatory
redemption or prepayment, acceleration or otherwise, and such default shall not
have been cured or waived or the benefits of this sentence waived by or on
behalf of the holders of such Senior Indebtedness. In addition, during the
continuance of any non-payment event of default with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be immediately
accelerated, and upon receipt by the Trustee of written notice (a "Payment
Blockage Notice") from the holder or holders of such Designated Senior
Indebtedness or the trustee or agent acting on behalf of the holders of such
Designated Senior Indebtedness, then, unless and until such event of default has
been cured or waived or has ceased to exist or such Designated Senior
Indebtedness has been discharged or repaid in full in cash or the benefits of
these provisions have been waived by the holders of such Designated Senior
Indebtedness, no direct or indirect payment (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment) will be made by the Company of principal of, premium, if any, or
interest on the Notes, whether pursuant to the terms of the Notes, upon
acceleration, pursuant to an Offer to Purchase or otherwise, to such Holders,
during a period (a "Payment Blockage Period") commencing on the date of receipt
of such notice by the Trustee and ending 179 days thereafter. Notwithstanding
anything in the subordination provisions of the Indenture or the Notes to the
contrary, (x) in no event will a Payment Blockage Period extend beyond 179 days
from the date the Payment Blockage Notice in respect thereof was given, (y)
there shall be a period of at least 181 consecutive days in each 360-day period
when no Payment Blockage Period is in effect and (z) not more than one Payment
Blockage Period may be commenced with respect to the Notes during any period of
360 consecutive days. No event of default that existed or was continuing on the
date of commencement of any Payment Blockage Period with respect to the
Designated Senior Indebtedness initiating such Payment Blockage Period (to the
extent the holder of Designated Senior Indebtedness, or trustee or agent, giving
notice commencing such Payment Blockage Period had knowledge of such existing or
continuing event of default) may be, or be made, the basis for the commencement
of any other Payment Blockage Period by the holder or holders of such Designated
Senior Indebtedness or the trustee or agent acting on behalf of such Designated
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Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such event of default has been cured or waived for a period of not less
than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indenture described under this
"Subordination of the Notes" heading will not prevent, or be construed as
preventing, the occurrence of any Default or Event of Default in respect of the
Notes. See "Events of Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full in cash, and the Company may be
unable to meet fully or at all its obligations with respect to the Notes.
Furthermore, by reason of such subordination, in the event of any such
insolvency of the Company, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than other creditors of the Company,
including Holders of the Notes.
FUTURE GUARANTEES
The Indenture also provides that at any time either (x) in excess of 10.0%
of the consolidated net assets of the Company are owned by Restricted
Subsidiaries (other than Foreign Subsidiaries) of the Company or (y) in excess
of 10.0% of the Consolidated EBITDA of the Company is derived from Restricted
Subsidiaries (other than Foreign Subsidiaries) of the Company, within 90 days of
the filing of the financial statements with the Commission which indicate that
either clause (x) or clause (y) above is applicable, the Company shall cause
such Restricted Subsidiaries (other than Foreign Subsidiaries) to (i) execute
and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall
become a party to the Indenture and thereby unconditionally guarantee on an
unsecured senior subordinated basis (on substantially the same terms as the
subordination of the Notes) (a "Guarantee") all of the Company's Obligations
under the Notes and the Indenture on the terms set forth therein and (ii)
deliver to the Trustee an opinion of counsel that such supplemental indenture
has been duly authorized, executed and delivered by such Restricted Subsidiary
and constitutes a valid, binding and enforceable obligation of such Restricted
Subsidiary (which opinion may be subject to customary assumptions and
qualifications). Thereafter, such Restricted Subsidiary shall (unless released
in accordance with the terms of the Indenture) be a guarantor (a "Guarantor")
for all purposes of the Indenture. The Guarantee of a Guarantor will be released
upon the sale or transfer of a majority of the capital stock of such Guarantor
owned directly or indirectly by the Company, provided that such sale or transfer
complies with all of the terms of the Indenture, or such Guarantor becoming an
Unrestricted Subsidiary in accordance with the terms of the Indenture.
Each Guarantee will be a continuing guarantee and will (a) remain in full
force and effect until payment in full of all of the obligations covered
thereby, (b) be binding upon each Guarantor and (c) inure to the benefit of and
be enforceable by the Trustee, the Holders and their successors, transferees and
assigns.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Following the occurrence of a Change of Control (the date of such occurrence
being the "Change of Control Date"), the Company shall notify the Holders of the
Notes of such occurrence in the manner prescribed by the Indenture and shall,
within 60 days after the Change of Control Date, make an Offer to Purchase all
Notes then outstanding at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the Purchase Date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
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If a Change of Control occurs which also constitutes an event of default
under the New Credit Facility, the lenders under the New Credit Facility would
be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to the terms of the New Credit Facility.
Accordingly, any claims of such lenders with respect to the assets of the
Company will be prior to any claim of the Holders of the Notes with respect to
such assets.
If the Company makes an Offer to Purchase, the Company will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable Federal or state securities laws and regulations and any applicable
requirements of any securities exchange on which the Notes are listed, and any
violation of the provisions of the Indenture relating to such Offer to Purchase
occurring as a result of such compliance shall not be deemed a Default or an
Event of Default.
The Change of Control provisions of the Indenture will not apply in the
event of (i) changes in a majority of the Board of Directors of the Company so
long as a majority of the Board of Directors consists of individuals who at the
beginning of any two year period constituted the Board of Directors of the
Company or who are new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved, or (ii) certain transactions
with Permitted Holders, who include members of management of the Company and
certain of their affiliates. THE CHANGE OF CONTROL PROVISIONS ARE NOT INTENDED
TO AFFORD HOLDERS OF NOTES PROTECTION IN THE EVENT OF CERTAIN HIGHLY LEVERAGED
TRANSACTIONS, REORGANIZATIONS, RECAPITALIZATIONS, RESTRUCTURINGS, MERGERS AND
SIMILAR TRANSACTIONS THAT MIGHT ADVERSELY AFFECT THE HOLDERS OF NOTES, BUT THAT
WOULD NOT CONSTITUTE A CHANGE OF CONTROL. The Company could, in the future,
enter into such transactions, including transactions involving the Permitted
Holders, that would not constitute a Change of Control under the Indenture, but
that would increase the amount of Indebtedness of the Company outstanding at
such time or otherwise affect the Company's capital structure or credit rating.
However, the Indenture contains certain limitations on the ability of the
Company to incur additional Indebtedness and to engage in certain mergers,
consolidations and sales of assets, whether or not a Change of Control is
involved. See "Certain Covenants-- Limitation on Indebtedness" and "Certain
Covenants--Merger, Sale of Assets, etc."
The occurrence of certain of the events that would constitute a Change of
Control under the Indenture would constitute an event of default under the New
Credit Facility. Future Senior Indebtedness of the Company and its Subsidiaries
may also contain prohibitions of certain events that would constitute a Change
of Control or require such Senior Indebtedness to be repurchased upon a Change
of Control. Moreover, the exercise by the Holders of their right to require the
Company to repurchase the Notes could cause a default under such Senior
Indebtedness, even if the events constituting a Change of Control do not. Upon
the occurrence of a Change of Control, if it is prohibited by the terms of any
outstanding Indebtedness from making an Offer to Repurchase or from repurchasing
the Notes, the Company is required to either (i) repay all such Indebtedness and
terminate all commitments outstanding thereunder or (ii) obtain the requisite
consents under any such Indebtedness required to permit the Offer to Repurchase
or the repurchase of the Notes. The New Credit Facility provides for loans up to
a maximum amount of $275.0 million and, if the requisite consents from the
lenders thereunder are not forthcoming, it is unlikely that the Company would be
able to repay all of its obligations under the New Credit Facility and
repurchase the Notes unless it could obtain alternative financing. In addition,
although it currently has no outstanding securities or liabilities which are
pari passu with the Notes, the Company could in the future incur such pari passu
obligations which could have change of control provisions similar to those in
the Indenture requiring repurchase of such obligations at the same time as the
repurchase of the Notes. Finally, the terms of certain agreements of the
Company's Subsidiaries may contain certain restrictions (which are permitted
under the terms of the Indenture) on the ability of such Subsidiaries to pay
dividends or make loans to the Company. The existence of pari passu obligations
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and restrictions on dividends and loans could further increase the Company's
need to obtain alternative financing to facilitate a repurchase of the Notes in
the event of a Change of Control. There can be no assurance that the Company
would be able to obtain any such financing on commercially reasonable terms, or
at all, and consequently no assurance can be given that the Company would be
able to repurchase any of the Notes tendered pursuant to such an Offer to
Purchase.
None of the provisions in the Indenture relating to a purchase of Notes upon
a Change of Control is waivable by the Board of Directors of the Company.
Without the consent of each Holder of Notes affected thereby, no amendment to
the Indenture may modify the provisions of the Indenture requiring the Company
to make an Offer to Purchase upon a Change of Control in a manner materially
adverse to any such Holder.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS. The Indenture will provide that the Company
shall not, and shall not cause or permit any Restricted Subsidiary to, directly
or indirectly, Incur any Indebtedness (including Acquired Indebtedness), except
for Permitted Indebtedness; PROVIDED, HOWEVER, that the Company may Incur
Indebtedness if, at the time of and immediately after giving pro forma effect to
such Incurrence of Indebtedness and the application of the proceeds therefrom,
the Consolidated Coverage Ratio would be greater than (x) 2.0 to 1.00 if such
Indebtedness is Incurred prior to the second anniversary of the Issue Date or
(y) 2.25 to 1.00 if such Indebtedness is incurred thereafter.
The limitations contained in the preceding paragraph will not apply to the
Incurrence of any of the following (collectively, "Permitted Indebtedness"),
each of which shall be given independent effect:
(a) Indebtedness under the Notes and any Guarantees;
(b) Indebtedness Incurred under the New Credit Facility in an aggregate
principal amount at any one time outstanding not to exceed the greater of
(x) the maximum committed amount (without giving effect to any borrowing
base restrictions) under the New Credit Facility on the Issue Date or (y)
the sum of (i) the cash and Cash Equivalents of the Company and its
Restricted Subsidiaries, (ii) 80% of the then book value of accounts
receivable of the Company and its Restricted Subsidiaries as such amount
would appear on a consolidated balance sheet of the Company prepared in
accordance with GAAP, and (iii) 80% of the then book value of Inventory of
the Company and its Restricted Subsidiaries;
(c) Indebtedness of any Restricted Subsidiary of the Company owed to and
held by the Company or any Restricted Subsidiary, and Indebtedness of the
Company owed to and held by any Restricted Subsidiary and that is unsecured
and subordinated in right of payment in liquidation to the payment of the
Company's obligations under any Senior Indebtedness, the Indenture and the
Notes; PROVIDED, HOWEVER, that an Incurrence of Indebtedness that is not
otherwise permitted by this clause (c) shall be deemed to have occurred upon
(i) any sale or other disposition of any Indebtedness of the Company or any
Restricted Subsidiary of the Company referred to in this clause (c) to a
Person (other than the Company or a Restricted Subsidiary), or (ii) any sale
or other disposition of Equity Interests of any Subsidiary which holds
Indebtedness of the Company or another Subsidiary;
(d) Indebtedness under Interest Rate Protection Obligations; PROVIDED,
HOWEVER, that such Interest Rate Protection Obligations have been entered
into for bona fide business purposes and not for speculation;
(e) Purchase Money Indebtedness and Capitalized Lease Obligations of the
Company or any Restricted Subsidiary in an aggregate principal amount
(including refinancings thereof) at any one time outstanding not to exceed
5% of aggregate total revenue of the Company and its Restricted Subsidiaries
during the most recently completed four fiscal quarter period on a
consolidated basis (determined at the time of Incurrence); PROVIDED,
HOWEVER, that the Company and its Restricted
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Subsidiaries may incur any amount of additional Indebtedness of the type
specified above in this clause (e) which is secured by real estate and any
improvements thereon so long as the sole recourse of the obligee with
respect to such Indebtedness is to the real property and/or improvements
financed, fixtures related thereto and any accessions and additions thereto,
replacements and substitutions therefor and the proceeds (including
insurance proceeds thereof);
(f) Indebtedness under Currency Agreements; PROVIDED, HOWEVER, that
such Currency Agreements have been entered into for bona fide business
purposes and not for speculation;
(g) Existing Indebtedness;
(h) Indebtedness to the extent representing a replacement, renewal,
defeasance, refinancing or extension (collectively, a "refinancing") of any
outstanding Indebtedness; PROVIDED, HOWEVER, that (i) any such refinancing
shall not exceed the sum of the principal amount (or accreted amount
(determined in accordance with GAAP), if less) of the Indebtedness being
refinanced (or in the case of a refinancing of the New Credit Facility the
maximum permitted amount under clause (b) above), plus the amount of accrued
interest thereon, plus the amount of any reasonably determined prepayment
premium necessary to accomplish such refinancing and such reasonable fees
and expenses incurred in connection therewith, (ii) Indebtedness
representing a refinancing of Indebtedness other than Senior Indebtedness
shall have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being refinanced and
(iii) Indebtedness that is PARI PASSU with, or subordinate to the Notes may
only be refinanced with Indebtedness that is made PARI PASSU with or
subordinate in right of payment to the Notes and Subordinated Indebtedness
may only be refinanced with Subordinated Indebtedness; PROVIDED, FURTHER,
that Indebtedness of the Company may be refinanced by Indebtedness of a
Restricted Subsidiary and Indebtedness of a Restricted Subsidiary of the
Company may be refinanced by Indebtedness of the Company;
(i) guarantees by the Company or a Restricted Subsidiary of
Indebtedness Incurred by the Company or a Restricted Subsidiary so long as
the Incurrence of such Indebtedness is otherwise permitted by the terms of
the Indenture.
(j) Acquired Indebtedness and Indebtedness Incurred in connection with
the acquisition of assets; PROVIDED that such Indebtedness was incurred by
the prior owner of such assets prior to such acquisition by the Company or
one of its Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by the Company or one of its Restricted
Subsidiaries; PROVIDED FURTHER that the principal amount (or accreted value,
as applicable) of such Indebtedness, together with any other outstanding
Indebtedness (including refinancings thereof) incurred pursuant to this
clause (j), does not exceed $5.0 million;
(k) additional Indebtedness of Restricted Subsidiaries of the Company,
incurred after the Issue Date, in an aggregate principal amount at any time
outstanding (including refinancings thereof) not to exceed $20.0 million;
(l) Indebtedness in respect of worker's compensation, self-insurance
obligations, performance, surety, appeal and similar bonds and completion
guarantees provided in the ordinary course of business;
(m) Indebtedness incurred in connection with the acquisition of capital
stock of Restricted Subsidiaries existing on the Issue Date representing
minority interests in such Restricted Subsidiaries in an aggregate principal
amount (including refinancings thereof) not to exceed $2.0 million; and
(n) additional Indebtedness of the Company or any of its Restricted
Subsidiaries, Incurred after the Issue Date, in an aggregate principal
amount at any time outstanding (including refinancings thereof), not to
exceed $20.0 million.
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For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (a) through (n) above or is entitled
to be Incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof or as having been divided and incurred pursuant to more
than one of such clauses or the first paragraph hereof. Accrual of interest, the
accretion of accreted value and the payment of interest in the form of
additional Indebtedness will not be deemed to be an incurrence of Indebtedness
for purposes of this covenant. If the Indebtedness is Incurred, denominated and
payable in other than United States currency, then the Indebtedness shall be
converted into United States currency using the spot foreign exchange rate of
the currency in which such Indebtedness is Incurred, denominated and payable on
the date of Incurrence of such Indebtedness. Indebtedness Incurred under clause
(h) above as a refinancing of the New Credit Facility may be Incurred as two or
more separate facilities entered into at the same time or at different times so
long as such facilities in the aggregate constitute a refinancing of the New
Credit Facility in a maximum amount not to exceed the amount permitted under
clause (b) above.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. The Indenture provides that
the Company shall not, directly or indirectly, Incur, or suffer to exist, any
Indebtedness that by its terms would expressly rank senior in right of payment
to the Notes and subordinate in right of payment to any other Indebtedness of
the Company.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
shall not, and shall not cause or permit any Restricted Subsidiary of the
Company to, directly or indirectly
(i) declare or pay any dividend or any other distribution on any Equity
Interests of the Company or make any payment or distribution to the direct
or indirect holders (in their capacities as such) of Equity Interests of the
Company (other than any dividends, distributions and payments made solely in
Qualified Equity Interests of the Company or in options, warrants or other
rights to purchase Qualified Equity Interests of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Subsidiary of the Company (other than
any such Equity Interests owned by the Company or any Restricted Subsidiary
of the Company);
(iii) make any Investment in any Person (other than Permitted
Investments); or
(iv) designate any Restricted Subsidiary as an Unrestricted Subsidiary;
(any such payment or any other action (other than any exception thereto)
described in (i), (ii) or (iii), a "Restricted Payment"), unless
(a) no Default or Event of Default shall have occurred and be
continuing at the time or immediately after giving effect to such
Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
Company would be able to incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the Consolidated Coverage Ratio test
set forth in the first paragraph of "--Limitation on Indebtedness;" and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date (excluding Restricted Payments permitted by clauses (ii)
and (iv) of the next succeeding paragraph) does not exceed an amount
equal to the sum of (1) 50% of cumulative Consolidated Net Income
determined for the period (taken as one period) from the beginning of the
first fiscal quarter commencing after the Issue Date and ending on the
last day of the most recent fiscal quarter immediately
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preceding the date of such Restricted Payment for which consolidated
financial information of the Company is available (or if such cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss), plus
(2) the aggregate net cash proceeds received by the Company either (x) as
capital contributions to the Company after the Issue Date or (y) from the
issue and sale (other than to a Subsidiary of the Company) of its
Qualified Equity Interests after the Issue Date (excluding the net
proceeds from any issuance and sale of Qualified Equity Interests
financed, directly or indirectly, using funds borrowed from the Company
or any Subsidiary of the Company until and to the extent such borrowing
is repaid), plus (3) the principal amount (or accreted amount (determined
in accordance with GAAP), if less) of any Indebtedness of the Company or
any Subsidiary of the Company Incurred after the Issue Date which has
been converted into or exchanged for Qualified Equity Interests of the
Company (minus the amount of any cash or property distributed by the
Company or any Subsidiary of the Company upon such conversion or
exchange), plus (4) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the Issue Date,
an amount equal to 100% of the net cash proceeds thereof (or dividends,
distributions or interest payments received in cash thereon), plus (5)
with respect to any Unrestricted Subsidiary that has been designated or
re-designated as a Restricted Subsidiary after the Issue Date, the direct
or indirect proportionate interest of the Company in such Subsidiary
multiplied by an amount equal to the excess of (x) the total assets of
such Subsidiary, valued on an aggregate basis at Fair Market Value, over
(y) the total liabilities of such Subsidiary, determined in accordance
with GAAP, plus (6) $5.0 million.
The foregoing provisions will not prevent (i) the payment of any dividend or
distribution on, or redemption of, Equity Interests within 60 days after the
date or declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of such
formal notice such payment or redemption would comply with the provisions of the
Indenture; (ii) the purchase, redemption, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the net cash proceeds
of the substantially concurrent issue and sale (other than to a Subsidiary of
the Company) of, Qualified Equity Interests received by the Company; PROVIDED,
HOWEVER, that any such net cash proceeds or any Equity Interest issued in
exchange for such retired Equity Interests are excluded from clause (c)(2) of
the preceding paragraph (and were not included therein at any time) and are not
used to redeem the Notes pursuant to "Optional Redemption" above; (iii) payments
by the Company to, or to enable Parent to, purchase, redeem or acquire for value
shares of capital stock of the Company or Parent (other than Disqualified Equity
Interests) or options on such shares held by officers or employees or former
officers or employees (or their estates or beneficiaries under their estates)
upon the death, disability, retirement or termination of employment of such
current or former officers or employees pursuant to the terms of an employee
benefit plan or any other agreement pursuant to which such shares of capital
stock or options were issued or pursuant to a severance, buy-sell or right of
first refusal agreement with such current or former officer or employee;
PROVIDED, HOWEVER, that the aggregate cash consideration paid, or distributions
made, pursuant to this clause (iii) do not in any one fiscal year exceed $5.0
million; (iv) Investments constituting Restricted Payments made as a result of
the receipt of non-cash consideration from any Asset Sale made pursuant to and
in compliance with "--Disposition of Proceeds of Asset Sales" below; (v) the
purchase of capital stock representing minority interests in Restricted
Subsidiaries; PROVIDED, HOWEVER, that the aggregate cash consideration paid
pursuant to this clause (v) does not exceed $5.0 million; (vi) the payment of
premiums in connection with the maintenance of Permitted Life Insurance; (vii)
payments by the Company to Parent to fund the payment by Parent of audit,
accounting, legal or other similar expenses, to pay franchise or other similar
taxes and to pay other corporate overhead expenses, so long as such dividends
are paid as and when needed by Parent so long as the aggregate amount of
payments pursuant to this clause (vii) does not exceed $1.0 million in any
fiscal year; and (viii) payments by the Company to fund taxes of Parent for a
given taxable year in an amount equal to the Company's
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"separate return liability," as if the Company were the parent of a consolidated
group (for purposes of this clause (viii) "separate return liability" for a
given taxable year shall mean the hypothetical United States tax liability of
the Company defined as if the Company had filed its own U.S. federal tax return
for such taxable year); PROVIDED, HOWEVER, that in the case of each of clauses
(ii), (iii) and (iv), no Default or Event of Default shall have occurred and be
continuing or would arise therefrom.
The amount of any non-cash Restricted Payment shall be deemed to be equal to
the Fair Market Value thereof at the date of the making of such Restricted
Payment.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Indenture provides that the Company shall not, and shall not
cause or permit any Restricted Subsidiary of the Company to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary of the
Company to (a) pay dividends or make any other distributions to the Company or
any Restricted Subsidiary of the Company on its Equity Interests or with respect
to any other interest or participation in, or measured by, its profits, or pay
any Indebtedness owed to the Company or any Restricted Subsidiary of the
Company, (b) make loans or advances to, or guarantee any Indebtedness or other
obligations of, or make any Investment in, the Company or any Restricted
Subsidiary of the Company or (c) transfer any of its properties or assets to the
Company or any Restricted Subsidiary of the Company, except for such
encumbrances or restrictions existing under or by reason of (i) the New Credit
Facility as in effect on the Issue Date, any other agreement of the Company or
its Restricted Subsidiaries outstanding on the Issue Date as in effect on the
Issue Date and any other agreement of the Company or its Restricted Subsidiaries
outstanding from time to time governing Senior Indebtedness, and any amendments,
restatements, renewals, replacements or refinancings thereof; (ii) applicable
law; (iii) any instrument governing Indebtedness or Equity Interests of an
Acquired Person acquired by the Company or any Restricted Subsidiary of the
Company as in effect at the time of such acquisition (except to the extent such
Indebtedness was Incurred by such Acquired Person in connection with, as a
result of or in contemplation of such acquisition); PROVIDED, HOWEVER, that such
encumbrances and restrictions are not applicable to the Company or any
Restricted Subsidiary of the Company, or the properties or assets of the Company
or any Restricted Subsidiary of the Company, other than the Acquired Person;
(iv) customary non-assignment, subletting or restriction on transfer provisions
or restrictions on cash or other deposits or net worth maintenance provisions
under leases, licenses or other contracts entered into in the ordinary course of
business; (v) Purchase Money Indebtedness for property acquired in the ordinary
course of business that only imposes encumbrances and restrictions on the
property so acquired and the proceeds thereof; (vi) any agreement for the sale
or disposition of the Equity Interests or assets of any Subsidiary of the
Company; PROVIDED, HOWEVER, that such encumbrances and restrictions described in
this clause (vi) are only applicable to such Subsidiary or assets, as
applicable, and any such sale or disposition is made in compliance with
"Disposition of Proceeds of Asset Sales" below to the extent applicable thereto;
(vii) refinancing Indebtedness permitted under clause (h) of the second
paragraph of "Limitation on Indebtedness" above; or (viii) the Indenture.
LIMITATION ON LIENS. The Indenture provides that the Company shall not, and
shall not cause or permit any Restricted Subsidiary of the Company to, directly
or indirectly, Incur, or suffer to exist, any Liens of any kind against or upon
any of their respective properties or assets now owned or hereafter acquired, or
any proceeds therefrom or any income or profits therefrom, to secure any
Indebtedness unless contemporaneously therewith effective provision is made to
secure the Notes and all other amounts due under the Indenture, equally and
ratably with such Indebtedness (or, in the event that such Indebtedness is
subordinated in right of payment to the Notes prior to such Indebtedness) with a
Lien on the same properties and assets securing such Indebtedness for so long as
such Indebtedness is secured by such Lien, except for (i) Liens securing Senior
Indebtedness and (ii) Permitted Liens.
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DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the
Company shall not, and shall not cause or permit any Restricted Subsidiary of
the Company to, directly or indirectly, make any Asset Sale, unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets sold or otherwise disposed of, and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of (a) cash or Cash Equivalents or (b) property or assets that are
used or useful in a Permitted Business, or Equity Interests of any Person
primarily engaged in a Permitted Business if, as a result of the acquisition by
the Company or any Restricted Subsidiary thereof, such Person becomes a
Restricted Subsidiary; PROVIDED that the amount of (x) any liabilities of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities of the Company that are by their terms subordinated to the Notes or
any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to the customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash or Cash Equivalents (to the extent of the cash or Cash Equivalents
received) within 360 days following the closing of such Asset Sale, will be
deemed to be cash for purposes of this provision; PROVIDED FURTHER that the 75%
limitation referred to above shall not apply to any sale, transfer or other
disposition of assets in which the cash portion of the consideration received
therefor, determined in accordance with the foregoing proviso, is equal to or
greater than what the after-tax net proceeds would have been had such
transaction complied with the aforementioned 75% limitation.
The Company or such Restricted Subsidiary of the Company, as the case may
be, may (i) apply the Net Cash Proceeds of any Asset Sale within 360 days of
receipt thereof to repay Senior Indebtedness, or (ii) make an Investment in
property or assets that are used or useful in a Permitted Business, or Equity
Interests of any Person primarily engaged in a Permitted Business if, as a
result of the acquisition by the Company or any Restricted Subsidiary thereof,
such Person becomes a Restricted Subsidiary.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied as described in clause (i) or (ii) of the immediately preceding
paragraph within the time periods set forth therein (the "Net Proceeds
Utilization Date") (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"),
the Company shall, within 20 days after such Net Proceeds Utilization Date, make
an Offer to Purchase all outstanding Notes up to a maximum principal amount
(expressed as a multiple of $1,000) of Notes equal to such Unutilized Net Cash
Proceeds, at a purchase price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the Purchase Date;
PROVIDED, HOWEVER, that the Offer to Purchase may be deferred until there are
aggregate Unutilized Net Cash Proceeds equal to or in excess of $15.0 million,
at which time the entire amount of such Unutilized Net Cash Proceeds, and not
just the amount in excess of $15.0 million, shall be applied as required
pursuant to this paragraph.
With respect to any Offer to Purchase affected pursuant to this covenant,
among the Notes, to the extent the aggregate principal amount of Notes tendered
pursuant to such Offer to Purchase exceeds the Unutilized Net Cash Proceeds to
be applied to the repurchase thereof, such Notes shall be purchased pro rata
based on the aggregate principal amount of such Notes tendered by each Holder.
To the extent the Unutilized Net Cash Proceeds exceed the aggregate amount of
Notes tendered by the Holders of the Notes pursuant to such Offer to Purchase,
the Company may retain and utilize any portion of the Unutilized Net Cash
Proceeds not required to be applied to repurchase Notes tendered pursuant to
such Offer for any purpose consistent with the other terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any violation of the provisions of the Indenture relating
to such Offer to Purchase occurring as a result of such compliance shall not be
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deemed an Event of Default or an event that with the passing of time or giving
of notice, or both, would constitute an Event of Default.
Each Holder shall be entitled to tender all or any portion of the Notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount and subject to any proration among tendering
Holders as described above.
MERGER, SALE OF ASSETS, ETC. The Indenture provides that the Company shall
not consolidate with or merge with or into any other Person and the Company
shall not sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the Company's properties and assets to any entity in a
single transaction or series of related transactions, unless: (i) either (x) the
Company shall be the Surviving Person or (y) the Surviving Person (if other than
the Company) shall be a Person organized and validly existing under the laws of
the United States of America or any State thereof or the District of Columbia
and shall, in any such case, expressly assume by a supplemental indenture, the
due and punctual payment of the principal of, premium, if any, and interest on
all the Notes and the performance and observance of every covenant of the
Indenture and the Exchange and Registration Rights Agreement to be performed or
observed on the part of the Company; and (ii) immediately thereafter on a pro
forma basis, no Default or Event of Default shall have occurred and be
continuing.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries of the Company the Equity Interests of which constitutes all or
substantially all the properties and assets of the Company shall be deemed to be
the transfer of all or substantially all the properties and assets of the
Company.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company shall
not and shall not cause or permit any Restricted Subsidiary of the Company to,
directly or indirectly, conduct any business or enter into any transaction (or
series of related transactions) with or for the benefit of any of their
respective Affiliates (including, without limitation, any Unrestricted
Subsidiary or the Company) or any officer, director or employee of the Company
or any Subsidiary of the Company (each an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms which are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party and (ii)
if such Affiliate Transaction (or series of related Affiliate Transactions)
involves aggregate payments or other consideration having a Fair Market Value in
excess of $5.0 million in any fiscal year, such Affiliate Transaction is in
writing and a majority of the disinterested members, if any, of the Board of
Directors of the Company shall have approved such Affiliate Transaction and
determined that such Affiliate Transaction complies with the foregoing
provisions. In addition, any Affiliate Transaction involving aggregate payments
or other consideration having a Fair Market Value in excess of $10.0 million
will also require a written opinion from an Independent Financial Advisor (filed
with the Trustee) stating that the terms of such Affiliate Transaction are fair,
from a financial point of view, to the Company or its Subsidiaries involved in
such Affiliate Transaction, as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and any Restricted
Subsidiary or between or among Restricted Subsidiaries or between the Company
and/or one or more of its Restricted Subsidiaries on the one hand, and
Non-Affiliated Joint Ventures, on the other hand; (ii) reasonable fees and
compensation (including customary benefit, deferred compensation, retirement and
stock incentive or similar plans) paid or made available to and indemnity
provided on behalf of, officers, directors, employees, consultants or agents of
the Company or any Restricted Subsidiary of the Company as determined in good
faith by the Company's Board of Directors; (iii) advances and loans to employees
for relocation, entertainment and travel expenses, drawing accounts and other
matters in the ordinary course of business, (iv) any transactions undertaken
pursuant to any contractual obligations in existence on the
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Issue Date (as in effect on the Issue Date), (v) any Restricted Payments made in
compliance with "Limitation on Restricted Payments" above, and (vi) transactions
in connection with the maintenance of Permitted Life Insurance.
PROVISION OF FINANCIAL INFORMATION. The Indenture provides that whether or
not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision thereto, the Company shall file with the SEC (if permitted
by SEC practice and applicable law and regulations) the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the SEC pursuant to such Section 13(a) or 15(d) or any successor
provision thereto if the Company were so subject, such documents to be filed
with the SEC on or prior to the respective dates (the "Required Filing Dates")
by which the Company would have been required so to file such documents if the
Company were so subject. The Company shall also in any event (a) within 15 days
of each Required Filing Date (whether or not permitted or required to be filed
with the SEC) (i) transmit (or cause to be transmitted) by mail to all Holders,
as their names and addresses appear in the Note register, without cost to such
Holders, and (ii) file with the Trustee, copies of the annual reports, quarterly
reports and other documents which the Company is required to file with the SEC
pursuant to the preceding sentence, or, if such filing is not so permitted,
information and data of a similar nature, and (b) if, notwithstanding the
preceding sentence, filing such documents by the Company with the SEC is not
permitted by SEC practice or applicable law or regulations, promptly upon
written request supply copies of such documents to any Holder. In addition, for
so long as any Notes remain outstanding and prior to the later of the
consummation of the Exchange Offer and the filing of the initial Shelf
Registration Statement, if required, the Company will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial Holder of Notes, if not obtainable from
the SEC, information of the type that would be filed with the SEC pursuant to
the foregoing provisions, upon the request of any such Holder. The first such
report was for the fiscal period ending April 30, 1998.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The Indenture will provide that
the Company may designate after the Issue Date any Subsidiary of the Company as
an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(ii) immediately after giving effect to such Designation, the Company
could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the "Limitation on Indebtedness" covenant; and
(iii) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the effectiveness
of such Designation) pursuant to the first paragraph of the "Limitation on
Restricted Payments" covenant in an amount (the "Designation Amount") equal
to the Fair Market Value of the parent's proportionate interest in the net
worth of such Subsidiary on such date calculated in accordance with GAAP.
Neither the Company nor any Restricted Subsidiary shall at any time (x)
provide credit support for or guarantee any Indebtedness of any Unrestricted
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness); provided, that the Company may pledge Equity Interests or
Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such that the
pledgee has no claim whatsoever against the Company other than to obtain such
pledged property, (y) be directly or indirectly liable for any Indebtedness of
any Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary,
except for any non-recourse guarantee given solely to support the pledge by the
Company of the
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capital stock of any Unrestricted Subsidiary. For purposes of the foregoing, the
Designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall
be deemed to include the Designation of all of the Subsidiaries of such
Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") only if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at such
time, be permitted to be Incurred for all purposes of the Indenture; and
(iii) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary was
an Unrestricted Subsidiary would be permitted by the "Transactions with
Affiliates" covenant described below as if such transaction (or series of
related transactions) had occurred at the time of such Revocation.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
EVENTS OF DEFAULT AND REMEDIES
The occurrence of any of the following is defined as an "Event of Default"
under the Indenture: (a) failure to pay principal of (or premium, if any, on)
any Note when due (whether or not prohibited by the provisions of the Indenture
described under "Subordination of the Notes" above); (b) failure to pay any
interest on any Note when due, continued for 30 days or more (whether or not
prohibited by the provisions of the Indenture described under "Subordination of
the Notes" above); (c) default in the payment of principal of or interest on any
Note required to be purchased pursuant to any Offer to Purchase required by the
Indenture when due and payable or failure to pay on the Purchase Date the
purchase price for any Note validly tendered pursuant to any Offer to Purchase
(whether or not prohibited by the provisions of the Indenture described under
"Subordination of the Notes" above); (d) failure to perform or comply with any
of the provisions described under "Certain Covenants--Merger, Sale of Assets,
etc." above; (e) failure to perform any other covenant, warranty or agreement of
the Company under the Indenture or in the Notes, continued for 30 days or more
after written notice to the Company by the Trustee or Holders of at least 25% in
aggregate principal amount of the outstanding Notes; (f) default or defaults
under the terms of one or more instruments evidencing or securing Indebtedness
of the Company or any Significant Restricted Subsidiaries having an outstanding
principal amount of $15.0 million or more individually or in the aggregate that
has resulted in the acceleration of the payment of such Indebtedness or failure
by the Company or any Significant Restricted Subsidiary to pay principal when
due at the stated maturity of any such Indebtedness and such default or defaults
shall have continued after any applicable grace period and shall not have been
cured or waived; (g) the rendering of a final judgment or judgments (not subject
to appeal) against the Company or any Significant Restricted Subsidiary in an
amount of $15.0 million or more (net of any amounts covered by reputable and
creditworthy insurance companies) which remains undischarged or unstayed for a
period of 60 days after the date on which the right to appeal has expired; or
(h) certain events of bankruptcy, insolvency or reorganization affecting the
Company or any of its Significant Restricted Subsidiaries.
If an Event of Default with respect to the Notes (other than an Event of
Default described in clause (h) of the preceding paragraph) occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of the outstanding Notes, by notice in writing to the Company may declare
the unpaid principal of (and premium, if any) and accrued interest to the date
of acceleration on all the outstanding Notes to be due and payable immediately
and, upon any such declaration, such principal
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amount (and premium, if any) and accrued interest, notwithstanding anything
contained in the Indenture or the Notes to the contrary, will become immediately
due and payable. If an Event or Default specified in clause (i) of the preceding
paragraph with respect to the Company occurs under the Indenture, the Notes will
ipso facto become immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder of the Notes.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders of Notes, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred an
such Trustee.
Any such declaration with respect to the Notes may be rescinded and annulled
by the Holders of a majority in aggregate principal amount of the outstanding
Notes upon the conditions provided in the Indenture. For information as to
waiver of defaults, see "Modification and Waiver" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes
outstanding, give the Holders of the Notes thereof notice of all uncured
Defaults or Events of Default thereunder known to it; PROVIDED, HOWEVER, that,
except in the case of a Default or an Event of Default in payment with respect
to the Notes or a Default or Event of Default in complying with "Certain
Covenants--Merger, Sale of Assets, etc." above, the Trustee shall be protected
in withholding such notice if and so long as a committee of its trust officers
in good faith determines that the withholding of such notice is in the interest
of the Holders of the Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default thereunder and unless the Holders of at least 25% of the aggregate
principal amount of the outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding, and
the Trustee shall have not have received from the Holders of a majority in
aggregate principal amount of such outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a Holder of
such a Note for enforcement of payment of the principal of and premium, if any,
or interest on such Note on or after the respective due dates expressed in such
Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any material default in such performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR,
MANAGER AND SHAREHOLDERS
No director, officer, employee, incorporator, manager or shareholder of the
Company or any of its Affiliates, as such, shall have any liability for any
obligations of the Company under the Notes or the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, noncallable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service, a ruling or (B) since the Issue Date, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries in a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that (A) the
trust funds will not be subject to any rights of holders of Senior Indebtedness,
including, without limitation, those arising under the Indenture and (B)
assuming no intervening bankruptcy of the Company between the date of deposit
and the 91st day following the date of the deposit and that no Holder is an
insider of the Company, after the 91st day following the date of the deposit,
the trust funds will not be subject to the
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effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied. Notwithstanding the foregoing, the opinion
of counsel required by clause (ii) above need not be delivered if all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable on the maturity date within one year or
(z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company.
GOVERNING LAW
The Indenture, the Notes and the Guarantees, if any, are governed by the
laws of the State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications, waivers and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the outstanding Notes (including consents obtained
in connection with a tender offer or exchange offer for the Notes); PROVIDED,
HOWEVER, that no such modification, waiver or amendment to the Indenture may,
without the consent of the Holder of each Note affected thereby, (a) change the
maturity of the principal of or any installment of interest on any such Note or
alter the optional redemption or repurchase provisions of any such Note or the
Indenture in a manner adverse to the Holders of the Notes; (b) reduce the
principal amount of (or the premium of) any such Note; (c) reduce the rate of or
extend the time for payment of interest on any such Note; (d) change the place
or currency of payment of principal of (or premium) or interest on any such
Note; (e) modify any provisions of the Indenture relating to the waiver of past
defaults (other than to add sections of the Indenture or the Notes subject
thereto) or the right of the Holders of Notes to institute suit for the
enforcement of any payment on or with respect to any such Note or Guarantee or
the modification and amendment provisions of the Indenture and the Notes (other
than to add sections of the Indenture or the Notes which may not be modified,
amended, supplemented or waived without the consent of each Holder affected);
(f) reduce the percentage of the principal amount of outstanding Notes necessary
for amendment to or waiver of compliance with any provision of the Indenture or
the Notes or for waiver of any Default in respect thereof; (g) waive a default
in the payment of principal of, interest on, or redemption payment with respect
to, the Notes (except a rescission of acceleration of the Notes by the Holders
thereof as provided in the Indenture and a waiver of the payment default that
resulted from such acceleration); (h) modify the ranking or priority of any Note
in respect thereof in any manner adverse to the Holders or modify the definition
of Senior Indebtedness or amend or modify the subordination provisions of the
Indenture in any manner adverse to the Holders of the Notes; or (i) modify the
provisions of any covenant (or the related definitions) in the Indenture
requiring the Company to make an Offer to Purchase in a manner materially
adverse to the Holders of Notes affected thereby otherwise than in accordance
with the Indenture.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the Holders of a majority in
aggregate principal amount of the Notes, on behalf of all Holders, may waive any
past default under the Indenture (including any such waiver obtained in
connection with a tender offer or exchange offer for the Notes), except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Notes tendered pursuant to an Offer to Purchase, or
a default in respect of a provision that under the indenture cannot be modified
or amended without the consent of the Holder of each Note that is affected.
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THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indenture. During the existence
of a Default, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company or any other obligor upon the Notes, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claim as security or otherwise. The Trustee is
permitted to engage in other transactions with the Company or an Affiliate of
the Company; PROVIDED, HOWEVER, that if it acquires any conflicting interest (as
defined in the Indenture or in the Trust Indenture Act), it must eliminate such
conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as any
other capitalized terms used.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person, or (b) existing at the time
such Person becomes a Subsidiary of the Company or is merged or consolidated
with or into the Company or any Restricted Subsidiary of the Company, in each
case other than Indebtedness of the Acquired Person actually repaid concurrent
with any such transaction.
"ACQUIRED PERSON" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"ACQUISITION" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary of the Company to any other Person, or any acquisition or purchase of
Equity Interests of any other Person by the Company or any Restricted Subsidiary
of the Company, in either case pursuant to which such Person shall become a
Subsidiary of the Company or shall be consolidated with or merged into the
Company or any Restricted Subsidiary of the Company or (ii) any acquisition by
the Company or any Restricted Subsidiary of the Company of the assets of any
Person which constitute substantially all of an operating unit or line of
business of such Person or which is otherwise outside of the ordinary course of
business.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise. Unrestricted
Subsidiaries of the Company shall be deemed Affiliates of the Company.
"ASSET SALE" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger or consolidation) to any Person other than the Company or
a Restricted Subsidiary, in one transaction or a series of related transactions,
of (i) any Equity Interest of any Restricted Subsidiary of the Company (other
than directors' qualifying shares, to the extent mandated by applicable law);
(ii) any assets of the Company or any Restricted Subsidiary of the Company which
constitute substantially all of an operating unit or line of business of the
Company or any Restricted Subsidiary of the Company; or (iii) any other property
or
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asset of the Company or any Restricted Subsidiary of the Company outside of the
ordinary course of business (including the receipt of proceeds paid on account
of the loss of or damage to any property or asset and awards of compensation for
any asset taken by condemnation, eminent domain or similar proceedings). For the
purposes of this definition, the term "Asset Sale" shall not include (a) any
transaction consummated in compliance with "Certain Covenants--Merger, Sale of
Assets, etc." above and the creation of any Lien not prohibited by "Certain
Covenants--Limitation on Liens" above; (b) sales of property or equipment that
has become worn out, obsolete or damaged or otherwise unsuitable for use in
connection with the business of the Company or any Restricted Subsidiary of the
Company, as the case may be; (c) any transaction consummated in compliance with
"Certain Covenants--Limitation on Restricted Payments" above; (d) a transfer of
assets from the Company to a Restricted Subsidiary, from a Restricted Subsidiary
to the Company or from a Restricted Subsidiary to another Restricted Subsidiary.
In addition, solely for purposes of "Certain Covenants--Disposition of Proceeds
of Asset Sales" above, any sale, conveyance, transfer, lease or other
disposition of any property or asset, whether in one transaction or a series of
related transactions, involving assets with a Fair Market Value not in excess of
$2.0 million in any fiscal year, shall be deemed not to be an Asset Sale. For
purposes of this definition, "ordinary course of business" shall be deemed to
include, without limitation, (i) the sale of rental inventory, consistent with
past practices, and (ii) closure of a store.
"ATTRIBUTABLE INDEBTEDNESS" in respect of a sale and lease-back transaction
means, as at the time of determination, the present value (discounted according
to GAAP at the cost of indebtedness implied in the lease) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such sale and lease-back transaction (including any period for
which such lease has been extended).
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
"BOARD RESOLUTION" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York, New York or Los Angeles, California are
not required to be open.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP; PROVIDED that liabilities in respect of real property leases shall
not be deemed Capital Lease Obligations regardless of their classification in
accordance with GAAP.
"CASH EQUIVALENTS" means: (a) United States dollars, (b) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (c) certificates of deposit, time deposits
and eurodollar time deposits with maturities of not more than one year from the
date of acquisition, bankers' acceptances with maturities of not more than one
year from the date of acquisition and overnight bank deposits, in each case with
any lender party to the New Credit Facility or any Indebtedness Incurred as a
refinancing of the New Credit Facility or with any commercial bank having
capital and surplus in excess of $500.0 million, (d) repurchase obligations with
a term of not more than thirty days for underlying securities of the types
described in clauses (b) and (c) above entered into with any financial
institution meeting the qualifications specified in clause (c) above, (e)
commercial paper rated at least P-2 by Moody's Investors Service, Inc. or at
least A-2 by Standard & Poor's Ratings Services with maturities of not more than
270 days from the date of acquisition, (f) readily marketable direct obligations
issued by any State of the United States of America or any political subdivision
thereof having maturities of not more than one year from the date of acquisition
and rated at least A by Moody's Investors Service, Inc. or A by Standard &
Poor's Ratings Services, (g) investment funds investing 95% of their assets in
securities of the types described in clauses (a) through (f) above; and (h) in
the case of any
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Foreign Subsidiary, Investments: (i) in direct obligations of the sovereign
nation (or any agency thereof) in which such Foreign Subsidiary is organized and
is conducting business or in obligations fully and unconditionally guaranteed by
such sovereign nation (or any agency thereof) or (ii) of the type and maturity
described in clauses (b) and (c) above of foreign obligers, which Investment or
obligers (or the parents of such obligers) have ratings described in such
clauses or equivalent ratings from comparable foreign rating agencies and (h)
other Investments which would constitute cash equivalents in accordance with
GAAP.
"CHANGE OF CONTROL" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company); (i) any
Person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other
than one or more Permitted Holders and their Related Parties, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time, upon the happening of
an event or otherwise), directly or indirectly, of more than 50% of the total
voting power of the then outstanding Voting Equity Interests of the Company;
(ii) the Company consolidates with, or merges with or into, another Person
(other than a Wholly Owned Restricted Subsidiary) or the Company or any of its
Restricted Subsidiaries sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of the assets of the Company and its
Restricted Subsidiaries (determined on a consolidated basis) to any Person
(other than the Company or any Wholly Owned Restricted Subsidiary), other than
any such transaction where immediately after such transaction the Person or
Persons that "beneficially owned" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time)
immediately prior to such transaction, directly or indirectly, a majority of the
total voting power of the then outstanding Voting Equity Interests of the
Company "beneficially own" (as so determined), directly or indirectly, a
majority of the total voting power of the then outstanding Voting Equity
Interests of the surviving or transferee Person; (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either directors 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
Board of Directors of the Company then in office; or (iv) the Company is
liquidated or dissolved or adopts a plan of liquidation or dissolution other
than in a transaction which complies with the provisions described under
"--Merger, Sale of Assets, etc." For purposes of this definition, beneficial
ownership of Parent shall be deemed to be pro rata beneficial ownership of that
portion of the Company owned by Parent.
"CHANGE OF CONTROL DATE" has the meaning set forth under "Offer to Purchase
upon Change of Control" above.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal quarters ending prior to the
date of such determination (the "Four Quarter Period") to (ii) Consolidated
Interest Expense for such Four Quarter Period; PROVIDED, HOWEVER, that (1) if
the Company or any Restricted Subsidiary of the Company has incurred any
Indebtedness since the beginning of such Four Quarter Period that remains
outstanding on such date of determination or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, Consolidated EBITDA and Consolidated Interest Expense for such
Four Quarter Period shall be calculated after giving effect on a pro forma basis
to such Indebtedness as if such Indebtedness had been Incurred on the first
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day of such Four Quarter Period (PROVIDED that if such Indebtedness is revolving
Indebtedness the amount thereof deemed to be incurred as of the first day of
such Four Quarter Period shall be the average daily balance of such Indebtedness
during the period since such revolving Indebtedness was initially incurred) and
the discharge of any other Indebtedness repaid, repurchased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such Four Quarter Period, (2) if since the
beginning of such Four Quarter Period the Company or any Restricted Subsidiary
of the Company shall have made any Asset Sale, the Consolidated EBITDA for such
Four Quarter Period shall be reduced by an amount equal to the Consolidated
EBITDA (if positive) directly attributable to the assets that are the subject of
such Asset Sale for such Four Quarter Period or increased by an amount equal to
the Consolidated EBITDA (if negative) directly attributable thereto for such
Four Quarter Period and Consolidated Interest Expense for such Four Quarter
Period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary of the Company repaid, repurchased or otherwise discharged with
respect to the Company and its continuing Subsidiaries in connection with such
Asset Sale for such Four Quarter Period (or, if the Equity Interests of any
Restricted Subsidiary of the Company are sold, the Consolidated Interest Expense
for such Four Quarter Period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing Subsidiaries
are no longer liable for such Indebtedness after such sale), (3) if since the
beginning of such Four Quarter Period the Company or any Restricted Subsidiary
of the Company (by merger or otherwise) shall have made an Investment in any
Subsidiary of the Company (or any Person that becomes a Restricted Subsidiary of
the Company) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, Consolidated EBITDA and Consolidated Interest Expense for such Four
Quarter Period shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such Four Quarter Period, (4) if since
the beginning of such Four Quarter Period any Person (that subsequently became a
Subsidiary or was merged with or into the Company or any Restricted Subsidiary
of the Company since the beginning of such Four Quarter Period) shall have made
any Asset Sale or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (2) or (3) above if made by the
Company or a Subsidiary of the Company during such Four Quarter Period,
Consolidated EBITDA and Consolidated Interest Expense for such Four Quarter
Period shall be calculated after giving pro forma effect thereto as if such
Asset Sale, Investment or acquisition of assets occurred on, with respect to any
Investment or acquisition, the first day of such Four Quarter Period and, with
respect to any Asset Sale, the day prior to the first day of such Four Quarter
Period, and (5) if since the beginning of such period the Company shall have
received the proceeds of an Equity Offering, Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its Restricted Subsidiaries in connection with such
receipt of proceeds of such Equity Offering for such period. For purposes of
this definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in
accordance with Regulation S-X under the Securities Act as in effect on the date
of such calculation. If any Indebtedness bears a floating rate of interest and
is being given pro forma effect, the interest expense on such Indebtedness shall
be calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any agreement under
which Interest Rate Protection Obligations are outstanding applicable to such
Indebtedness if such agreement under which such Interest Rate Protection
Obligations are outstanding has a remaining term as at the date of determination
in excess of 12 months); PROVIDED, HOWEVER, that the Consolidated Interest
Expense of the Company attributable to interest on any Indebtedness Incurred
under a revolving
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credit facility computed on a pro forma basis shall be computed based upon the
average daily balance of such Indebtedness during the Four Quarter Period.
"CONSOLIDATED EBITDA" means, for any period, the Consolidated Net Income for
such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) Consolidated Income Tax Expense for such period;
(ii) Consolidated Interest Expense for such period; and (iii) Consolidated
Non-cash Charges for such period, less all non-cash items increasing
Consolidated Net Income for such period.
"CONSOLIDATED INCOME TAX EXPENSE" means, with respect to the Company for any
period, the provision for Federal, state, local and foreign income taxes of the
Company and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and its Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (e) all capitalized interest and all accrued interest, (f) non-cash
interest expense and (g) interest on Indebtedness of another Person that is
guaranteed by the Company or any Subsidiary of the Company actually paid by the
Company or any Subsidiary of the Company, (ii) preferred stock dividend
requirements on the preferred stock described in clause (h) of the definition of
Indebtedness and (iii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by the Company and its
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP. Notwithstanding the foregoing, Consolidated Interest
Expense shall not include any expense of the Company incurred as one-time
payments in connection with the extension of certain Indebtedness of the Company
in February 1998.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net income
(loss) of the Company and its Subsidiaries, provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (loss) of
any Person if such Person is not a Restricted Subsidiary of the Company, except
that the Company's equity in the net income of any such Person for such period
shall be included in determining such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or distribution; (ii)
any net income (loss) of any Person acquired by the Company or a Restricted
Subsidiary of the Company in a pooling of interests transaction for any period
prior to the date of such acquisition; PROVIDED that there shall not be any such
exclusion of the net income (loss) of any Person acquired in connection with the
Reorganization; (iii) any net income (but not loss) of any Restricted Subsidiary
of the Company that is not a Guarantor if such Restricted Subsidiary is subject
to restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Subsidiary, directly or indirectly, to the
Company to the extent of such restrictions; (iv) any gain or loss realized upon
the sale or other disposition of any asset of the Company or its Restricted
Subsidiaries (including pursuant to any sale/lease-back transaction) outside of
the ordinary course of business including, without limitation, on or with
respect to Investments (and excluding dividends, distributions or interest
thereon); (v) any extraordinary gain or loss in accordance with GAAP; (vi) the
cumulative effect of a change in accounting principles after the Issue Date; and
(vii) any restoration to income of any contingency reserve of an extraordinary,
non-recurring or unusual nature, except to the extent that provision for such
reserve was made out of Consolidated Net Income accrued at any time following
the Issue Date.
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"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period the sum of (a) depreciation, (b) amortization and (c) other non-cash
items presented on such Person's consolidated statement of cash flows as
"Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities," determined on a consolidated basis in accordance with GAAP.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement relating to fluctuations in
currency values.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (a) any Indebtedness outstanding
under the New Credit Facility and (b) any other Senior Indebtedness which, at
the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least $10.0
million, if the instrument governing such other Senior Indebtedness expressly
states that such Indebtedness is "Designated Senior Indebtedness" for purposes
of the Indenture.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"DISQUALIFIED EQUITY INTEREST" means any Equity Interest which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the earlier
of the maturity date of the Notes or the date on which no Notes remain
outstanding.
"DOMESTIC SUBSIDIARY" means, with respect to a Subsidiary, a Subsidiary
whose jurisdiction of incorporation or formation is the United States, any state
thereof or the District of Columbia.
"EQUITY INTEREST" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Equity Interests.
"EQUITY OFFERING" means (i) an underwritten public offering of Qualified
Equity Interests of Parent or the Company pursuant to an effective registration
statement filed under the Securities Act (excluding registration statements
filed on Form S-8) or (ii) a private offering of Qualified Equity Interests of
Parent or the Company pursuant to an exemption from registration under the
Securities Act in an aggregate purchase price of not less than $50.0 million.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the Issue Date, until such amounts are repaid.
"EXPIRATION DATE" has the meaning set forth in the definition of "Offer to
Purchase" below.
"FAIR MARKET VALUE" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash or other
consideration, between a willing seller and a willing and able buyer, neither of
which is under any compulsion to complete the transaction; PROVIDED, HOWEVER,
that the Fair Market Value of any such asset shall be determined conclusively by
the Board of Directors of the Company acting in good
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faith, and, with respect to any determination of Fair Market Value in excess of
$10.0 million, shall be evidenced by a Board Resolution delivered to the
Trustee.
"FOREIGN SUBSIDIARY" means, with respect to a Subsidiary, a Subsidiary other
than a Domestic Subsidiary.
"FOUR QUARTER PERIOD" has the meaning set forth in the definition of
"Consolidated Coverage Ratio" above.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the Issue Date
and which are consistently applied for all applicable periods, including those
set forth in (i) the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants, (ii) statements
and pronouncements of the Financial Accounting Standards Board, and (iii) such
other statements by such other entity as approved by a significant segment of
the accounting profession.
"GUARANTEE" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
"GUARANTORS" means each Subsidiary of the Company (other than Foreign
Subsidiaries and Unrestricted Subsidiaries) which is required to become a
Guarantor pursuant to the terms of the Indenture.
"HOLDERS" means the registered holders of the Notes.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Acquired Person or any of its
Subsidiaries existing at the time such Acquired Person becomes a Subsidiary of
the Company (or is merged into or consolidated with the Company or any
Restricted Subsidiary of the Company), whether or not such Indebtedness was
Incurred in connection with, as a result of, or in contemplation of, such
Acquired Person becoming a Restricted Subsidiary of the Company (or being merged
into or consolidated with the Company or any Restricted Subsidiary), shall be
deemed Incurred at the time any such Acquired Person becomes a Subsidiary or
merges into or consolidates with the Company or any Restricted Subsidiary.
"INDEBTEDNESS" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person, (a) the
principal amount of every obligation of such Person for money borrowed; (b) the
principal amount of every obligation of such Person evidenced by bonds,
debentures, notes or other similar instruments, including the principal amount
of such obligations incurred in connection with the acquisition of property,
assets or businesses; (c) reimbursement obligations of such Person with respect
to letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person; (d) the principal amount of obligations of such Person
issued or assumed as the deferred purchase price of property or services (but
excluding trade accounts payable incurred in the ordinary course of business and
payable in accordance with industry practices, or other accrued liabilities
arising in the ordinary course of business); (e) Capital Lease Obligations of
such Person; (f) net obligations under Interest Rate Protection Obligations or
similar agreements or Currency Agreements of such Person; (g) Attributable
Indebtedness; (h) any Disqualified Equity Interests of the Company or any
preferred stock of any Restricted Subsidiary of the Company not held by the
Company or a Restricted
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Subsidiary; (i) obligations of the type referred to in clauses (a) through (j)
of another Person and all dividends of another Person the payment of which, in
either case, such Person has guaranteed or is responsible or liable for,
directly or indirectly, as obligor, guarantor or otherwise; and (j) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
clauses (a) through (i) above. Indebtedness (i) with respect to reimbursement
obligations as described under clause (c) above, shall not be deemed Incurred if
satisfied within 15 Business Days of such Incurrence and (ii) which provides
that an amount less than the principal amount thereof shall be due upon any
declaration of acceleration thereof shall be deemed to be Incurred or
outstanding in an amount equal to the accreted value thereof at the date of
determination.
"INDEPENDENT FINANCIAL ADVISOR" means a nationally recognized accounting,
appraisal, investment banking firm or consultant (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST" means, with respect to the Notes, the sum of any cash interest
and any Additional Interest (as defined under "Exchange and Registration Rights
Agreement" below) on the Notes.
"INTEREST RATE PROTECTION OBLIGATIONS" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements relating to fluctuations in interest rates.
"INVENTORY" means, with respect to any Person as of any date of
determination, the then book value of inventory which would appear on the
consolidated balance sheet of such Person in accordance with GAAP, plus the then
book value of video rental product recorded on the books of such Person in
accordance with GAAP.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan,
advance, guarantee or other extension of credit or capital contribution to (by
means of transfers of cash or other property or assets to others or payments for
property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. For
purposes of the "Limitation on Restricted Payments" covenant above, the amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment; reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; PROVIDED, HOWEVER, that no such payment of dividends or
distributions or receipt of any such other amounts shall reduce the amount of
any Investment if such payment of dividends or distributions or receipt of any
such amounts would be included in Consolidated Net Income. In determining the
amount of any investment involving a transfer of any property or asset other
than cash, such property shall be valued at its fair market value at the time of
such transfer, as determined in good faith by the Board of Directors (or
comparable body) of the Person making such transfer.
"ISSUE DATE" means the original issue date of the Notes.
"LIEN" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"MATURITY DATE" means the date, which is set forth on the face of the Notes,
on which the Notes will mature.
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"NET CASH PROCEEDS" means the aggregate proceeds in the form of cash or Cash
Equivalents received by the Company or any Restricted Subsidiary of the Company
in respect of any Asset Sale, including all cash or Cash Equivalents received
upon any sale, liquidation or other exchange of proceeds of Asset Sales received
in a form other than cash or Cash Equivalents, net of (a) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sales; (d) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets which are the subject of
such Asset Sale; including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee (provided that the amount of any such reserves shall be deemed to
constitute Net Cash Proceeds at the time such reserves shall have been reversed
or are not otherwise required to be retained as a reserve); and (e) with respect
to Asset Sales by a Restricted Subsidiary, the portion of such cash payments
attributable to Persons holding a minority interest in such Restricted
Subsidiary.
"NET PROCEEDS UTILIZATION DATE" has the meaning set forth in the second
paragraph under "Certain Covenants-Disposition of Proceeds of Asset Sales"
above.
"NEW CREDIT FACILITY" means the Credit Agreement dated April 23, 1998, by
and among the Company, the Subsidiaries of the Company identified on the
signature pages thereto, the lenders named therein, and The Chase Manhattan
Bank, as Agent, as amended, including any deferrals, renewals, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto and any agreement providing therefor, whether by or with
the same or any other lender, creditor, group of lenders or group of creditors,
and including related notes, guarantee and note agreements and other instruments
and agreements executed in connection therewith.
"NON-AFFILIATED JOINT VENTURE" means any Person (other than a Subsidiary) in
which the Company or its Subsidiaries have an ownership interest in excess of
25% and in which no Affiliate of the Company has any other interest; provided,
however, that the business of such joint venture relates to the development,
marketing or sale of products of the Company and its Subsidiaries.
"OBLIGATIONS" means any principal, interest (including, without limitation,
Post-Petition Interest), premium, if any, penalties, fees, indemnifications,
reimbursement obligations, damages and other liabilities payable under the
documentation governing any Indebtedness.
"OFFER" has the meaning set forth in the definition of "Offer to Purchase"
below.
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by or on behalf
of the Company by first-class mail, postage prepaid, to each Holder at his
address appearing in the register for the Notes on the date of the Offer
offering to purchase up to the principal amount of Notes specified in such Offer
at the purchase price specified in such Offer (as determined pursuant to the
Indenture). Unless otherwise required by applicable law, the Offer shall specify
an expiration date (the "Expiration Date") of the Offer to Purchase, which shall
be not less than 30 nor more than 90 days after the date of such Offer, and a
settlement date (the "Purchase Date") for purchase of Notes to occur no later
than five Business Days after the Expiration Date. The Company shall notify the
Trustee at least 15 Business Days (or such shorter period as is acceptable to
the Trustee) prior to the mailing of the Offer of the Company's obligation to
make an Offer to Purchase, and the Offer shall be mailed by the Company or, at
the Company's request, by the Trustee in the name and at the expense of the
Company. The Offer shall contain all the information required by applicable law
to be included therein and shall contain all instructions and materials
necessary to enable such Holders to tender Notes pursuant to the Offer to
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Purchase. The Offer shall also state: (1) the Section of the Indenture pursuant
to which the Offer to Purchase is being made and (2) the circumstances and
relevant facts and relevant financial information regarding the Offer to
Purchase.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"PERMITTED BUSINESS" means the businesses engaged in by the Company and its
Subsidiaries as of the Issue Date, businesses utilizing the TOWER trademark, and
businesses which are reasonably related or incidental to the foregoing or which
are extensions thereof.
"PERMITTED HOLDER" means each of Russell M. Solomon, Doris E. Solomon, the
Trusts, Michael Solomon, David Solomon, Stanley Goman, DeVaughn Searson and
Christopher Hopson.
"PERMITTED INDEBTEDNESS" has the meaning set forth in the second paragraph
of "Certain Covenants--Limitation on Indebtedness" above.
"PERMITTED INVESTMENTS" means (a) Investments in Cash Equivalents or deposit
accounts maintained in the ordinary course of business; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c)
Investments under Interest Rate Protection Obligations and Currency Agreements;
(d) Investments received in connection with the bankruptcy or reorganization of
suppliers and customers and in settlement of delinquent obligations of, and
other disputes with, customers and suppliers, in each case arising in the
ordinary course of business; (e) Investments in the Company and Investments in a
Restricted Subsidiary of the Company and Investments in a Person which is
engaged in (or immediately after such Investment will be engaged in) a Permitted
Business and if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary; (f) Investments
acquired in exchange for Qualified Equity Interests; (g) loans or advances to
officers or employees of the Company and its Restricted Subsidiaries in the
ordinary course of business for bona fide business purposes of the Company and
its Subsidiaries (including travel and moving expenses); (h) any Investment
existing on the Issue Date and any amendment, modification, restatement,
supplement, extension, renewal, refunding, replacement, refinancing, in whole or
in part, thereof; (i) any Investment accepted as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Certain
Covenants--Disposition of Proceeds of Asset Sales;" (j) advances and extensions
of credit in the nature of accounts receivable or notes receivable arising from
the sale or lease of goods or services or the licensing of property in the
ordinary course of business; (k) Investments in Non-Affiliated Joint Ventures in
an aggregate amount not to exceed $5.0 million during any fiscal year; (l) other
Investments by the Company or any Restricted Subsidiary in any Person having an
aggregate fair market value (measured as of the date each such Investment is
made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (l) that are at
the time outstanding, not to exceed $15.0 million; and (l) intercompany
Investments permitted under clauses (c), (h) and (i) of the covenant described
under the caption "--Certain Covenants-- Limitation on Indebtedness."
"PERMITTED JUNIOR SECURITIES" means any securities of the Company or any
other Person that are (i) Equity Interests or (ii) debt securities expressly
subordinated in right of payment to all Senior Indebtedness that may at the time
be outstanding (and any Indebtedness or debt securities issued in exchange for
Senior Indebtedness), to substantially the same extent as, or to a greater
extent than, the Notes are subordinated as provided in the Indenture, in any
event pursuant to a court order so providing
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and as to which (a) the rate of interest on such securities shall not exceed the
effective rate of interest on the Notes on the Issue Date, (b) such securities
shall not be entitled to the benefits of covenants or defaults materially more
beneficial to the holders of such securities than those in effect with respect
to the Notes on the Issue Date and (c) such securities shall not provide for
amortization (including sinking fund and mandatory prepayment provisions)
commencing prior to the date six months following the final scheduled maturity
date of the Senior Indebtedness (as modified by the plan of reorganization of
readjustment pursuant to which such securities are issued).
"PERMITTED LIENS" means (i) Liens securing Senior Debt of the Company and
its Restricted Subsidiaries; (ii) Liens existing on the Issue Date; (iii) Liens
on the assets of the Company or any of its Restricted Subsidiaries to secure
Interest Rate Protection Obligations and Currency Agreements permitted by the
Indenture to be incurred; (iv) Liens on property of a Person existing at the
time such Person or such Person's parent corporation becomes a Subsidiary of the
Company or any Subsidiary of the Company; PROVIDED THAT such Liens were in
existence prior to the contemplation of such transaction and do not extend to
any assets other than those of such Person; (v) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
PROVIDED THAT such Liens were in existence prior to the contemplation of such
acquisition and extend only to the property so acquired and the proceeds
thereof; (vi) Liens to secure any Indebtedness permitted by clause (h) of the
covenant described above under the caption "--Certain Covenants--Limitation on
Indebtedness" incurred to refinance any Indebtedness secured by any Lien
referred to in the foregoing clauses (i) through (v), PROVIDED, HOWEVER, that
such new Lien shall be limited to all or part of the same property that secured
the original Lien (PROVIDED THAT such Liens may extend to after-acquired
property, including any assets or Equity Interests of any subsequently formed or
acquired Subsidiary, if such original Lien included such property or assets as
collateral) and the Indebtedness secured by such Lien at such time is not
increased to any amount greater than permitted under the covenant described
above under the caption "--Certain Covenants--Limitation on Indebtedness," or,
in the case of other Senior Debt, or, in the case of other Indebtedness, the
outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (i) through (v), as the case may be, at the
time the original Lien became a Permitted Lien; (vii) Liens in favor of the
Company or any Guarantor; (viii) Liens incurred in the ordinary course of
business of the Company or any Restricted Subsidiary that (a) are not incurred
in connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit and accruals in the ordinary course of business) and
(b) do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Restricted Subsidiary; (ix) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds, letters of credit,
deposits to secure the performance of bids, trade contracts, government
contracts, leases or licenses or other obligations of a like nature incurred in
the ordinary course of business (including, without limitation, landlord Liens
on leased properties); (x) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently prosecuted,
PROVIDED THAT any reserve or other appropriate provision as shall be required to
conform with GAAP shall have been made therefor; (xi) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (e) of
the covenant described above under the caption "--Certain Covenants--Limitation
on Indebtedness" covering only the assets acquired or financed with such
Indebtedness, together with any additions and accessions thereto and
replacements, substitutions and proceeds (including insurance proceeds) thereof;
(xii) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business in
respect of obligations not overdue for a period in excess of 90 days or which
are being contested in good faith by appropriate proceedings promptly instituted
and diligently prosecuted; PROVIDED, that any reserve or other appropriate
provision as shall be required to conform with GAAP shall have been made
therefor; (xiii) easements, rights-of-way, zoning and similar restrictions and
other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, which do not in any case
materially
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detract from the value of the property subject thereto or do not interfere with
or adversely affect in any material respect the ordinary conduct of the business
of the Company and its Restricted Subsidiaries taken as a whole; (xiv) Liens in
favor of customs and revenue authorities to secure payment of customs duties in
connection with the importation of goods in the ordinary course of business and
other similar Liens arising in the ordinary course of business; (xv) leases or
subleases granted to third Persons not interfering with the ordinary course of
business of the Company or its Restricted Subsidiaries; (xvi) Liens (other than
any Lien imposed by ERISA or any rule or regulation promulgated thereunder)
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance, and other types of social
security; (xvii) deposits made in the ordinary course of business to secure
liability to insurance carriers, and Liens on the proceeds of insurance granted
to insurance carriers solely to secure the payment of financed premiums; (xviii)
any attachment or judgment Lien not constituting an Event of Default under
clause (g) of the first paragraph of the section described above under the
caption "--Events of Default and Remedies;" (xix) any interest or title of a
lessor or sublessor under any operating lease; (xx) Liens arising by virtue of
any common law, statutory or contractual provision relating to bankers' liens,
rights of set-off or similar rights and remedies as to deposit or securities
accounts maintained in the ordinary course of business; (xxi) Liens in favor of
a trustee under any indenture securing amounts due to the trustee in connection
with its services under such indenture, (xxii) Liens under licensing agreements
for use of intellectual property entered into in the ordinary course of
business; (xxiii) purchase money Liens on Inventory and the proceeds thereof
securing obligations owed to vendors in the ordinary course of business; and
(xxiv) Liens arising out of consignments or similar arrangements for the sale of
goods entered into in the ordinary course of business.
"PERMITTED LIFE INSURANCE" means life insurance on the lives of Russell M.
Solomon and Doris Solomon, the beneficiaries of which are the Company (up to the
amounts of the premiums paid by the Company) and the Trusts, and certain other
similar life insurance policies maintained on the lives of executive officers of
the Company, in each case described under the caption "Certain Transactions."
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"PREFERRED EQUITY INTEREST," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"PRINCIPAL" of a debt security means the principal of the security plus,
when appropriate, the premium, if any, on the security.
"PURCHASE DATE" has the meaning set forth in the definition of "Offer to
Purchase" above.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or any
Subsidiary of the Company (including, without limitation, conditional sale
obligations and title retention agreements) Incurred for the purpose of
financing all or any part of the purchase price or the cost of construction or
improvement of any property (real or personal) (if incurred within 270 days of
the date of purchase or completion of such construction or improvement);
PROVIDED, HOWEVER, that the aggregate principal amount of such Indebtedness does
not exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such Indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof,
plus any premium required to accomplish such refinancing, as of the date of
refinancing.
"QUALIFIED EQUITY INTEREST" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
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"RELATED PARTY" with respect to any Permitted Holder means (i) any
controlling stockholder, 51% (or more) owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Permitted Holder or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a 51% or more
controlling interest of which consist of such Permitted Holder and/or such other
Persons referred to in the immediately preceding clause (i).
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of the
Board of Directors of the Company delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to the "Designation of Unrestricted Subsidiaries" covenant.
Any such designation may be revoked by a resolution of the Board of Directors of
the Company delivered to the Trustee, subject to the provisions of such
covenant.
"SEC" means the Securities and Exchange Commission.
"SENIOR INDEBTEDNESS" means, at any date, (a) all Indebtedness of the
Company under the New Credit Facility; (b) all other Indebtedness of the
Company, unless the instrument under which such Indebtedness of the Company is
Incurred expressly provides that such Indebtedness is not senior or superior in
right of payment to the Notes, and (c) all Obligations with respect to the
foregoing. Notwithstanding the foregoing, Senior Indebtedness shall not include
(a) to the extent that it may constitute Indebtedness, any Obligation for
Federal, state, local or other taxes; (b) any Indebtedness among or between the
Company and any Subsidiary of the Company or any Affiliate of the Company or any
of such Affiliate's Subsidiaries; (c) to the extent that it may constitute
Indebtedness, any Obligation in respect of any trade payable Incurred for the
purchase of goods or materials, or for services obtained, in the ordinary course
of business; (d) that portion of any Indebtedness that is Incurred in violation
of the Indenture; (e) Indebtedness evidenced by the Notes; (f) Indebtedness of
the Company that is expressly subordinate or junior in right of payment to any
other Indebtedness of the Company; (g) to the extent that it may constitute
Indebtedness, any obligation owing under leases (other than Capitalized Lease
Obligations) or management agreements; and (h) any obligation that by operation
of law is subordinate to any general unsecured obligations of the Company. No
Indebtedness shall be deemed to be subordinated to other Indebtedness solely
because such other Indebtedness is secured.
"SIGNIFICANT RESTRICTED SUBSIDIARY" means, at any date of determination, (a)
any Subsidiary of the Company that together with its Subsidiaries (i) for the
most recent fiscal year of the Company accounted for more than, 10.0% of the
consolidated revenues of the Company and its Subsidiaries or (ii) as of the end
of such fiscal year, owned more than 10.0% of the consolidated assets of the
Company and its Subsidiaries, all as set forth on the consolidated financial
statements of the Company and the Subsidiaries for such year prepared in
conformity with GAAP, and (b) any Subsidiary of the Company which, when
aggregated with all other Subsidiaries of the Company that are not otherwise
Significant Restricted Subsidiaries and as to which any event described in
clause (h) of "Events of Default" above has occurred, would constitute a
Significant Restricted Subsidiary under clause (a) of this definition.
"STATED MATURITY" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable.
"SUBORDINATED INDEBTEDNESS" means, with respect to the Company, any
Indebtedness of the Company which is expressly subordinated in right of payment
to the Notes.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of which
the outstanding Voting Equity Interests having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, or (b) any other Person of which at
least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
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"SURVIVING PERSON" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"TRUSTS" means, collectively, The Michael Solomon 1994 Trust and The David
Solomon 1994 Trust created under the trust agreement, dated as of July 29, 1994,
known as The Russell M. and Doris E. Solomon 1994 Children's Trust, as amended.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated as
such pursuant to the "Designation of Unrestricted Subsidiaries" covenant. Any
such designation may be revoked by a resolution of the Board of Directors of the
Company delivered to the Trustee, subject to the provisions of such covenant.
"UNUTILIZED NET CASH PROCEEDS" has the meaning set forth in the third
paragraph under "Certain Covenants--Disposition of Proceeds of Asset Sales"
above.
"VOTING EQUITY INTERESTS" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of the
Company all of the outstanding Voting Equity Interests (other then directors'
qualifying shares) of which are owned, directly or indirectly, by the Company.
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FEDERAL INCOME TAX CONSIDERATIONS
The following sets forth the material anticipated federal income tax
consequences expected to result to Holders from the Exchange Offer and from the
purchase, ownership and disposition of the New Notes. The description of the
federal income tax consequences set forth below is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), and judicial decisions and
administrative interpretations thereunder, as of the date hereof, and such
authorities may be repealed, revoked, modified or otherwise interpreted or
applied so as to result in federal income tax consequences different from those
described below. There can be no assurance that the Internal Revenue Service
(the "IRS") will not challenge one or more of the tax consequences described
herein, and the Company has not obtained, nor does it intend to obtain, a ruling
from the IRS or an opinion of counsel with respect to the U.S. federal income
tax consequences of acquiring or holding New Notes. The description below
pertains only to U.S. Holders, except as described below under the caption
"Non-U.S. Holders." As used herein, U.S. Holders means (i) citizens or residents
(within the meaning of Section 7701(b) of the Code) of the United States, (ii)
corporations, partnerships or other entities created in or under the laws of the
United States or any political subdivision thereof, (iii) estates, the income of
which is subject to United States federal income taxation regardless of its
source, and (iv) in general, trusts subject to the primary supervision of a
court within the United States and the control of a United States person as
described in Section 7701(a)(30) of the Code.
This description does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable to
all categories of investors, some of which (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding New
Notes as part of a hedging or conversion transaction or straddle or persons
deemed to sell New Notes under the constructive sale provisions of the Code) may
be subject to special rules. The description below is premised upon the
assumption that the New Notes and Existing Notes constitute indebtedness for
U.S. federal income tax purposes, and that the Existing Notes and New Notes are
held (or would be held if acquired) as capital assets within the meaning of
Section 1221 of the Code. This description does not describe the tax
considerations applicable to subsequent purchasers. The description also does
not describe any aspect of state, local or foreign law, nor federal estate and
gift tax law.
EACH PROSPECTIVE HOLDER AND, SUBSEQUENT TO THE EXCHANGE OFFER, EACH HOLDER,
OF NEW NOTES IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR INCLUDING WITH
RESPECT TO ITS PARTICULAR TAX SITUATION THE TAX EFFECTS OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of Existing Notes for New Notes pursuant to the Exchange Offer
will not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a Holder will have the same adjusted issue price, adjusted basis
and holding period in the New Notes as it had in the Existing Notes immediately
before the exchange.
STATED INTEREST
The New Notes will be issued without original issue discount. Stated
interest on the Existing Notes and New Notes will be includable in the Holder's
income under such Holder's method of accounting.
BOND PREMIUM
Generally, if the New Notes are purchased, or if the Existing Notes were
purchased, for an amount in excess of the amount payable at the maturity date
(or a call date, if appropriate) of the New Notes, such
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excess will constitute amortizable bond premium that the Holder may elect to
amortize under the constant interest method over the period from the date of
acquisition to the date of maturity (or until an earlier call date). If bond
premium is amortized, the amount required to be included in the Holder's income
each year with respect to interest on the Note will be reduced by the amount of
amortizable bond premium allocable to such year. An election to amortize bond
premium is available only if the New Notes are held as capital assets. This
election is revocable only with the consent of the IRS and applies to all
obligations owned or subsequently acquired by the Holder. To the extent the
excess is deducted as amortizable bond premium, the Holder's adjusted tax basis
in the New Notes will be reduced.
MARKET DISCOUNT ON THE NEW NOTES
To the extent a Holder had market discount with respect to an Existing Note,
the Holder generally will have market discount with respect to a New Note. Any
principal payment or gain realized by a Holder on disposition or retirement of a
New Note will be treated as ordinary income to the extent that there is accrued
market discount on the New Note. Unless a Holder elects to accrue under a
constant-interest method, accrued market discount is the total market discount
multiplied by a fraction, the numerator of which is the number of days the
Holder has held the obligation and the denominator of which is the number of
days from the date the Holder acquired the obligation under its maturity. A
Holder may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry a New Note purchased with market discount. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includable in income. If the Holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by the Holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
SALE, EXCHANGE OR RETIREMENT OF THE NEW NOTES
Upon the sale, exchange or retirement of a New Note, the Holder generally
will recognize gain or loss equal to the difference between the amount realized
on the sale, exchange or retirement (which does not include any amount
attributable to accrued but unpaid interest) and the Holder's adjusted tax basis
in the New Note. A Holder's adjusted tax basis in a New Note will generally
equal the Holder's adjusted basis for the Existing Note exchanged therefor
increased by any original issue discount or market discount previously included
in income by such Holder with respect to such New Note and decreased by any
payments received thereon that are not qualified stated interest and the amount
of any amortizable bond premium applied to reduce interest on the New Note.
Gain or loss realized on the sale, exchange or retirement of a New Note will
be capital (subject to the market discount rules, discussed above), and will be
long-term if at the time of sale, exchange or retirement the New Note has been
held or deemed held for more than one year. Under recently enacted federal
legislation which is retroactively effective as of January 1, 1998, gain on most
capital assets held by an individual more than one year is subject to a maximum
rate of tax of 20%. The deductibility of capital losses is subject to
limitations.
NON-U.S. HOLDERS
The following sets forth the material anticipated U.S. federal income and
estate tax consequences expected to result to Non-U.S. Holders from the
ownership and disposition of New Notes by Non-U.S. Holders. As used herein, a
Non-U.S. Holder means any Holder other than a U.S. Holder.
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INTEREST
Interest paid by the Company to a Non-U.S. Holder generally will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-U.S. Holder and pursuant to the "portfolio interest
exception" such Non-U.S. Holder: (i) does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company; (ii) is not a controlled foreign corporation with respect to which the
Company is a "related person" within the meaning of the code; and (iii)
certifies, under penalties of perjury, that such Holder is not a United States
person and provides such Holder's name and address. Recently adopted Treasury
Regulations that will be effective beginning January 1, 2000 (the "New
Regulations") would modify the foregoing certification requirement in certain
respects. Prospective holders are urged to consult their own tax advisors as to
the certification and other requirements under the New Regulations.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to United States federal
income tax on gain recognized on a sale, redemption or other disposition of a
New Note unless: (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-U.S. Holder; or (ii) in
the case of a Non-U.S. Holder who is a nonresident alien individual and holds
the Note as a capital asset, such Holder is present in the United States for 183
or more days in the taxable year and certain other requirements are met.
FEDERAL ESTATE TAXES
If interest on the New Notes is exempt from withholding of United States
federal income tax under the portfolio interest exception described above, the
New Notes will generally not be included in the estate of a deceased Non-U.S.
Holder for United States federal estate tax purposes.
BACKUP WITHHOLDING
A Holder of the New Notes may be subject to backup withholding at a rate of
31% with respect to interest paid or accrued on, and gross proceeds of a sale
of, the New Notes unless (i) such Holder is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A Holder of the New Notes who does
not provide such Holder's correct taxpayer identification number may be subject
to penalties imposed by the IRS.
In general, payment of the proceeds from the sale of Notes to or through a
United States office of a broker is subject to both United States backup
withholding and information reporting unless the Holder or beneficial owner
certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption. United States information reporting and backup
withholding generally will not apply to a payment made outside the United States
of the proceeds of a sale of Notes through an office outside the United States
of a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment made outside
the United States of the proceeds of a sale of Notes through an office outside
the United States of a broker that is a United States person, that derives 50%
or more of its gross income for a specified three-year period from the conduct
of a trade or business in the United States, or that is a "controlled foreign
corporation" as to the United States, unless the broker has documentary evidence
in its files that the Holder or beneficial owner is a non-United States person
or the Holder or beneficial owner otherwise establishes an exemption.
The New Regulations would modify the application of the information
reporting requirements and the backup withholding tax to Non-U.S. Holders
beginning January 1, 2000. Amounts withheld under the
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backup withholding rules may be credited against a Holder's tax liability, and a
Holder may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
THE FOREGOING DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES DOES NOT
CONSTITUTE TAX ADVICE, AND IS NOT BASED UPON ANY OPINION OF COUNSEL.
ACCORDINGLY, EACH HOLDER OF THE EXISTING NOTES SHOULD CONSULT SUCH HOLDER'S OWN
TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO SUCH HOLDER OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by Exchanging Dealers in connection with resales of New Notes received
in exchange for Existing Notes where such Existing Notes were acquired as a
result of market-making activities or other trading activities. Each Exchanging
Dealer that receives New Notes for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. The Company has agreed that under certain
circumstances, for a period of up to 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any Exchanging
Dealer for use in connection with any such resale. In addition, up through and
including , 1998 (90 days after this Prospectus was sent to Existing
Holders), all dealers effecting transactions in the New Notes, whether or not
participating in the Exchange Offer, may be required to deliver a prospectus in
connection with such transaction.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any Exchanging Dealer
that acquired Existing Notes as a result of market making activities or other
trading activities and who resells New Notes that were received by it pursuant
to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes and
any commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, an Exchanging Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of up to 180 days following effectiveness of the Exchange Offer
Registration Statement, and subject to certain conditions, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all required
expenses incident to the Exchange Offer (including the expenses of one counsel
for the Existing Holders) other than commissions or concessions of any
broker-dealers and will indemnify the Existing Holders (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
89
<PAGE>
EXPERTS
The consolidated balance sheets as of July 31, 1996 and 1997 and the
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended July 31, 1997 of MTS, INCORPORATED and
Subsidiaries have been included in this Prospectus in reliance upon the report
of PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.), independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission the Exchange Offer Registration
Statement on Form S-4 pursuant to the Securities Act, and the rules and
regulations promulgated thereunder, covering the New Notes being offered hereby.
This Prospectus does not contain all the information set forth in the Exchange
Offer Registration Statement. For further information with respect to the
Company and the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are necessarily
incomplete. With respect to each such contract, agreement or other document
filed as an exhibit to the Exchange Offer Registration Statement, reference is
made to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
As a result of the effectiveness of the Exchange Offer Registration
Statement, the Company is now subject to the informational requirements of
Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), by virtue of Section 15(d) of the Exchange Act, and in accordance
therewith will file reports and other information as required with the
Commission as long as such reporting is required under Section 15(d) of the
Exchange Act. Periodic reports and other information filed by the Company can be
inspected and copied at the public reference facilities of the Commission's
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and the regional offices of the Commission at Seven
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661. Copies of such material can be
obtained from the public reference facilities of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a website (http://www.sec.gov) that
also contains certain reports and other information filed by the Company.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the Holders and, to the extent permitted
by applicable law or regulation, file with the Commission all annual reports,
quarterly reports and other documents which the Company would have been required
to file pursuant to Section 13(a) or 15(d) of the Exchange Act.
90
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of July 31, 1996, and 1997, and April 30, 1998 (unaudited).................. F-3
Consolidated Statements of Income for the fiscal years ended July 31, 1995, 1996, and 1997, and for the
nine months ended April 30, 1997 and 1998 (unaudited).................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the fiscal years ended July 31, 1995, 1996,
and 1997, and for the nine months ended April 30, 1998 (unaudited)....................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended July 31, 1995, 1996, and 1997, and for the
nine months ended April 30, 1997 and 1998 (unaudited).................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of MTS, INCORPORATED
and Subsidiaries
West Sacramento, California
We have audited the accompanying consolidated balance sheets of MTS,
INCORPORATED and Subsidiaries as of July 31, 1996 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended July 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MTS,
INCORPORATED and Subsidiaries as of July 31, 1996 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1997, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Sacramento, California
October 29, 1997, except for
Notes 2 and 3 as to which the
dates are April 20, 1998 and
March 20, 1998, respectively
F-2
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31,
------------------------
1996 1997
----------- ----------- APRIL 30,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 8,253 $ 6,607 $ 10,685
Receivables, net........................................................ 22,248 20,698 20,864
Merchandise inventories................................................. 273,726 282,015 267,693
Prepaid expenses........................................................ 12,796 9,085 5,997
Deferred tax assets..................................................... -- 425 6,863
----------- ----------- -----------
Total current assets................................................ 317,023 318,830 312,102
Fixed assets, net......................................................... 188,631 190,357 177,763
Deferred tax assets....................................................... -- 7,566 9,265
Other assets.............................................................. 23,116 27,825 34,325
----------- ----------- -----------
Total assets........................................................ $ 528,770 $ 544,578 $ 533,455
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.................................... $ 8,671 $ 163,171 $ 1,892
Accounts payable........................................................ 148,771 163,956 130,754
Accrued liabilities..................................................... 29,588 28,876 29,172
Income taxes payable.................................................... 3,029 191 561
Deferred revenue, current portion....................................... 2,229 2,877 3,118
Deferred tax liabilities................................................ 4,068 -- --
----------- ----------- -----------
Total current liabilities........................................... 196,356 359,071 165,497
Long-term liabilities:
Long-term debt, less current maturities................................. 194,099 48,096 239,169
Deferred revenue, less current portion.................................. 196 184 174
----------- ----------- -----------
Total liabilities................................................... 390,651 407,351 404,840
----------- ----------- -----------
Minority equity in subsidiaries........................................... 2,972 3,196 --
----------- ----------- -----------
Commitments and contingencies (Notes 10 and 15)
Shareholders' equity:
Common stock:
Class A, no par value; 5,000,000 shares authorized; 500 shares issued
and outstanding at July 31, 1996 and 1997; none at April 30, 1998... 3 3 --
Class B, no par value; 10,000,000 shares authorized; 500 shares issued
and outstanding at July 31, 1996 and 1997; 1,000 issued and
outstanding at April 30, 1998....................................... 3 3 6
Additional paid-in capital.............................................. 780 780 780
Retained earnings....................................................... 134,361 133,245 127,829
----------- ----------- -----------
Total shareholders' equity.......................................... 135,147 134,031 128,615
----------- ----------- -----------
Total liabilities and shareholders' equity.......................... $ 528,770 $ 544,578 $ 533,455
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED JULY 31, APRIL 30,
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997
------------- ------------- -----------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
Net revenue............................... $ 950,561 $ 1,001,035 $ 991,810 $ 752,523 $ 771,403
Cost of sales............................. 640,587 676,155 669,279 508,421 522,632
------------- ------------- ----------- ----------- -----------
Gross profit.......................... 309,974 324,880 322,531 244,102 248,771
Selling, general and administrative
expenses................................ 255,140 270,353 267,620 202,099 204,776
Depreciation and amortization............. 20,397 20,938 21,784 17,276 17,602
------------- ------------- ----------- ----------- -----------
Income from operations................ 34,437 33,589 33,127 24,727 26,393
Other income and (expenses):
Interest expense........................ (11,467) (14,905) (14,298) (11,464) (10,422)
Foreign currency translation gain
(loss)................................ 5,622 (1,425) (3,552) (538) (838)
Other income and (expenses)............. (2,367) (62) (5,735) (795) 108
------------- ------------- ----------- ----------- -----------
Income before taxes, extraordinary
item and minority interest.......... 26,225 17,197 9,542 11,930 15,241
Provision for income taxes................ 10,920 7,013 4,543 5,326 6,407
------------- ------------- ----------- ----------- -----------
Income before extraordinary item and
minority interest................... 15,305 10,184 4,999 6,604 8,834
Minority interest in net income of
subsidiaries............................ 192 149 224 115 139
------------- ------------- ----------- ----------- -----------
Income before extraordinary item...... 15,113 10,035 4,775 6,489 8,695
Extraordinary loss on extinguishment of
debt, net of income taxes of $824....... -- -- 1,236 1,236 --
------------- ------------- ----------- ----------- -----------
Net income............................ $ 15,113 $ 10,035 $ 3,539 $ 5,253 $ 8,695
------------- ------------- ----------- ----------- -----------
------------- ------------- ----------- ----------- -----------
Basic and diluted earnings per share:
On income before extraordinary item..... $ 15,113.47 $ 10,035.73 $ 4,774.83 $ 6,489.41 $ 8,694.62
------------- ------------- ----------- ----------- -----------
------------- ------------- ----------- ----------- -----------
On net income........................... $ 15,113.47 $ 10,035.73 $ 3,539.31 $ 5,253.89 $ 8,694.62
------------- ------------- ----------- ----------- -----------
------------- ------------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------------
COMMON STOCK SERIES A SERIES B
------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1994............................ 500 $ 6 -- $ -- -- $ --
Reissuance of common stock....................... (500) (6) 500 6 500 --
Stock dividend accounted for as a stock split.... -- -- -- (3) -- 3
Trust distributions.............................. -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
Tranlation adjustment, net of income taxes....... -- -- -- -- -- --
--- ----------- --- ----------- ----- -----------
Balance, July 31, 1995............................. -- -- 500 3 500 3
Trust distributions.............................. -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
Translation adjustment, net of income taxes...... -- -- -- -- -- --
--- ----------- --- ----------- ----- -----------
Balance, July 31, 1996............................. -- -- 500 3 500 3
Trust distributions.............................. -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
Translation adjustment, net of income taxes...... -- -- -- -- -- --
--- ----------- --- ----------- ----- -----------
Balance, July 31, 1997............................. -- -- 500 3 500 3
Trust distribution (unaudited)................... -- -- -- -- -- --
Net income (unaudited)........................... -- -- -- -- -- --
Translation adjustment, net of income taxes
(unaudited).................................... -- -- -- -- -- --
Conversion of Class A to Class B common shares as
part of Reorganization (unaudited)............. -- -- (500) (3) 500 3
--- ----------- --- ----------- ----- -----------
Balance, April 30, 1998 (unaudited)................ -- $ -- -- $ -- 1,000 $ 6
--- ----------- --- ----------- ----- -----------
--- ----------- --- ----------- ----- -----------
<CAPTION>
RETAINED EARNINGS
-------------------------------------
BEFORE AFTER
ADDITIONAL CUMULATIVE CUMULATIVE CUMULATIVE
PAID-IN TRANSLATION TRANSLATION TRANSLATION
CAPITAL ADJUSTMENT ADJUSTMENT ADJUSTMENT TOTAL
------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, August 1, 1994............................ $ 780 $ 122,209 $ (10,923) $ 111,286 $ 112,072
Reissuance of common stock....................... -- -- -- -- --
Stock dividend accounted for as a stock split.... -- -- -- -- --
Trust distributions.............................. -- (175) -- (175) (175)
Net income....................................... -- 15,113 -- 15,113 15,113
Tranlation adjustment, net of income taxes....... -- -- 454 454 454
----- ----------- ----------- ----------- ---------
Balance, July 31, 1995............................. 780 137,147 (10,469) 126,678 127,464
Trust distributions.............................. -- (357) -- (357) (357)
Net income....................................... -- 10,035 -- 10,035 10,035
Translation adjustment, net of income taxes...... -- -- (1,995) (1,995) (1,995)
----- ----------- ----------- ----------- ---------
Balance, July 31, 1996............................. 780 146,825 (12,464) 134,361 135,147
Trust distributions.............................. -- (126) -- (126) (126)
Net income....................................... -- 3,539 -- 3,539 3,539
Translation adjustment, net of income taxes...... -- -- (4,529) (4,529) (4,529)
----- ----------- ----------- ----------- ---------
Balance, July 31, 1997............................. 780 150,238 (16,993) 133,245 134,031
Trust distribution (unaudited)................... -- (9,890) -- (9,890) (9,890)
Net income (unaudited)........................... -- 8,695 -- 8,695 8,695
Translation adjustment, net of income taxes
(unaudited).................................... -- -- (4,221) (4,221) (4,221)
Conversion of Class A to Class B common shares as
part of Reorganization (unaudited)............. -- -- -- -- --
----- ----------- ----------- ----------- ---------
Balance, April 30, 1998 (unaudited)................ $ 780 $ 149,043 $ (21,214) $ 127,829 $ 128,615
----- ----------- ----------- ----------- ---------
----- ----------- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
----------------------------------
1995 1996 1997
--------- ------------ --------- FOR THE NINE
MONTHS ENDED
APRIL 30,
------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 15,113 $ 10,035 $ 3,539 $ 5,253 $ 8,695
Adjustments to reconcile net income to net cash
provided by operating actvities:
Depreciation and amortization................. 25,957 26,784 27,546 21,651 21,229
Provision (recovery) for losses on accounts
receivable.................................. 145 (95) 23 (19) (17)
Loss on disposal of depreciable assets........ 6,044 2,432 7,259 2,150 1,514
Exchange (gain) loss.......................... (3,008) 763 1,902 1,983 2,831
Other non-cash expense........................ 411 249 834 283 357
Provision for deferred taxes.................. 5,280 789 360 820 (1,415)
Minority interests in net income of
subsidiaries................................ 192 149 223 114 140
Extraordinary loss on extinguishment of
debt........................................ -- -- 1,236 1,236 --
(Decrease) increase in cash resulting from
changes in:
Accounts receivable......................... (1,233) 3,960 1,551 (241) (149)
Inventories................................. (52,634) (26,624) (8,290) (6,097) 14,322
Prepaid expenses............................ (8,451) 287 3,711 3,424 3,001
Accounts payable............................ 11,141 19,260 15,183 (2,490) (33,202)
Accrued liabilities......................... 1,663 10,140 (3,549) (588) (667)
Deferred revenue............................ 169 77 635 567 (231)
--------- ------------ --------- ----------- -----------
Net cash provided by operating
activities.............................. 789 48,206 52,163 28,046 16,408
--------- ------------ --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets..................... (50,163) (48,730) (45,012) (27,954) (16,787)
Acquisition of investments and artwork.......... (716) (7,025) (5,467) (3,737) (5,520)
Increase in deposits............................ (933) (835) (1,701) (1,610) (1,491)
Refund of deposits.............................. 2,369 791 121 37 1,464
Increase in intangibles......................... (922) (3,080) (681) (475) (5,740)
--------- ------------ --------- ----------- -----------
Net cash used in investing activities..... (50,365) (58,879) (52,740) (33,739) (28,074)
--------- ------------ --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to shareholders, officers and employees... (657) (345) (223) (247) (60)
Proceeds from employee loan repayments.......... 218 520 572 368 81
Trust distributions............................. (175) (357) (126) (127) --
Principal payments under long-term financing
agreements.................................... (45,651) (32,523) (93,672) (97,939) (207,060)
Proceeds from issuance of long-term financing
agreements.................................... 143,082 38,941 102,169 125,144 231,400
Net repayments under line-of-credit
aggrements.................................... (40,000) -- -- -- --
--------- ------------ --------- ----------- -----------
Net cash provided by financing
activities.............................. 56,817 6,236 8,720 27,199 24,361
--------- ------------ --------- ----------- -----------
Effect of exchange rate changes on cash........... (3,662) (7,289) (9,789) (16,689) (8,617)
--------- ------------ --------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 3,579 (11,726) (1,646) 4,817 4,078
Cash and cash equivalents, beginning of period.... 16,400 19,979 8,253 8,253 6,607
--------- ------------ --------- ----------- -----------
Cash and cash equivalents, end of period.......... $ 19,979 $ 8,253 $ 6,607 $ 13,070 $ 10,685
--------- ------------ --------- ----------- -----------
--------- ------------ --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY--The consolidated financial statements include the
accounts of MTS, INCORPORATED and its majority and wholly owned subsidiaries
(Company). As the result of a reorganization in April 1998 of the retail
business assets of the shareholder and his family, the financial statements
include, on a retroactive basis, the accounts of businesses previously held by
two trusts for the benefit of the shareholder's sons (Trusts) as well as the
accounts of two S corporations owned by the shareholder's sons (S Corporations)
(Note 2).
The Company has 50% investments in certain foreign joint ventures that are
accounted for using the equity method. In September 1995, the Company acquired
the stock of two joint ventures from its former partners; consequently, income
or loss of those operations is included in the consolidated statement of income
from the date that the Company acquired a controlling interest.
All material intercompany balances and transactions have been eliminated in
consolidation.
GENERAL--The Company operates retail stores under the name Tower offering a
diversified line of recorded music products and other complementary products
throughout the United States, Japan, the United Kingdom and other parts of the
world.
INTERIM RESULTS (UNAUDITED)--The accompanying balance sheet as of April 30,
1998, and the statements of income, changes in stockholders' equity and cash
flows for the nine-month periods ended April 30, 1997 and 1998, are unaudited.
In the opinion of management, these statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results of the interim periods. The data disclosed in these
notes to the financial statements for those interim periods are also unaudited.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid temporary
cash investments with maturities of three months or less when purchased to be
cash equivalents for purposes of the statement of cash flows. The Company's bank
deposits generally exceed the federally insured limit.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost is
determined principally by the first-in, first-out method. The Company does not
provide an allowance for inventory markdowns, due to music industry return
policies which generally provide for full recovery of cost upon return.
PROPERTY AND EQUIPMENT--Property and equipment are carried at cost.
Depreciation is computed using the straight-line method. Depreciation is
computed on all fixed assets with the exception of land. Buildings are
depreciated over 40 years, leasehold improvements over an average of 15 years,
store fixtures over 7 to 10 years, and equipment and vehicles over 5 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the lease term. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
income for the period. The cost of maintenance and repairs is charged to income
as incurred; significant renewals and betterments are capitalized.
STORE PREOPENING COSTS--Costs of a noncapital nature incurred prior to
opening of new stores are expensed as incurred.
F-7
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES--Intangibles primarily represent the excess of cost over the
fair value of businesses acquired and debt issuance costs. The Company amortizes
goodwill using the straight-line method over 40 years. Debt issuance costs are
amortized over the term of the related debt using the effective interest rate
method.
INCOME TAXES--The Company accounts for income taxes under the liability
method. Deferred taxes are recorded based on the difference between the
financial statement and tax basis of assets and liabilities. A valuation
allowance would be established to reduce deferred tax assets if it is more
likely than not that all, or a portion, of the deferred tax asset will not be
realized. No allowance against deferred tax assets was provided at July 31, 1997
or April 30, 1998.
EARNINGS PER SHARE--Effective January 31, 1998, the Company adopted the
provisions of SFAS No. 128, EARNINGS PER SHARE, which was effective for
accounting periods ending after December 15, 1997. SFAS No. 128 changed the
method of calculating earnings per share and requires a dual presentation of
basic and diluted earnings per share. In accordance with the provisions of SFAS
No. 128, earnings per share information for all periods presented have been
stated under the methodology and disclosures specified in SFAS No. 128.
REVENUE RECOGNITION--The Company's revenue is primarily from retail sales
comprised of recorded music (including compact discs and audio cassettes), video
sales (including recorded video cassettes, laser discs and DVD) and other
complementary products (including books, magazines, blank tapes, software titles
and accessories) through the Company's stores and are recognized at the point of
the retail transaction. Reductions of revenues for returns by customers are
generally provided at the point of the return due to infrequency and occurrence
within short intervals of the sale.
TRANSLATION OF FOREIGN CURRENCY--The value of the U.S. dollar rises and
falls day-to-day on foreign currency exchanges. Since the Company does business
in several foreign countries, these fluctuations affect the Company's financial
position and results of operations. In accordance with SFAS No. 52, FOREIGN
CURRENCY TRANSLATION, all foreign assets and liabilities have been translated at
the exchange rates prevailing at the respective balance sheet dates, and all
income statement items have been translated using the weighted average exchange
rates during the respective years. The net gain or loss resulting from
translation upon consolidation into the combined financial statements is
reported as a separate component of retained earnings. Some transactions of the
Company and its foreign subsidiaries are made in currencies different from their
own. Translation gains and losses from these transactions are included in income
as they occur.
RISK MANAGEMENT INSTRUMENTS--The Company enters into foreign exchange
contracts as a hedge against variations in exchange rates on accounts and notes
payable due in foreign currency. Market value gains and losses related to
foreign exchange contracts are recognized and offset foreign exchange gains and
losses on foreign accounts and notes payable. Counterparties to risk management
instruments are major financial institutions. Credit loss from counterparty
nonperformance is not anticipated.
F-8
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE--Advertising expenses are recorded as expense when
incurred. Cooperative advertising rebates are recognized as reductions of
advertising expense in the period the advertisements are run. Net advertising
and marketing expense (revenue) was $7,965,176, $3,306,051 and ($1,469,155) for
the years ended July 31, 1995, 1996 and 1997, respectively, and ($1,299,689) and
($1,345,438) for the nine-month periods ended April 30, 1997 and 1998.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
GIFT CERTIFICATES--The Company offers gift certificates for sale. A deferred
income account is established for gift certificates issued. When gift
certificates are redeemed at the store level, the deferred income account is
charged and revenue is credited.
NEW ACCOUNTING PRONOUNCEMENTS--Statement of Financial Accounting Standards
(SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, were issued in June
1997. The Company will adopt both of the statements on their effective date,
which will be in the Company's fiscal year ending July 31, 1999.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is a measure of all changes in the equity of the Company as a result of
recognized transactions and other economic events of the period other than
transactions with shareholders in their capacity as shareholders. Had the
provisions of SFAS No. 130 been applied for the years ended July 31, 1995, 1996
and 1997, comprehensive income would have consisted primarily of net income and
foreign currency translation adjustments.
SFAS No. 131 requires that the Company report financial and descriptive
information about its reportable operating segments using the "management
approach" model. Under the management approach model, segments are defined based
on the way the Company's management internally evaluates segment performance and
decides how to allocate resources to segments. The Company is in the process of
evaluating the impact of this pronouncement on its segment disclosures
NOTE 2--REORGANIZATION
In April 1998, the Company consummated certain transactions designed to
consolidate substantially all of the Tower business operations into the Company
(such transactions collectively, the "Reorganization") as a result of which the
Company became a wholly owned subsidiary of TOWER RECORDS, INCORPORATED
(Parent). The Company also, prior to and apart from the Reorganization,
transferred certain assets to the Trusts in April 1998.
The Reorganization included an exchange by the Company's shareholders of
their common shares in the Company for a controlling equity interest in the
Parent. As part of the Reorganization, two irrevocable trusts established by the
Company's principal shareholder for the benefit of his sons (the
F-9
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 2--REORGANIZATION (CONTINUED)
Trusts) and the shareholders of two S corporations (the S Corporations),
contributed certain assets, liabilities and equity ownership interests in
businesses to the Parent in exchange for the remaining equity interest in the
Parent. The assets, liabilities and businesses contributed by the Trusts and the
shareholders of the S Corporations consist of one Tower store, land used in the
Tower business, trademark rights to the Tower name in Japan and all royalties
accrued in connection therewith on and after February 1, 1998, a recorded music
wholesale operation, intercompany receivables and payables, bank debt and the
cash surrender value as of April 1998 (see Note 6) of certain second-to-die
split value life insurance policies on the lives of the Parent's principal
shareholder and his wife. The Parent then contributed to the Company the assets
and liabilities it received from the Trusts and the shareholders of the S
corporations.
The Reorganization was a combination of businesses under common control and,
accordingly, has been accounted for in a manner similar to a
pooling-of-interests. Accordingly, the assets and liabilities the Company
received from the Parent in the Reorganization and the historical results of
operations of such business assets are included, on a retroactive basis, in the
Company's consolidated balance sheets and statements of income for all periods
presented at the previous accounting basis of the Trusts and shareholders of the
S corporations.
Also, it is the Company's intention that T.R. Services, a subsidiary of the
Company, will be eliminated by upstream merger of the subsidiary into the
Company. The Company recently reacquired all minority interests in certain
subsidiaries of MTS, INCORPORATED which the Company eliminated through upstream
mergers into the Company. The Company also eliminated Tower Domestic, Inc. and
Queen Anne Record Sales, subsidiaries of the Company, through upstream mergers
into the Company.
Prior to and apart from the Reorganization, the Company transferred to the
Trusts certain assets valued at $2,860,000 in exchange for inventory with an
equal value (the "Prior Asset Exchange"). The sale price of these assets was
determined based on independent appraisals or estimates of the fair market value
of the assets that the Company believes to be reasonable. Because the transfer
was between businesses under common control, no gain or loss was recognized for
accounting purposes with respect to the difference between book value and fair
market value of the assets exchanged. The principal business purpose of the
Prior Asset Exchange was to transfer certain primarily non-income producing
assets of a personal nature out of the Company and into the Trusts.
In the Reorganization, the Trusts transferred to the Parent certain business
assets and liabilities, intercompany accounts, and the cash surrender value of
certain life insurance policies and retained their cash, certain receivables and
other assets and liabilities with an aggregate net book value of $9,890,000, net
of related deferred taxes. The principal asset retained is a noninterest bearing
trademark royalty receivable from the Company amounting to $12,891,000 offset by
a related deferred tax liability of $5,801,000. Since the Company's consolidated
financial statements are inclusive of the Trusts' transactions after retroactive
restatement, the assets retained by the Trusts are reflected as distributions of
retained earnings on the date of the Reorganization.
In accordance with the Company's articles of incorporation, each outstanding
share of its Class A common stock automatically converted to one share of Class
B common stock upon exchange of the Company's common shares by the shareholders
for shares of the Parent as part of the Reorganization.
F-10
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 3--EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations under SFAS No. 128 is as follows (in thousands,
except per share information):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED JULY 31, APRIL 30,
------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------- ------------- ------------ ------------ -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income available to common shareholders
before extraordinary item............. $ 15,113 $ 10,035 $ 4,775 $ 6,489 $ 8,695
Extraordinary item...................... -- -- (1,236) (1,236) --
------------- ------------- ------------ ------------ -----------
$ 15,113 $ 10,035 $ 3,539 $ 5,253 $ 8,695
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
Weighted average shares outstanding for
determination of:
Basic earnings per share.............. 1,000 1,000 1,000 1,000 1,000
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
Diluted earnings per share............ 1,000 1,000 1,000 1,000 1,000
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
Basic earnings per share:
On income before extraordinary item... $ 15,113.47 $ 10,035.73 $ 4,774.83 $ 6,489.41 $ 8,694.62
On extraordinary item................. -- -- (1,235.52) (1,235.52) --
------------- ------------- ------------ ------------ -----------
On net income......................... $ 15,113.47 $ 10,035.73 $ 3,539.31 $ 5,253.89 $ 8,694.62
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
</TABLE>
Diluted earnings per share is the same as basic earnings per share since the
Company has a simple capital structure with only common shares outstanding.
F-11
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 4--RECEIVABLES
Receivables consist of (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------- APRIL 30,
1996 1997 1998
--------- --------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Trade receivables, less allowance for doubtful accounts
of $448, $420 and $452................................. $ 15,387 $ 16,914 $ 16,274
Officers and employee receivables, including notes, less
allowance for doubtful accounts of $98, $103 and $78... 2,199 1,736 2,243
Notes receivable, shareholders and family members,
current portion........................................ 371 371 --
Other receivables........................................ 4,291 1,677 2,347
--------- --------- ------------
$ 22,248 $ 20,698 $ 20,864
--------- --------- ------------
--------- --------- ------------
</TABLE>
The Company has receivables of approximately $5,011,000, $4,930,000 and
$5,510,000 from sales of product for resale and supplies to unconsolidated
foreign joint ventures at July 31, 1996 and 1997, and April 30, 1998
respectively.
NOTE 5--FIXED ASSETS
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
JULY 31,
------------------------ APRIL 30,
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Land.................................................. $ 10,362 $ 9,876 $ 9,527
Buildings............................................. 19,355 19,708 19,049
Leasehold improvements................................ 137,913 134,876 138,198
Video rental cassettes................................ 20,538 20,241 19,245
Store fixtures........................................ 38,877 41,910 45,724
Equipment............................................. 98,341 115,982 113,775
Vehicles.............................................. 822 581 507
----------- ----------- ------------
326,208 343,174 346,025
Less: accumulated depreciation and amortization....... 137,577 152,817 168,262
----------- ----------- ------------
$ 188,631 $ 190,357 $ 177,763
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The cost to build new store fixtures and improvements includes a portion of
the interest expense. Interest capitalized was $487,000, $135,000 and $192,000,
for the years ended July 31, 1995, 1996 and
F-12
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 5--FIXED ASSETS (CONTINUED)
1997 respectively, and $120,000 and $106,000 for the nine-month periods ended
April 30, 1997 and 1998, respectively.
Depreciation and amortization of fixed assets was $25,636,000, $26,330,000
and $26,898,000 for the years ended July 31, 1995, 1996 and 1997, respectively,
and $21,651,000 and $21,229,000 for the nine-month periods ended April 30, 1997
and 1998, respectively.
NOTE 6--OTHER ASSETS
Other assets consist of (in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
1996 1997 APRIL 30, 1998
--------- --------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Notes receivable, shareholders and family members,
less current portion................................ $ 400 $ 785 $ --
Notes receivable, officers and employees, less current
portion............................................. 2,040 2,280 1,920
Investment in foreign joint ventures.................. 1,021 1,962 3,197
Securities and artwork................................ 736 994 2
Cash surrender value of officers' life insurance...... 5,554 8,956 11,776
Deposits.............................................. 6,714 7,298 6,818
Goodwill, debt issuance costs and other intangible
assets, net of accumulated amortization of $1,655,
$3,336 and $4,176................................... 6,651 5,550 10,612
--------- --------- --------------
$ 23,116 $ 27,825 $ 34,325
--------- --------- --------------
--------- --------- --------------
</TABLE>
Cash surrender value of life insurance at July 31, 1997 includes $6,496,000
($7,932,000 at April 30, 1998) as to split value life insurance policies on the
lives of the Company's Parent's principal shareholder and his wife for the
benefit of certain family trusts. Under the terms of the policies, the Company
will receive the first proceeds of the policies up to the aggregate premiums
paid by the Company, except for one group of policies as to which the Company
will receive the first proceeds of the policies up to the sum of the aggregate
premiums paid by the Company plus $7,634,000 representing the cash surrender
value of the policies when received by the Company in April 1998 as part of the
Reorganization. The balance of the proceeds will be paid to the Trusts. Premiums
on the policies amount to $3.6 million per year which are recorded as expense,
net of increases in the cash surrender value of the policies. Life insurance
expense related to these policies amounted to $220,000, $352,000 and $274,000 in
the years ended July 31, 1995, 1996 and 1997, and $137,000 and $82,000 in the
nine month periods ended April 30, 1997 and 1998, respectively.
F-13
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 7--LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
JULY 31,
------------------------ APRIL 30,
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
9.375% Senior Subordinated Notes, uncollateralized, interest payable
semiannually, principal due May 2005.................................... $ -- $ -- $ 110,000
Senior Revolving Credit Facility, collateralized, variable interest
payable monthly (6.23% at April 30, 1998), principal due April 2001..... -- -- 120,629
7.37% to 10.05% Senior notes, uncollateralized, interest payable
quarterly, retired in January 1997...................................... 48,364 -- --
Revolving credit line, uncollateralized, variable interest payable monthly
(6.63% at July 31, 1997 and 6.98% at April 30, 1998), retired in April
1998.................................................................... 134,000 102,000 --
1.88% Senior note, uncollateralized, interest payable quarterly, retired
in April 1998........................................................... -- 49,374 --
1.42% Senior note, uncollateralized, interest payable quarterly, retired
in April 1998........................................................... -- 29,175 --
2.40% to 2.50% term loan notes, uncollateralized, principal and interest
payable quarterly, retired in April 1998................................ 18,142 17,017 --
Other obligations, 8.21% to 12.5%, principal and interest generally due in
monthly installments, collateralized by certain real property, equipment
and leasehold improvements.............................................. 2,264 13,701 10,432
----------- ----------- ------------
Total Long-term Debt...................................................... 202,770 211,267 241,061
Less Current Portion...................................................... 8,671 163,171 1,892
----------- ----------- ------------
Noncurrent Debt........................................................... $ 194,099 $ 48,096 $ 239,169
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
In April, 1998 the Company refinanced on a long-term basis certain
obligations outstanding under its revolving credit lines and senior notes and
term notes by consummating an offering of $110.0 million of 9.375% senior
subordinated notes (Notes) and entering into a new senior revolving credit
facility (New Credit Facility) of up to $275.0 million.
F-14
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 7--LONG-TERM DEBT (CONTINUED)
The Notes have options to redeem in part at various premiums throughout the
duration of the indenture. The New Credit Facility consists of two
sub-facilities (one for a maximum of $125.0 million and one for a maximum of
Japanese yen of 19,810,500,000, which amounted to $150.0 million at inception)
and matures in April 2001 with two provisions to extend for an additional
one-year period subject to certain terms and conditions. Maximum borrowings
under the New Credit Facility are subject to a borrowing base formula and are
collateralized by a majority of the Company's inventory, accounts receivable and
a pledge of 65% of the capital stock of its Japanese subsidiary. The New Credit
Facility bears interest at various variable rates, including (as defined in the
agreements) a Money Market Rate, ABR rate, Yen Base Rate and Euro Rate, plus an
annual facility fee. As of April 30, 1998, $124.5 million of additional
borrowing capacity was available under the New Credit Facility.
There are various restrictive terms and covenants under the senior notes,
term notes and revolving credit lines (some of which were amended in 1997),
relating to occurrence of material adverse financial or operating conditions,
minimum levels of net worth, minimum ratios of current assets to current
liabilities, net worth to debt, cash flow to fixed charges, inventory and
receivables to certain debt and certain limitations on additional indebtedness,
liens or encumbrances on assets, long-term lease transactions, capital
expenditures, and issuance of capital stock.
In connection with retirement of Senior Notes in January 1997, the Company
recorded an extraordinary loss consisting of prepayment penalties.
Maturities of long-term debt obligations are as follows (in thousands):
<TABLE>
<CAPTION>
TWELVE-MONTH
PERIOD ENDING
--------------------------
JULY 31, APRIL 30,
------------ ------------
<S> <C> <C>
1998.............................................................. $ 163,171 --
1999.............................................................. 36,067 $ 1,892
2000.............................................................. 2,872 1,502
2001.............................................................. 2,827 121,629
2002.............................................................. 1,837 859
Thereafter........................................................ 4,493 115,179
------------ ------------
Total......................................................... $ 211,267 $ 241,061
------------ ------------
------------ ------------
</TABLE>
NOTE 8--DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments approximates
the related carrying value. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS AND NOTES RECEIVABLE--The carrying amount
approximates fair value because of the short-term maturity of these instruments.
F-15
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 8--DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT--The fair value of the Company's fixed rate long-term debt
was estimated based upon the discounted amount of future cash flows using rates
offered to the Company for debt of a similar nature using remaining average
maturities and taking into account the global markets in which funds are
available to the Company. The carrying value of the Company's variable rate debt
approximates fair value due to the variable nature of interest rates.
RISK MANAGEMENT INSTRUMENTS--Foreign exchange and interest rate risk
management instruments are recorded at their estimated value based on quoted
market prices of comparable contracts.
DEPOSITS--The fair value is not determinable since there is no market for
these deposits and the date of recovery of the amount on deposit depends on
future events.
NOTE 9--SHAREHOLDERS' EQUITY
COMMON STOCK--The Company's articles of incorporation authorize issuance of
two classes of common stock: Class A and Class B. Class A and Class B Common
Stock have no par value and have the same rights and privileges except that
Class A common has ten votes per share on all matters while Class B common has
one vote per share on all matters and Class B common has priority voting rights,
as a separate class, to elect twenty-five percent of the total membership of the
Board of Directors.
In accordance with the Company's Articles of Incorporation, each share of
Class A common automatically converted into one share of Class B common stock
upon the exchange by the shareholders of the Company's common shares for shares
of the Parent as part of the Reorganization (see Note 2).
PREFERRED STOCK--Preferred stock (1,000,000 shares authorized) may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to or
imposed upon unissued series of preferred stock and to fix the number of shares
of any such series.
NOTE 10--LEASES
OPERATING LEASES--The Company leases substantially all of its retail stores,
warehouses and administrative facilities. Those operating lease agreements
expire through 2023 and generally have renewal options of one to twenty years.
The terms of the leases provide for fixed or minimum payments plus, in some
cases, contingent rents based on the consumer price index, or percentages of
sales in excess of specified minimum amounts or other specified increases. The
Company is generally responsible for maintenance, insurance and property taxes.
F-16
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 10--LEASES (CONTINUED)
Minimum future obligations on noncancelable operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
- ---------------------------------------------------------------------------------
<S> <C>
1998........................................................................... $ 38,805
1999........................................................................... 38,462
2000........................................................................... 36,372
2001........................................................................... 31,521
2002........................................................................... 30,097
Thereafter..................................................................... 185,596
-----------
Total Minimum Future Rental Payments......................................... $ 360,853
-----------
-----------
</TABLE>
Total rental expenses (including taxes and maintenance, when included in
rent, contingent rents and accruals to recognize minimum rents on the
straight-line basis over the term of the lease) relating to all operating leases
are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED JULY 31, ENDED APRIL 30,
------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1997 1998
1995 1996 1997 ----------- -----------
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
Minimum rentals.................................... $ 53,276 $ 62,318 $ 64,808 $ 48,412 $ 48,731
Contingent rentals................................. 4,089 4,211 5,141 3,642 4,344
--------- --------- --------- ----------- -----------
$ 57,365 $ 66,529 $ 69,949 $ 52,054 $ 53,075
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
F-17
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 11--INCOME TAXES
The provision for income taxes is allocated between income from operations,
extraordinary loss on extinguishment of debt and cumulative translation
adjustments to retained earnings. The provision for income taxes on income from
operations consists of:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Current:
U.S. Federal................................................................... $ -- $ 4,220 $ 843
State and Local................................................................ 1,352 (185) 424
Foreign........................................................................ 4,288 2,189 2,916
--------- --------- ---------
5,640 6,224 4,183
--------- --------- ---------
Deferred:
U.S. Federal................................................................... 2,178 (3,467) 1,106
State and Local................................................................ 919 773 237
Foreign........................................................................ 2,183 3,483 (983)
--------- --------- ---------
5,280 789 360
--------- --------- ---------
Provision for income taxes....................................................... $ 10,920 $ 7,013 $ 4,543
--------- --------- ---------
--------- --------- ---------
</TABLE>
The effective tax rates (i.e. provision for income taxes as a percent of
income before income taxes) differs from the statutory federal income tax rate
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 % 1996 % 1997 %
--------- --------- --------- --------- --------- ---------
Federal income tax, at statutory rate......................... $ 9,179 35.0% $ 6,019 35.0% $ 3,339 35.0%
Trust taxes in excess of (less than) C corporation rate....... (1,140) (4.3) 170 0.8 229 2.4
State and local income taxes, net of federal benefit.......... 1,534 5.8 871 5.2 362 3.8
Foreign taxes................................................. 6,470 25.6 5,672 32.7 1,933 20.3
Foreign tax credit recognized................................. (5,207) (20.8) (5,672) (32.7) (1,933) (20.3)
Other, principally permanent differences...................... 84 0.3 (47) (0.2) 613 6.4
--------- --------- --------- --------- --------- ---------
Provision for income taxes.................................... $ 10,920 41.6% $ 7,013 40.8% $ 4,543 47.6%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The effective tax rate prior to the Reorganization in April 1998 was
influenced by higher statutory tax rates applicable to trust income than to C
corporation income and deductibility of distributions of trust income within
certain time frames of when earned.
F-18
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities consist of the tax effects of
temporary differences related to the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Deferred tax assets:
Foreign tax credits.................................................. $ 10,145 $ 11,816
Cumulative translation adjustment to retained earnings............... 8,873 12,896
Tax, but not book, gain on transactions between MTS and Trusts....... 4,166 3,626
California state franchise tax....................................... 1,224 1,792
Vacation Accrual..................................................... 711 632
Capitalized inventory costs.......................................... 727 383
Other nondeductible expenses and accelerated income items............ 1,499 1,483
--------- ---------
Total deferred tax assets.......................................... 27,345 32,628
--------- ---------
Deferred tax liabilities:
Depreciation and amortization........................................ 20,712 15,293
Differences between tax and accounting in inclusion of income from
foreign operations................................................. 5,311 3,413
Cash to accrual difference on Trusts................................. 3,504 4,264
Other accelerated deductions and deferred income items............... 1,886 1,667
--------- ---------
Total deferred tax liabilities..................................... 31,413 24,637
--------- ---------
Net deferred tax assets (liabilities)............................ $ (4,068) $ 7,991
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets and liabilities are reflected in the Company's
consolidated balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Current deferred tax assets (liabilities)............................... $ (4,068) $ 425
Non-current deferred tax assets (liabilities)........................... -- 7,566
--------- ---------
Net deferred tax assets (liabilities)............................... $ (4,068) $ 7,991
--------- ---------
--------- ---------
</TABLE>
Net deferred tax assets increased by $8,137,000 during the nine month period
ended April 30, 1998, including an increase of $6,042,000 in April 1998 as a
result of the elimination of deferred tax liabilities associated with assets
retained by the Trusts as part of the Reorganization (Note 2).
F-19
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 12--OTHER INCOME AND EXPENSES
Other income and (expenses) consist of (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED JULY 31, APRIL 30,
------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1997 1998
1995 1996 1997 ------------- -------------
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
Loss on disposition of fixed assets................. $ (6,044) $ (2,432) $ (7,259) $ (399) $ 19
Other, net.......................................... 3,677 2,370 1,524 (396) 89
--------- --------- --------- ------ -----
$ (2,367) $ (62) $ (5,735) $ (795) $ 108
--------- --------- --------- ------ -----
--------- --------- --------- ------ -----
</TABLE>
NOTE 13--PENSION PLAN
PROFIT SHARING--Substantially all full-time domestic employees with
twenty-four months of service who have attained age twenty-one participate in
the Company's profit sharing retirement programs. The plans provide for
discretionary contributions as determined annually by the Board of Directors of
up to 15% of all eligible compensation. Costs under the plans are funded on an
annual basis.
The Company also maintains a plan for employees of their Japanese
subsidiary. The plan covers substantially all employees of the Japanese
operations. The plan provides for a lump sum payment upon termination without
cause based on term of service and compensation level. A liability for plan
payments is accrued equal to the amount that would result from termination of
all employees based on service to date and current compensation levels. As
permitted by Japanese law, the plan is not funded.
Pension expense under the pension plans amounted to $1,889,000, $1,792,000
and $1,719,000 for the years ended July 31, 1995, 1996 and 1997, respectively,
and $1,200,000 and $1,100,000 for the nine month periods ended April 30, 1997
and 1998, respectively.
F-20
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 14--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates predominantly in the recorded music retail industry.
Financial information relating to the Company's principal foreign operations
is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED JULY 31, APRIL 30,
--------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1997 1998
1995 1996 1997 ----------- -----------
----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
Net Revenue:
United States:
Unaffiliated customer sales.............. $ 560,484 $ 520,960 $ 553,292 $ 433,539 $ 453,442
Interarea transfers...................... 44,651 63,392 44,092 20,648 26,085
----------- ------------- ----------- ----------- -----------
605,135 584,352 597,384 454,187 479,527
----------- ------------- ----------- ----------- -----------
Japan:
Unaffiliated customer sales.............. 284,309 334,586 304,630 230,003 219,758
Interarea transfers...................... 0 0 0 0 0
----------- ------------- ----------- ----------- -----------
284,309 334,586 304,630 230,003 219,758
----------- ------------- ----------- ----------- -----------
Great Britain and Ireland:
Unaffiliated customer sales.............. 53,145 56,590 59,774 45,436 48,693
Interarea transfers...................... 1,575 1,045 1,858 1,393 2,341
----------- ------------- ----------- ----------- -----------
54,720 57,635 61,632 46,829 51,034
----------- ------------- ----------- ----------- -----------
Other:
Unaffiliated customer sales.............. 6,397 24,462 28,164 21,504 21,084
Interarea transfers...................... 0 0 0 0 0
----------- ------------- ----------- ----------- -----------
6,397 24,462 28,164 21,504 21,084
----------- ------------- ----------- ----------- -----------
$ 950,561 $ 1,001,035 $ 991,810 $ 752,523 $ 771,403
----------- ------------- ----------- ----------- -----------
----------- ------------- ----------- ----------- -----------
Operating income (loss):
United States.............................. $ 15,171 $ 13,747 $ 17,412 $ 13,194 $ 18,079
Japan...................................... 18,030 19,605 14,825 11,047 9,234
Great Britain and Ireland.................. 935 440 1,081 372 639
Other...................................... 301 (203) (191) 114 (1,559)
----------- ------------- ----------- ----------- -----------
$ 34,437 $ 33,589 $ 33,127 $ 24,727 $ 26,393
----------- ------------- ----------- ----------- -----------
----------- ------------- ----------- ----------- -----------
</TABLE>
F-21
<PAGE>
MTS, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTH PERIODS
ENDED APRIL 30, 1997 AND 1998)
NOTE 14--SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
<TABLE>
<CAPTION>
JULY 31,
------------------------------------- APRIL 30,
1995 1996 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Identifiable assets:
United States.............................................. $ 368,302 $ 359,735 $ 373,273 $ 378,981
Japan...................................................... 106,789 122,952 121,778 107,312
Great Britain and Ireland.................................. 27,700 30,077 29,937 31,591
Other...................................................... 2,303 16,006 19,590 15,571
----------- ----------- ----------- -----------
$ 505,094 $ 528,770 $ 544,578 $ 533,455
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
United States net revenue includes export sales to non-affiliated customers
of $-0-, $-0- and $3,856,000 for the years ended July 31, 1995, 1996 and 1997,
respectively, and $1,585,000 and $5,059,000 for the nine-month periods ended
April 30, 1997 and 1998, respectively.
NOTE 15--FORWARD EXCHANGE CONTRACTS
At July 31, 1997, the Company had outstanding forward exchange contracts
maturing on dates through July 1998, to buy approximately $16,000,000 in foreign
currency (1,825 million yen at the spot rate). The contracts are for the purpose
of hedging foreign currency exposure on specific commitments and a net exposed
liability position of the Company's operations in Japan, as well as to take
advantage of expected changes in exchange rates. At April 30, 1998, the Company
had outstanding forward exchange contracts maturing through October 1998, to buy
approximately $9,000,000 in foreign currency (1,084 million yen at the spot
rate).
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION
During the twelve months ending July 31, 1995, 1996 and 1997, the Company
made income tax payments of $13,964,000, $4,057,000 and $5,440,000, and interest
payments (net of amounts capitalized) of $11,173,000, $13,562,000 and
$17,434,000, respectively.
During the nine months ending April 30, 1997 and 1998, the Company made
income tax payments of $6,765,000 and $4,109,000, respectively, and interest
payments (net of amounts capitalized) of $13,343,000 and $11,279,000,
respectively.
F-22
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE OF EXISTING NOTES FOR NEW NOTES
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
- -------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 12
The Exchange Offer........................................................ 18
The Recapitalization...................................................... 27
Use of Proceeds........................................................... 28
Capitalization............................................................ 29
Selected Historical Consolidated Financial Information.................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 32
Business.................................................................. 38
Management................................................................ 46
Ownership of Capital Stock................................................ 48
Certain Transactions...................................................... 49
Description of New Credit Facility........................................ 52
Description of the Notes.................................................. 55
Federal Income Tax Considerations......................................... 86
Plan of Distribution...................................................... 89
Legal Matters............................................................. 89
Experts................................................................... 90
Additional Information.................................................... 90
Index to Financial Statements............................................. F-1
</TABLE>
PROSPECTUS
$110,000,000
MTS, INCORPORATED
EXCHANGE OFFER WITH RESPECT TO 9 3/8% SENIOR SUBORDINATED NOTES DUE 2005
[LOGO]
EXCHANGE AGENT:
State Street Bank and Trust Company
of California Exchange Agent
c/o State Street Bank and Trust Company
2 International Place, 4th Floor
Boston, MA 02110
Attn: Kellie Mullen, Corporate Trust Dept.
Tel: 617-664-5587
Fax: 617-664-5290
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers who are parties or are threatened to be made parties to any
proceeding (with certain exceptions) by reason of the fact that the person is or
was an agent of the corporation, against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with the
proceeding if that person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation. This
limitation on liability has no effect on a director's liability (i) for acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) relating to
any transaction from which a director derived an improper personal benefit, (iv)
for acts or omissions that show a reckless disregard for the director's duty to
the corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of a serious injury to the corporation or its
shareholders, (v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, (vi) under Section 310 of the California
General Corporation Law (concerning contracts or transactions between the
corporation and a director) or (vii) under Section 316 of the California General
Corporation Law (directors' liability for improper dividends, loans and
guarantees).
In accordance with Section 317, the Articles of Incorporation, as amended
(the "Articles"), of the Company limit the liability of a director to the
Company or its shareholders for monetary damages to the fullest extent
permissible under California law, and authorize the Company to provide
indemnification to its agents (including officers and directors), subject to the
limitations set forth above.
Pursuant to the authority provided in the Articles, the Company has entered
into, or anticipates that it will soon enter into, indemnification agreements
with each of its officers and directors, indemnifying them against certain
potential liabilities that may arise as a result of their service to the
Company, and providing for certain other protection.
The Company also maintains insurance policies which insure its officers and
directors against certain liabilities.
The foregoing summaries are necessarily subject to the complete text of the
statute, the Articles and the agreements referred to above and are qualified in
their entirety by reference thereto.
ITEM 21. EXHIBITS
A list of exhibits included as part of the Registration Statement is set
forth below:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation of MTS, INCORPORATED filed with the California Secretary of State on
September 22, 1994
3.2 By-Laws of MTS, INCORPORATED
4.1+ Purchase Agreement dated April 20, 1998 between the Registrant, Chase Securities, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated
4.2+ Indenture dated as of April 23, 1998 (the "Indenture") by and between the Registrant and State Street
Bank and Trust Company of California, N.A., as Trustee
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
4.3+ Exchange and Registration Rights Agreement dated as of April 20, 1998 by and among the Registrant and
Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as the Initial Purchasers
4.4+ $104,720,000 Existing 144A Global 9 3/8% Senior Subordinated Note due 2005
4.5+ $5,280,000 Existing Regulation S Global 9 3/8% Senior Subordinated Note due 2005
4.6* Form of New 9 3/8% Senior Subordinated Note due 2005
5.1* Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of securities being registered
10.1+ Credit Agreement dated as of April 23, 1998 by and among the Registrant, Tower Records Kabushiki Kaisha,
the Lenders party thereto, and The Chase Manhattan Bank as Administrative Agent
10.2 Japanese Security Agreement dated as of April 23, 1998
10.3 MTS, INCORPORATED Security Agreement dated as of April 23, 1998
12.1++ Statement re Computation of Ratios
21.1+ List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1)
25.1++ Statement of Eligibility on Form T-1 for State Street Bank and Trust Company of California, N.A., as
Trustee under the Indenture
27.1++ Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Consent of Music Business International
</TABLE>
- ------------------------
* To be filed by amendment
+ Previously filed with initial filing on June 1, 1998.
++ Previously filed with Amendment No. 1 on July 1, 1998.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To respond to requests for information that is incorporated by reference
into the Prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
2. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the
II-2
<PAGE>
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of their counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sacramento, State of California, this July 23, 1998.
MTS, INCORPORATED
/S/ DEVAUGHN D. SEARSON
--------------------------------------
DeVaughn D. Searson,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ------------------------------------------- ----------------
<S> <C> <C>
/s/ RUSSELL M. SOLOMON President, Chief Executive Officer and July 23, 1998
- --------------------------------------- Director (Principal Executive Officer)
Russell M. Solomon
/s/ MICHAEL T. SOLOMON Executive Vice President, General Counsel July 23, 1998
- --------------------------------------- and Director
Michael T. Solomon
/s/ DEVAUGHN D. SEARSON Chief Financial Officer, Secretary, July 23, 1998
- --------------------------------------- Treasurer and Director (Principal Financial
DeVaughn D. Searson Officer and Principal Accounting Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation of MTS, INCORPORATED filed with the California Secretary of State on
September 22, 1994
3.2 By-Laws of MTS, INCORPORATED
4.1+ Purchase Agreement dated April 20, 1998 between the Registrant, Chase Securities, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated
4.2+ Indenture dated as of April 23, 1998 (the "Indenture") by and between the Registrant and State Street
Bank and Trust Company of California, N.A., as Trustee
4.3+ Exchange and Registration Rights Agreement dated as of April 20, 1998 by and among the Registrant and
Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as the Initial Purchasers
4.4+ $104,720,000 Existing 144A Global 9 3/8% Senior Subordinated Note due 2005
4.5+ $5,280,000 Existing Regulation S Global 9 3/8% Senior Subordinated Note due 2005
4.6* Form of New 9 3/8% Senior Subordinated Note due 2005
5.1* Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of securities being registered
10.1+ Credit Agreement dated as of April 23, 1998 by and among the Registrant, Tower Records Kabushiki Kaisha,
the Lenders party thereto, and The Chase Manhattan Bank as Administrative Agent
10.2 Japanese Security Agreement dated as of April 23, 1998
10.3 MTS, INCORPORATED Security Agreement dated as of April 23, 1998
12.1++ Statement re Computation of Ratios
21.1+ List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1)
25.1++ Statement of Eligibility on Form T-1 for State Street Bank and Trust Company of California, N.A., as
Trustee under the Indenture
27.1++ Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Consent of Music Business International
</TABLE>
- ------------------------
* To be filed by amendment
+ Previously filed with initial filing on June 1, 1998.
++ Previously filed with Amendment No. 1 on July 1, 1998.
<PAGE>
[Exhibit 3.1]
RESTATED
ARTICLES OF INCORPORATION
OF
M T S, INCORPORATED
The undersigned, Russell M. Solomon and Walter S. Martin, do hereby
certify:
First: They are the duly elected and acting President and Secretary,
respectively, of MTS, INCORPORATED, a California corporation (the
"Corporation").
Second: The Articles of Incorporation of the Corporation are amended and
restated to read in full as follows:
Article I
The name of the Corporation is M T S, INCORPORATED.
Article II
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated
by the California Corporations Code. The Corporation elects to be governed
by all of the provisions of the General Corporation Law of 1977 not otherwise
applicable to it under Chapter 23 thereof.
Article III
A. Authorized Capitalization. The Corporation is authorized to issue
three classes of shares designated "Class A Common Stock," "Class B Common
Stock" and "Preferred Stock", respectively. The total number of shares of
all classes of stock which the Corporation shall have authority to issue is
sixteen million (16,000,000) shares. The number of shares of Preferred Stock
which the Corporation is authorized to issue is one million (1,000,000)
shares. The number of shares of Class A Common Stock which the Corporation
is authorized to issue is five million(5,000,000) shares. The number of
shares of Class B Common Stock which the Corporation is authorized to issue
is ten million (10,000,000) shares. Effective upon the filing of these
Restated Articles of Incorporation, each outstanding share of Common Stock is
converted into one (1) share of Class A Common Stock.
B. Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series. The Board of Directors is hereby authorized to
determine and alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock,
and to fix the number of shares of any such series of Preferred Stock and the
designation of any such series of Preferred Stock. The Board of Directors,
within the
<PAGE>
limits and restrictions stated in this Article III or in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any series
subsequent to the issuance of shares of that series.
C. Class A Common Stock. The shares of Class A Common Stock and
shares of Class B Common Stock shall be identical in all respects and shall
have equal rights and privileges except as set forth in this paragraph C and
in paragraph D of this Article III. Upon dissolution of the Corporation, the
Class A Common Stock and Class B Common Stock are entitled to share ratably
in the assets thereof that may be available for distribution after
satisfaction of creditors and the payment of any liquidation preference of
any outstanding shares of Preferred Stock.
1. Dividends.
(a) Dividends or distributions as may be determined by the Board of
Directors of the Corporation from time to time may be declared and paid or
made upon the Class A Common Stock out of any source at the time lawfully
available for the payment of dividends, provided that (subject to
subparagraphs (b) and (c) below of this paragraph C.1.) identical dividends
or distributions are declared and paid concurrently on the Class B Common
Stock. If dividends or distributions are declared and paid upon the Class B
Common Stock (subject to subparagraphs (b) and (c) below of this paragraph
C.1.), an identical dividend shall be declared and paid concurrently on the
Class A Common Stock.
(b) No dividend may be declared and paid in Class A Common Stock unless
the dividend is payable only to holders of Class A Common Stock and a
dividend payable to Class B Common Stock is declared and paid concurrently in
respect of outstanding shares of Class B Common Stock in the same number of
shares of Class B Common Stock per outstanding share.
(c) No dividend may be declared and paid in Class B Common Stock unless
the dividend is payable only to holders of Class B Common Stock and a
dividend payable to Class A Common Stock is declared and paid concurrently in
respect of outstanding shares of Class A Common Stock in the same number of
shares of Class A Common Stock per outstanding share.
2. Stock Combinations and Subdivisions. The Class A Common stock
shall not be combined or subdivided unless at the same time there is a
proportionate combination or subdivision of the Class B Common Stock. If the
Class B Common Stock is combined or subdivided, a proportionate combination
or subdivision of the Class A Common Stock shall be made at the same time.
3. Voting. Subject to the provisions of paragraph D.3. of this
Article III, the Class A Common Stock shall have ten (10) votes per share on
all matters that may be submitted to a vote or consent of the shareholders.
Without limiting the generality of the foregoing:
<PAGE>
(a) With respect to the election of Directors, the holders of Class A
Common Stock shall be entitled, voting as a separate class, to elect the
remaining Directors not subject to the priority right of the holders of the
Class B Common Stock set forth in paragraphs D.3.(a) and (c) of this Article
III; and
(b) The holders of the Class A Common Stock will be entitled to vote as
a separate class on the removal, with or without cause, of any Director
elected by the holders of the Class A Common Stock, provided that, to the
extent permitted by applicable law, any Director may be removed for cause by
the Board of Directors.
4. Conversion.
(a) Each holder of record of Class A Common Stock may, in such holder's
sole discretion and at such holder's option, convert any whole number or all
of such holder's shares of Class A Common Stock into fully paid and
nonassessable shares of Class B Common Stock at the rate (subject to
adjustment as hereinafter provided) of one (1) share of Class B Common Stock
for each share of Class A Common Stock surrendered for conversion. Any such
conversion may be effected by any holder of Class A Common Stock by
surrendering such holder's certificate or certificates for the shares of
Class A Common Stock to be converted, duly endorsed, at the office of the
Corporation or any transfer agent for the Class A Common Stock, together with
a written notice to the Corporation at such office that such holder elects to
convert all or a specified number of shares of Class A Common Stock and
stating the name or names in which such holder desires the certificate or
certificates for such shares of Class B Common Stock to be issued. Promptly
thereafter, the Corporation shall issue and deliver to such holder or such
holder's nominee or nominees, a certificate or certificates for the number of
shares of Class B Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made at the close of
business on the day of such surrender and the person or persons entitled to
receive the shares of Class B Common Stock issuable on such conversion shall
be treated for all purposes as the record holder or holders of such shares of
Class B Common Stock on that date.
(b) Each share of Class A Common Stock shall automatically be converted
into Class B Common Stock at the conversion ratio set forth above, in the
event that the beneficial or record ownership of such share of Class A Common
Stock shall be transferred (including, without limitation, by way of gift,
settlement, will or intestacy) to any person or entity that is not (i) a
shareholder (whether of record or beneficially) of the Corporation as of the
date of filing with the California Secretary of State of these Restated
Articles of Incorporation; (ii) a direct lineal descendant of Russell M.
Solomon, including adopted persons (if adopted during their minority) and
excluding foster children, stepchildren and persons born out of wedlock; or
(iii) a trust under which any of the persons described in clauses (i) or (ii)
above is a beneficiary. A pledge of Class A Common Stock as security for an
obligation of a holder of such Stock shall not be considered a transfer for
purposes of this paragraph C.4(b), unless and until beneficial ownership of
such Stock is transferred to the pledgeholder. The conversion into Class B
Common Stock shall be deemed to have occurred (whether or not certificates
representing such shares are surrendered) as of the close of business on the
date of transfer, and the person or persons entitled to receive shares of
Class B Common Stock issuable
<PAGE>
on such conversion shall be treated for all purposes as the record holder or
holders of such shares of Class B Common Stock on that date.
(c) Before any shares of Class B Common Stock shall be delivered upon
conversion, the holder of shares of Class A Common Stock whose shares have
been converted into Class B Common Stock shall deliver the certificate(s)
representing such shares to the Corporation or its duly authorized agent (or
if such certificates have been lost, stolen or destroyed, such holder shall
execute an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such conversion),
specifying the place where the Class B Common Stock issued in conversion
thereof shall be sent. The endorsement of the share certificate shall be in
form satisfactory to the Corporation or such agent, as the case may be.
(d) The number of shares of Class B Common Stock into which the shares
of Class A Common Stock may be converted shall be subject to adjustment from
time to time in the event of any capital reorganization, reclassification of
stock of the Corporation, consolidation or merger of the Corporation with or
into another corporation, or sale or conveyance of all or substantially all
of the assets of the Corporation to another corporation or other entity or
person. Each share of Class A Common Stock shall thereafter be convertible
into such kind and amount of securities or other assets, or both, as are
issuable or distributable in respect of the number of shares of Class B
Common Stock into which each share of Class A Common Stock is convertible
immediately prior to such reorganization, reclassification, consolidation,
merger, sale or conveyance. In any such case, appropriate adjustments shall
be made by the Board of Directors of the Corporation in the application of
the provisions herein set forth with respect to the rights and interests
thereafter of the holders of Class A Common Stock to the end that the
provisions set forth herein (including provisions for adjustment of the
conversion rate) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any securities or other assets thereafter deliverable on
conversion of the Class A Common Stock.
(e) The Corporation shall, at all times, reserve and keep available out
of the authorized and unissued shares of Class B Common Stock, solely for the
purpose of effecting the conversion of the outstanding Class A Common Stock,
such number of shares of Class B Common Stock as shall from time to time be
sufficient to effect conversion of all outstanding Class A Common Stock and
if, at any time, the number of authorized and unissued shares of Class B
Common Stock shall not be sufficient to effect conversion of the then
outstanding shares of Class A Common Stock, the Corporation shall take such
corporate action as may be necessary to increase the number of authorized and
unissued shares of Class B Common Stock to such number as shall be sufficient
for such purposes.
(f) No fractional shares of Class B Common Stock shall be issued upon
conversion of shares of Class A Common Stock. If more than one share of
Class A Common Stock shall be surrendered for conversion at any one time by
the same holder, the number of shares of Class B Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of the Class A Common Stock so surrendered. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Class B Common Stock, the number of shares of Class B
Common Stock to be
<PAGE>
issued shall be rounded down to the nearest full share and the Corporation
shall, in lieu of issuing any fractional share, pay the holder otherwise
entitled to such fraction a sum in cash equal to such fraction multiplied by
the fair market value of one share of Class B Common Stock at the time of the
conversion.
(g) The Corporation shall pay any and all issue and other taxes that
may be payable in respect of any issue or delivery of shares of Class B
Common Stock on conversion of Class A Common Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax that may be
payable in respect of the issue of any Class B Common Stock in a name other
than that in which the Class A Common Stock so converted was registered, and
no such issue or delivery shall be made unless and until the person
requesting such issue has paid to the Corporation the amount of any such tax,
or has established, to the satisfaction of the Corporation, that such tax has
been paid.
(h) If any shares of capital stock to be reserved for the purpose of
conversion of shares of Class A Common Stock require registration or listing
with, or approval of, any governmental authority, stock exchange or other
regulatory body under any federal or state law or regulation or otherwise,
before such shares may be validly issued or delivered upon conversion, the
Corporation will in good faith and as expeditiously as possible endeavor to
secure such registration, listing or approval, as the case may be.
(i) All shares of Class B Common Stock that may be issued upon
conversion of the shares of Class A Common Stock will, upon issuance by the
Corporation, be validly issued, fully paid and non-assessable and free from
all taxes, liens and charges with respect to the issuance thereof.
(j) All certificates representing Class A Common Stock surrendered for
conversion shall be appropriately canceled on the books of the Corporation,
and the shares so converted represented by such certificates shall be
restored to the status of authorized but unissued Class A Common Stock of the
Corporation.
(k) In case:
(1) the Corporation shall take a record of the holders of its Class B
Common Stock for the purpose of entitling them to receive a dividend, or any
other distribution, payable otherwise than in cash; or
(2) the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to subscribe for or purchase any
shares of stock of any class or to receive any other rights; or
(3) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then, and in any such case, the Corporation shall cause to be mailed to the
holders of record of the outstanding Class A Common Stock, at least ten (10)
days prior to the date hereinafter
<PAGE>
specified, a notice stating the date on which (x) a record is to be taken for
the purpose of such dividend, distribution, subscription or purchase rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up is to take place and the
date, if any is to be fixed, as of which holders of Class B Common Stock of
record shall be entitled to exchange their shares of Class B Common Stock for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation
or winding up.
(l) So long as any shares of Class A Common Stock are outstanding, the
Corporation shall not, without first obtaining the approval by vote or
written consent, in the manner provided by law, of the holders of at least
sixty percent (60%) of the total number of shares of Class A Common Stock
outstanding, voting separately as a class, (1) alter or change the rights or
privileges of the Class A Common Stock; (2) amend any provision of this
Section C; or (3) effect any reclassification or recapitalization of the
Corporation's outstanding capital stock.
D. Class B Common Stock.
1. Dividends and Distributions. Subject to the provisions of
paragraph C.1. of this Article III, dividends and distributions may be
declared and paid or made upon the Class B Common Stock as may be permitted
by applicable law.
2. Stock Combinations and Subdivisions. Subject to the provisions of
paragraph C.2. of this Article III, the Class B Common Stock may be combined
or subdivided in such manner as may be permitted by applicable law.
3. Voting. The holders of Class B Common Stock shall have the voting
rights set forth below:
(a) With respect to the election of the Board of Directors, the holders
of Class B Common Stock, voting as a separate class, shall be entitled to
elect that number of Directors which constitutes twenty-five percent (25%) of
the total membership of the Board of Directors, and if such twenty-five
percent (25%) is not a whole number, then the holders of Class B Common Stock
will be entitled to elect the next higher whole number of directors which
constitutes twenty-five percent (25%) of such membership. Such election
shall be from a slate of Director nominees separate from a slate of Director
nominees from which holders of Class A Common Stock shall elect Directors.
(b) The holders of Class B Common Stock will be entitled to vote as a
separate class on the removal, with or without cause, of any Director elected
by the holders of Class B Common Stock, provided that, to the extent
permitted by applicable law, any Director may be removed for cause by the
Board of Directors.
(c) Irrespective of the foregoing, if the number of outstanding shares
of Class A Common Stock is less than twelve and one-half percent (12 1/2%) of
the total number of outstanding shares of Class A Common Stock and Class B
Common Stock (which
<PAGE>
shall, for this purpose, include the aggregate number of shares of Class A
Common Stock or Class B Common Stock into which any outstanding shares of
Preferred Stock shall be convertible), then the holders of the Class B Common
Stock shall be entitled to elect twenty-five percent (25%) of the number of
Directors to be elected at such meeting (rounded, if such twenty-five percent
(25%) is not a whole number, to the next higher whole number) and shall be
entitled to participate with the holders of the Class A Common Stock voting
as a single class, in the election of the remaining number of Directors to be
elected at such meeting, provided that the holders of Class B Common Stock
shall have one (1) vote per share and the holders of the Class A Common Stock
shall have ten (10) votes per share. If, during the interval between annual
meetings for the election of Directors, the number of Directors who have been
elected by either the holders of the Class A Common Stock or the Class B
Common Stock shall, by reason of resignation, death, retirement,
disqualification or removal, be reduced, the vacancy or vacancies in
Directors so created may be filled by a majority vote of the remaining
Directors then in office, even if less than a quorum, or by a sole remaining
Director. Except as may otherwise be required by law, any Director so
elected by the remaining Directors to fill any such vacancy may be removed
from office by the vote of the holders of a majority of the shares of the
Class A Common Stock and the Class B Common Stock voting as a single class,
provided that the holders of Class A Common Stock shall have ten (10) votes
per share and the holders of the Class B Common Stock shall have one (1) vote
per share.
(d) Except as may otherwise be required by law, the holders of Class B
Common Stock shall, in all matters not referred to in subparagraphs (a) or
(b) of paragraph C.3. of this Article III or in subparagraphs (a), (b) or (c)
of this paragraph D.3., vote together with the holders of Class A Common
Stock as a single class, provided that the holders of Class A Common Stock
shall have ten (10) votes per share and the holders of Class B Common Stock
shall have one (1) vote per share.
(e) Notwithstanding anything herein to the contrary, the holders of
Class A Common Stock shall have exclusive voting power on all matters at any
time when no shares of Class B Common Stock or Preferred Stock are issued and
outstanding, and the holders of the Class B Common Stock shall have exclusive
voting power on all matters at any time when no shares of Class A Common
Stock or Preferred Stock are issued and outstanding.
E. Quorum. Where a separate vote by class or series is required with
respect to any matter, the holders of shares entitled to cast a majority of
the votes that could be cast by all shares of such class or series entitled
to vote thereon shall constitute a quorum. With respect to any other matter,
the holders of shares entitled to cast a majority of the votes that could be
a vote thereon shall constitute a quorum.
Article IV
1. The liability of the directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
2. This Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) for breach of
duty to the corporation and its
<PAGE>
shareholders through bylaw provisions or through agreements with the agents,
or through shareholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the Corporations Code,
subject to the limits on such excess indemnification set forth in Section 204
of the Corporations Code.
Article V
The Board of Directors is expressly authorized to make, alter or repeal
the bylaws of the Corporation.
Article VI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Restated Articles of Incorporation, in the
manner now or hereafter prescribed by statute, except as otherwise provided
herein and all rights conferred upon the shareholders herein are granted
subject to this reservation.
Article VII
This Article VII shall become effective only when the Corporation
becomes a listed corporation within the meaning of Section 301.5 of the
Corporations Code. The ability of shareholders to cumulate votes in the
election of directors shall automatically be eliminated.
Third: The foregoing Restated Articles of Incorporation have been
duly approved by the Board of Directors.
Fourth: The foregoing Restated Articles of Incorporation have been
duly approved by the required vote of shareholders in accordance with
Sections 902 and 903 of the Corporations Code. The total number of
outstanding shares of the Corporation entitled to vote on this amendment is
500 shares of Common Stock. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote
required was a majority of the shares of Common Stock.
<PAGE>
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: September 13, 1994, at Sacramento, California.
/s/ RUSSELL M. SOLOMON
----------------------------
RUSSELL M. SOLOMON
PRESIDENT
/s/ WALTER S. MARTIN
--------------------------
WALTER S. MARTIN
SECRETARY
<PAGE>
[Exhibit 3.2]
BY-LAWS
of
M T S, INCORPORATED
ARTICLE 1.
Offices
Section 1. PRINCIPAL OFFICE. The principal office for the transaction of
the business of the Corporation is hereby fixed and located at 1518 Broadway,
Sacramento, California. The Board of Directors is hereby granted full power and
authority to change said principal office from one location to another in said
County. Any such change shall be noted on the By-Laws by the Secretary,
opposite this section, or this section maybe amended to state the new location.
Section 2. OTHER OFFICES. Branch or subordinate offices may at any time
be established by the Board of Directors, at any place or places within the
State of California, as the Board of Directors may, from time to time,
determine.
ARTICLE II
Section 1. PLACE OF MEETINGS. All annual meetings of shareholders shall be
held at the principal office of the Corporation, and all other meetings of
shareholders shall be held either at the principal office or at any other place
within the State of California, which may be designated either by the Board of
Directors pursuant to authority hereinafter granted to said Board, or by the
written consent of all shareholders entitled to vote thereat, given either
before or after the meeting and filed with the Secretary of the Corporation.
Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be
held on the last Wednesday of May of each year, at 1:00 o'clock P.M. of said
day, provided, however, that should said day fall upon a legal holiday, then any
such annual meeting of shareholders shall be held at the same time and place on
the next day thereafter ensuing which is not a legal holiday.
<PAGE>
Articles of Incorporation, of the By-laws and of the laws of the State of
California as to action to be authorized or approved by the shareholders and
subject to the duties of directors as prescribed by the by-laws, all corporate
powers shall be exercised by or under the authority of and the business and
affairs of the corporation shall be controlled by the Board of Directors.
Without prejudice of such general powers but subject to the same limitations, it
is hereby expressly declared that the directors shall have the following powers,
to wit:
First - to select and remove all officers, agents and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or by the by-laws, fix
their compensation and require from them security for faithful service.
Second - to conduct, manage and control the affairs and business of the
corporation, and to make such rules and regulations therefor not inconsistent
with law, with the articles of incorporation or the by-laws, as they may deem
best.
Third - to change the principal office for the transaction of business of
the corporation from one location to another within the same county as provided
in Article I, Section 1, hereof; to fix and locate from time to time one or more
subsidiary offices of the corporation within the State of California, as
provided in Article I, Section 2, hereof; to designate any place within the
State of California for the holding of any shareholders' meeting or meetings
except annual meetings; and to adopt, make and use a corporate seal, and to
prescribe the forms of certificates of stock and to alter the form of such
seal and of such certificates from time to time, as in their judgment they may
deem best, provided such seal and such certificates shall at all times comply
with the provisions of law.
Fourth - to authorize the issue of shares of stock of the corporation from
time to time upon such terms as may be fixed from time to time by the Board of
Directors.
Fifth - to borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidences of debt and securities thereof.
Sixth - to appoint an executive committee and other committees, and to
delegate to the executive committee any of
<PAGE>
the powers and authority of the board in the management of the business and
affairs of the corporation, except the power to declare dividends and to
adopt, amend or repeal by-laws. The executive committee shall be composed of
three directors.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors of the corporation shall be three (3) until changed by amendment of
the Articles of Incorporation or a by-law duly adopted by the shareholders.
Section 3. ELECTION AND TERM OF OFFICE. The directors shall be elected at
each annual meeting of shareholders, but if any such annual meeting is not held,
or the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose. All directors shall hold
office until their respective successors are elected.
Section 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, and each director so elected shall hold office until
his successor is elected at an annual or a special meeting of the shareholders.
A vacancy or vacancies in the board of directors shall be deemed to
exist in case of the death, resignation or removal of any director, or if the
authorized number of directors be increased, or if the shareholders fail at any
annual or special meeting of shareholders at which any director or directors are
elected to elect the full authorized number of directors to be voted for at that
meeting.
The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors. If the board of
directors accepts the resignation of a director tendered to take effect at a
future time, the board or the shareholders shall have power to elect a
successor to take office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
Section 5. PLACE OF MEETING. Regular meetings of the board of directors
shall be held at any place within the State of California which has been
designated from time to time by resolution of the board or by written consent of
all members of the board. In the absence of such designation, regular meetings
shall be held at the principal office of the corporation. Special meetings of
the board may be held either at a place so designated or at the principal
office.
<PAGE>
Section 6. ORGANIZATION MEETING. Immediately following each annual
meeting of shareholders the board of directors shall hold a regular meeting
for the purpose of organization, election of officers, and the transaction
of other business. Notice of such meetings is hereby dispensed with.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of
directors shall be held without call on the last Wednesday of each and every
month at 2:OO P.M. of said day; provided, however, should said day fall upon a
legal holiday, then said meeting shall be held at the same time on the next day
thereafter ensuing which is not a legal holiday. Notice of all such regular
meetings of the board of directors is hereby dispensed with.
Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be called, for any purpose or purposes, at any time by the president, or,
if he is absent or unable or refuses to act, by any vice president, or by any
two directors.
Written notice of the time and place of special meetings shall be
delivered personally to the directors or sent to each director by mail or other
form of written communication, charges prepaid, addressed to him at his address
as it is shown upon the records of the corporation, or if it is not so shown on
such records or is not readily ascertainable, at the place in which the meetings
of the directors are regularly held. In case such notice is mailed or
telegraphed, it shall be deposited in the United States mail or delivered to the
telegraph company in the place in which the principal office of the corporation
is located at least forty-eight (48) hours prior to the time of the holding of
the meeting. In case such notice is delivered personally as above provided, it
shall be so delivered at least twenty-four (24) hours prior to the time of the
holding of the meeting. Such mailing, telegraphing or delivery as above
provided for shall be due, legal and personal notice to such director.
Section 9. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given to absent directors if the time and place
be fixed at the meeting adjourned.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called or noticed or wherever held, shall be as
valid as though had at a meeting duly held, after regular call and notice, if
a quorum be present, and if, either before or after the meeting, each of the
directors not present sign a written waiver of notice or
<PAGE>
a consent to holding such meeting or approval of the minutes thereof. All
such waivers, consents or approvals shall be filed with the corporate records
or made a part of the minutes of the meeting.
Section 11. QUORUM. A majority of the authorized number of directors
shall be necessary to constitute a quorum for the transaction of business,
except to adjourn as hereinafter provided. Every act or decision done or made
by a majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the board of directors, unless a
greater number be required by law or by the Articles of Incorporation.
Section 12. ADJOURNMENT. A quorum of the directors may adjourn any
directors' meeting to meet again at a stated day and hour; provided, however,
that in the absence of a quorum, a majority of the directors present at any
directors' meeting, either regular or special, may adjourn from time to time
until the time fixed for the next regular meeting of the board.
Section 13. FEES AND COMPENSATION. Directors shall not receive any
stated salary for their services as directors, but, by resolution of the
board, a fixed fee, with or without expenses of attendance, may be allowed
for attendance at each meeting. Nothing herein contained shall be construed
to preclude any director from serving the corporation in any other capacity
as an officer, agent, employee, or otherwise, and receiving compensation
therefor.
ARTICLE IV
Officers
Section 1. OFFICERS. The officers of the corporation shall be a
president, a vice president, a secretary and a treasurer. The offices of
secretary and treasurer shall be held by the same person. The corporation may
also have, at the discretion of the board of directors, a chairman of the board,
one or more additional vice presidents, one or more assistant secretaries, one
or more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 3 of this article. Officers other
than the president and the chairman of the board need not be directors.
Section 2. ELECTION. The officers of the corporation, except such officer
as may be appointed in accordance with the provisions of Section 3 of this
article, shall be chosen
<PAGE>
annually by the board of directors, and each shall hold his office until he
shall resign or shall be removed or otherwise disqualified to serve, or his
successor shall be elected and qualified.
Section 3. SUBORDINATE OFFICERS, ETC. The board of directors may appoint
such other officers as the business of the corporation may require, each of
whom shall hold office for such period, have such authority and perform such
duties as are provided in the by-laws or as the board of directors may from time
to time determine.
Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either
with or without cause, by a majority of the authorized number of directors, at
any regular or special meeting of the board, or, except in case of an officer
chosen by the board of directors, by any officer upon whom such power of removal
may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
board of directors or to the president, or to the secretary of the corporation.
Any such resignation shall take effect at the date of the receipt of such notice
or at any later time specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause, shall be filled in
the manner prescribed in the by-laws for regular appointments to such office,
provided, however, that such vacancy may be filled at any time prior to the
annual meeting of the board of directors held the last Friday of April.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if there
shall be such an officer, shall, if present, preside at all meetings of the
board of directors, and exercise and perform such other powers and duties as may
be from time to time assigned to him by the board of directors or prescribed by
the by-laws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the board of directors to the chairman of the board, if there
be such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and officers of
the corporation. He shall preside at all meetings of the shareholders and in
the absence of the
<PAGE>
chairman of the board, or if there is none, at all meetings of the board of
directors. He shall be ex-officio a member of all the standing committees
including the executive committees, if any, and shall have the general powers
and duties of management usually vested in the office of president of a
corporation, and shall have such other powers and duties as may be prescribed
by the board of directors or the by-laws.
Section 8. VICE PRESIDENT. In the absence or disability, of the
president, the vice presidents in order of their rank as fixed by the board of
directors, or if not ranked, the vice president designated by the board of
directors, shall perform all the duties of the president, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president. The vice presidents shall have such other powers and perform such
other duties as from tine to time the board of directors or the by-laws
prescribe for them.
Section 9. TREASURER. The treasurer shall keep and maintain, or cause
to be kept and maintained, adequate and correct accounts of the properties
and business transactions of the corporation, including accounts of its
assets, liabilities, receipts, disbursements, gains, losses, capital,
surplus, and shares. Any surplus including earned surplus, paid-in surplus
and surplus arising from a reduction of stated capital shall be classified
according to source and shown in a separate account. The books of account
shall be at all times open to inspection of any director.
The treasurer shall deposit all moneys and other valuables in the name
and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, and shall render to
the president and the board of directors whenever they request it, an account
of all of his transactions as treasurer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or the by-laws.
Section 10. SECRETARY. The secretary shall keep, or cause to be kept a
book of minutes at the principal office or such other place an the board of
directors may order, of all meetings of directors and shareholders, with the
time and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at directors'
meetings, the number of shares present or represented by proxy, shareholders'
meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal office
or at the office of the corporation's transfer agent, a share register, or a
duplicate share
<PAGE>
register, showing the names of the shareholders and their addresses; the
number and classes of shares held by each; the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all the
meetings of the shareholders and of the board of directors required by the by-
laws or by law to be given, and he shall keep the seal of the corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or the by-laws.
ARTICLE V
Miscellaneous
Section 1. RECORD DATE, AND CLOSING STOCK BOOKS. The board of directors
may fix a time, in the future, not exceeding fifteen (15) days preceding the
date of any meeting of shareholders, and not exceeding thirty (30) days
preceding the date fixed for the payment of any dividend or distribution, or
for the allotment of rights, or when any change or conversion or exchange of
shares shall go into effect, as a record date for the determination of the
shareholders entitled to notice of and to vote at any such meeting, or
entitled to receive any such dividend or distribution, or any such allotment
of rights, or to exercise the rights in respect to any such change, conversion
or exchange of shares, and in such case only shareholders of record on the
date so fixed shall be entitled to notice of and to vote at such meeting, or
to receive such dividend, distribution or allotment of rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of any shares on
the books of the corporation after any record date fixed as aforesaid. The
board of directors may close the books of the corporation against transfers of
shares during the whole, or any part, of any such period.
Section 2. INSPECTION OF CORPORATE RECORDS. The share register or
duplicate share register, the books of account, the minutes of proceedings of
the shareholders and directors shall be open to inspection upon the written
demand of any shareholder or the holder of a voting trust certificate, at any
reasonable time, and for a purpose reasonably related to his interests as a
shareholder or as the holder of a voting trust certificate, and shall be
exhibited at any time when required by the demand of ten per cent (10%) of the
shares represented at any shareholders' meeting. Such inspection other than
at a shareholders' meeting shall be made in writing upon the president,
secretary, or assistant secretary of the corporation.
<PAGE>
Section 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the corporation, shall be signed or endorsed by such person
or persons, and in such manner, as, from time to time, shall be determined by
resolution of the Board of Directors.
Section 4. ANNUAL REPORT. The board of directors of the corporation shall
cause to be sent to the shareholders not later than one hundred twenty (120)
days after the close of the fiscal year, an annual report.
Section 5. CONTRACT, ETC., HOW EXECUTED. The board of directors, except
as in the by-laws otherwise provided, may authorize any officer of this
corporation, or officers, agent or agents of this corporation to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation, and such authority may be general or confined to specific
instances; and unless so authorized by the board of directors, no officer, agent
or employee shall have any power or authority to bind the corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or to any amount.
Section 6. CERTIFICATE OF STOCK. A certificate or certificates for shares
of the capital stock of the corporation shall be issued to each shareholder when
any such shares are fully paid up. All certificates shall be signed by the
president or vice president and by the secretary or the assistant secretary.
Section 7. REPRESENTATION OF SHARES HELD BY OTHER CORPORATIONS. Shares of
this corporation standing in the name of another corporation may be voted or
represented and all rights incident thereto may be exercised an behalf of such
corporation by any officer or officers of such corporation authorized to do so
by the by-laws of such corporation and in the absence of such a vote or
representation, by any person authorized to do so by resolution of the board of
directors or of the executive committee of such corporation, and in the absence
of such vote or representation, by any person authorized to so do by proxy or
power of attorney duly executed by the president or vice president and secretary
or assistant secretary of such corporation.
Section 8. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The president,
or any vice president and the secretary shall vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation, as
directed by the board of directors. Such authority may be exercised either by
such officers in person
<PAGE>
or by any person authorized so to do by proxy or power of attorney duly
executed by such officers.
Section 9. INSPECTION OF BY-LAWS. The corporation shall keep in its
principal office for the transaction of business, the original or a copy of the
by-laws as amended or otherwise altered to date, certified by the secretary,
which shall be open to inspection by the shareholders at all reasonable times
during office hours.
ARTICLE VI
Amendments
Section 1. POWERS OF SHAREHOLDERS. New by-laws may be adopted or these
by-laws may be amended or repealed by the vote of shareholders entitled to
exercise a majority of the voting power of the corporation or by the written
assent of such shareholders, except as otherwise provided by law or by the
articles of incorporation.
Section 2. POWER OF DIRECTORS. Subject to the right of shareholders as
provided in Section I of this Article VI to adopt, amend or repeal by-laws, by-
laws may be adopted, amended or repealed by the board of directors.
ARTICLE VII
Restrictions on Sale and/or Transfer of Shares
Section 1. Before there can be a valid sale or transfer or any of the
shares of this corporation by the holders thereof, the holder of the shares to
be sold or transferred shall first give notice in writing to the secretary of
this corporation of his intention to sell or transfer such shares. Said notice
shall specify the name and address of each intended vendee or intended
transferee, the number of shares to be sold or transferred, the price per share,
the terms upon which such holder intends to make such sale or transfer, and
shall state generally that the notice is given pursuant to this Article VII of
the by-laws of this corporation. The secretary shall, within five (5) days
thereafter, mail or deliver a copy of said notice to each of the other
shareholders of record of this corporation. Such notice may be delivered to
such shareholders personally or may be mailed to the last known addresses of
such shareholders, as the same may appear on the books of this corporation.
Within fifteen (15) days after the mailing or delivering of said notices to such
shareholders, any such shareholder or shareholders desiring to acquire any part
or all of the shares referred to in said notice shall deliver by mail or
otherwise to the secretary
<PAGE>
of this corporation a written offer or offers to purchase a specified number
or numbers of such shares at the price and upon the terms states in said
notice.
If the total number or shares specified in such offers exceeds the number
of shares referred to in said notice, each offering shareholder shall be
entitled to purchase such proportion of the shares referred to in said notice to
the secretary, as the number of shares of this corporation, which he holds,
bears to the total number of shares held by all such shareholders desiring to
purchase the shares referred to in said notice to the secretary.
If all of the shares referred to in said notice to the secretary are not
disposed of under such apportionment, each shareholder desiring to purchase
shares in a number in excess of his proportionate share, as provided above,
shall be entitled to purchase such proportion of those shares which remain thus
undisposed of, as the total number of shares which he holds bears to the total
number of shares held by all of the shareholders desiring to purchase shares in
excess of those to which they are entitled under such apportionment.
If none or only part of the shares referred to in said notice to the
secretary is purchased, as aforesaid, in accordance with offers made within said
fifteen (15) day period, the shareholders desiring to sell or transfer may
dispose of all shares of stock referred to in said notice to the secretary not
so purchased by the other shareholders, to any person or persons named as an
intended vendee or intended transferee in said notice to the secretary, but to
no other person or persons; provided, however, that he shall not sell or
transfer such shares at a lower price or on terms more favorable to the
purchaser or transferee than those specified in said notice to the secretary;
and provided further, that such sale or transfer shall be made within sixty (60)
days following the expiration of said fifteen (15) day period.
Section 2. Any sale or transfer, or purported sale or transfer, of the
shares of this corporation shall be null and void unless the terms, conditions
and provisions of this Article VII of this corporation's by-laws are strictly
observed and followed.
<PAGE>
WRITTEN ASSENT OF SHAREHOLDERS OF
MTS, INCORPORATED
TO AMENDMENTS OF BY-LAWS
The undersigned, each holding the number of shares of said corporation
entitled to vote herein below indicated after his name, and constituting, in the
aggregate, shareholders of said corporation entitled to exercise a majority of
the voting power, do hereby assent to the amendment of the by-laws of said
corporation and do hereby amend the by-laws of said corporation as follows:
1. Section 2 of Article II of the by-laws of said corporation is hereby
amended to read as follows:
ARTICLE II
Meetings of Shareholders
"Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall
be held on the last Wednesday of May of each year at 10:00 A.M., provided,
however, that should said day fall upon a legal holiday, then any such annual
meeting of shareholders shall be held at the same time and place on the next
day thereafter ensuing which is a full business day. At such meetings
directors shall be elected, reports of the affairs of the corporation shall
be considered, and any other business may be transacted which is within the
powers of the shareholders.
"Written notice of each annual meeting shall be given to each shareholder
entitled to vote, either personally or by mail or other means of written
communication, charges prepaid, addressed to such shareholder at his address
appearing on the books of the corporation or given by him to the corporation for
the purpose of notice. If a shareholder gives no address, or other means of
written communication addressed to the place where the principal office of the
corporation is situated, or if published at least once in some newspaper of
general circulation in the county in which said office is located. All such
notices shall be sent to each shareholder entitled thereto not less than SEVEN
days before each annual
<PAGE>
meeting. Such notices shall specify the place, the day and the hour of such
meeting and shall state such other matters, if any, as may be expressly
required by statute."
2. Section 7 of Article III of the by-laws of said corporation, is hereby
amended to read as follows:
ARTICLE III
DIRECTORS
"Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the
board of directors shall be held without call on the last Wednesday of each
month at 10:00 P.M., provided, however, should said day fall upon a legal
holiday, then said meeting shall be held at the same time on the next day
thereafter ensuing which is a full business day. Notice of all such regular
meetings of the board of directors is hereby dispensed with."
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has hereunto signed his
name and following his name the date of signing and the number of shares of
said corporation entitled to vote held by him of record on said date.
NAME DATE NUMBER OF SHARES
- ---- ---- ----------------
/s/ Russell M. Solomon Sept 16, 1974 500
- ----------------------------
RUSSELL M. SOLOMON
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting secretary of MTS,
INCORPORATED, a California corporation: and,
2. That the foregoing by-laws, comprising 14 pages, together with the
Written Assent of Shareholders of MTS, INCORPORATED to Amendment of By-Laws,
comprised of 2 pages, constitute the By-Laws of said corporation as duly adopted
at a meeting of the Board of Directors thereof, duly held on October 14, 1960,
and as amended by the shareholders of said corporation by written assent of all
of the shareholders thereof on September 16, 1974.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of this corporation this 16 day of September, 1974.
/s/ Walter S. Martin
----------------------------------
WALTER S. MARTIN, Secretary
<PAGE>
CERTIFICATION OF BY-LAWS
I, WALTER S. MARTIN, Secretary of MTS, Incorporated, a California
Corporation (herein called the "Company"), do hereby certify that attached
hereto as exhibit "A" is a true and correct copy of the By-Laws of the Company
which were duly adopted, are in full force and effect on the date hereof, and
have been in effect since adopted on October 14, 1960 and amended on September
16, 1974. On or about October 1, 1985 a notation was made opposite Section 1 of
the By-Laws as contemplated therein changing the principal office of the
corporation to 2500 Del Monte Street, West Sacramento, CA 95691.
Dated this 13th day of April, 1994.
----------
/s/ Walter S. Martin
----------------------------------
WALTER S. MARTIN, Secretary of
MTS, Incorporated
<PAGE>
Exhibit 10.2
JAPANESE SECURITY AGREEMENT
THIS AGREEMENT, made and entered into this 23rd day of April, 1998 by
and between Tower Records Kabushiki Kaisha, a Japanese corporation having its
principal office at 15-9, Minami Shinagawa 2-chome, Shinagawa-ku, Tokyo,
Japan ("TRKK"), and The Chase Manhattan Bank, a New York banking corporation
("Chase"), as collateral agent (the "Collateral Agent") for the Secured
Parties (as defined below).
WITNESSETH:
WHEREAS, a Credit Agreement dated as of April 23, 1998 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement")
has been entered into by and among MTS, Incorporated, a California
corporation ("MTS"), TRKK (MTS and TRKK being hereinafter collectively
referred to as the "Borrowers"), the lenders from time to time party thereto
(the "Lenders") and Chase, as administrative agent for the Lenders;
WHEREAS, a Guarantee Agreement dated as of April 23, 1998 (as amended,
supplemented or otherwise modified from time to time, the "Guarantee
Agreement") has been entered into by and among MTS, the other Guarantors
named therein and the Collateral Agent;
WHEREAS, the Lenders have agreed to make Loans to the Borrowers upon
the terms and subject to the conditions set forth in the Credit Agreement,
and each of the Guarantors has agreed to guarantee, among other things, all
the obligations of the Borrowers under the Credit Agreement; and
WHEREAS, the obligations of the Lenders to make Loans are conditional
upon, among other things, the execution and delivery by TRKK of a security
agreement in the form hereof to secure the Obligations (as defined below).
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
-2-
ARTICLE I
DEFINITIONS
SECTION 1. DEFINITION OF CERTAIN TERMS USED HEREIN
As used herein, the following terms shall have the following meanings:
"ACCOUNTS RECEIVABLE" means the accounts receivable set forth in
Schedule III hereto.
"DESIGNATED LOCATIONS" means the locations set forth in Schedule II
hereto, provided that TRKK hereby represents and warrants that, as of the
date hereof, the locations set forth in Schedule II hereto constitute all
locations at which any compact discs and other goods of TRKK are located, and
provided further that if TRKK shall, after the date hereof, locate any
compact discs or other goods at any location other than a Designated Location
set forth in such Schedule II, TRKK shall forthwith notify in writing the
Collateral Agent thereof, and such location shall henceforth constitute a
Designated Location for all purposes of this Agreement.
"EVENT OF DEFAULT" means any Event of Default as defined in Section
7.01 of the Credit Agreement.
"INVENTORY" means the goods set forth in Schedule I hereto.
"JAPANESE LOANS" means any and all loans made by the Lenders to TRKK
pursuant to the Credit Agreement.
"OBLIGATIONS" means (a) the due and punctual payment of (i) the
principal of and interest (including interest accruing during the pendency of
any bankruptcy, insolvency, receivership or other similar proceeding,
regardless of whether allowed or allowable in such proceeding) on the
Japanese Loans, when and as due, whether at maturity, by acceleration, upon
one or more dates set for prepayment or otherwise, and (ii) all other
monetary obligations, including fees, costs, expenses and indemnities,
whether primary, secondary, direct, contingent, fixed or otherwise (including
monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding, regardless of whether
allowed or allowable in such proceeding), of TRKK to the Secured Parties under
the Credit Agreement, the Guarantee Agreement and the other Loan
<PAGE>
-3-
Documents and (b) all obligations of TRKK, monetary or otherwise, under each
Hedging Agreement entered into to fix or limit interest rate or exchange rate
risk associated with the Japanese Loans under the Credit Agreement with a
counterparty that was a Lender at the time such Hedging Agreement was entered
into, but only if such Lender and TRKK expressly agree that such obligations
referred to in (b) above shall constitute "Obligations".
"SECURED PARTIES" means (a) the Lenders, (b) the Administrative Agent,
(c) the Collateral Agent, (d) each counterparty to a Hedging Agreement
entered into with any Borrower if such counterparty was a Lender at the time
the Hedging Agreement was entered into, (e) the beneficiaries of each
indemnification obligation undertaken by TRKK under any Loan Document and (f)
the successors and assignees of each of the foregoing.
Capitalized terms used herein without definition shall have the
meanings assigned thereto in the Credit Agreement.
ARTICLE II
ASSIGNMENT OF INVENTORY AS SECURITY
SECTION 2. ASSIGNMENT OF INVENTORY
2.1 TRKK hereby assigns to the Collateral Agent and its successors
and assignees, for the ratable benefit of the Secured Parties, all Inventory
which is currently located at the Designated Locations, as security (JOHTO
TAMPO) for the payment in full of the present and future Obligations. TRKK
hereby delivers all Inventory currently located at the Designated Locations
to the Collateral Agent by way of SENYU KAITEI within the meaning of Article
183 of the Civil Code of Japan.
2.2 All goods henceforth placed in each Designated Location shall,
forthwith upon such placement, be automatically added to the Inventory and
assigned by TRKK to the Collateral Agent and its successors and assignees,
for the ratable benefit of the Secured Parties, as security (JOHTO TAMPO) for
the payment or performance, as the case may be, in full of the present and
future Obligations, without any action to be taken by either TRKK or the
Collateral Agent. Thereupon, such goods shall be deemed to have been
delivered by TRKK to the Collateral Agent by way of SENYU KAITEI within the
meaning of Section 183 of the Civil Code of Japan.
2.3 For the purpose of creation of security (JOHTO TAMPO) provided
in Sections
<PAGE>
-4-
2.1 and 2.2 hereof, title to the Inventory shall pass from TRKK to the
Collateral Agent and its successors and assignees, for the ratable benefit of
the Secured Parties, forthwith upon assignment thereof pursuant to Section
2.1 or 2.2 hereof, not only VIS-A-VIS third parties but also as between TRKK
and the Collateral Agent.
2.4 TRKK hereby warrants and covenants that the Inventory is, and
will be, free from any and all lien, pledge, mortgage or other encumbrance
which may be prejudicial to the interests of the Secured Parties subject only
to Liens permitted pursuant to Section 6.02 of the Credit Agreement.
SECTION 3. POSSESSION AND MANAGEMENT OF INVENTORY
TRKK, on behalf of the Collateral Agent, shall retain possession of
the Inventory assigned by it to the Collateral Agent as security (JOHTO
TAMPO) hereunder, and shall hold such Inventory in custody with the care of a
good manager.
SECTION 4. DISPOSITION OF INVENTORY
4.1 TRKK shall not sell, transfer, process, lease or otherwise
dispose of any Inventory, except as permitted under Section 4.2 hereof.
4.2 TRKK may sell, transfer, process, lease or otherwise dispose of
the Inventory held by it in the ordinary course of its business; provided,
however, that upon the occurrence of any Event of Default, the Collateral
Agent may prohibit such disposition by TRKK by giving a written notice to
that effect to TRKK.
SECTION 5. INDICATION
TRKK shall place at all the Designated Locations, and/or affix to all
the Inventory, such signs, labels or other appropriate indications as may be
instructed by the Collateral Agent, stating, so as to be clearly apparent and
understandable to any third party viewing such signs, labels or other
indications, that the Inventory has been assigned as security to the
Collateral Agent; provided, however, that such signs, labels or other
indications placed at TRKK's shops shall not be visible to any retail
customers of TRKK or to other tenants of the buildings where its shops are
located.
<PAGE>
-5-
SECTION 6. REPORTS AND INSPECTION CONCERNING INVENTORY
6.1 TRKK shall maintain daily records of the types, amounts and
quantities of all goods added to or removed from the Inventory at each of the
Designated Locations.
6.2 On or prior to the 10th day of each month, TRKK shall submit to
the Collateral Agent copies of the records showing the additions to and
removals from the Inventory held by TRKK during the immediately preceding
month, together with a report setting forth a breakdown of the Inventory held
by it at each of the Designated Locations as of the end of such immediately
preceding month.
6.3 The Collateral Agent and its directors, officers, employees and
agents shall have the right at any time (i) to have access to any Designated
Location to inspect the Inventory and (ii) to peruse, and makes copies of,
the records referred to in Section 6.2 hereof and the books and accounts of
TRKK for the purpose of verification of the status and condition of the
Inventory. TRKK shall extend full cooperation to the Collateral Agent and
its directors, officers, employees and agents in exercising their rights
under this Section 6.3. The Collateral Agent shall have the right to share
any information it gains from such inspection with any Secured Party (it
being understood that any such information shall be deemed to be
AInformation@ subject to the provisions of Section 9.12 of the Credit
Agreement).
SECTION 7. INSURANCE
7.1 TRKK shall, at its expense, maintain, with financially sound
and reputable insurance companies, insurance on the Inventory in such amounts
and against such risks as are customarily maintained by companies engaged in
the same or similar businesses operating in the same or similar locations.
7.2 TRKK shall deliver to the Collateral Agent the insurance policy
in respect of its insurance as provided under Section 7.1 above and shall
take all steps necessary for the Collateral Agent to receive the full amount
of the insurance money receivable under such insurance.
7.3 If TRKK fails to enter into or continue or renew an agreement
relating to insurance as provided under Section 7.1 above (an "Insurance
Agreement"), the Collateral Agent, on behalf of TRKK, shall be entitled to
enter into or continue or renew such Insurance Agreement on behalf of TRKK.
In such case, TRKK shall reimburse the
<PAGE>
-6-
Collateral Agent for all insurance premiums and other costs and expenses
incurred by the Collateral Agent in connection therewith, together with a
delinquency charge thereon at a rate of 14% per annum (computed on the basis
of a 365-day year) for the period from (and including) the date of
disbursement thereof by the Collateral Agent to (and including) the date of
reimbursement thereof by TRKK to the Collateral Agent.
7.4 TRKK shall comply with such instructions as may be given by the
Collateral Agent in connection with any continuance, renewal or amendment of,
or change in, any Insurance Agreement of TRKK, and in connection with the
treatment of any loss of or damage to the Inventory.
7.5 The Collateral Agent shall be entitled to apply any insurance
money received by it under the Insurance Agreements to the payment of any
Obligations, regardless of the due date thereof.
SECTION 8. COMPENSATION
If any goods contained in the Inventory cause damage to any third
party, TRKK shall be responsible for resolving any dispute arising therefrom
and pay any required compensation in connection therewith.
SECTION 9. COSTS AND EXPENSES RELATING TO INVENTORY
All costs, expenses, taxes and charges for storage, maintenance,
management, transfer and repair of the Inventory shall be for the account of,
and borne by, TRKK.
SECTION 10. REMEDY
10.1 Upon the occurrence of any Event of Default, the Collateral
Agent shall be free to dispose of the Inventory in such manner and order, on
such schedule and at such price as may be reasonably determined by it, and
without taking any legal action against TRKK. TRKK shall not be entitled to
make any objection to the manner, schedule or price of, or other matters
pertaining to, such disposition by the Collateral Agent.
10.2 The Collateral Agent shall apply all amounts acquired by it
through the disposal of the Inventory under Section 10.1 hereof, less all
costs and expenses of such disposal, to the payment of all or part of the
Obligations in such manner and order, and on such schedule, as may be
determined by the Collateral Agent in its sole discretion.
<PAGE>
-7-
10.3 Any surplus remaining after the application of proceeds of the
disposition of the Inventory under Section 10.2 hereof shall be paid over by
the Collateral Agent to TRKK, its successors or assigns.
ARTICLE III
ASSIGNMENT OF ACCOUNTS RECEIVABLE AS SECURITY
SECTION 11. AGREEMENT OF ASSIGNMENT OF ACCOUNTS RECEIVABLE
TRKK hereby agrees that, forthwith upon request by the Collateral
Agent, all the Accounts Receivable which are currently held, or will in the
future be acquired, by TRKK shall automatically be assigned to the Collateral
Agent and its successors and assignees, for the ratable benefit of the
Secured Parties, as security (JOHTO TAMPO) for the payment in full of the
present and future Obligations, without any action to be taken by either TRKK
or the Collateral Agent.
SECTION 12. REPORTS AND INSPECTION CONCERNING ACCOUNTS RECEIVABLE
12.1 On or prior to the 10th day of each month, TRKK shall submit to
the Collateral Agent a report, substantially in the form attached as Schedule
IV hereto, setting forth a breakdown of the Accounts Receivable held by it at
the end of the immediately preceding month. TRKK shall also promptly submit
such report to the Collateral Agent at any time, if so requested by the
Collateral Agent. In addition, TRKK shall promptly submit to the Collateral
Agent such other documents and materials with respect to the Accounts
Receivable as may be requested by the Collateral Agent.
12.2 The Collateral Agent and its directors, officers, employees and
agents shall have the right at any time, during ordinary business hours, to
have access to, and to peruse and make copies of, the Pertinent Documents (as
defined below) and the books and accounts of TRKK for the purpose of
verification of the status and condition of its Accounts Receivable. TRKK
shall fully cooperate with the Collateral Agent and its directors, officers,
employers and agents in connection with the foregoing.
SECTION 13. NOTICE OR CONSENT
13.1 Forthwith upon receipt by TRKK of a request from the Collateral
Agent under Section 11 hereof, TRKK shall (i) give notice of the assignment
of the Accounts
<PAGE>
-8-
Receivable to the debtors thereof or (ii) obtain consents without objection
from the debtors thereof, in either such case expressed in an instrument
certified as to date (KAKUTEI HIZUKE). In such case, TRKK shall promptly
submit to the Collateral Agent (x) documents verifying the giving or receipt
of all such notices or consents, (y) the executed originals of the
agreements, contracts or other instruments under which such Accounts
Receivable were created and (z) such other documents as may be legally or
practically necessary for the Collateral Agent to collect all amounts payable
under such Accounts Receivable (such agreements, contracts, instruments and
documents being hereinafter referred to as the "Pertinent Documents").
13.2 Notwithstanding the provisions of Section 13.1 hereof, the
Collateral Agent may, whenever it deems necessary, require TRKK to deliver
the Pertinent Documents to it forthwith.
13.3 As soon as practicable, but in any event within 30 days, after
execution of this Agreement, TRKK shall deposit with the Collateral Agent
forms of notice of assignment of the Accounts Receivable from TRKK to the
debtors thereof (executed and sealed by TRKK) substantially in the form
attached hereto (together with an English translation thereof) as Schedule V
and in such number as may be designated by the Collateral Agent. If the
Collateral Agent deems it necessary for the protection of the interests of
the Secured Parties due to TRKK's financial difficulties, it may fill in all
pertinent matters on such deposited forms on behalf of TRKK and give notices
of assignment of the Accounts Receivable under the name of TRKK to debtors
using the completed forms, and may also, as agent of TRKK, give notices of
assignment of the Accounts Receivable to the debtors thereof in any other
manner permitted by law.
13.4 Without prejudice to the generality of the provisions of
Section 5.09 (c) and (d) of the Credit Agreement, in the event that the new
Japanese law, the bill of which was entitled "the Bill of Special Rules of
the Civil Code regarding Method of Perfection of Assignment of Credit" and
approved by the Cabinet meeting and submitted to the Diet in 1998, comes into
effect as a new law, TRKK shall take any and all steps deemed necessary or
advisable by the Collateral Agent and/or the Lenders to perfect the security
interests created hereunder in accordance with such new law.
SECTION 14. INFRINGEMENT
14.1 TRKK shall not take any action with respect to the Accounts
Receivable which may be prejudicial to the interests of the Secured Parties,
including, without
<PAGE>
-9-
limitation, assignment, sale or other disposition of the Accounts Receivable
(other than that contemplated hereby) and the creation of any lien, pledge,
mortgage or other encumbrance on the Accounts Receivable for the benefit of
any third party.
14.2 TRKK shall give notice to the Collateral Agent forthwith upon
the occurrence of any event which causes, or may cause, adverse effects to
the Accounts Receivable.
SECTION 15. CONSENT FROM GUARANTOR
Forthwith upon request by the Collateral Agent to TRKK, TRKK shall
obtain from each of the guarantors (if any) of the Accounts Receivable a
consent to the assignment (or TRKK's agreement to the assignment) of the
Accounts Receivable hereunder.
SECTION 16. CHANGE IN ACCOUNTS RECEIVABLE
If there has been any change in the address, trade name or the
representatives of the debtor or the guarantor of any Account Receivable held
by TRKK, TRKK shall immediately notify the Collateral Agent thereof.
SECTION 17. ADMINISTRATION AND COLLECTION OF ACCOUNTS RECEIVABLE
17.1 The Collateral Agent hereby entrusts TRKK with, and TRKK hereby
undertakes, the administration and collection of the Accounts Receivable
assigned by TRKK to the Collateral Agent hereunder. TRKK shall, at its
expense and free of charge, administer and collect the Accounts Receivable
with the care of a good manager; provided, however, that TRKK shall be free
to use any money collected by it under the Accounts Receivable for its own
business until the occurrence of any Event of Default, whereupon TRKK shall
immediately transfer all the collected moneys held by it to the Collateral
Agent.
17.2 Forthwith upon the occurrence of any Event of Default, TRKK
shall submit to the Collateral Agent a report setting forth the status of the
collection of the Accounts Receivable which have been entrusted by the
Collateral Agent to TRKK under Section 17.1 hereof. TRKK shall comply with
such instructions as may be given by the Collateral Agent in connection with
the administration or collection of the Accounts Receivable.
17.3 Upon the occurrence of any Event of Default, the Collateral
Agent may
<PAGE>
-10-
revoke its entrustment to TRKK under Section 17.1 hereof. Forthwith upon
revocation of such entrustment, TRKK shall deliver to the Collateral Agent
all the Pertinent Documents, and shall notify the debtors of the Accounts
Receivable to that effect. TRKK shall, upon request by the Collateral Agent,
give assistance to it, as may be necessary for its collection of the Accounts
Receivable.
17.4 Upon collection of any Account Receivable by the Collateral
Agent, or upon receipt by the Collateral Agent of any amount collected by
TRKK under Section 17.1 hereof, the Collateral Agent shall apply the amount
so collected or received by it to the payment of all or part of the
Obligations in such manner and order, and on such schedule, as may be
determined by the Collateral Agent in its sole discretion.
SECTION 18. DISPOSITION OF ACCOUNTS RECEIVABLE
Upon the occurrence of any Event of Default, the Collateral Agent may
sell, transfer or otherwise dispose of any Accounts Receivable, and TRKK
shall not be entitled to make any objection to such disposition. The
provisions of Section 17.4 hereof shall be applicable to the proceeds of any
such disposition.
SECTION 19. TRANSFER OF SECURITY
If any Account Receivable held by TRKK is secured by a pledge,
mortgage (including, without limitation, NETEITO) or other charge, TRKK
shall, upon request by the Collateral Agent, take any and all action
necessary for perfection of such pledge, mortgage or other charge VIS-A-VIS
third parties (including, without limitation, application for registration of
the assignment of such pledge, mortgage or other charge to the Collateral
Agent).
ARTICLE IV
MISCELLANEOUS
SECTION 20. NOTICE
If any of the following events occurs with respect to TRKK, TRKK shall
forthwith notify the Collateral Agent thereof:
(i) transfer outside the Designated Locations, destruction, loss or
theft of a
<PAGE>
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material portion of the Inventory;
(ii) assertion by any third party to TRKK of title or other rights
relating to the Inventory or the Accounts Receivable; or
(iii) filing of any petition for attachment, provisional attachment,
provisional disposition or other enforcement against the Inventory or the
Accounts Receivable.
SECTION 21. COSTS AND EXPENSE
Except as otherwise provided herein, all reasonable costs and expenses
relating hereto, including, without limitation, costs and expenses for
execution hereof and performance of obligations hereunder, and all reasonable
costs and expenses for resolution of disputes relating to the Inventory or
the Accounts Receivable to which the Collateral Agent is involved, shall be
for the account of, and borne by, TRKK.
SECTION 22. CONFIDENTIALITY
Neither party hereto may disclose to a third party any information
regarding the other party's business which may be acquired by the first party
under this Agreement, except that such information may be disclosed (a) to
its directors, officers, employees and agents, including accountants, legal
counsel and other advisors or (b) to the Secured Parties by the Collateral
Agent or (c) with the written consent of such other party or (d) to the
extent such information becomes (i) publicly available other than as a result
of a breach of this Section or (ii) available to the first party on a
nonconfidential basis from a source other than such other party or (e) if the
Collateral Agent or a Secured Party is required to disclose such information
by any competent governmental authority or agency thereof pursuant to any
applicable law or regulation or administrative guidance.
SECTION 23. CONCLUSION
23.1 This Agreement shall continue in full force and effect until
all the present and future Obligations have been paid or performed, as the
case may be, in full (other than inchoate indemnity Obligations), and the
Commitments have terminated whereupon this Agreement shall terminate, and
title to the Inventory and the Accounts Receivable (if assigned to the
Collateral Agent) shall revert from the Collateral Agent to TRKK.
23.2 If at any time when no Default shall have occurred and be
continuing TRKK
<PAGE>
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shall have outstanding any senior, unsecured, non-credit enhanced long-term
Indebtedness for borrowed money that shall be rated BBB- or better by
Standard & Poor's Ratings Group and Baa3 or better by Moody's Investors
Service, Inc., the security interests granted hereby shall be automatically
released.
SECTION 24. ENTIRE AGREEMENT
24.1 This Agreement constitutes the entire agreement between the
parties hereto relating to the subject matter hereof and shall supersede all
previous communications, oral or written, between the parties hereto with
respect to the subject matter hereof.
24.2 If there is in effect at any time an Agreement on Bank
Transactions between TRKK and any of the Secured Parties, the provisions of
such Agreement on Bank Transactions shall not apply to any Japanese Loan or
other transaction contemplated by this Agreement, nor shall they apply to any
security established by TRKK hereunder in favor of the Secured Parties,
notwithstanding anything to the contrary contained in such Agreement on Bank
Transactions.
SECTION 25. AMENDMENT
This Agreement may not be amended or supplemented except by written
agreement executed by the parties hereto.
SECTION 26. WAIVER
No waiver of any provision, right or remedy under this Agreement on
one or more occasions shall constitute a waiver of the same or any other
provision, right or remedy under this Agreement on any other occasion.
<PAGE>
-13-
SECTION 27. GOVERNING LAW AND JURISDICTION
27.1 This Agreement shall be governed by, and construed in
accordance with, the laws of Japan.
27.2 Any legal action against TRKK relating to this Agreement may be
instituted in the Tokyo District Court, to the jurisdiction of which TRKK
hereby expressly and irrevocably agrees to submit. Such action may also be
instituted in any other competent court.
<PAGE>
-13-
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
TOWER RECORDS KABUSHIKI KAISHA
by [SIG]
---------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
as Collateral Agent
by /s/ Marian N. Schulman
---------------------------
Name: Marian N. Schulman
Title: Vice President
<PAGE>
Schedule I
INVENTORY
Compact discs (CDs) and all other goods located at the shops, warehouses,
offices and any other space in the Designated Locations.
<PAGE>
Schedule II
Designated Locations
<TABLE>
<CAPTION>
Name Address
- ---------------------------- ----------------------------
<S> <C>
Tower Records Sapporo Privy Privy 2F, 3F
Nishi 2-chome, Minami Nijo, Chuo-ku, Sapporo,
Hokkaido, 060-0062
Tower Records Shibuya 1-22-14, Jinnan, Shibuya-ku, Tokyo, 150-0041
Tower Records Yokohama Casa Montomachi 2F,
1-1, Ishikawa-cho, Naka-ku, Yokohama, Kanagawa,
231-0868
Tower Records Sendai Forus 8F,
3-11-15, Ichiban-cho, Aoba-ku, Sendai, Miyagi,
980-0811
Tower Records Kyoto Kawarmachi Vivre 6F,
595-1, Takoyakushi, Nishiiru Uradera-cho,
Kawarmachi-dori, Nakakyo-ku, Kyoto, 604-8041
Tower Records Hiroshima Hiroshima Parco 10F
10-1, Hon Dori, Naka-ku, Hiroshima, 730-0035
Tower Records Ikebukuro Ikebukuro P'Parco 5F, 6F
1-50-35, Higashi Ikebukuro, Toshima-ku, Tokyo,
170-0013
Tower Records Nagoya Parco Nagoya Parco East 6F,
3-29-1, Sakae, Naka-ku, Nagoya, Aichi, 460-0008
Tower Records Hachioji Sigma Game Fantasia Bldg. 5F
11-3, Azuma-cho, Hachioji, Tokyo, 192-0082
Tower Records Shinsaibashi 2-9-22, Nishi Shinsaibashi, Chuo-ku, Osaka,
542-0086
Tower Records Himeji Himeji Forus West 5F,
100 Higashi Ekimae-cho, Himeji, Hyogo, 670-0926
Tower Records Kawasaki Cine Citta Kawasaki 1F,
1-15, Ogawa-cho, Kawasaki-ku, Kawasaki,
Kanagawa, 210-0023
Tower Records Niigata Kamino Furumachi 5F,
7-938, Furumachi-dori, Niigata, 951-8063
Tower Records Shinjuku Lumine Shinjuku Lumine 2 6F,
3-38-2, Shinjuku, Shinjuku-ku, Tokyo 160-0022
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Address
- ------------------------ ---------------------------------------------
<S> <C>
Tower Records Chiba Chiba Parco 7F,
2-2-2, Chuo, Chuo-ku, Chiba, 260-0013
Tower Records Fukuoka Shoppers Fukuoka 7F,
4-4-11, Tenjin, Chuo-ku, Fukuoka 810-0001
Tower Records Kobe Sannomiya Vivre 6P,
1-5-26, Sannomiya-cho, Chuo-ku, Kobe, Hyogo,
650-0021
Tower Records Shinjuku East Musashino-Kan 2F,
3-27-10, Shinjuku, Shinjuku-ku, Tokyo 160-0022
Tower Records Hamamatsu Act Plaza 4F,
111-2, Itaya-cho, Hamamatsu, Shizuoka, 430-7704
Tower Records Kichijoji May's One Bldg. 2F, 3F,
2-12-12, Kichijoji Honcho, Musashino, Tokyo
180-0004
Tower Records Nagoya Chubu Kintetsu Dept. Store 9F,
Kintetsu Pas, se 1-2-2, Naeki, Nakamura-ku, Nagoya, Aichi, 450-0002
Tower Records Okayama Okayama Opa 4F,
6-30, Hon-cho, Okayama, 700-0901
Tower Records Nagano K's Square 4F, 5F,
1-3-6, Minami Chitose-cho, Nagano, 380-0822
Tower Records Kokura Lafore Harajuku Kokura 6F,
2-14-5, Asano, Kokura Kita-ku, Kitakyushu Fukuoka,
802-0001
Tower Records Kumamoto The Fine Bldg. 3F, 4F,
4-12, Tedorihoncho, Kumamoto, 860-0808
Tower Records Umeda Osaka Maru Bldg. B1,
1-9-20, Umeda, Kita-ku, Osaka, 530-0001
Tower Records Kanazawa Kanazawa Temisu, 4F,
1-4-20, Katamachi, Kanazawa, Ishikawa, 920-0981
Tower Records Naha Naha Opa 6F,
2-8-19, Matsuo, Naha, Okinawa, 900-0014
Tower Records Kagoshima Takapla 5F,
1-12, Sennichi-cho, Kagoshima, 892-0843
Tower Records Sagamiono Regaro 4F,
3498-87, Kamitsuruma, Sagamihara, Kanagawa,
228-0802
Tower Records Matsuyama Lafore Harajuku Matsuyama 4F,
2-3, Ichibancho, Matsuyama, Ehime, 790-0001
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Name Address
- ---------------------------- ---------------------------------------------
<S> <C>
Tower Records Minamikoshigaya Minamikoshigaya Opa 5F,
1-15-1, Minamikoshigaya, Koshigaya, Saitama,
343-0845
Tower Records Sapporo Pivot Pivot 7F, 8F,
Nishi 4-chome, Minami Nijo, Chuo-ku, Sapporo
Hokkaido, 060-0062
Tower Records Oita Oita Forus, B1F,
1-chome 2-7, Chuo-cho, Oita, 870-0035
Tower Records Wakayama Wakayama Vivre 8F,
1-73, Motodara-cho, Wakayama, 640-8024
Tower Records Takasaki Takasaki Vivre B1F,
46-1, Yajima-cho, Takasaki, Gunma, 370-0849
Tower Records Otsu Otsu Parco 5F,
14-30, Utsidehama, Otsu, Shiga, 520-0806
Tower Records Machida Be me Machidadaimaru 8F,
6-2-6, Haramachida, Machida, Tokyo, 194-0013
Tower Records Akita Akita Forus, B1F
4-2, Senshu Kubota-machi, Akita, 010-0874
Tower Records Utsunomiya Utsunomiya Parco 9F,
3-1-1, Baba-dori, Utsunomiya, Tochigi, 320-0026
Tower Records Fujisawa Fujisawa Opa 8F,
22-3, Minami Fujisawa, Fujisawa, Kanagawa, 251-0055
Tower Records Return Warehouse Tokyo SRC Bldg., A-5F
1-1-1 Katsujima Shinagawa-ku, Tokyo 140-0012
Tower Records Warehouse 2-15-9, Minami Shinagawa, Shinagawa-ku,
Tokyo, 140-8667
</TABLE>
3
<PAGE>
Schedule III
ACCOUNTS RECEIVABLE
GENERAL DESCRIPTION OF
ACCOUNTS RECEIVABLE: All accounts receivable arising from the business
of TRKK, including, without limitation, (i)
accounts receivable from retailers for the
wholesale by TRKK of CDs or any other goods, (ii)
accounts receivable from department stores for
services rendered by TRKK and (iii) accounts
receivable from credit companies in respect of
the sale by TRKK of CDs or any other goods.
ACCOUNTS RECEIVABLE OUTSTANDING
AS OF THE DATE OF THIS AGREEMENT:
(i) Accounts receivable from retailers for the wholesale by TRKK of
CDs and other goods for month of February 1998.
(ii) Accounts receivable for March 1998 sales at the stores payable in
April 1998.
(iii) Accounts receivable from credit companies (Visa/JCB/Diners/Amex)
in respect of the sale by TRKK of CDs and other goods for month of
March 1998.
<PAGE>
<TABLE>
<CAPTION>
(ii) Accounts receivable for March sales at the stores payable in April 1998.
---------------------------------------------------------------------------------------
TENANTO NAME STORE NAME DEPOSIT ESTIMATE (YEN)
<S> <C> <C>
---------------------------------------------------------------------------------------
Wanda SAPPORO PRIVY 22,270,524
---------------------------------------------------------------------------------------
Forus SENDAI 24,601,515
---------------------------------------------------------
HIMEJI 22,951,436
---------------------------------------------------------
OITA 23,150,386
---------------------------------------------------------
AKITA 27,313,323
---------------------------------------------------------
Forus Total 98,016,660
---------------------------------------------------------------------------------------
MYCAL KYOTO 14,072,252
---------------------------------------------------------
KOBE 37,502,082
---------------------------------------------------------
WAKAYAMA 8,031,862
---------------------------------------------------------
TAKASAKI 17,801,632
---------------------------------------------------------
MYCAL Total 77,407,828
---------------------------------------------------------------------------------------
Parco HIROSHIMA 69,471,185
---------------------------------------------------------
IKEBUKURO 87,524,315
---------------------------------------------------------
NAGOYA PARCO 117,254,822
---------------------------------------------------------
CHIBA 44,931,434
---------------------------------------------------------
OTSU 44,057,207
---------------------------------------------------------
UTSUNOMIYA 25,534,705
---------------------------------------------------------
Parco Total 388,773,668
----------------------------------------------------------------------------------------
Daisyo Kaihatsu NIGATA 11,423,514
----------------------------------------------------------------------------------------
LUMINE SHINJYUKU LUMINE 70,536,412
----------------------------------------------------------------------------------------
Daiei Leasing Company FUKUOKA 30,291,650
----------------------------------------------------------------------------------------
San-ai SHINJUKU EAST 51,112,018
----------------------------------------------------------------------------------------
ACT CITY Co. Ltd. HAMAMATSU 9,718,634
----------------------------------------------------------------------------------------
Chuba Kintetsu Hyakkaten NAGOYA KINTETSU PAS,SE 57,440,895
----------------------------------------------------------------------------------------
OPA OKAYAMA 25,456,157
---------------------------------------------------------
MINAMIKOSHIGAYA 16,134,406
---------------------------------------------------------
FUJISAWA 13,222,052
---------------------------------------------------------
NAHA 12,542,950
---------------------------------------------------------
OPA Total 67,355,564
----------------------------------------------------------------------------------------
LAFORET KOKURA 44,978,353
---------------------------------------------------------
MATSUYAMA 22,082,823
---------------------------------------------------------
LAFORET Total 1,582,962,264
----------------------------------------------------------------------------------------
Niko Niko Do KUMAMOTO 24,415,088
----------------------------------------------------------------------------------------
Osaka Maru Bldg UMEDA 93,111,446
----------------------------------------------------------------------------------------
Takashimaya Kaihatsu KAGOSHIMA 8,353,045
----------------------------------------------------------------------------------------
PIVOT SAPPORO PIVOT 34,246,524
----------------------------------------------------------------------------------------
Citu's Meito SAGAMIONO 3,112,976
----------------------------------------------------------------------------------------
Machidadaimaru MACHIDA 8,444,714
----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(iii) Accounts receivable from credit companies in respect of the sale by TRKK
of CDs and other goods for month of March 1998.
Y71,890,728
<TABLE>
<CAPTION>
CREDIT CARD COMPANY ADDRESS
Customer Name Address
<S> <C>
1 Sumitomo Credit Service 1-15-10 Shimura Itabashi-ku,
(Visa/Master) Tokyo, 174-0056
2 JCB Card 1-6 Surugadai Chiyoda-ku,
Tokyo 101-0062
3 Diners Club 1-13-7 Shibuya Shibuya-ku,
Tokyo 150-0002
4 American Express 4-30-6 Ogikubo Suginami-ku,
Tokyo 167-0051
</TABLE>
<PAGE>
Schedule IV
FORM OF REPORT
MONTH:
ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
Outstanding
Amount of
Brief Account Due Date for
Date of Accrual Name and Description of Receivable at Payment of
of Account Address of Account the End of the Account
Receivable Debtor Receivable Relevant Month Receivable
---------------- ---------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
Schedule V
NOTICE
Ladies and gentleman:
We hereby notify you that we have assigned as security to The Chase
Manhattan Bank our accounts receivable from you as specified in the following
list as of _________________.
List of Accounts Receivable
Creditor:
Debtor:
Amount:
Date of Accrual:
Due Date for Payment:
Kind:
Date:_____________________
Vey Truly Yours,
[Signature and seal]
<PAGE>
EXHIBIT 10.3
SECURITY AGREEMENT dated as of April 23, 1998 among MTS,
Incorporated, a California corporation ("MTS"), each Material Subsidiary
of MTS (other than Tower Records Kabushiki Kaisha and its Material
Subsidiaries and any other Non-US Subsidiaries of MTS), if any, listed
on Schedule I hereto (each such subsidiary being individually called a
"Subsidiary Grantor" and collectively, the "Subsidiary Grantors"; the
Subsidiary Grantors and MTS are referred to collectively herein as the
"Grantors") and THE CHASE MANHATTAN BANK, a New York banking corporation
("Chase"), as collateral agent (the "Collateral Agent") for the Secured
Parties (as defined below).
Reference is made to the Credit Agreement dated as of April 23, 1998 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among MTS, Tower Records Kabushiki Kaisha, a Japanese
corporation ("TRKK", and together with MTS, the "Borrowers"), the lenders
from time to time party thereto (the "Lenders") and the Chase Manhattan Bank,
as administrative agent for the Lenders. Capitalized terms used and not
defined herein shall have the meanings assigned to them in the Credit
Agreement.
The Lenders have agreed to make Loans to the Borrowers upon the terms
and subject to the conditions set forth in the Credit Agreement. Each of the
Guarantors has agreed to guarantee, among other things, all the obligations
of the Borrowers under the Credit Agreement. The obligations of the Lenders
to make Loans are conditioned upon, among other things, the execution and
delivery by the Grantors of a Security Agreement in the form hereof to secure
the Obligations (as defined below). In order to induce the Lenders to make
Loans, the Grantors are willing to execute and deliver this Agreement.
Accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITION OF CERTAIN TERMS USED HEREIN. As used herein,
the following terms shall have the following meanings:
"ACCOUNT DEBTOR" means any person who is or may become obligated to any
Grantor under, with respect to or on account of an Account.
"ACCOUNTS" means any and all right, title and interest of any Grantor to
payment for goods and services sold or leased, including any such right
evidenced by chattel paper, whether due or to become due, whether or not it
has been earned by performance, and whether now or hereafter acquired or
arising in
<PAGE>
2
the future, including accounts receivable from Affiliates of the Grantors.
"ACCOUNTS RECEIVABLE" means all Accounts and all right, title and
interest in any returned goods, together with all rights, titles, securities
and guarantees with respect thereto, including any rights to stoppage in
transit, replevin, reclamation and resales, and all related security
interests, liens and pledges, whether voluntary or involuntary, in each case
whether now existing or owned or hereafter arising or acquired.
"COLLATERAL" means all (a) Accounts Receivable, (b) Documents, (c)
Inventory and (d) Proceeds.
"COLLECTION DEPOSIT ACCOUNT" means a lockbox account of a Grantor
maintained for the benefit of the Secured Parties with the Collateral Agent
pursuant to Article V or with a Sub-Agent pursuant to a Lockbox Agreement.
"CREDIT AGREEMENT" shall have the meaning assigned to such term in the
preliminary statement of this Agreement.
"DOCUMENTS" means all instruments, files, records, ledger sheets and
documents covering or relating to any of the Collateral.
"INVENTORY" means all goods of any Grantor, whether now owned or
hereafter acquired, held for sale or lease, or furnished or to be furnished
by any Grantor under contracts of service, or consumed in any Grantor's
business, including raw materials, intermediates, work in process, packaging
materials, finished goods, semi-finished inventory, scrap inventory,
manufacturing supplies and spare parts, and all such goods that have been
returned to or repossessed by or on behalf of any Grantor.
"LOCKBOX AGREEMENT" means a Lockbox Agreement substantially in the form
of Annex 2 hereto among a Grantor, the Collateral Agent and a Sub-Agent or
such other form as may be agreed upon by a Grantor, the Collateral Agent and
a Sub-Agent.
"OBLIGATIONS" means (a) the due and punctual payment of (i) the
principal of and interest (including interest accruing during the pendency of
any bankruptcy, insolvency, receivership or other similar proceeding,
regardless of whether allowed or allowable in such proceeding) on the Loans,
when and as due, whether at maturity, by acceleration, upon one or more dates
set for prepayment or otherwise, and (ii) all other monetary obligations,
including fees, costs, expenses and indemnities, whether primary, secondary,
direct, contingent, fixed or otherwise (including monetary obligations
incurred during the pendency of any bankruptcy, insolvency, receivership or
other similar proceeding, regardless of whether allowed or allowable in such
proceeding), of the Loan Parties to the Secured Parties under the Credit
Agreement, the Guarantee Agreement and the other Loan Documents and (b) all
obligations of the Loan Parties, monetary or otherwise, under each Hedging
Agreement entered into to fix or limit interest rate or exchange rate risk
associated with the
<PAGE>
3
Loans under the Credit Agreement with a counterparty that was a Lender at the
time such Hedging Agreement was entered into, but only if such Lender and
such Loan Parties expressly agree that such obligations shall constitute
"Obligations".
"PERFECTION CERTIFICATE" shall mean a certificate substantially in the
form of Exhibit F to the Credit Agreement, completed and supplemented with
the schedules and attachments contemplated thereby, and duly executed by a
Chief Financial Officer of the Borrowers' Agent.
"PROCEEDS" shall mean any consideration received from the sale,
exchange, license, lease or other disposition of any asset or property that
constitutes Collateral, any value received as a consequence of the possession
of any Collateral and any payment received from any insurer or other person
or entity as a result of the destruction, loss, theft, damage or other
involuntary conversion of whatever nature of any asset or property which
constitutes Collateral, and shall include (a) all cash and negotiable
instruments received by or held on behalf of the Collateral Agent in
connection with any Collection Deposit Accounts and (b) any and all other
amounts from time to time paid or payable under or in connection with any of
the Collateral.
"SECURED PARTIES" means (a) the Lenders, (b) the Administrative Agent,
(c) the Collateral Agent, (d) each counterparty to a Hedging Agreement
entered into with any Borrower if such counterparty was a Lender at the time
the Hedging Agreement was entered into, (e) the beneficiaries of each
indemnification obligation undertaken by any Grantor under any Loan Document
and (f) the successors and assigns of each of the foregoing.
"SECURITY INTEREST" shall have the meaning assigned to such term in
Section 2.01.
"SUB-AGENT" means a financial institution which shall have delivered to
the Collateral Agent an executed Lockbox and Depository Agreement.
SECTION 1.03. RULES OF INTERPRETATION. The rules of interpretation
specified in Section 1.03 of the Credit Agreement shall be applicable to this
Agreement.
ARTICLE II
SECURITY INTEREST
SECTION 2.01. SECURITY INTEREST. As security for the payment or
performance, as the case may be, in full of the Obligations (other than, as
to each Subsidiary Grantor that is a Non-US Subsidiary, the applicable
Excluded Obligations), each Grantor hereby bargains, sells, conveys, assigns,
sets over, mortgages, pledges, hypothecates and transfers to the Collateral
Agent, its successors and assigns, for the ratable benefit of the Secured
Parties, and hereby grants to the Collateral Agent, its
<PAGE>
4
successors and assigns, for the ratable benefit of the Secured Parties, a
security interest in, all of such Grantor's right, title and interest in, to
and under the Collateral now or hereafter owned by such Grantor (the
"Security Interest"). Without limiting the foregoing, the Collateral Agent
is hereby authorized to file one or more financing statements, continuation
statements or other documents for the purpose of perfecting, confirming,
continuing, enforcing or protecting the Security Interest granted by each
Grantor, without the signature of any Grantor, and naming any Grantor or the
Grantors as debtors and the Collateral Agent as secured party, to the extent
permitted by law.
SECTION 2.02. NO ASSUMPTION OF LIABILITY. The Security Interest is
granted as security only and shall not subject the Collateral Agent or any
other Secured Party to, or in any way alter or modify, any obligation or
liability of any Grantor with respect to or arising out of the Collateral.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Grantors jointly and severally represent and warrant to the
Collateral Agent and the Secured Parties that:
SECTION 3.01. TITLE AND AUTHORITY. Each Grantor has good and valid
rights in and title to the Collateral with respect to which it has purported
to grant a Security Interest hereunder and has full power and authority to
grant to the Collateral Agent the Security Interest in such Collateral
pursuant hereto and to execute, deliver and perform its obligations in
accordance with the terms of this Agreement, without the consent or approval
of any other person other than any consent or approval which has been
obtained.
SECTION 3.02. FILINGS. The Perfection Certificate has been duly
prepared, completed and executed and the information set forth therein is
correct and complete. Fully executed Uniform Commercial Code financing
statements or other appropriate filings, recordings or registrations
containing a description of the Collateral have been delivered to the
Collateral Agent for filing in each governmental, municipal or other office
specified in Schedule 6 to the Perfection Certificate, which are all the
filings, recordings and registrations that are necessary to publish notice of
and protect the validity of and to establish a legal, valid and perfected
security interest in favor of the Collateral Agent (for the ratable benefit
of the Secured Parties) in respect of all Collateral in which the Security
Interest may be perfected by filing, recording or registration in the United
States (or any political subdivision thereof) and its territories and
possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the
filing of continuation statements (unless a Grantor shall change its name or
location).
<PAGE>
5
SECTION 3.03. VALIDITY OF SECURITY INTEREST. The Security Interest
constitutes (a) a legal and valid security interest in all the Collateral
securing the payment and performance of the Obligations and (b) subject to
the filings described in Section 3.02 above, a perfected security interest in
all Collateral in which a security interest may be perfected by filing,
recording or registering a financing statement or analogous document in the
United States (or any political subdivision thereof) and its territories and
possessions pursuant to the Uniform Commercial Code or other applicable law
in such jurisdictions. The Security Interest is and shall be prior to any
other Lien on any of the Collateral, other than Liens expressly permitted to
be prior to the Security Interest pursuant to Section 6.02 of the Credit
Agreement.
SECTION 3.04. ABSENCE OF OTHER LIENS. The Collateral is owned by the
Grantors free and clear of any Lien, except for Liens expressly permitted
pursuant to Section 6.02 of the Credit Agreement. The Grantor has not filed
or consented to the filing of (a) any financing statement or analogous
document under the Uniform Commercial Code or any other applicable laws
covering any Collateral or (b) any assignment in which any Grantor assigns
any Collateral or any security agreement or similar instrument covering any
Collateral with any foreign governmental, municipal or other office, which
financing statement or analogous document, assignment, security agreement or
similar instrument is still in effect, except, in each case, for Liens
expressly permitted pursuant to Section 6.02 of the Credit Agreement.
ARTICLE IV
COVENANTS
SECTION 4.01. CHANGE OF NAME; LOCATION OF COLLATERAL; RECORDS; PLACE OF
BUSINESS. (a) Each Grantor agrees promptly to notify the Collateral Agent
in writing of any change (i) in its corporate name or in any trade name used
to identify it in the conduct of its business or in the ownership of its
properties, (ii) in the location of its chief executive office, its principal
place of business, any office in which it maintains books or records relating
to Collateral owned by it or any office or facility at which Collateral owned
by it is located (including the establishment of any such new office or
facility), (iii) in its identity or corporate structure or (iv) in its
Federal Taxpayer Identification Number. Each Grantor agrees not to effect or
permit any change referred to in the preceding sentence unless all filings
have been made under the Uniform Commercial Code or otherwise that are
required in order for the Collateral Agent to continue at all times following
such change to have a valid, legal and perfected first priority security
interest in all the Collateral subject only to Liens permitted pursuant to
Section 6.02 of the Credit Agreement. Each Grantor agrees promptly to notify
the Collateral Agent if any material portion of the Collateral owned or held
by such Grantor is damaged or destroyed.
<PAGE>
6
(b) Each Grantor agrees to maintain, at its own cost and expense, such
complete and accurate records with respect to the Collateral owned by it as
is consistent with its current practices and in accordance with such prudent
and standard practices used in industries that are the same as or similar to
those in which such Grantor is engaged, but in any event to include complete
accounting records indicating all payments and proceeds received with respect
to any part of the Collateral, and, at such time or times as the Collateral
Agent may reasonably request (but, so long as no Event of Default has
occurred and is continuing, no more frequently than once per fiscal year),
promptly to prepare and deliver to the Collateral Agent a duly certified
schedule or schedules in reasonable detail showing the identity, amount and
location of any and all Collateral.
SECTION 4.02. PERIODIC CERTIFICATION. Each year, at the time of
delivery of annual financial statements with respect to the preceding fiscal
year pursuant to Section 5.01 of the Credit Agreement, if so requested by the
Collateral Agent, the Borrowers' Agent shall deliver to the Collateral Agent
a certificate executed by the chief financial officer and the chief legal
officer of the Borrowers' Agent (a) setting forth the information required
pursuant to Section 2 of the Perfection Certificate or confirming that there
has been no change in such information since the date of such certificate or
the date of the most recent certificate delivered pursuant to this Section
4.02 and (b) certifying that all Uniform Commercial Code financing statements
or other appropriate filings, recordings or registrations, including all
refilings, rerecordings and reregistrations, containing a description of the
Collateral have been filed of record in each governmental, municipal or other
appropriate office in each jurisdiction identified pursuant to clause (a)
above to the extent necessary to protect and perfect the Security Interest
for a period of not less than 18 months after the date of such certificate
(except as noted therein with respect to any continuation statements to be
filed within such period).
SECTION 4.03. PROTECTION OF SECURITY. Each Grantor shall, at its own
cost and expense, take any and all actions necessary to defend title to the
Collateral against all persons and to defend the Security Interest of the
Collateral Agent in the Collateral and the priority thereof against any Lien
not expressly permitted pursuant to Section 6.02 of the Credit Agreement.
SECTION 4.04. FURTHER ASSURANCES. Each Grantor agrees, at its own
expense, to execute, acknowledge, deliver and cause to be duly filed all such
further instruments and documents and take all such actions as the Collateral
Agent may from time to time reasonably request to better assure, preserve,
protect and perfect the Security Interest and the rights and remedies created
hereby, including the payment of any fees and taxes required in connection
with the execution and delivery of this Agreement, the granting of the
Security Interest and the filing of any financing statements or other
documents in connection herewith or therewith. If any amount greater than
$1,000,000 that is payable under or in connection with any of the Collateral
shall be or become evidenced by any promissory note or other instrument, such
note or
<PAGE>
7
instrument shall be immediately pledged and delivered to the Collateral
Agent, duly endorsed in a manner satisfactory to the Collateral Agent.
SECTION 4.05. INSPECTION AND VERIFICATION. Subject to Section 5.06 of
the Credit Agreement, the Collateral Agent and its designated agents shall
have the right, at the Grantors' own cost and expense and at reasonable times
and upon reasonable notice, to inspect the Collateral, all records related
thereto (and to make extracts and copies from such records) and the pre-
mises upon which any of the Collateral is located, to discuss the Grantors'
affairs with the officers of the Grantors and their independent accountants
and to verify under reasonable procedures the validity, amount, quality,
quantity, value, condition and status of, or any other matter relating to,
the Collateral, including, in the case of Collateral in the possession of any
third person, by contacting the third person possessing such Collateral for
the purpose of making such a verification. The Collateral Agent may not
contact Account Debtors unless an Event of Default has occurred and is
continuing. The Collateral Agent shall have the absolute right to share any
information it gains from such inspection or verification with any Secured
Party (it being understood that any such information shall be deemed to be
"Information" subject to the provisions of Section 9.12 of the Credit
Agreement).
SECTION 4.06. TAXES; ENCUMBRANCES. At its option, the Collateral Agent
may discharge past due taxes, assessments, charges, fees, Liens, security
interests or other encumbrances at any time levied or placed on the
Collateral and not permitted pursuant to Section 6.02 of the Credit
Agreement, and may pay for the maintenance and preservation of the Collateral
to the extent any Grantor fails to do so as required by the Credit Agreement
or this Agreement, and each Grantor jointly and severally agrees to reimburse
the Collateral Agent on demand for any payment made or any expense incurred
by the Collateral Agent pursuant to the foregoing authorization; provided,
however, that nothing in this Section 4.06 shall be interpreted as excusing
any Grantor from the performance of, or imposing any obligation on the
Collateral Agent or any Secured Party to cure or perform, any covenants or
other promises of any Grantor with respect to taxes, assessments, charges,
fees, liens, security interests or other encumbrances and maintenance as set
forth herein or in the other Loan Documents.
SECTION 4.07. ASSIGNMENT OF SECURITY INTEREST. If at any time any
Grantor shall take a security interest in any property of an Account Debtor
or any other person to secure payment and performance of an Account, such
Grantor shall promptly assign such security interest to the Collateral Agent.
Such assignment need not be filed of public record unless necessary to
continue the perfected status of the security interest against creditors of
and transferees from the Account Debtor or other person granting the security
interest.
SECTION 4.08. CONTINUING OBLIGATIONS OF THE GRANTORS. Each Grantor
shall remain liable to observe and perform all the conditions and obligations
to be observed and performed by it
<PAGE>
8
under each contract, agreement or instrument relating to the Collateral, all
in accordance with the terms and conditions thereof, and each Grantor jointly
and severally agrees to indemnify and hold harmless the Collateral Agent and
the Secured Parties from and against any and all liability for such
performance.
SECTION 4.09. USE AND DISPOSITION OF COLLATERAL. None of the Grantors
shall make or permit to be made an assignment, pledge or hypothecation of
the Collateral or shall grant any other Lien in respect of the Collateral,
except as expressly permitted by Section 6.02 of the Credit Agreement. None
of the Grantors shall make or permit to be made any transfer of the
Collateral, except that (a) Inventory may be sold in the ordinary course of
business and (b) unless and until the Collateral Agent shall notify the
Grantors that an Event of Default shall have occurred and be continuing and
that during the continuance thereof the Grantors shall not sell, convey,
lease, assign, transfer or otherwise dispose of any Collateral (which notice
may be given by telephone if promptly confirmed in writing), the Grantors may
use and dispose of the Collateral in any lawful manner not inconsistent with
the provisions of this Agreement, the Credit Agreement or any other Loan
Document. Without limiting the generality of the foregoing, each Grantor
agrees that it shall not permit any Inventory to be in the possession or
control of any warehouseman, bailee, agent or processor at any time unless
such warehouseman, bailee, agent or processor shall have been notified of the
Security Interest and shall have agreed in writing to hold the Inventory
subject to the Security Interest and the instructions of the Collateral Agent
and to waive and release any Lien held by it with respect to such Inventory,
whether arising by operation of law or otherwise.
SECTION 4.10. LIMITATION ON MODIFICATION OF ACCOUNTS. None of the
Grantors will, without the Collateral Agent's prior written consent, grant
any extension of the time of payment of any of the Accounts Receivable,
compromise, compound or settle the same for less than the full amount
thereof, release, wholly or partly, any person liable for the payment thereof
or allow any credit or discount whatsoever thereon, other than extensions,
credits, discounts, compromises or settlements granted or made in the
ordinary course of business and consistent with its current practices and in
accordance with such prudent and standard practices used in industries that
are the same as or similar to those in which such Grantor is engaged.
SECTION 4.11. LEGEND. Each Grantor shall legend, in form and manner
satisfactory to the Collateral Agent, its books, records and documents
evidencing or pertaining to its Accounts Receivable with an appropriate
reference to the fact that the Collateral Agent has a security interest
therein.
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9
ARTICLE V
COLLECTIONS
SECTION 5.01. COLLECTION DEPOSIT ACCOUNTS. (a) At any time that an
Event of Default has occurred and is continuing, upon the written request of
the Collateral Agent, each Grantor agrees to establish and maintain one or
more Collection Deposit Accounts with the Collateral Agent or with any
financial institution that is satisfactory to the Collateral Agent and enters
into a Lockbox Agreement.
(b) Upon and after the establishment of any Collection Deposit Accounts
as provided above, each Grantor shall use all reasonable efforts to prevent
any funds which are not payments on Accounts Receivable or Inventory from
being deposited into, or otherwise commingled with, the funds held in the
Collection Deposit Accounts. Unless and until the Collection Deposit
Accounts are converted to closed lockbox accounts pursuant to paragraph (c)
below, each Grantor may at any time withdraw any of the funds contained in a
Collection Deposit Account of such Grantor for use, subject to the provisions
of the Loan Documents, for general corporate purposes. If all Events of
Default that had occurred shall be cured or waived or are no longer
continuing, any Grantor may notify each Sub-Agent that such Collection
Deposit Account shall no longer be in effect.
(c) Effective upon notice to the Grantors from the Collateral Agent
after the occurrence and during the continuance of an Event of Default (which
notice may be given by telephone if promptly confirmed in writing), each
Collection Deposit Account will, without any further action on the part of
any Grantor, the Collateral Agent or any Sub-Agent, convert into a closed
lockbox account under the exclusive dominion and control of the Collateral
Agent in which funds are held subject to the rights of the Collateral Agent
hereunder. No Grantor shall thereafter have any right or power to withdraw
funds from any Collection Deposit account without the prior written consent
of the Collateral Agent until all Events of Default are cured or waived. The
Grantors irrevocably authorize the Collateral Agent to notify each Sub-Agent
(i) of the occurrence of an Event of Default and (ii) of the matters referred
to in this paragraph (c). Following the occurrence of an Event of Default,
the Collateral Agent may instruct each Sub-Agent to transfer immediately all
funds in each Collection Deposit Account to an account maintained with the
Collateral Agent. If all Events of Default that had occurred shall be cured
or waived or are no longer continuing, any Grantor may notify each Sub-Agent
that such Collection Deposit Account shall no longer be a closed lockbox
account.
SECTION 5.02. COLLECTIONS. So long as no Event of Default shall have
occurred and be continuing, the Grantors shall have the right to collect all
Accounts Receivable and other payments in respect of Inventory in the
ordinary course of their businesses; PROVIDED, HOWEVER, that the Grantors
agree, if an Event of Default shall occur and be continuing and if the
Collateral Agent shall by notice to the Grantors so request (which
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10
notice may be given by telephone if promptly confirmed in writing), (i) to
arrange for remittances on any Accounts Receivable and Inventory to be made
directly to Collection Deposit Accounts established in accordance with
Section 6.01, and (ii) promptly to deposit all payments received by the
Grantors on account of Accounts Receivable and Inventory, whether in the form
of cash, checks, notes, drafts, bills of exchange, money orders or otherwise,
in such Collection Deposit Accounts in precisely the form in which received
(but with any endorsements of the Grantors necessary for deposit or
collection), and until they are so deposited such payments shall be held in
trust by the Grantors for and as the property of the Collateral Agent and
shall not be commingled with the Grantors' other funds.
SECTION 5.03. POWER OF ATTORNEY. Each Grantor irrevocably makes,
constitutes and appoints the Collateral Agent (and all officers, employees or
agents designated by the Collateral Agent) as such Grantor's true and lawful
agent and attorney-in-fact, and in such capacity the Collateral Agent shall
have the right, with power of substitution for each Grantor and in each
Grantor's name or otherwise, for the use and benefit of the Collateral Agent
and the Secured Parties, upon the occurrence and during the continuance of an
Event of Default (a) to receive, endorse, assign and/or deliver any and all
notes, acceptances, checks, drafts, money orders or other evidences of
payment relating to the Collateral or any part thereof; (b) to demand,
collect, receive payment of, give receipt for and give discharges and
releases of all or any of the Collateral; (c) to sign the name of any Grantor
on any invoice or bill of lading relating to any of the Collateral; (d) to
send verifications of Accounts Receivable to any Account Debtor; (e) to
commence and prosecute any and all suits, actions or proceedings at law or
in equity in any court of competent jurisdiction to collect or otherwise
realize on all or any of the Collateral or to enforce any rights in respect
of any Collateral; (f) to settle, com-promise, compound, adjust or defend any
actions, suits or proceedings relating to all or any of the Collateral; (g)
to notify, or to require any Grantor to notify, Account Debtors to make
payment directly to the Collateral Agent; and (h) to use, sell, assign,
transfer, pledge, make any agreement with respect to or otherwise deal with
all or any of the Collateral, and to do all other acts and things necessary
to carry out the purposes of this Agreement, as fully and completely as
though the Collateral Agent were the absolute owner of the Collateral for all
purposes; PROVIDED, HOWEVER, that nothing herein contained shall be construed
as requiring or obligating the Collateral Agent or any Secured Party to make
any commitment or to make any inquiry as to the nature or sufficiency of any
payment received by the Collateral Agent or any Secured Party, or to present
or file any claim or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby, and no action taken or omitted to be
taken by the Collateral Agent or any Secured Party with respect to the
Collat-eral or any part thereof shall give rise to any defense, counterclaim
or offset in favor of any Grantor or to any claim or action against the
Collateral Agent or any Secured Party. It is understood and agreed that the
appointment of the Collateral Agent as the agent
<PAGE>
11
and attorney-in-fact of the Grantors for the purposes set forth above is
coupled with an interest and is irrevocable. The provisions of this Section
shall in no event relieve any Grantor of any of its obligations hereunder or
under any other Loan Document with respect to the Collateral or any part
thereof or impose any obligation on the Collateral Agent or any Secured Party
to proceed in any particular manner with respect to the Collateral or any
part thereof, or in any way limit the exercise by the Collateral Agent or
any Secured Party of any other or further right which it may have on the date
of this Agreement or hereafter, whether hereunder, under any other Loan
Document, by law or otherwise.
ARTICLE VI
REMEDIES
SECTION 6.01. REMEDIES UPON DEFAULT. Upon the occurrence and during
the continuance of an Event of Default, each Grantor agrees on demand to
deliver each item of Collateral to the Collateral Agent or to such location
specified by the Collateral Agent as is reasonably convenient to both such
Grantor and the Collateral Agent, and it is agreed that, to the extent
permitted by law, the Collateral Agent shall have the right to take any of or
all the following actions at the same or different times with or without
legal process and with or without prior notice or demand for performance, to
take possession of the Collateral and without liability for trespass
against Grantors to enter any premises where the Collateral may be located
for the purpose of taking possession of or removing the Collateral and,
generally, to exercise any and all rights afforded to a secured party under
the Uniform Commercial Code or other applicable law. Without limiting the
generality of the foregoing, each Grantor agrees that the Collateral Agent
shall have the right, subject to the mandatory requirements of applicable
law, to sell or otherwise dispose of all or any part of the Collateral, at
public or private sale or at any broker's board or on any securities
exchange, for cash, upon credit or for future delivery as the Collateral
Agent shall deem appropriate. The Collateral Agent shall be authorized at any
such sale (if it deems it advisable to do so) to restrict the prospective
bidders or purchasers to persons who will represent and agree that they are
purchasing the Collateral for their own account for investment and not with a
view to the distribution or sale thereof, and upon consummation of any such
sale the Collateral Agent shall have the right to assign, transfer and
deliver to the purchaser or purchasers thereof the Collateral so sold. Each
such purchaser at any such sale shall hold the property sold absolutely, free
from any claim or right on the part of any Grantor, and each Grantor hereby
waives (to the extent permitted by law) all rights of redemption, stay and
appraisal which such Grantor now has or may at any time in the future have
under any rule of law or statute now existing or hereafter enacted.
The Collateral Agent shall give the Grantors 10 days' written notice
(which each Grantor agrees is reasonable notice within the meaning of Section
9-504(3) of the Uniform Commercial
<PAGE>
12
Code as in effect in the State of New York or its equivalent in other
jurisdictions) of the Collateral Agent's intention to make any sale of
Collateral. Such notice, in the case of a public sale, shall state the time
and place for such sale and, in the case of a sale at a broker's board or on
a securities exchange, shall state the board or exchange at which such sale
is to be made and the day on which the Collateral, or portion thereof, will
first be offered for sale at such board or exchange. Any such public sale
shall be held at such time or times within ordinary business hours and at
such place or places as the Collateral Agent may fix and state in the notice
(if any) of such sale. At any such sale, the Collateral, or portion thereof,
to be sold may be sold in one lot as an entirety or in separate parcels, as
the Collateral Agent may (in its sole and absolute discretion) determine.
The Collateral Agent shall not be obligated to make any sale of any
Collateral if it shall determine not to do so, regardless of the fact that
notice of sale of such Collateral shall have been given. The Collateral
Agent may, without notice or publication, adjourn any public or private sale
or cause the same to be adjourned from time to time by announcement at the
time and place fixed for sale, and such sale may, without further notice, be
made at the time and place to which the same was so adjourned. In case any
sale of all or any part of the Collateral is made on credit or for future
delivery, the Collateral so sold may be retained by the Collateral Agent
until the sale price is paid by the purchaser or purchasers thereof, but the
Collateral Agent shall not incur any liability in case any such purchaser or
purchasers shall fail to take up and pay for the Collateral so sold and, in
case of any such failure, such Collateral may be sold again upon like notice.
At any public (or, to the extent permitted by law, private) sale made
pursuant to this Section, any Secured Party may bid for or purchase, free (to
the extent permitted by law) from any right of redemption, stay, valuation or
appraisal on the part of any Grantor (all said rights being also hereby
waived and released to the extent permitted by law), the Collateral or any
part thereof offered for sale and may make payment on account thereof by
using any claim then due and payable to such Secured Party from any Grantor
as a credit against the purchase price, and such Secured Party may, upon
compliance with the terms of sale, hold, retain and dispose of such property
without further accountability to any Grantor therefor. For purposes hereof,
a written agreement to purchase the Collateral or any portion thereof shall
be treated as a sale thereof; the Collateral Agent shall be free to carry out
such sale pursuant to such agreement and no Grantor shall be entitled to the
return of the Collateral or any portion thereof subject thereto,
notwithstanding the fact that after the Collateral Agent shall have entered
into such an agreement all Events of Default shall have been remedied and the
Obligations paid in full. As an alternative to exercising the power of sale
herein conferred upon it, the Collateral Agent may proceed by a suit or suits
at law or in equity to foreclose this Agreement and to sell the Collateral or
any portion thereof pursuant to a judgment or decree of a court or courts
having competent jurisdiction or pursuant to a proceeding by a
court-appointed receiver.
<PAGE>
13
SECTION 6.02. APPLICATION OF PROCEEDS. The Collateral Agent shall
apply the proceeds of any collection or sale of the Collateral as follows:
FIRST, to the payment of all reasonable costs and expenses incurred
by the Administrative Agent or the Collateral Agent (in its capacity as
such hereunder or under any other Loan Document) in connection with such
collection or sale or otherwise in connection with this Agreement or any
of the Obligations, including all court costs and the fees and expenses
of its agents and legal counsel, the repayment of all advances made by
the Collateral Agent hereunder or under any other Loan Document on
behalf of any Grantor and any other costs or expenses incurred in
connection with the exercise of any right or remedy hereunder or under
any other Loan Document;
SECOND, to the payment in full of the Obligations (the amounts so
applied to be distributed among the Secured Parties pro rata in
accordance with the amounts of the Obligations owed to them on the date
of any such distribution); and
THIRD, to the Grantors, their successors or assigns, or as a court
of competent jurisdiction may otherwise direct.
The Collateral Agent shall have absolute discretion as to the time of
application of any such proceeds, moneys or balances in accordance with this
Agreement. Upon any sale of the Collateral by the Collateral Agent
(including pursuant to a power of sale granted by statute or under a judicial
proceeding), the receipt of the Collateral Agent or of the officer making the
sale shall be a sufficient discharge to the purchaser or purchasers of the
Collateral so sold and such purchaser or purchasers shall not be obligated to
see to the application of any part of the purchase money paid over to the
Collateral Agent or such officer or be answerable in any way for the
misapplication thereof.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. NOTICES. All communications and notices hereunder shall
(except as otherwise expressly permitted herein) be in writing and given as
provided in Section 9.01 of the Credit Agreement. All communications and
notices hereunder to any Guarantor shall be given to it at its address or
telecopy number set forth on Schedule I, as the case may be, with a copy to
the Borrowers' Agent.
SECTION 7.02. SECURITY INTEREST ABSOLUTE. All rights of the Collateral
Agent hereunder, the Security Interest and all obligations of the Grantors
hereunder shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of the Credit Agreement, any other Loan Document,
any agreement with respect to any of the Obligations or any other
<PAGE>
14
agreement or instrument relating to any of the foregoing, (b) any change in
the time, manner or place of payment of, or in any other term of, all or any
of the Obligations, or any other amendment or waiver of or any consent to any
departure from the Credit Agreement, any other Loan Document or any other
agreement or instrument, (c) any exchange, release or non-perfection of any
Lien on other collateral, or any release or amendment or waiver of or consent
under or departure from any guarantee, securing or guaranteeing all or any of
the Obligations, or (d) any other circumstance that might otherwise
constitute a defense available to, or a discharge of, any Grantor in respect
of the Obligations or this Agreement.
SECTION 7.03. SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made by any Grantor herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement shall be considered to have been relied upon by
the Secured Parties and shall survive the making by the Lenders of the Loans,
and the execution and delivery to the Lenders of any notes evidencing such
Loans, regardless of any investigation made by the Lenders or on their
behalf, and shall continue in full force and effect until this Agreement
shall terminate.
SECTION 7.04. BINDING EFFECT; SEVERAL AGREEMENT. This Agreement shall
become effective as to any Grantor when a counterpart hereof executed on
behalf of such Grantor shall have been delivered to the Collateral Agent and
a counterpart hereof shall have been executed on behalf of the Collateral
Agent, and thereafter shall be binding upon such Grantor and the Collateral
Agent and their respective successors and assigns, and shall inure to the
benefit of such Grantor, the Collateral Agent and the other Secured Parties
and their respective successors and assigns, except that no party hereto
shall have the right to assign or transfer its rights or obligations
hereunder or any interest herein or in the Collateral (and any such
assignment or transfer shall be void) except (x) that assignees of Lenders
will acquire interests in the Collateral and (y) as otherwise expressly
contemplated by this Agreement or the Credit Agreement. This Agreement shall
be construed as a separate agreement with respect to each Grantor and may be
amended, modified, supplemented, waived or released with respect to any
Grantor without the approval of any other Grantor and without affecting the
obligations of any other Grantor hereunder.
SECTION 7.05. SUCCESSORS AND ASSIGNS. Whenever in this Agreement any
of the parties hereto is referred to, such reference shall be deemed to
include the permitted successors and assigns of such party; and all
covenants, promises and agreements by or on behalf of any Grantor or the
Collateral Agent that are contained in this Agreement shall bind and inure to
the benefit of their respective permitted successors and assigns.
SECTION 7.06. COLLATERAL AGENT'S FEES AND EXPENSES; INDEMNIFICATION.
(a) Each Grantor jointly and severally agrees to pay upon demand to the
Collateral Agent the amount of any and all reasonable expenses, including the
reasonable fees,
<PAGE>
15
disbursements and other charges of its counsel and of any experts or agents,
which the Collateral Agent may incur in connection with (i) the
administration of this Agreement, (ii) the custody or preservation of, or the
sale of, collection from or other realization upon any of the Collateral,
(iii) the exercise, enforcement or protection of any of the rights of the
Collateral Agent hereunder or (iv) the failure of any Grantor to perform or
observe any of the provisions hereof.
(b) Without limitation of its indemnification obligations under the
other Loan Documents, each Grantor jointly and severally agrees to indemnify
the Collateral Agent and the other Indemnitees against, and hold each of them
harmless from, any and all losses, claims, damages, liabilities and related
expenses, including reasonable fees, disbursements and other charges of
counsel, incurred by or asserted against any of them arising out of, in any
way connected with, or as a result of, the execution, delivery or performance
of this Agreement or any claim, litigation, investigation or proceeding
relating hereto or to the Collateral, whether or not any Indemnitee is a
party thereto; provided that such indemnity shall not, as to any Indemnitee,
be available to the extent that such losses, claims, damages, liabilities or
related expenses resulted from the gross negligence or wilful misconduct of
an Indemnitee.
(c) Any such amounts payable as provided hereunder shall be additional
Obligations secured hereby and by the other Security Documents. The
provisions of this Section 7.06 shall remain operative and in full force and
effect regardless of the termination of this Agreement or any other Loan
Document, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term
or provision of this Agreement or any other Loan Document, or any
investigation made by or on behalf of the Collateral Agent or any Lender.
All amounts due under this Section 7.06 shall be payable on written demand
therefor.
SECTION 7.07. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 7.08. WAIVERS; AMENDMENT. (a) No failure or delay of the
Collateral Agent in exercising any power or right hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right
or power, or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise thereof or the
exercise of any other right or power. The rights and remedies of the
Collateral Agent hereunder and of the Collateral Agent, the Administrative
Agent and the Lenders under the other Loan Documents are cumulative and are
not exclusive of any rights or remedies that they would otherwise have. No
waiver of any provisions of this Agreement or any other Loan Document or
consent to any departure by any Grantor therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) below, and then
such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No
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16
notice to or demand on any Grantor in any case shall entitle such Grantor or
any other Grantor to any other or further notice or demand in similar or
other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Collateral Agent and the Grantor or Grantors with respect
to which such waiver, amendment or modification is to apply, subject to any
consent required in accordance with Section 9.02 of the Credit Agreement.
SECTION 7.09. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT
OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO
HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS,
AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
IN THIS SECTION 7.09.
SECTION 7.10. SEVERABILITY. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby (it being understood that the invalidity of a particular
provision in a particular jurisdiction shall not in and of itself affect the
validity of such provision in any other jurisdiction). The parties shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 7.11 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract (subject to
Section 7.04), and shall become effective as provided in Section 7.04.
Delivery of an executed signature page to this Agreement by facsimile
transmission shall be effective as delivery of a manually executed
counterpart hereof.
SECTION 7.12. HEADINGS. Article and Section headings used herein are
for the purpose of reference only, are not part of this Agreement and are not
to affect the construction of, or to be taken into consideration in
interpreting, this Agreement.
SECTION 7.13. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Each
Grantor hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and
any
<PAGE>
17
appellate court from any thereof, in any action or proceeding arising out of
or relating to this Agreement or the other Loan Documents, or for recognition
or enforcement of any judgment, and each of the parties hereto hereby
irrevocably and unconditionally agrees that all claims in respect of any such
action or proceeding may be heard and determined in such New York State or,
to the extent permitted by law, in such Federal court. Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law. Nothing in this Agreement shall
affect any right that the Collateral Agent, the Administrative Agent, the
Issuing Bank or any Lender may otherwise have to bring any action or
proceeding relating to this Agreement or the other Loan Documents against any
Grantor or its properties in the courts of any jurisdiction.
(b) Each Grantor hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the other Loan
Documents in any New York State or Federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 7.01. Nothing in this
Agreement will affected the right of any party to this Agreement to serve
process in any other manner permitted by law.
SECTION 7.14. TERMINATION. (a) This Agreement and the Security
Interest shall terminate when all the Obligations have been indefeasibly paid
in full other than inchoate indemnity Obligations, the Lenders have no
further commitment to lend under the Credit Agreement, at which time the
Collateral Agent shall execute and deliver to the Grantors, at the Grantors'
expense, all Uniform Commercial Code termination statements and similar
documents which the Grantors shall reasonably request to evidence such
termination. Any execution and delivery of termination statements or
documents pursuant to this Section 7.14 shall be without recourse to or
warranty by the Collateral Agent. A Grantor (other than MTS) shall
automatically be released from its obligations hereunder and the Security
Interest in the Collateral of such Grantor (other than MTS) shall be
automatically released in the event that all the capital stock of such
Grantor (other than MTS) shall be sold, transferred or otherwise disposed of
to a person that is not an Affiliate of the Borrowers in accordance with the
terms of the Credit Agreement; provided that the Required Lenders shall have
consented to such sale, transfer or other disposition (to the extent required
by the Credit Agreement) and the terms of such consent did not provide
otherwise.
(b) If at any time when no Default shall have occurred and be
continuing MTS shall have outstanding any senior,
<PAGE>
18
unsecured, non-credit enhanced long-term Indebtedness for borrowed money that
shall be rated BBB- or better by Standard & Poor's Ratings Group and Baa3 or
better by Moody's Investors Service, Inc., the security interests granted
hereby shall be automatically released.
SECTION 7.15. ADDITIONAL GRANTORS. Pursuant to Section 5.09 of the
Credit Agreement, certain Subsidiaries that were not originally parties
hereto are required to become parties to this Agreement as Grantors. Upon
the execution and delivery after the date hereof by the Collateral Agent and
any Subsidiary of an instrument in the form of Annex 2 hereto, such
Subsidiary shall become a Grantor hereunder with the same force and effect as
if originally named as a Grantor herein. The execution and delivery of any
such instrument shall not require the consent of any Grantor hereunder. The
rights and obligations of each Grantor hereunder shall remain in full force
and effect notwithstanding the addition of any new Grantor as a party to this
Agreement.
<PAGE>
19
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
MTS, INCORPORATED,
by /s/ DeVaughn Searson
-------------------------------------
Name: DeVaughn Searson
Title: Vice President - Finance
THREE A'S HOLDINGS, L.L.C.,
by /s/ Michael Solomon
-------------------------------------
Name: Michael Solomon
Title: Manager
CAMPBELL RECORD SALES, INCORPORATED
by /s/ DeVaughn Searson
-------------------------------------
Name: DeVaughn Searson
Title: Vice President - Finance
FRESNO RECORD SALES, INCORPORATED,
by /s/ DeVaughn Searson
-------------------------------------
Name: DeVaughn Searson
Title: Vice President - Finance
SAN DIEGO RECORD SALES, INCORPORATED,
by /s/ DeVaughn Searson
-------------------------------------
Name: DeVaughn Searson
Title: Vice President - Finance
STOCKTON RECORD SALES, INCORPORATED,
by /s/ DeVaughn Searson
-------------------------------------
Name: DeVaughn Searson
Title: Vice President - Finance
THE CHASE MANHATTAN BANK, as
Collateral Agent,
by /s/ Marian Schulman
-------------------------------------
Name: Marian Schulman
Title: Authorized Officer
<PAGE>
SCHEDULE I
SUBSIDIARY GRANTORS
Three A's Holdings, L.L.C.
Tower Domestic, INC.
Campbell Record Sales, Incorporated
Fresno Record Sales, Incorporated
San Diego Record Sales, Incorporated
Stockton Record Sales, Incorporated
<PAGE>
Annex 1 to the
Security Agreement
SUPPLEMENT NO. __ dated as of , to the
Security Agreement dated as of April 23, 1998, among MTS, Incorporated,
a California corporation ("MTS"), each Material Subsidiary of MTS (other
than Tower Records Kabushiki Kaisha and its Material Subsidiaries and
any other Non-US Subsidiaries of MTS), if any, listed on Schedule I
hereto (each such subsidiary being individually called a "Subsidiary
Grantor" and collectively, the "Subsidiary Grantors"; the Subsidiary
Grantors and MTS are referred to collectively herein as the "Grantors")
and THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"),
as collateral agent (the "Collateral Agent") for the Secured Parties (as
defined in the Credit Agreement referred to below).
A. Reference is made to the Credit Agreement dated as of April 23, 1998
(as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among MTS, Tower Records Kabushiki Kaisha, a Japanese
corporation ("TRKK", and together with MTS, the "Borrowers"), the lenders
from time to time party thereto (the "Lenders") and the Chase Manhattan Bank,
as administrative agent for the Lenders.
B. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Security Agreement and the
Credit Agreement.
C. The Grantors have entered into the Security Agreement in order to
induce the Lenders to make Loans. Section 7.15 of Security Agreement
provides that certain Subsidiaries that were not originally parties to the
Security Agreement are required to become Grantors under the Security
Agreement by execution and delivery of an instrument in the form of this
Supplement. The undersigned Subsidiary (the "New Grantor") is executing this
Supplement in accordance with the requirements of the Credit Agreement to
become a Grantor under the Security Agreement in order to induce the Lenders
to make additional Loans and as consideration for Loans previously made.
Accordingly, the Collateral Agent and the New Grantor agree as follows:
SECTION 1. In accordance with Section 7.15 of the Security Agreement,
the New Grantor by its signature below becomes a Grantor under the Security
Agreement with the same force and effect as if originally named therein as a
Grantor and the New Grantor hereby (a) agrees to all the terms and provisions
of the Security Agreement applicable to it as a Grantor thereunder and (b)
represents and warrants that the representations and warranties made by it as
a Grantor thereunder are true and correct on and as of the date hereof. In
furtherance of the foregoing, the New Grantor, as security for the payment
and performance in full of the Obligations (as defined in the Security
Agreement), does hereby create and grant to the Collateral Agent, its
successors and assigns, for the benefit of the Secured Parties, their
successors and assigns, a security interest in and lien on all of the New
Grantor's right, title and interest in and to the Collateral (as defined in
the Security Agreement) of the New Grantor. Each reference to a "Grantor" in
the Security Agreement
<PAGE>
2
shall be deemed to include the New Grantor. The Security Agreement is hereby
incorporated herein by reference.
SECTION 2. The New Grantor represents and warrants to the Collateral
Agent and the other Secured Parties that this Supplement has been duly
authorized, executed and delivered by it and con- stitutes its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
SECTION 3. This Supplement may be executed in counterparts (and by
different parties hereto on different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute
a single contract. This Supplement shall become effective when the Collateral
Agent shall have received counterparts of this Supplement that, when taken
together, bear the signatures of the New Grantor and the Collateral Agent.
Delivery of an executed signature page to this Supplement by facsimile
transmission shall be as effective as delivery of a manually signed
counterpart of this Supplement.
SECTION 4. The New Grantor hereby represents and warrants that (a) set
forth on Schedule I attached hereto is a true and correct schedule of the
location of any and all Collateral of the New Grantor and (b) set forth under
its signature hereto, is the true and correct location of the chief executive
office of the New Grantor.
SECTION 5. Except as expressly supplemented hereby, the Security
Agreement shall remain in full force and effect.
SECTION 6. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions
contained herein and in the Security Agreement shall not in any way be
affected or impaired thereby (it being understood that the invalidity of a
particular provision in a particular jurisdiction shall not in and of itself
affect the validity of such provision in any other jurisdiction). The parties
hereto shall endeavor in good faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
SECTION 8. All communications and notices hereunder shall be in writing
and given as provided in Section 7.01 of the Security Agreement. All
communications and notices hereunder to the New Grantor shall be given to it
at the address set forth under its signature below.
<PAGE>
3
SECTION 9. The New Grantor agrees to reimburse the Collateral Agent for
its reasonable out-of-pocket expenses in connection with this Supplement,
including the reasonable fees, other charges and disbursements of counsel for
the Collateral Agent.
IN WITNESS WHEREOF, the New Grantor and the Collateral Agent have duly
executed this Supplement to the Security Agreement as of the day and year
first above written.
[Name Of New Grantor],
by ____________________________________
Name:
Title:
Address:
THE CHASE MANHATTAN BANK, as
Collateral Agent,
by ____________________________________
Name:
Title:
<PAGE>
SCHEDULE I
TO SUPPLEMENT NO.___ TO THE
SECURITY AGREEMENT
LOCATION OF COLLATERAL
----------------------
Description Location
- ----------- --------
<PAGE>
Annex 2 to the
Security Agreement
LOCKBOX AGREEMENT dated as of [ ], among [Name of
Grantor], a [ ] corporation (the "Grantor"), THE CHASE MANHATTAN
BANK, a New York banking corporation ("Chase"), as collateral agent (in
such capacity, the "Collateral Agent") for the Secured Parties (such
term, and each other capitalized term used but not defined herein,
having the meaning given it in the Security Agreement referred to below)
and [Name of Sub-Agent], a [ ] banking corporation (the "Sub-Agent").
A. The Grantor, certain other Grantors and the Collateral Agent are
parties to a Security Agreement dated as of April 23, 1998 (as amended,
supplemented or otherwise modified from time to time, the "Security
Agreement"). Pursuant to the terms of the Security Agreement, the Grantor
has granted to the Collateral Agent, for the ratable benefit of the Secured
Parties, a security interest in its Accounts Receivable, Inventory and other
Collateral to secure the payment and performance of the Obligations and has
irrevocably appointed the Collateral Agent as its agent to collect amounts
due in respect thereof.
B. The Sub-Agent has agreed to act as collection sub-agent of the
Collateral Agent to receive and forward payments with respect to the Accounts
Receivable and Inventory on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Collateral Agent hereby appoints the Sub-Agent as its collection
sub-agent under the Security Agreement and authorizes the Sub-Agent, on the
terms and subject to the conditions set forth herein, to receive payments in
respect of Collateral consisting of Accounts Receivable and Inventory.
2. Contemporaneously with the execution and delivery by the Sub-Agent
of this Agreement, and for the purposes of this Agreement, the Sub-Agent
shall establish and maintain one or more collection accounts for the benefit
of the Collateral Agent (all such accounts being collectively called the
"Collection Deposit Account"). The Collection Deposit Account shall be
designated with the title, "The Chase Manhattan Bank, as Collateral Agent
under the MTS, Incorporated Security Agreement dated as of April 23, 1998"
(or a similar title). All payments received by the Sub-Agent in respect of
Accounts Receivable or Inventory shall be deposited in the Collection Deposit
and shall not be commingled with other funds. All funds at any time on
deposit in the Collection Deposit Account shall be held by the Sub-Agent for
application in accordance with the terms of this Agreement. The Sub-Agent
agrees to give the Collateral Agent prompt notice if the Collection Deposit
Account shall become subject to any writ, judgment, warrant of attachment,
execution or similar process. As security for the payment and performance of
the Obligations, the Grantor hereby confirms and pledges, assigns and
transfers to the Collateral Agent, and hereby creates and grants to the
Collateral Agent, a security interest in the Collection Deposit Account, all
property and assets held therein and all Proceeds thereof.
<PAGE>
2
3. The Collection Deposit Account shall be under the sole dominion and
control of the Collateral Agent, who shall have the sole right of withdrawal
over the Collection Deposit Account; provided, however, that the Collateral
Agent hereby authorizes the Sub-Agent to permit the Grantor to make
withdrawals from the Collection Deposit Account so long as the Sub-Agent has
not received notice from the Collateral Agent pursuant to the next succeeding
sentence or paragraph 8 below. Upon receipt of written, telecopy or
telephonic notice (which, in the case of telephonic notice, shall be promptly
confirmed in writing or by telecopy) from the Collateral Agent so directing
the Sub-Agent at any time, the Sub-Agent shall no longer permit withdrawals
from the Collection Deposit Account to be made by the Grantor and, if so
directed in such notice, shall promptly transmit to the Collateral Agent at
the office specified in paragraph 11 hereof (or such other office as the
Collateral Agent shall specify) (a) all funds, if any, then on deposit in, or
otherwise to the credit of, the Collection Deposit Account (providedthat
funds on deposit that are subject to collection may be transmitted promptly
upon collection), (b) all checks, drafts and other instruments for the
payment of money relating to the Accounts Receivable or Inventory at the time
in the possession of or thereafter received by the Sub-Agent without
depositing such checks, drafts or other instruments in the Collection Deposit
Account or any other account.
4. The Sub-Agent shall furnish the Collateral Agent with monthly
statements setting forth the amounts deposited in and withdrawn from the
Collection Deposit Account and shall furnish such other information at such
times as shall be reasonably requested by the Collateral Agent.
5. The fees for the services of the Sub-Agent shall be mutually agreed
upon between the Grantor and the Sub-Agent and shall be the obligation of the
Grantor; PROVIDED, HOWEVER, that, notwithstanding the terms of any agreement
under which the Collection Deposit Account shall have been established with
the Sub-Agent, the Grantor and the Sub-Agent agree not to terminate such
Collection Deposit Account for any reason (including the failure of the
Grantor to pay such fees) for so long as this Agreement shall remain in
effect (it being understood that the foregoing shall not be construed to
prohibit the resignation of the Sub-Agent in accordance with paragraph 8
below). Neither the Collateral Agent nor the Secured Parties shall have any
liability for the payment of any such fees.
6. The Sub-Agent may perform any of its duties hereunder by or through
its agents, officers or employees and shall be entitled to rely upon the
advice of counsel as to its duties. The Sub-Agent shall not be liable to the
Collateral Agent or the Grantor for any action taken or omitted to be taken
by it in good faith, nor shall the Sub-Agent be responsible to the Collateral
Agent or the Grantor for the consequences of any oversight or error of
judgment or be answerable to the Collateral Agent for the same unless such
consequences shall occur through the Sub-Agent's gross negligence or wilful
misconduct.
7. The Sub-Agent hereby represents and warrants that (a) it is a
banking corporation duly organized, validly existing and
<PAGE>
3
in good standing under the laws of [ ] and has full corporate power and
authority under such laws to execute, deliver and perform its obligations
under this Agreement and (b) the execution, delivery and performance of this
Agreement by the Sub-Agent have been duly and effectively authorized by all
necessary corporate action and this Agreement has been duly executed and
delivered by the Sub-Agent and constitutes a valid and binding obligation of
the Sub-Agent enforceable in accordance with its terms.
8. The Sub-Agent may resign at any time as Sub-Agent hereunder by
delivery to the Collateral Agent of written notice of resignation not less
than 30 days prior to the effective date of such resignation. The Sub-Agent
may be removed by the Collateral Agent at any time, with or without cause, by
written, telecopy or telephonic notice (which, in the case of telephonic
notice, shall be promptly confirmed in writing or by telecopy) of removal
delivered to the Sub-Agent. Upon receipt of such notice of removal, or
delivery of such notice of resignation, the Sub-Agent shall immediately
transmit or deliver to the Collateral Agent at the office specified in
paragraph 11 (or such other office as the Collateral Agent shall specify) (a)
all funds, if any, then on deposit in, or otherwise to the credit of, the
Collection Deposit Account, (b) all checks, drafts and other instruments for
the payment of money relating to the Accounts Receivable or Inventory in
possession of the Sub-Agent, without depositing such checks, drafts or other
instruments in the Collection Deposit Account or any other account and (c)
any checks, drafts and other instruments for the payment of money received by
the Sub-Agent after such notice, in whatever form received.
9. The Grantor consents to the appointment of the Sub-Agent and agrees
that it will not withdraw, or request to withdraw, funds from the Collection
Deposit Account other than in accordance with the provisions of this
Agreement, the Security Agreement and the other Loan Documents. The
Sub-Agent shall incur no liability to the Grantor as a result of any action
taken pursuant to an instruction given by the Collateral Agent in accordance
with the provisions of this Agreement. The Grantor agrees to indemnify and
defend the Sub-Agent against any loss, liability, claim or expense (including
reasonable attorneys' fees) arising from the Sub-Agent's entry into this
Agreement and actions taken hereunder, except to the extent resulting from
the Sub-Agent's gross negligence or wilful misconduct.
10. The term of this Agreement shall extend from the date hereof until
the earlier of (a) the date on which the Sub-Agent has been notified in
writing by the Collateral Agent that the Sub-Agent has no further duties
under this Agreement and (b) the date of termination specified in the notice
of removal given by the Collateral Agent, or notice of resignation given by
the Sub-Agent, as the case may be, pursuant to paragraph 8. The obligations
of the Sub-Agent contained in the last sentence of paragraph 8 and in
paragraph 14, and the obligations of the Grantor contained in paragraphs 6
and 9, shall survive the termination of this Agreement.
11. All notices and communications hereunder shall be in writing and
shall be delivered by hand or by courier service, mailed by certified or
registered mail or sent by telecopy (except where telephonic instructions or
notices are authorized herein) and shall be effective on the day on which
received (a) in the case of the
<PAGE>
4
Collateral Agent, to The Chase Manhattan Bank, 270 Park Avenue, New York, New
York 10017, Attention of [Collateral Monitoring Department], and (b) in the
case of the Sub-Agent, addressed to [ ], Attention of [ ]. For
purposes of this Agreement, any officer of the Collateral Agent shall be
authorized to act, and to give instructions and notices, on behalf of the
Collateral Agent hereunder.
12. The Sub-Agent will not assign or transfer any of its rights or
obligations hereunder (other than to the Collateral Agent) without the prior
written consent of the other parties hereto, and any such attempted
assignment or transfer shall be void.
13. This Agreement may be amended only by a written instrument executed
by the Collateral Agent, the Sub-Agent and the Grantor, acting by their duly
authorized representative officers.
14. Except as otherwise provided in the Credit Agreement with respect
to rights of set off available to the Sub-Agent in its capacity as a Lender
(if and so long as the Sub-Agent is a Lender thereunder), the Sub-Agent
hereby irrevocably waives any right to set off against, or otherwise deduct
from, any funds held in the Collection Deposit Account, any indebtedness or
other claim owed by the Grantor to the Sub-Agent.
15. This Agreement shall inure to the benefit of and be binding upon
the Collateral Agent, the Sub-Agent, the Grantor and their respective
permitted successors and assigns.
16. This Agreement may be executed 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. Delivery of an executed signature page to this
Agreement by facsimile transmission shall be effective as delivery of a
manually executed counterpart hereof.
17. EXCEPT TO THE EXTENT THE LAWS OF THE STATE OF [ ] GOVERN
THE COLLECTION DEPOSIT ACCOUNT, THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
18. The Sub-Agent shall be an independent contractor. This Agreement
does not give rise to any partnership, joint venture or fiduciary
relationship.
19. In the event any one or more of the provisions contained in this
Agreement should be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby (it
being understood that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect the validity of
such provision in any other jurisdiction). The parties shall endeavor in
good-faith
<PAGE>
5
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provisions.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
[Name of Grantor],
by __________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as Collateral Agent,
by __________________________________
Name:
Title:
[Sub-Agent],
by __________________________________
Name:
Title:
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to registration
statement on Form S-4 (File No. 333-54035) of our report (Coopers & Lybrand
L.L.P. as predecessor to PricewaterhouseCoopers LLP) dated October 29, 1997
(except for Notes 2 and 3 as to which the dates are April 20, 1998 and March 20,
1998, respectively), on our audits of the consolidated financial statements of
MTS Incorporated and Subsidiaries. We also consent to the reference to our firm
under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
Sacramento, California
July 23, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
MTS, INCORPORATED
OFFER TO EXCHANGE ITS
NEW 9 3/8% SENIOR SUBORDINATED NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/8% SENIOR SUBORDINATED NOTES DUE 2005
PURSUANT TO THE PROSPECTUS
DATED JULY , 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME ON , , 1998 (30 DAYS AFTER THE PROSPECTUS WAS SENT TO
EXISTING HOLDERS, UNLESS EXTENDED BY MTS, INCORPORATED IN ITS SOLE DISCRETION)
(SUCH TIME ON SUCH DATE, AND AS SUCH TIME AND DATE MAY BE EXTENDED, THE
"EXPIRATION DATE"). THE EXPIRATION DATE WILL NOT BE EXTENDED BEYOND 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998 (60 DAYS AFTER THIS PROSPECTUS WAS
SENT TO EXISTING HOLDERS).
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
STATE STREET BANK
AND TRUST COMPANY
OF CALIFORNIA, N.A.
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
State Street Bank and Trust Company of California, N.A.
c/o State Street Bank and Trust Company
2 International Place, 4th Floor
Boston, MA 02110
Attention: Kellie Mullen, Corporate Trust Department
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(617) 664-5587
FACSIMILE TRANSMISSIONS:
(617) 664-5290
(Originals of all documents sent by facsimile should be sent promptly by hand,
overnight courier or registered or certified mail.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
<PAGE>
This Letter of Transmittal is to be completed by holders of Existing Notes
(as defined below) either if Existing Notes are to be forwarded herewith or if
tenders of Existing Notes are to be made by book-entry transfer to an account
maintained by State Street Bank and Trust Company of California, N.A. (the
"Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in "The Exchange Offer--Procedures for Tendering Existing
Notes" in the Prospectus.
HOLDERS OF EXISTING NOTES (i) WHOSE CERTIFICATES (THE "CERTIFICATES") FOR
SUCH EXISTING NOTES ARE NOT IMMEDIATELY AVAILABLE OR (ii) WHO CANNOT DELIVER
THEIR CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT ON OR
PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE PROSPECTUS) OR (iii) WHO CANNOT
COMPLETE THE PROCEDURES FOR BOOK-ENTRY TRANSFER ON A TIMELY BASIS, MUST TENDER
THEIR EXISTING NOTES ACCORDING TO THE GUARANTEED DELIVERY PROCEDURES SET FORTH
IN "THE EXCHANGE OFFER--PROCEDURES FOR TENDERING EXISTING NOTES" IN THE
PROSPECTUS, INCLUDING SUBMISSION OF A NOTICE OF GUARANTEED DELIVERY PRIOR TO THE
EXPIRATION DATE. SEE INSTRUCTION 1 HERETO.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
Ladies and Gentlemen:
The undersigned hereby tenders to MTS, Incorporated, a California
corporation (the "Company"), the aggregate principal amount of the Company's
9 3/8% Senior Subordinated Notes due 2005 (the "Existing Notes") described in
Box 1 below in exchange for a like aggregate principal amount of the Company's
new 9 5/8% Senior Subordinated Notes due 2005 (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms and subject to the conditions set forth in the Prospectus dated
, 1998 (as the same may be amended or supplemented from time to
time, the "Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitutes the "Exchange
Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Existing Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Existing Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
State Street Bank and Trust Company of California, N.A., as the Exchange Agent
(the "Exchange Agent"), as its agent and attorney-in-fact (with full knowledge
that the Exchange Agent is also acting as agent of the Company in connection
with the Exchange Offer) with respect to the tendered Existing Notes, with full
power of substitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest), subject only to the right of withdrawal
described in the Prospectus, to (i) deliver Certificates for Existing Notes to
the Company together with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company, upon receipt by the Exchange
Agent, as the undersigned's agent, of the New Notes to be issued in exchange for
such Existing Notes, (ii) present Certificates for such Existing Notes for
transfer, and to transfer the Existing Notes on the books of the Company, and
(iii) receive for the account of the Company all benefits and otherwise exercise
all rights of beneficial ownership of such Existing Notes, all in accordance
with the terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE EXISTING
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
2
<PAGE>
AND THAT THE EXISTING NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE
CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY
OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE EXISTING
NOTES TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS
UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO
ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Existing
Notes tendered hereby should be printed in Box 1 below, if they are not already
set forth below, as they appear on the Certificates representing such Existing
Notes. The Certificate number(s) and the Existing Notes that the undersigned
wishes to tender should be indicated in the appropriate box below.
If any tendered Existing Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Existing Notes
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Existing Notes will be returned (or, in the case of Existing
Notes tendered by book-entry transfer, such Existing Notes will be credited to
an account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Existing Notes pursuant to any
one of the procedures described in "The Exchange Offer--Procedures for Tendering
Existing Notes" in the Prospectus and in the instructions hereto will, upon the
Company's acceptance for exchange of such tendered Existing Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Existing Notes tendered
hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the New Notes
be issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Existing Notes, that such New Notes be credited to the account
indicated below maintained at DTC. If applicable, substitute Certificates
representing Existing Notes not exchanged or not accepted for exchange will be
issued to the undersigned or, in the case of a book-entry transfer of Existing
Notes, will be credited to the account indicated below maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions" (Box
8), please deliver New Notes to the undersigned at the address shown below the
undersigned's signature.
BY TENDERING EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL,
INCLUDING ANY TENDER VIA THE DEPOSITORY TRUST COMPANY'S AUTOMATED TENDER OFFER
PROGRAM (ATOP), THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE
UNDERSIGNED IS NOT AN "AFFILIATE" OF THE COMPANY, (ii) ANY NEW NOTES TO BE
RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS
BUSINESS, (iii) THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY
PERSON TO PARTICIPATE IN THE DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES
ACT) OF NEW NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (iv) THE UNDERSIGNED
IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE
MEANING OF THE SECURITIES ACT) OF SUCH NEW NOTES. BY TENDERING EXISTING NOTES
PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL,
INCLUDING ANY TENDER VIA THE DEPOSITORY TRUST COMPANY'S AUTOMATED TENDER OFFER
PROGRAM (ATOP), A HOLDER OF EXISTING NOTES WHICH IS A BROKER-DEALER REPRESENTS
AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF
THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT SUCH EXISTING NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR
ITS OWN ACCOUNT AS A
3
<PAGE>
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES (SUCH A BROKER-
DEALER WHICH IS TENDERING EXISTING NOTES IS HEREIN REFERRED TO AS A
"PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER THE PROSPECTUS (AS AMENDED OR
SUPPLEMENTED FROM TIME TO TIME) MEETING THE REQUIREMENTS OF THE SECURITIES ACT
IN CONNECTION WITH ANY RESALE OF SUCH NEW NOTES (PROVIDED THAT, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH PARTICIPATING BROKER-DEALER
WILL NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF
THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH RESALES
OF NEW NOTES RECEIVED IN EXCHANGE FOR EXISTING NOTES, WHERE SUCH EXISTING NOTES
WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD OF
180 DAYS FOLLOWING THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION
STATEMENT ON FORM S-4 (I.E. THROUGH , 1999) OR, IF EARLIER, UNTIL
ALL SUCH NEW NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN
THAT REGARD, EACH PARTICIPATING BROKER-DEALER, BY TENDERING SUCH EXISTING NOTES
AND EXECUTING THIS LETTER OF TRANSMITTAL, INCLUDING ANY TENDER VIA THE
DEPOSITORY TRUST COMPANY'S AUTOMATED TENDER OFFER PROGRAM (ATOP), AGREES THAT,
UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE
DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY
REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE
PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY
WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED
IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL
SUSPEND THE SALE OF NEW NOTES PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY HAS
AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION
AND HAS FURNISHED COPIES OF THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE
PARTICIPATING BROKER-DEALER OR THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF THE
NEW NOTES MAY BE RESUMED, AS THE CASE MAY BE.
Each New Note will bear interest from the most recent date to which interest
has been paid or duly provided for on the Existing Note surrendered in exchange
for such New Note or, if no such interest has been paid or duly provided for on
such Existing Note, from April 23, 1998. Holders of the Existing Notes whose
Existing Notes are accepted for exchange will not receive accrued interest on
such Existing Notes for any period from and after the last Interest Payment Date
to which interest has been paid or duly provided for on such Existing Notes
prior to the original issue date of the New Notes or, if no such interest has
been paid or duly provided for, will not receive any accrued interest on such
Existing Notes, and will be deemed to have waived the right to receive any
interest on such Existing Notes accrued from and after such Interest Payment
Date or, if no such interest has been paid or duly provided for, from and after
April 23, 1998.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
4
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE
BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE A-10 HEREOF.
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
<TABLE>
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF EXISTING NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
-----------------------------------------------------------------------------------------------------
IF BLANK, PLEASE PRINT NAME(S) AND ADDRESS(ES) CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
OF REGISTERED HOLDER(S), EXACTLY AS NAME(S) OF EXISTING NOTES* EXISTING NOTES EXISTING NOTES TENDERED**
APPEAR(S) ON EXISTING NOTE CERTIFICATE(S):
------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL TOTAL PRINCIPAL AMOUNT
AMOUNT TENDERED
$ $
--------------------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Existing Notes may be tendered in whole or in part in denominations of $1,000 and integral multiples thereof. All Existing
Notes held shall be deemed tendered unless a lesser number is specified in this column. See Instruction 4.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------------------------------------------------------------
BOX 2
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
----------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ___________________________________________
DTC Account Number ______________________________________________________
Transaction Code Number _________________________________________________
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
/ / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name of Registered Holders(s) ___________________________________________
Window Ticket Number (if any) ___________________________________________
Date of Execution of Notice of Guaranteed Delivery ______________________
Name of Institution which Guaranteed Delivery ___________________________
If Guaranteed Delivery is to be made by Book-Entry Transfer:
Name of Tendering Institution ___________________________________________
DTC Account Number ______________________________________________________
Transaction Code Number _________________________________________________
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BOX 4
RETURN OF NON-EXCHANGED EXISTING NOTES TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
-------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED
EXISTING NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET
FORTH ABOVE.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BOX 5
PARTICIPATING BROKER-DEALER
----------------------------------------------------------------------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE EXISTING NOTES
FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN
ADDITIONAL COPIES OF THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name: ___________________________________________________________________
Address: ________________________________________________________________
__________________________________________________________________
-------------------------------------------------------------------------
6
<PAGE>
-------------------------------------------------------------------------
BOX 6
TENDERING HOLDER SIGNATURE
-------------------------------------------------------------------------
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
-------------------------------------------------------------------------
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Existing Notes hereby tendered or on a security
position listing, or by a person(s) authorized to become the registered
holder(s) by endorsements and documents transmitted herewith (including such
opinions of counsel, certifications and other information as may be required
by the Company or the Trustee for the Existing Notes to comply with the
restrictions on transfer applicable to the Existing Notes). If signature is
by an attorney-in-fact, executor, administrator, trustee, guardian, officer
of a corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title. See Instruction 5 below.
____________________________________________________________________________
(Name Of Holder)
By:_________________________________________________________________________
(Signature(s))
Name(s) ____________________________________________________________________
(Please Print)
____________________________________________________________________________
(Title)
Date
------------------, 1998
Address ____________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _____________________________________________
____________________________________________________________________________
(Tax Identification Or Social Security Number(s) Of Holder)
____________________________________________________________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
Authorized Signature _______________________________________________________
Name _______________________________________________________________________
(Please Print)
Date
----------------------------, 1998
Capacity or Title __________________________________________________________
Name of Firm _______________________________________________________________
Address ____________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _____________________________________________
----------------------------------------------------------------------------
7
<PAGE>
----------------------------------------------------------------------------
BOX 7
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 BELOW)
----------------------------------------------------------------------------
To be completed ONLY if the New Notes are to be issued in the name of
someone other than the registered holder of the Existing Notes whose name(s)
appear(s) above.
Issue New Notes to:
Name _______________________________________________________________________
(Please Print)
Address ____________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(Include Zip Code)
____________________________________________________________________________
(Taxpayer Identification or Social Security No.)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BOX 8
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 BELOW)
----------------------------------------------------------------------------
To be completed ONLY if New Notes are to be sent to someone other than
the registered holder of the Existing Notes whose name(s) appear(s) above,
or to such registered holder(s) at an address other than that shown above.
Mail New Notes to:
Name _______________________________________________________________________
(Please Print)
Address ____________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(Include Zip Code)
____________________________________________________________________________
(Taxpayer Identification or Social Security No.)
----------------------------------------------------------------------------
8
<PAGE>
<TABLE>
<C> <C> <C>
- ----------------------------------------------
BOX 9
SUBSTITUTE FORM W-9
- ----------------------------------------------------------------------------------------
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX 6
PAYER'S NAME: STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
- --------------------------------------------------------------------------------------------------
SUBSTITUTE Part I--Please provide your TIN TIN
FORM W-9 (either your social security ------------------------------
DEPARTMENT OF THE TREASURY number or employer
INTERNAL REVENUE SERVICE identification number) in the
box to the right and certify by
signing and dating below.
Part 2--Awaiting TIN / /
SIGN THIS FORM AND THE CERTIFICATION OF
PAYER'S REQUEST FOR AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW.
TAXPAYER
IDENTIFICATION NUMBER Part 3--Exempt / /
(TIN) See enclosed Guidelines for additional information and SIGN THIS
FORM.
AND CERTIFICATION
- --------------------------------------------------------------------------------------------------
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number (or I am waiting
for a number to be issued to me); and
(2) I am not subject to backup withholding because (i) I am exempt from backup withholding, or
(ii) I have not been notified by the Internal Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to report all interest or dividends, or (iii) the
IRS has notified me that I am no longer subject to backup withholding.
(3) Any other information provided on this form is true and correct.
CERTIFICATION INSTRUCTIONS--You must cross out item (iii) in Part (2) above if you have been
notified by the IRS that you are subject to backup withholding because of underreporting interest
or dividends on your tax return and you are no longer subject to backup withholding.
SIGNATURE -------------------------------------------------- DATE ----------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued
to me, and either (1) I have mailed or delivered an application to receive a taxpayer
identification number to the appropriate Internal Revenue Service Center or Social Security
Administration Office or (2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the time of payment, 31% of
all payments made to me on account of the New Notes shall be retained until I provide a taxpayer
identification number to the Exchange Agent and that, if I do not provide my taxpayer
identification number within 60 days, such retained amounts shall be remitted to the Internal
Revenue Service as backup withholding and 31% of all reportable payments made to me thereafter will
be withheld and remitted to the Internal Revenue Service until I provide a taxpayer identification
number.
SIGNATURE -------------------------------------------------- DATE ----------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
9
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Existing Notes directly to the Company.
Your Existing Note Certificates, together with your signed and completed Letter
of Transmittal and any required supporting documents should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
the address indicated on the first page hereof. THE METHOD OF DELIVERY OF
CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR OVERNIGHT
DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED
TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Existing Notes" in the Prospectus. Certificates,
or timely confirmation of a book-entry transfer of such Existing Notes into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Existing Notes may be tendered in whole or in part in the principal amount of
$1,000 and integral multiples of $1,000.
Holders who wish to tender their Existing Notes and (i) whose Existing Notes
are not immediately available or (ii) who cannot deliver their Existing Notes,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Existing Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering Existing Notes" in the Prospectus
and by completing Box 3 hereof. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution (as defined below); (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, must be received by the
Exchange Agent prior to the Expiration Date; and (iii) the Certificates (or a
book-entry confirmation (as defined in the Prospectus)) representing all
tendered Existing Notes, in proper form for transfer, together with a Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent on or before three
New York Stock Exchange trading days after the date of execution of such Notice
of Guaranteed Delivery, all as provided in "The Exchange Offer--Procedures for
Tendering Existing Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Existing Notes to
be properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein, "Eligible Institution" means a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor
institution," including (as such terms are defined therein) (i) a bank, (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer, (iii) a credit union, (iv) a national securities exchange,
registered securities association or clearing agency, or (v) a savings
association, respectively, that is a participant in the Securities Transfer
Agents Medallion
10
<PAGE>
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant in
DTC whose name appears on a security position listing as the owner of the
Existing Notes) of Existing Notes tendered herewith, unless such holder(s)
has completed either the box entitled "Special Exchange Instructions" (Box
7) or the box entitled "Special Delivery Instructions" (Box 8) above, or
(ii) such Existing Notes are tendered for the account of a firm that is
an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Existing Notes"
is inadequate, the Certificate number(s) and/or the principal amount of Existing
Notes and any other required information should be listed on a separate signed
schedule which should be attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Existing Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Existing Notes
evidenced by any Certificate submitted are to be tendered, fill in the principal
amount of Existing Notes which are to be tendered in Box 1 under the column
"Principal Amount of Existing Notes Tendered." In such case, new Certificate(s)
for the remainder of the Existing Notes that were evidenced by your Existing
Certificate(s) will only be sent to the holder of the Existing Notes, promptly
after the Expiration Date. All Existing Notes represented by Certificates
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at its address set forth above or in the
Prospectus on or prior to the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Existing Notes to be
withdrawn, the aggregate principal amount of Existing Notes to be withdrawn, and
(if Certificates for such Existing Notes have been tendered) the name of the
registered holder of the Existing Notes as set forth on the Certificate for the
Existing Notes, if different from that of the person who tendered such Existing
Notes. If Certificates for the Existing Notes have been delivered or otherwise
identified to the Exchange Agent, then prior to the physical release of such
Certificates for the Existing Notes, the tendering holder must submit the serial
numbers shown on the particular Certificates for the Existing Notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Existing Notes tendered for the
account of an Eligible Institution. If Existing Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Existing Notes," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Existing Notes, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by written, telegraphic, telex or
facsimile transmission. Withdrawals of tenders of Existing Notes may not be
rescinded. Existing Notes properly withdrawn will not be deemed validly tendered
for purposes of the Exchange Offer, but
11
<PAGE>
may be retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described in the Prospectus under "The Exchange
Offer--Procedures for Tendering Existing Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give such notification. Any Existing Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Existing Notes tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Existing Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company, must
submit proper evidence satisfactory to the Company, in its sole discretion, of
such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Existing Notes listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless New Notes are to be
issued in the name of a person other than the registered holder(s). However, if
New Notes are to be issued in the name of a person other than the registered
holder(s), signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Existing Notes listed, the certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also must
be accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Existing Notes may require in accordance
with the restrictions on transfer applicable to the Existing Notes. Signatures
on such Certificates or bond powers must be guaranteed by an Eligible
Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If New Notes are to be issued in the name of a person other than the signer
of this Letter of Transmittal, or if New Notes are to be sent to someone other
than the signer of this Letter of Transmittal or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal should be
completed (Box 7 and 8). Certificates for Existing Notes not exchanged will be
returned by mail or, if tendered by book-entry transfer, by crediting the
account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Existing
12
<PAGE>
Notes, which determination shall be final and binding on all parties. The
Company reserves the absolute right to reject any and all tenders determined by
it not to be in proper form or the acceptance of which, or exchange for, may, in
the view of counsel to the Company, be unlawful. The Company also reserves the
absolute right, subject to applicable law, to waive any of the conditions of the
Exchange Offer set forth in the Prospectus under "The Exchange Offer--Certain
Conditions to the Exchange Offer" or any conditions or irregularity in any
tender of Existing Notes of any particular holder whether or not similar
conditions or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Existing Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the Company,
the Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter of
Transmittal (Box 9) and certify, under penalties of perjury, that such number is
correct and he or she is not subject to backup withholding. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Existing Notes
exchanged pursuant to the Exchange Offer, or with respect to New Notes following
the Exchange Offer, may be subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below Substitute Form W-9 in order to avoid backup
withholding. Notwithstanding that the box in Part 2 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Existing Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Existing Notes. If the Existing Notes are registered in
more than one name or are not in the name of the actual owner, consult the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed IRS
Form W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
13
<PAGE>
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Existing Notes have been lost, destroyed
or stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, New Notes are to
be delivered to, or are to be issued in the name of, any person other than the
registered holder of the Existing Notes tendered, or if a transfer tax is
imposed for any reason other than the exchange of Existing Notes in connection
with the Exchange Offer, then the amount of any such transfer tax (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN
THE TAXPAYER IDENTIFICATION NUMBER FOR MOST INDIVIDUALS IS THEIR SOCIAL
SECURITY NUMBER. REFER TO THE FOLLOWING CHART TO DETERMINE THE APPROPRIATE
NUMBER:
<TABLE>
<CAPTION>
GIVE THE
SOCIAL
FOR THIS TYPE OF SECURITY
ACCOUNT NUMBER OF
- ---------------------------------------------- -----------------------------------
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
1. Individual The individual
2. Two or more individuals (joint account) The actual owner of the account or, if
combined funds, the first individual on
the account (1)
3. Custodian account of a minor (Uniform The minor (2)
Gift to Minors Act)
4. a. The usual revocable savings trust The grantor-trustee (1)
(grantor is also trustee)
b. So-called trust account that is not a The actual owner (1)
legal or valid trust under state law
5. Sole proprietorship The owner (3)
6. Sole proprietorship The owner (3)
7. A valid trust, estate or pension trust Legal entity (4)
8. Corporate The corporation
9. Association, club, religious, The organization
charitable, educational or other tax-
exempt organization
10. Partnership The partnership
11. A broker or registered nominee The broker or nominee
12. Account with the Department of The public entity
Agriculture
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
14
<PAGE>
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
B. EXEMPT PAYEES
The following lists exempt payees. If you are exempt, you must nonetheless
complete the form and provide your TIN in order to establish that you are
exempt. Check the box in Part 3 of the form, sign and date the form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an
organization exempt from tax under section 501(a), or an individual
retirement plan (IRA) or a custodial account under section 403(b)(7); (3)
the United States or any of its agencies or instrumentalities; (4) a state,
the District of Columbia, a possession of the United States, or any of their
political subdivisions or instrumentalities; (5) a foreign government or any
of its political subdivisions, agencies or instrumentalities; (6) an
international organization or any of its agencies or instrumentalities; (7)
a foreign central bank of issue; (8) a dealer in securities or commodities
required to register in the U.S. or a possession of the U.S.; (9) a real
estate investment trust; (10) an entity or person registered at all times
during the tax year under the Investment Company Act of 1940; (11) a common
trust fund operated by a bank under section 584(a); (12) a financial
institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form
SS-4, Application for Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply
for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report
the payments to the IRS. The IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not payees are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not
furnish a taxpayer identification number. Certain penalties may also apply.
E. PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being
due to negligence and will be subject to a penalty of 5% on any portion of
an under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
15
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
9 3/8% SENIOR SUBORDINATED NOTES DUE 2005 OF
MTS, INCORPORATED
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's (as defined below) 9 3/8% Senior Subordinated
Notes due 2005 (the "Existing Notes") are not immediately available, (ii) the
Existing Notes, the Letter of Transmittal and all other required documents
cannot be delivered to State Street Bank and Trust Company of California, N.A.
(the "Exchange Agent") on or prior to the Expiration Date (as defined in the
Prospectus referred to below) or (iii) the procedures for delivery by book-entry
transfer cannot be completed on a timely basis. See Instruction 1 to the Letter
of Transmittal. This Notice of Guaranteed Delivery may be delivered by hand,
overnight courier or mail, or transmitted by facsimile transmission, to the
Exchange Agent prior to the Expiration Date. See "The Exchange Offer Procedures
for Tendering Existing Notes" in the Prospectus.
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
State Street Bank and Trust Company of California, N.A.
c/o State Street Bank and Trust Company
2 International Place, 4th Floor
Boston, MA 02110
Attention: Kellie Mullen, Corporate Trust Department
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(617) 664-5587
FACSIMILE TRANSMISSIONS:
(617) 664-5290
(Originals of all documents sent by facsimile should be sent promptly by hand,
overnight courier or registered or certified mail.)
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
1
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to MTS, Incorporated, a California
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated , 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus") and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Existing Notes set
forth below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer--Procedures for Tendering
Existing Notes."
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DESCRIPTION OF EXISTING NOTES TENDERED
- -------------------------------------------------------------------------------------------
<S> <C>
NAME(S), ADDRESS(ES) AND AREA CODE(S) AND TELEPHONE
NUMBER(S) OF REGISTERED HOLDER(S): CERTIFICATE NUMBER(S) (IF
AVAILABLE):
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
Aggregate Principal Amount Tendered: $
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
Signature(s):
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
If Existing Notes will be tendered by book-entry transfer, please provide the following
information:
Name of Tendering Institution:
DTC Account Number:
Date:
Transaction Code Number:
<CAPTION>
- -------------------------------------------------------------------------------------------
</TABLE>
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i) a bank, (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer, (iii) a credit union, (iv) a national securities exchange,
registered securities association or clearing agency, or (v) a savings
association, respectively, that is a participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange Medallion Signature
Program or the Stock Exchanges Medallion Program (each of the foregoing being
referred to as an "Eligible Institution"), hereby guarantees to deliver to the
Exchange Agent, at its address set forth above, either the Existing Notes
tendered hereby in proper form for transfer, or confirmation of the book-entry
transfer of such Existing Notes to the Exchange Agent's account at The
Depository Trust Company ("DTC"), pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with one or
2
<PAGE>
more properly completed and duly executed Letter(s) of Transmittal (or facsimile
thereof) and any other required documents on or before three New York Stock
Exchange trading days after the Expiration Date of the Exchange Offer.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Existing Notes tendered hereby to the Exchange Agent within
the time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------------------
Name of Firm: Authorized Signature:
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
Address: Name (Please Print):
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
Capacity or Title:
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
Area Code and Telephone Number: Date:
<CAPTION>
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE: DO NOT SEND EXISTING NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
ACTUAL SURRENDER OF EXISTING NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED
BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
3
<PAGE>
[MBI LETTERHEAD]
EXHIBIT 99.3
July 17, 1998
MTS, Incorporated
2500 Del Monte St. Bldg. C
West Sacramento, CA 95691
De Vaughn Searson, Chief Financial Officer
Dear De Vaughn:
Music Business International (MBI) hereby gives consent to MTS, Incorporated to
use MBI as a reference and for the use of market and industry data from MBI
reports. This consent is rendered for MTS's registration statement on form S-4
(333-54035).
Sincerely,
/s/ JOHN HURLEY
John Hurley
Music Business International
