-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QojAkw44xdB6yd0HDj7Ttb9l2hFzLxgEhvxA4fjxnr5yUq3v+PDOCPX8UZ/iJ8x3 UKnfdC5qkrqtVYfy+D/amA== 0001047469-98-039410.txt : 19981113 0001047469-98-039410.hdr.sgml : 19981113 ACCESSION NUMBER: 0001047469-98-039410 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980424 DATE AS OF CHANGE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUSICLAND GROUP INC /DE CENTRAL INDEX KEY: 0000798507 STANDARD INDUSTRIAL CLASSIFICATION: 5735 IRS NUMBER: 411307776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-66871 FILM NUMBER: 98739255 BUSINESS ADDRESS: STREET 1: 10400 YELLOW CIRCLE DR CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129318000 MAIL ADDRESS: STREET 1: 10400 YELLOW CIRCLE DRIVE CITY: MINNETONKA STATE: MN ZIP: 55343 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1998 REGISTRATION NO. 333- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ THE MUSICLAND GROUP, INC. ("MGI") (Exact name of Company as specified in its charter) DELAWARE 41-1307776 (State of Incorporation) (I.R.S. Employer Identification No.) ------------------------------ AND MUSICLAND STORES CORPORATION ("MSC") (Exact name of Company as specified in its charter) DELAWARE 41-1623376 (State of Incorporation) (I.R.S. Employer Identification No.)
------------------------------ MUSICLAND STORES CORPORATION THE MUSICLAND GROUP, INC. 10400 YELLOW CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343 (612) 931-8000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Company's Principal Executive Offices) ------------------------------ JACK W. EUGSTER, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS OF MGI AND MSC MUSICLAND STORES CORPORATION THE MUSICLAND GROUP, INC. 10400 YELLOW CIRCLE DRIVE MINNETONKA, MINNESOTA 55343 (612) 931-8000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------------------------ COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO: JANNA R. SEVERANCE, ESQ. MOSS & BARNETT 4800 NORWEST CENTER 90 SOUTH SEVENTH STREET MINNEAPOLIS, MINNESOTA 55402-4129 (612) 347-0367 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------------ If the only securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box: / / If this form is filed to register additional securities for an offering pursuant to rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective registration statement for the same offering: / / If this form is a post-effective amendment filed pursuant to rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE OFFERING PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE(3) OFFERING PRICE(4) REGISTRATION FEE 9 7/8% Series B Senior Subordinated Notes due 2008 (1)............................................. $150,000,000 $1,000 $150,000,000 $44,250 Guarantee (2)..................................... (5) (5) (5) (5)
(1) Issued by The Musicland Group, Inc. ("MGI"). (2) Guarantee of the Notes by Musicland Stores Corporation ("MSC"), which owns 100% of MGI. (3) Minimum Note denomination. (4) Estimated solely for purposes of calculating the registration fee. Fee calculated pursuant to Rule 457(f)(2) based on the par value of the 9.875% Series A Senior Subordinated Notes of MGI (and associated Guarantee by MSC) to be exchanged for the securities being registered. (5) No additional value is attributed to the Guarantee, which is inseparable from the Series B Notes. ------------------------------ THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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. SUBJECT TO COMPLETION, DATED APRIL , 1998 PROSPECTUS $150,000,000 [LOGO] OFFER TO EXCHANGE 9 7/8% SERIES B SENIOR SUBORDINATED NOTES FOR ANY AND ALL OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2008 Offer to Exchange 9 7/8% Series B Senior Subordinated Notes Due 2008, which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 9 7/8% Senior Subordinated Notes Due 2008. The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on , 1998 (minimum of 20 and maximum of 30 business days following the commencement of the Exchange Offer) (the "Expiration Date") unless the Exchange Offer is extended. The Musicland Group, Inc. ("MGI" or the "Issuer") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal (each a "Letter of Transmittal," collectively the "Letters of Transmittal" and, together with this Prospectus, the "Exchange Offer"), to exchange its 9 7/8% Series B Senior Subordinated Notes Due 2008 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for an equal principal amount of its outstanding 9 7/8% Series A Senior Subordinated Notes Due 2008 (the "Old Notes") outstanding in the principal amount of $150,000,000 as of the date of this Prospectus. The Old Notes were originally sold on April 6, 1998 (the "Issue Date") to a limited number of qualified investors in reliance upon exemption from registration under the Securities Act (the "Private Placement"). The Issuer will accept for exchange any and all Old Notes that are validly tendered and not withdrawn on or prior to 5:00 p.m., Eastern Standard Time, on , 1998, unless extended. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. See "The Exchange Offer." The New Notes will be obligations of the MGI evidencing the same indebtedness as the Old Notes and will be entitled to the benefits of the Indenture (as defined), which governs both the Old Notes and the New Notes, and to the benefits of the Guarantee of Musicland Stores Corporation ("MSC" or the "Guarantor"), which owns 100% of MGI. All references to the "Company" shall include MSC, MGI, and MGI's subsidiaries. The principal asset of MSC is the stock of MGI; MSC has no business operations other than those conducted by MGI. The form and terms of the New Notes are in all material respects identical to the form and terms of the Old Notes, except that the offer and issuance of the New Notes will have been registered under the Securities Act and, therefore, the New Notes will not bear legends restricting their transfer. The Old Notes and the New Notes are collectively, and sometimes individually, referred to as the "Notes." See "Description of the Notes." The New Notes are being offered hereunder in order to satisfy certain obligations of the Issuer and the Guarantor under the Registration Rights Agreement, dated April 6, 1998 (the "Registration Rights Agreement"), among the Issuer, the Guarantor and Donaldson Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and NationsBanc Montgomery Securities LLC (the "Initial Purchasers"). Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission"), as set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder that is an "affiliate" of the Company, as defined under Rule 405 of the Securities Act), provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement with any person to participate in the distribution of such New Notes. However, the staff of the Commission has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. By tendering the Old Notes in exchange for the New Notes, each holder, other than a broker-dealer, will represent to the Company that (i) it is not an affiliate of the Company (as defined under Rule 405 of the Securities Act), (ii) any New Notes to be received by it were acquired in its ordinary business and (iii) it is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement or understanding to participate in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. The Letters of Transmittal state that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that it will make this Prospectus available to any broker-dealer for use in connection with resale for a period starting on the Expiration Date and ending on the earlier of (i) the close of business 360 days after the Expiration Date or (ii) the date when (A) all Old Notes have been exchanged for New Notes, (B) all Old Notes have been sold pursuant to a Shelf Registration Statement (as defined) or pursuant to Rule 144 under the Act, and (C) all New Notes have been sold (as contemplated by "Plan of Distribution," herein) by any broker-dealer who acquires such New Notes in exchange for Old Notes pursuant to this Exchange Offer. In addition, until [ , 1998] (90 days after the date of this Prospectus), all dealers effecting transactions in the New Notes may be required to deliver a prospectus. See "Plan of Distribution." Prior to this Exchange Offer, there has been no public market for the Old Notes or the New Notes. The Initial Purchasers have agreed that one or more of them will act as market-makers for the New Notes. However, the Initial Purchasers are not obligated to so act and they may discontinue any such market-making at any time without notice. Moreover, the New Notes and Old Notes could trade at prices that may be higher or lower than their principal amount if a market were to develop for either of them. The Company does not intend to apply for listing or quotation of the New Notes or Old Notes on any securities exchange or stock market. Therefore, there can be no assurance as to the liquidity of any trading market for the New Notes or Old Notes or that an active public market for the New Notes or Old Notes will develop. See "Risk Factors--Absence of Public Market." The Company will not receive any proceeds from the Exchange Offer. The Company will pay all the expenses incident to the Exchange Offer. No underwriter is being used in connection with the Exchange Offer. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE OF THIS PROSPECTUS. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER THE HEADING "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON THE COMPANY'S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. i PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" SHALL INCLUDE MSC AND MGI AND ITS SUBSIDIARIES. THE PRINCIPAL ASSET OF MSC IS 100% OF THE OUTSTANDING COMMON STOCK OF MGI AND MSC ENGAGES IN NO INDEPENDENT BUSINESS OPERATIONS. THE INDUSTRY DATA REFERRED TO IN THIS OFFERING MEMORANDUM ARE DERIVED FROM INFORMATION BY VERONIS, SUHLER AND ASSOCIATES, AN INDUSTRY RESEARCH ORGANIZATION AND STRATEGIC RECORD RESEARCH, A MARKET RESEARCH ORGANIZATION. WHILE THE COMPANY BELIEVES THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED FROM RELIABLE SOURCES, THERE CAN BE NO ASSURANCE THAT SUCH INFORMATION IS ACCURATE AND COMPLETE. THIS PROSPECTUS CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES AND SUCH INFORMATION IS SUBJECT TO THE ASSUMPTIONS SET FORTH IN CONNECTION THEREWITH AND THE INFORMATION CONTAINED HEREIN. SEE "RISK FACTORS--FORWARD-LOOKING STATEMENTS." THE COMPANY The Company is the leading specialty retailer of prerecorded music in the United States and is one of the largest national full-media retailers of music, video sell-through, books, computer software and related products. The Company's stores operate under two principal strategies: (i) mall based music and video sell-through stores (the "Mall Stores"), operating under the principal trade names Sam Goody and Suncoast Motion Picture Company ("Suncoast"), and (ii) non-mall based full-media superstores (the "Superstores"), operating under the trade names Media Play and On Cue. At December 31, 1997, the Company operated 1,363 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands and the United Kingdom. For the year ended December 31, 1997, the Company had consolidated revenues of $1.8 billion, including $1.2 billion from the Mall Stores and $0.6 billion from the Superstores, and EBITDA (as defined) of $85.4 million. MALL STORES SAM GOODY. Sam Goody is a well established music retailer that provides a broad selection in an exciting, customer friendly shopping environment. Sam Goody stores offer a full line of music, along with video and related products, and typically carry from 4,500 to 8,500 compact disc titles, depending upon store size and location, with the largest stores carrying up to 45,000 titles. The music stores are predominantly found in mall locations and range in size from 1,000 to 30,000 square feet, averaging 4,300 square feet. Many of the music stores previously operated under the Musicland name have been converted to the Sam Goody name. At December 31, 1997, the Company operated 713 Sam Goody music stores with total square footage of approximately three million square feet or 37% of the Company's total store square footage. SUNCOAST. Suncoast is the dominant mall based video sell-through retailer in the United States offering a broad selection and excellent customer service in an entertaining atmosphere. The typical Suncoast store is 2,400 square feet in size and features 8,000 to 10,000 video titles along with movie and video related apparel, digital video discs ("DVD"), special order video and other related products. At December 31, 1997, the Company operated 409 Suncoast stores with total square footage of approximately one million square feet or 12% of the Company's total store square footage. SUPERSTORES MEDIA PLAY. Media Play is a full-media, superstore retailer of entertainment software products providing a superior assortment at competitive prices in a fun and exciting family oriented environment. Media Play stores average 48,000 square feet and are in freestanding and strip mall locations primarily in urban and suburban areas. The extensive merchandise assortment, including up to 50,000 compact disc titles, 50,000 book titles, 15,000 video titles and 2,000 computer software programs, complemented by 1 other media and related products including magazines, video games, educational toys, greeting cards and apparel, appeals to customers of all ages and encourages browsing. The non-mall locations and largely self-service environment lower operating costs and enable Media Play to offer products at competitive prices. At December 31, 1997, the Company operated 68 Media Play stores with total square footage of approximately three million square feet or 39% of the Company's total store square footage. ON CUE. On Cue is a full-media retailer in small towns, generally with populations between 8,000 and 20,000 people, providing a wide assortment of entertainment software products at competitive prices. On Cue stores offer customers a convenient local store to shop for music, books, video, computer software and related products with superior customer service to encourage repeat business. On Cue stores average 6,200 square feet in size and carry approximately 5,000 compact disc titles, 6,500 book titles and 2,000 video titles. On Cue customers also have access to over 100,000 home entertainment titles through the Company's special order program. At December 31, 1997, the Company operated 157 On Cue stores with total square footage of approximately one million square feet or 12% of the Company's total store square footage. Beginning in 1995, the Company's financial results began to deteriorate as a result of: (i) aggressive expansion of product offerings and new store openings by most of the Company's non-mall competitors; (ii) severe price discounting of music products by certain non-mall competitors; (iii) a lack of strong selling hits in the music industry, which depressed sales throughout the industry; and (iv) the Company's own rapid expansion of Media Play stores in response to encouraging initial results. In 1996 management initiated restructuring programs designed to improve the Company's cash flow and profitability. The major components of the restructuring programs included: (i) closing 114 underperforming stores, which in the last full year of their operations lost an aggregate of $17.7 million on an operating contribution basis; (ii) closing one of the Company's two distribution centers, which reduced the Company's working capital investment by approximately $20 million and contributed to a $6.9 million reduction in distribution costs in 1997; and (iii) improving inventory management techniques, which increased the Company's inventory turnover from 1.8 times during 1996 to 2.1 times during 1997. Inventory levels at year-end 1997 were $55.8 million below those of the prior year with approximately $30 million of the reduction due to store closings and the remainder attributable to distribution efficiencies and improved inventory management. The Company reduced Media Play advertising expense by $7.9 million in 1997 from the prior year as a result of closing stores in entire markets and the introduction of a less costly, but more targeted, program of newspaper advertising inserts. In addition, in 1997 the Company began to benefit from positive trends in the music retailing industry, including a retreat from severe price discounting and an increase in unit sales. As a result, the Company's EBITDA increased from $35.1 million in 1996 to $85.4 million in 1997, and comparable store sales improved from a decrease of 0.6% in 1996 to an increase of 4.5% in 1997. The Company's principal executive offices are located at 10400 Yellow Circle Drive, Minnetonka, Minnesota 55343, and its telephone number is (612) 931-8000. COMPETITIVE STRENGTHS The Company believes that it benefits from the following competitive advantages: LARGEST NATIONAL MUSIC RETAILER. The Company is the largest specialty retailer of music in the United States, with music available in all 1,363 stores. The Company's leading market presence allows the Company to: (i) spread its fixed operating costs over a large revenue base; (ii) realize distribution savings through freight consolidation; (iii) take advantage of vendor discounts and cooperative advertising programs; (iv) negotiate more effectively with national landlords; (v) use national advertising media; and (vi) benefit from market clustering. A national distribution of stores also minimizes the impact on the Company of regional business trends. In recent years, as a result of adverse industry conditions, a number of mall based music chains have closed hundreds of stores. Although the Company has also closed 2 underperforming stores, the Company was the single music retailer in 285 malls at the end of 1997 compared to 274 malls at the end of 1996. SOPHISTICATED INVENTORY MANAGEMENT AND DISTRIBUTION SYSTEMS. Management believes that the Company's proprietary retail inventory management ("RIM") and distribution systems are the most sophisticated in the industry, allowing the Company to manage its inventory more effectively than its competitors. The RIM system performs comprehensive merchandise control functions on both an individual store and a company wide basis. It maintains an inventory profile for every store, incorporates an "intelligent" new release allocation system and adjusts and monitors store inventory on a daily basis. The RIM system allows the Company to meet demand for fast selling titles and carry a broad range of current hits and catalog titles while avoiding excess inventory and substantial returns. In January 1997, the Company consolidated its distribution operations into its state-of-the-art, centrally located facility in Franklin, Indiana, that contains 715,000 square feet. This facility incorporates computerized processing and laser technology for receiving, storing, sorting and shipping new product and returns. This technology has enabled the Company to implement "just-in-time" inventory management with certain vendors, which reduces working capital. STRONG BRAND NAME RECOGNITION. The Company benefits from strong national brand name recognition and continually markets to strengthen the brand images for each of its retail concepts. A 1997 national survey by Strategic Record Research determined that more music consumers preferred shopping at the Company's stores than at other music stores. Strong brand name recognition offers advantages in advertising, in-store events and marketing partnerships. The Company is able to attract large corporate partners such as Pepsi-Cola, Sears, VISA, MasterCard and L'Oreal for cross promotions, events and sweepstakes that the Company believes are attractive to shoppers. The Company's monthly REQUEST magazine, with an annual audited circulation of 6 million copies, is an award winning, cutting edge music publication. REQUEST offers numerous cross marketing opportunities with Sam Goody and the Company's other concepts and reinforces the Company's brand names with consumers. LONG-STANDING VENDOR RELATIONSHIPS. The Company believes its relationships with major music and video vendors are among the best in the industry. Strong vendor relations allow the Company to be creative in its marketing programs and business operations. The Company's long-standing relationships with vendors are further enhanced because: (i) the Company's large selection of products provides vendors with a needed outlet for their catalog product, which is generally more profitable than hit product; and (ii) the Company's RIM system allows the Company to manage product returns at rates below the industry average, which is an economic benefit to the vendors. Management believes that the continued support of its vendors in 1996 and 1997 is a testament to the strength of its vendor relationships. BUSINESS STRATEGY The Company's objective is to continue to increase revenue, cash flow and profitability. Management believes that the Company's recent operating results have begun to reflect the successful implementation of its business strategy. The key elements of the Company's business strategy are as follows: STRENGTHEN STORE BASE. After closing 236 underperforming stores over the past three years, management believes that its current store base is well positioned for future growth. Management intends to improve sales by enhancing brand name awareness and increasing store traffic through creative advertising and marketing programs. Management also intends to remodel certain stores in order to enhance their appeal to customers. While management does not currently intend to significantly expand its store base, the Company will open selected new stores in order to fill out existing markets or capitalize on attractive leasing opportunities. The Company will continue to assess the profitability of its stores and will close a limited number of underperforming stores in the coming years, if the closings can be accomplished economically. 3 CAPITALIZE ON FAVORABLE INDUSTRY DYNAMICS. The Company expects sales of its products to increase due to: (i) increased consumer spending; (ii) favorable demographic trends; and (iii) the advent of new technologies. Through 2001, consumer spending on pre-recorded music, video sell-through and trade books is projected to grow at compounded annual growth rates of 5.6%, 11.2% and 5.8%, respectively (according to Veronis, Suhler & Associates). Demographic shifts over the next few years are expected to contribute to sales growth. The 15 to 24 age group, whose members are known to be mall-shoppers and strong music buyers, is projected to be 4.1% larger in the year 2000 than its size in 1995. The principal book buying population, between 35 and 54 years of age, is projected to grow in the same period by 12.3%. Children's music, video, books and toys should benefit by a growth of 6.4% in the 5 to 14 age group in the same period (source: U.S. Bureau of Census 1996). Historically, the introduction of new technology, such as compact discs, has had a positive impact on the Company's business, and the most encouraging new technology today is DVD. Veronis, Suhler & Associates projects that by 2001 annual consumer spending on DVDs will be approximately $1.2 billion. Most of the Company's stores carry DVD, and Suncoast in particular is pursuing the early adopters of this new format. INCREASE GROSS MARGIN. The Company believes the following initiatives will benefit gross margin: (i) selective price decisions in response to the competitive environment in various markets; (ii) adjustments to merchandise assortment to include more higher margin products; and (iii) cross promotions on product lines to increase sales of high margin ancillary products, such as apparel. REDUCE WORKING CAPITAL. The Company plans to continue reducing working capital by: (i) expanding the "just in time" inventory program, which completely eliminates backup inventory, to include more products and selective additional vendors; (ii) implementing more precise buying rules to reduce returns; and (iii) eliminating less profitable product lines. IMPROVE MEDIA PLAY PROFITABILITY. The Company will concentrate on improving profitability in all concepts, but particularly in Media Play. The Company's efforts to increase sales, improve gross margin, increase customer traffic and reduce operating costs in its Media Play stores include the following initiatives: (i) introducing new merchandise assortments; (ii) altering departmental and store layouts; and (iii) reducing operating costs through improved store management, expense control and inventory management. Of the Company's four concepts, Media Play showed the most significant profitability improvement in 1997. 4 THE EXCHANGE OFFER Registration Rights Agreement..... The Old Notes were sold by the Company on April 6, 1998 (the "Issue Date") in the Private Placement to Donaldson, Lufkin & Jenrette, Securities Corporation, BT Alex. Brown, and NationsBanc Montgomery Securities LLC (the "Initial Purchasers"), who placed such Old Notes with institutional investors. In connection therewith, the Company executed and delivered for the benefit of the holders of the Old Notes the Registration Rights Agreement obligating the Company to file with the Commission within 60 days after the date of issuance of the Old Notes, a registration statement under the Securities Act relating to an exchange offer for the Old Notes (the "Exchange Offer") and to use its best efforts to cause such registration statement to become effective within 150 days after the Issue Date. The Exchange Offer................ The New Notes are being offered in exchange for an equal principal amount at maturity of Old Notes. As of the date hereof, there was outstanding $150,000,000 principal amount of Old Notes. Because the New Notes will be recorded in the Company's accounting records at the same carrying value as the Old Notes, no gain or loss will be recognized by the Company upon the consummation of the Exchange Offer. See "The Exchange Offer--Accounting Treatment." Holders of the Old Notes do not have appraisal or dissenter's rights in connection with the Exchange Offer under the Delaware General Corporation Law (the "DGCL"), which is the law of the state of incorporation of the Issuer and the Guarantor. Based on interpretations by the staff of the Commission, as set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder who is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided, however, that such New Notes are acquired in the ordinary course of the holder's business and such holder is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement with any person to participate in a distribution of such New Notes. The staff of the Commission has not considered the Exchange Offer in the context of a no action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." To
5 comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the New Notes prior to offering or selling such New Notes. The Company has agreed, pursuant to the Registration Agreement and subject to certain specified limitations therein, to register or qualify the New Notes for offer or sale under the securities or "blue sky" laws of such jurisdictions as may be necessary to permit the holders of New Notes to trade such New Notes without any restrictions or limitations under the securities laws of the several states of the United States. If a holder of Old Notes does not exchange such Old Notes for New Notes pursuant to the Exchange Offer, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors--Consequences of Failure to Exchange." Expiration Date................... 5:00 p.m. Eastern Standard Time, on , 1998, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Conditions to the Exchange Offer........................... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer--Conditions." Except for the requirements of applicable Federal and state securities laws, there are no Federal or state regulatory requirements to be complied with or obtained by the Company in connection with the Exchange Offer. NO VOTE OF THE SECURITY HOLDERS OF MSC OR MGI IS REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING REQUESTED BY MEANS OF THIS PROSPECTUS OR OTHERWISE. Procedures for Tendering Old Notes........................... Each holder of Old Notes who wishes to accept the Exchange Offer must complete, sign and date the Letter of Transmittal (the "Letter of Transmittal"), or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile together with the Old Notes to be exchanged and any other required documentation to the Exchange Agent (as defined) at the address set forth herein and therein. See "The Exchange Offer--Procedures for Tendering." Withdrawal Rights................. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. To withdraw a tender of Old Notes, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent (as defined) at its address set forth below under "Exchange Agent" prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date.
6 Acceptance of Old Notes and Delivery of New Notes........... Subject to certain conditions, the Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Exchange Agent.................... Bank One, N.A., the Trustee under the Indenture, is also serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. The Exchange Agent can be contacted by telephone at: (800) 346-5153; by facsimile at: (614) 248-5088, or by mail at: Bank One, N.A., 235 West Schrock Road, Westerville, OH 43081, Attn: Corporate Trust Operations. Use of Proceeds................... There will be no proceeds to the Company from the Exchange Offer. The net proceeds to the Company from the Private Placement were approximately $144 million (after deduction of discounts and estimated offering expenses). The Company has applied such proceeds to the repayment of existing indebtedness.
SUMMARY OF TERMS OF NEW NOTES The Exchange Offer relates to the exchange of Old Notes for an equal principal amount at maturity of New Notes. The New Notes will be obligations of the Company evidencing the same indebtedness as the Old Notes and will be entitled to the benefits of the same Indenture (as defined), which governs both the Old Notes and the New Notes. In addition, the New Notes will be subject to the benefits of the Guarantee. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes except that the offer of the New Notes will have been registered under the Securities Act and, therefore, the New Notes will not bear legends restricting the transfer thereof. Generally, the New Notes will be freely transferable under the Securities Act by holders who are not affiliates of the Company. The New Notes otherwise will be substantially identical in all material respects to the old Notes, as summarized below. Securities Offered................ $150.0 million in aggregate principal amount of 9 7/8% Series B Senior Subordinated Notes due 2008. Maturity Date..................... March 15, 2008. Interest Rate..................... The Notes will bear interest at the rate of 9 7/8% per annum, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 1998. Subordination..................... The Notes will be general unsecured obligations of MGI, will rank subordinate in right of payment to all Senior Debt and will rank senior or PARI PASSU in right of payment to all existing and future subordinated indebtedness of MGI. The Notes will be unconditionally guaranteed on a senior subordinated basis by MSC. The Guarantee will be a general unsecured obligation of MSC, will rank subordinate in right of payment to all Senior Debt of the Guarantor and will rank senior or PARI PASSU in right of payment to all existing and future subordinated indebtedness of MSC. As of March 1, 1998, on a pro forma basis, after giving
7 effect to the issuance of the Notes and the application of the net proceeds therefrom, the Notes would have been subordinated to $83.0 million of Senior Debt of MGI. In addition, on such date and pro forma basis, MGI could have borrowed up to an additional $99.0 million under the Revolver Agreement (as defined below) which would also have constituted Senior Debt. See "Risk Factors--Subordination" and "Description of Existing Financing Arrangements." Optional Redemption............... The Notes will be redeemable at the option of MGI, in whole or in part, at any time on or after March 15, 2003 in cash, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption. In addition, at any time prior to March 15, 2001, MGI may redeem up to 40% of the initially outstanding aggregate principal amount of Notes at a redemption price equal to 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net proceeds of a Public Equity Offering; PROVIDED that, in each case, at least 60% of the initially outstanding aggregate principal amount of Notes remains outstanding immediately after the occurrence of any such redemption. See "Description of Notes--Optional Redemption." Change of Control................. Upon the occurrence of a Change of Control, each holder of Notes will have the right to require MGI to repurchase all or any part of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase. See "Description of Notes--Repurchase at the Option of Holders-- Change of Control." There can be no assurance that, in the event of a Change of Control, MGI would have sufficient funds to repurchase all New Notes tendered. See "Risk Factors-- Possible Inability to Repurchase Notes Upon a Change of Control." Guarantee......................... The New Notes will be unconditionally guaranteed on a senior subordinated basis by MSC, the Guarantor. Certain Covenants................. The Indenture contains certain covenants that limit, among other things, the ability of MGI to: (i) pay dividends, redeem capital stock or make certain other restricted payments or investments; (ii) incur additional indebtedness or issue preferred equity interests; (iii) merge, consolidate or sell all or substantially all of its assets; (iv) create liens on assets; and (v) enter into certain transactions with affiliates or related persons. See "Description of Notes--Certain Covenants." Use of Proceeds................... The Company will not receive any proceeds from the issuance of the New Notes. See "Use of Proceeds."
8 Book-Entry; Delivery.............. The New Notes will not be certificated but will be book-entry securities, and transfers will be effected through the facilities of The Depository Trust Company ("DTC"). See "Description of Notes--Book-Entry; Delivery and Form."
EFFECT UPON OLD NOTES The holders of Old Notes currently are entitled to certain registration rights pursuant to the Registration Rights Agreement among the Issuer, the Guarantor, and the Initial Purchasers. However, upon consummation of the Exchange Offer, subject to certain exceptions, holders of Old Notes who do not exchange their Old Notes for New Notes in the Exchange Offer will no longer be entitled to registration rights and will not be able to offer or sell their Old Notes, unless such Old Notes are subsequently registered under the Securities Act (which, subject to certain limited exceptions, the Company will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors--Consequences of Failure to Exchange" and "The Exchange Offer--Continuing Registration Rights." Old Notes which are not exchanged and which remain outstanding will continue to be obligations of the Company and will be entitled to the benefits of the Indenture and the Guarantee. RISK FACTORS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS." 9 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following table sets forth summary consolidated financial data and operating data for the years and dates indicated. The data presented below under the captions "Pro Forma Data," "Operating Data" and "Store Data" for all years presented, are unaudited. The unaudited summary pro forma financial and operating data of the Company for the year ended December 31, 1997 do not necessarily reflect the results of operations or financial position of the Company that would have actually resulted had the events referred to in the notes to the unaudited pro forma financial information been consummated as of the dates indicated and are not intended to project the Company's financial position or results of operations for any future period. This information should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere herein and "Management's Discussion and Analysis of Results of Operations and Financial Condition."
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Sales......................... $1,181,658 $1,478,842 $1,722,572 $1,821,594 $1,768,312 Gross profit.................. 470,951 542,199 606,070 611,759 614,829 Selling, general and administrative expenses..... 365,311 450,919 525,213 576,658 529,427 Depreciation and amortization................ 29,057 37,243 45,531 44,819 39,411 Goodwill write-down(1)........ -- -- 138,000 95,253 -- Restructuring charges(2)...... -- -- -- 75,000 -- Operating income (loss)....... 76,583 54,037 (102,674) (179,971) 45,991 Interest expense.............. 19,831 19,555 27,881 32,967 31,720
YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ----------------------- PRO FORMA DATA(3): EBITDA(4)(5)....................... $86,520 Cash interest expense(6)........... 35,134 Ratio of net debt to EBITDA........ 2.2x Ratio of EBITDA to cash interest expense.......................... 2.5x
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1993 1994 1995 1996 1997 --------- -------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: EBITDA(4)..................... $ 105,640 $ 91,280 $ 80,857 $ 35,101 $ 85,402 EBITDA margin................. 8.9% 6.2% 4.7% 1.9% 4.8% Comparable store sales increase (decrease)(7): Mall Stores................. 4.5% 3.1% (4.9)% (1.7)% 4.7% Superstores................. 27.6 33.3 4.8 2.0 4.1 Total(8).................. 4.6 4.6 (3.2) (0.6) 4.5
10
DECEMBER 31, --------------------------------- 1993 1994 1995 1996 1997 ----- ----- ----- ----- ----- STORE DATA: Total store square footage (in millions)............................. 4.9 7.2 9.9 9.5 8.3 Store count: Music stores.......................... 875 869 820 777 713 Suncoast stores....................... 320 378 412 422 409 Media Play stores..................... 13 46 89 87 68 On Cue stores......................... 32 77 153 158 157 United Kingdom and other stores....... 11 16 22 22 16 ----- ----- ----- ----- ----- Total............................... 1,251 1,386 1,496 1,466 1,363 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
DECEMBER 31, 1997 ------------------------- ACTUAL AS ADJUSTED(9) -------- --------------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents(10)..................... $ 3,942 $115,326 Total assets(10).................................. 733,895 849,625 Long-term debt, including current maturities...... 193,087 308,817 Stockholders' equity.............................. 18,770 18,770
- - ------------------------------ (1) The goodwill write-downs were taken following evaluations of goodwill for impairment because of sales declines experienced by the music stores during 1995 and 1996. See Note 2 of Notes to Consolidated Financial Statements. (2) The restructuring charges were recorded during 1996 for the estimated cost of closing the Company's distribution facility in Minneapolis, Minnesota and 114 underperforming stores. See Note 3 of Notes to Consolidated Statements. (3) Gives pro forma effect to the sale of the Notes offered hereby and the anticipated application of the net proceeds therefrom as described under the caption "Use of Proceeds" as of the first date of the stated period. (4) EBITDA represents earnings (loss) before extraordinary charge plus interest expense, income taxes, depreciation and amortization, goodwill write-down and restructuring charges. While EBITDA should not be construed as a substitute for income from operations, net earnings or cash flows from operating activities (as defined by generally accepted accounting principles) in analyzing the Company's operating performance, financial position or cash flows, the Company has included EBITDA because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt. In addition, the method of calculating EBITDA set forth above may be different from calculations of EBITDA employed by other companies and, accordingly, may not be directly comparable to such other calculations. (5) Pro forma EBITDA represents EBITDA plus $1.1 million of rent expense related to the financing agreements for the Company's distribution facility prior to the recording of the mortgage notes payable on the Company's Consolidated Balance Sheet in June 1997. See Note 15 of Notes to Consolidated Financial Statements. (6) For the purposes of Pro Forma Data, cash interest expense represents total interest expense minus (i) amortization of debt issuance costs and (ii) original issue discount on the Notes and plus deferred financing credits. (7) Comparable store sales percentages are computed for stores open for a full year during each year. (8) The totals include United Kingdom and other stores. (9) As Adjusted information gives pro forma effect to the sale of the Notes offered hereby and the anticipated application of the net proceeds therefrom as described under the caption "Use of Proceeds" as if they had occurred on December 31, 1997. See "Capitalization." (10) At December 31, 1997, outstanding checks in excess of cash balances of $12.1 million were included in accounts payable. Cash and cash equivalents and total assets, as adjusted to give effect to the Offering and the application of the net proceeds therefrom, do not reflect the reduction of $12.1 million for the outstanding checks in excess of cash balances that would not have been included in accounts payable had the actual net amount of cash and cash equivalents at December 31, 1997 exceeded this amount. 11 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO PURCHASING THE NOTES OFFERED HEREBY. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. Based on interpretations by the staff of the Commission, as set forth in no-action letters to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by the holders thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, a distribution of such New Notes and have no arrangement or understanding with any person to participate in the distribution of such New Notes. The staff of the Commission has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning or the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of one year after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." However, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption for registration or qualification is available and is complied with. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for the untendered and the tendered but unaccepted Old Notes could be adversely affected. RISK ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS AND LIQUIDITY The Company is highly leveraged. On a pro forma basis after giving effect to the issuance of the Notes, the Company's long-term debt, including current maturities, at December 31, 1997 was $308.8 million. In addition, on a pro forma basis after giving effect to the issuance of the Notes, the Company's consolidated ratio of long-term debt (including current maturities) to stockholders' equity would have been 16.5:1 at December 31, 1997. At December 31, 1997, there were no borrowings outstanding under the Revolver Agreement, and at March 1, 1998, the Company had borrowings of $146.0 million under the Revolver Agreement. The highest balance outstanding under the Revolver Agreement during the year ended December 31, 1997 was $273.0 million, and the average daily balance was $238.5 million. However, in 1997 the Company maintained an average month-end cash balance of $45.8 million and did not borrow the $50 million under the Term Loan until September 15, 1997. The net proceeds from the sale of the 12 Notes will be used to pay amounts outstanding under the Credit Facility and the Mortgage Notes Payable. See "Use of Proceeds." The Company's indebtedness and related financial covenants could significantly limit its ability to withstand competitive pressures or adverse economic conditions, make acquisitions, obtain future financing, or take advantage of business opportunities that may arise. The indebtedness under the Revolver Agreement and the Term Loan Agreement bears interest at floating rates, causing the Company to be sensitive to changes in prevailing interest rates. The Revolver Agreement will expire, and all amounts must be repaid thereunder, on October 7, 1999. The Term Loan Agreement must be repaid in installments of $25.0 million on each of December 14, 1998 and February 15, 1999. There is no assurance that the Company will be able to enter into new credit arrangements or, if able to do so, that such arrangements will be on favorable terms. Beginning in 1995, the Company's financial results began to deteriorate as a result of: (i) aggressive expansion of product offerings and new store openings by most of the Company's non-mall competitors; (ii) severe price discounting; (iii) a lack of strong selling hits in the music industry, which depressed sales throughout the industry; and (iv) the Company's own rapid expansion of Media Play stores in response to encouraging initial results. In 1996 the Company initiated restructuring programs designed to improve the Company's cash flow and profitability. The major components of the restructuring programs included: (i) closing 114 underperforming stores; (ii) closing one of the Company's two distribution centers; and (iii) improving inventory management techniques, which increased the Company's inventory turnover. Because of the deterioration of the Company's financial results and the incurrence of restructuring charges, the Company would not have been in compliance with the financial covenants in the Revolver Agreement without certain amendments and waivers to the Revolver Agreement which were received throughout 1996 and in the first quarter of 1997. In June 1997, the Company completed agreements with the Banks to amend the Revolver Agreement and to provide additional financing under the Term Loan Agreement. Also during the first quarter of 1997, the Company's largest vendors and a substantial majority of its remaining vendors agreed to temporarily defer existing trade payables and provide continued product supply, subject to payment terms reduced to ten days or less on new purchases. During the third quarter of 1997, the Company completed individual agreements or understandings with most of these vendors, including the ten largest, for the repayment of the deferred trade payables balance and return to normal credit terms. The Company completed repayment of deferred trade payables during the fourth quarter of 1997. In addition to its obligations under the Notes, the Company is obligated to make substantial principal and interest payments on indebtedness under the Revolver Agreement and Term Loan Agreement and under the 9% Senior Subordinated Notes due 2003 (the "2003 Notes"). See "Description of Existing Financing Arrangements." The ability of the Company to make payments of principal and interest on its indebtedness will be largely dependent upon its future performance, which will be subject to factors affecting its business and operations, many of which are beyond its control. There will be no sinking fund established in connection with the Notes. There can be no assurance that the Company will be able to generate sufficient cash flow, or that future borrowings will be available in an amount sufficient to cover all required interest and principal payments. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources." SUBORDINATION The right of holders to receive payment of principal and interest on the Notes will be subordinate to the prior payment in full of all Senior Debt, which consists of, among other things, amounts owing under the Revolver Agreement, the Term Loan Agreement and any other debt of the Company not by its terms subordinate to, or PARI PASSU with, the Notes. At December 31, 1997, on a pro forma basis after giving effect to the Offering, the amount of Senior Debt was $50.0 million, and at March 1, 1998, it was $83.0 million. At March 1, 1998, on a pro forma basis after giving effect to the Offering and the application of the net proceeds therefrom, the Company could have borrowed up to an additional $99.0 million under the Revolver Agreement. No payment of principal or interest on the Notes may be made during the 13 continuance of a payment default under any Senior Debt. Further, the holders of certain Senior Debt will be able to block payments on the Notes for up to 179 days during any 360-day period upon the occurrence of certain nonpayment events of default under such Senior Debt. In addition, in the event of dissolution, liquidation or the winding-up of the business of the Company, or upon acceleration of the Notes prior to their stated maturity, all obligations with respect to Senior Debt must first be paid in full before any payment may be made with respect to the Notes, and the holders of the 2003 Notes would be entitled to share ratably with the holders of the Notes. As a result, sufficient assets may not exist to pay amounts due under the Notes. Subject to certain restrictions contained in the Revolver Agreement and the Indentures related to the 2003 Notes and the Notes, the Company is permitted to incur additional Senior Debt. See "Description of Notes" and "Description of Existing Financing Arrangements." The principal asset of MSC is all of the outstanding stock of MGI and substantially all MSC's operations are conducted through MGI. MSC is, and will be, guaranteeing MGI's obligations under the Revolver Agreement, the Term Loan Agreement, the 2003 Notes and the Notes. MSC's guarantee of the Notes is subordinated in right of payment to MSC's guarantee of the Issuer's obligations under the Revolver Agreement and Term Loan Agreement. MSC is restricted under the terms of the Revolver Agreement from engaging in activities other than ownership of MGI's stock and providing management and services to MGI. MGI's indebtedness under the Revolver Agreement and the Term Loan Agreement is secured by a pledge of the stock of MGI's consolidated wholly-owned subsidiaries. Additionally, the Term Loan Agreement is secured by a first-priority lien on all inventory of MGI and its consolidated wholly-owned subsidiaries. In the event of defaults under the Revolver Agreement and Term Loan Agreement, such lenders will have secured claims against such assets. RECENT NET LOSSES During the years ended December 31, 1995 and 1996, the Company incurred net losses of $135.8 million and $193.7 million, respectively. These losses were the result of many factors, primarily the write-down of goodwill and also included restructuring charges, changes in the competitive environment, lack of hit music product and the Company's rapid expansion of its Media Play concept. As a result of these losses and the Company's liquidity problems, the Company's independent auditors included a going concern qualification in their report for fiscal 1996. During the years ended December 31, 1996 and December 31, 1997, the Company implemented the restructuring programs described above under "--Risk Associated with Substantial Indebtedness and Liquidity." In fiscal 1997, the Company had net earnings of $14.0 million. This improvement was aided by the recent positive trends in the music retailing industry, including a retreat from severe price discounting and an increase in unit sales. There can be no assurance that the restructuring programs will continue to result in positive financial results, that the positive trend in the music industry will continue, that the negative trend in the video industry will not worsen, or that the current competitive environment will be sustained. RISK OF COMPETITION The Company operates in highly competitive markets, which are generally local or individual in nature. The Company competes on the basis of service, selection and price, with a broad range of specialty, discount and other retailers, and certain national chains, some of whom have greater financial and marketing resources than the Company. The number of stores and types of competitors have increased significantly over recent years, including non-mall discount stores, consumer electronic superstores, and mall based music, video and book specialty retailers expanding into non-mall multimedia stores. The low prices offered by these non-mall stores have created intense price competition and adversely impacted the performance of both the Company's Superstores and Mall Stores. Although deep discount pricing by many retailers of entertainment products abated somewhat in 1997, there can be no assurance that if such practice returns the Company will continue to achieve satisfactory gross margins while remaining competitive. 14 In addition, the Company competes for consumer time and spending with all leisure time activities, such as movie theaters, television, home computing and internet use, live theater, sporting facilities and spectator events, travel, amusement parks, and other family entertainment centers. The Company's ability to compete successfully depends on its ability to secure and maintain attractive and convenient locations, market and manage merchandise attractively and efficiently, offer an extensive product selection and knowledgeable customer service and provide effective management. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Results of Operations--Gross Profit" and "Business--Competition." RISK OF RESTRICTIONS IMPOSED BY LENDERS The Company's Revolver Agreement and, to a lesser extent, the Term Loan Agreement and the indenture covering the 2003 Notes (the "2003 Indenture") contain certain financial covenants which, among other things, limit the ability of the Company to incur indebtedness, make investments, create or permit liens, make capital expenditures, make guarantees and pay dividends. Additionally, the Company is required to meet certain financial covenants under the Revolver Agreement and Term Loan Agreement. Because of the highly competitive environment and the decline in the Company's financial results, the Company experienced difficulty meeting the financial covenants throughout 1996. As a result, the Company obtained a series of amendments and waivers beginning in April 1996 and ending with the amendment completed in June 1997. There can be no assurance that, despite its recent improved results, the Company may not experience such difficulty in the future and/or may require additional financing. If the Company were unable to comply with the covenants under the Credit Facility or under the 2003 Notes, such indebtedness could be declared immediately due and payable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Existing Financing Arrangements." RISK OF AVAILABILITY OF HIT PRODUCTS Entertainment product sales are dependent to some extent upon the availability of hit products, which can create cyclical trends that do not necessarily follow trends in the general economy. It is not possible to determine the timing of these cycles or the future availability of hit products. The availability of hit product is important for generating customer traffic in the Company's stores. During recent years, industry growth and sales of music and video products slowed due to the lack of strong new releases. Although the situation in the music industry improved in fiscal 1997, the Company has no control over the availability and strength of hit products and is dependent upon the major music and movie producers continuing to produce a minimal number of current hits. To the extent that current hits are not available, or not available at prices attractive to consumers, the Company's business may be adversely affected. RISK FROM NEW TECHNOLOGIES The Company believes that the introduction of new home entertainment products, such as DVD, can help increase sales. This benefit, however, is dependent upon acceptance by consumers of the new technology and availability of product for consumer purchase. The switch of consumers from one format to another, such as the shift from records to audio cassettes, and the later shift from cassettes to compact discs, may also reduce sales of the existing format. The Company intends to monitor carefully such technology shifts and to adjust as necessary to respond to customer demand. Sales may be adversely affected and product returns may be increased if the Company does not carry the right balance of old and new formats. There can be no assurance that the Company will be successful in interpreting the desires of consumers or predicting which of any new technologies or formats will be accepted by consumers. Although the Company believes DVD products may contribute to sales growth, there can be no assurance that DVD will gain significant consumer acceptance generally or among the Company's customers. Even if DVD is successful, any significant impact on sales may not be seen for several years. 15 In addition to the emergence of new technologies affecting product offerings, emerging technologies are facilitating the offering by the internet, cable companies, direct broadcast satellite companies, telephone companies and other telecommunications companies of a wide selection of music and video services to consumers. The Company expects this trend to continue. There is no assurance that these new technologies will not have an adverse impact on sales. UNCERTAINTY OF LEASE RENEWALS All but three of the Company's stores are under operating leases with terms ranging from 3 to 25 years. A total of 168 leases without renewal options will expire in fiscal 1998 and 1999. Although the Company has historically been successful in renewing most of its store leases when they have expired, there can be no assurance that the Company will continue to be able to do so on favorable terms or at all, particularly in light of the recent restructuring programs. If the Company is unable to renew leases for its stores as they expire, or find acceptable locations on favorable terms, there can be no assurance that such failures will not have a material adverse effect on the Company's financial condition or results of operations. See "Business--Properties." RELATIONSHIPS WITH VENDORS The Company obtains approximately 68% of its product from the ten largest vendors. Continued delivery of product to the Company by its vendors is critical to the Company's operating results. During 1996, the Company experienced some problems with delivery of product by vendors who were concerned about the Company's financial viability. During the first quarter of 1997, the Company's largest vendors and a substantial majority of the remaining vendors agreed to temporarily defer existing trade payables and provide continued product supply, subject to payment terms reduced to ten days or less on new purchases. During the third quarter of 1997, the Company completed individual agreements or understandings with most of its vendors, including the ten largest, for the repayment of trade payables balances and the return to normal credit terms. The Company completed repayment of the deferred trade payables during the fourth quarter of 1997. There can be no assurance that the Company may not experience similar financial difficulties in the future or that the vendors would in such case provide the Company with deferred or other favorable payment terms to allow the Company to receive product. SEASONALITY RISK The Company's business is highly seasonal. During the years ended December 31, 1997 and 1996, nearly 40% of the Company's annual revenues and all of its net income, if any, were generated during the fourth quarter. Quarterly results are affected by the timing and strength of new releases, the timing of holidays, new store openings and sales performance of existing stores. There can be no assurance that economic conditions will not adversely affect the Company's sales and earnings, particularly during the fourth quarter of the year. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Seasonality." RISKS ASSOCIATED WITH FUTURE GROWTH SALES AND EARNINGS GROWTH The Company's sales and earnings growth is primarily dependent upon increasing revenues in existing stores, which will be affected by various industry and competitive factors discussed herein. In addition, the Company's profitability is dependent on the economic environment in general and the level of consumer spending. Many mall based specialty retailers have experienced weak comparable store sales in recent periods. The Company experienced negative comparable store sales in fiscal 1996. Comparable store sales of music product were slightly up in fiscal 1996 and strongly up in fiscal 1997. However, comparable store sales of video product were slightly negative in fiscal 1996 and increased only negligibly in fiscal 1997. There can be no assurance that comparable sales of video product will improve or that they will not deteriorate further. During fiscal 1995 and 1996, the Company's operating results were affected by the high fixed cost of poorly performing stores, both mall stores and non-mall stores. These results have been 16 attributed in part to the growth of non-mall superstores and power shopping centers that have attracted the mall customer base. In an effort to improve results, the Company closed 114 stores, including 30 Media Play stores, and, in fiscal 1996, reported restructuring charges totaling $75 million to reflect the cost of these closings and other steps taken. During 1997, the Company initiated certain changes in the size, design, and merchandise offerings of Media Play in an attempt to improve the operating results of this concept. In 1997, after implementing the restructuring programs, the Media Play concept became profitable, on an operating contribution basis, for the first time. The improvement efforts are continuing during 1998. There can be no assurance that these efforts will be successful. Although the Company's operating results improved in fiscal 1997, there can be no assurance that such results will continue. There can also be no assurance that a deterioration in economic conditions would not adversely affect the Company's business. GROWTH THROUGH NEW STORES OPENINGS; AVAILABILITY OF CAPITAL FOR STORE EXPANSION The Company may also increase revenues by opening or acquiring stores. The opening of new stores is contingent upon the availability of desirable locations and the negotiation of suitable lease terms, and the acquisition of stores is dependent upon the availability of desirable stores at acceptable prices. Any expansion will depend on business conditions, the availability of desirable sites obtainable on an acceptable economic basis, the ability to attract and retain qualified managers and sales associates and the availability of sufficient capital. There can be no assurance that the Company will be able to open any new stores, or open them on a timely basis, or that they can be operated profitably. To the extent the Company's rate of expansion is slower than historical levels, the Company's sales growth may be adversely affected. In addition, the success of new stores is dependent upon acceptance by customers. During 1997, the Company initiated certain changes in the size, design, and merchandise offerings of Media Play in an attempt to improve operating results. These efforts are continuing during 1998. There can be no assurance that these efforts will be successful. In 1998, the Company anticipates spending approximately $20 million to remodel and expand existing stores. The Company expects that substantially all future capital expenditures will be funded by net cash provided by operating activities. The amount of any additional capital needed will depend upon the profitability of the Company's existing stores. There can be no assurance that any needed capital will be available on terms acceptable to the Company. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources." RISK OF DEPENDENCE ON KEY PERSONNEL The Company is dependent on the active participation of certain key personnel, the loss of whom could have a material adverse effect on the Company. The Company has taken certain steps to minimize these risks by executing employment agreements with Messrs. Eugster, Benson, Wachsman and Ross. CORPORATE STRUCTURE MSC is a holding company and does not have any material operations or assets other than its ownership of 100% of the outstanding stock of MGI. MGI holds 100% of the outstanding stock of its subsidiaries. MSC and MGI are dependent on the cash flow of MGI's subsidiaries and distributions from such subsidiaries in order to meet their debt service obligations. Any right of MSC and MGI to participate in any distribution of the assets of any of MGI's subsidiaries upon liquidation, reorganization or insolvency of any such subsidiary (and the consequent right of the holders of the Notes to participate in distribution of those assets) will be subject to the prior claims of such subsidiary's creditors. RISK OF FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE The Company has assessed its systems and equipment with respect to Year 2000 compliance and has developed a project plan. Many of the Year 2000 issues, including the processing of credit card transactions, have been addressed. The remaining Year 2000 issues will either be addressed with scheduled system 17 upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expense as incurred and are not expected to have a material impact on the financial position or results of operations of the Company. However, the Company could be adversely impacted if Year 2000 modifications are not properly completed by either the Company or its vendors, banks or any other entity with whom the Company conducts business. FRAUDULENT TRANSFER CONSIDERATIONS Various laws enacted for the protection of creditors may apply to the Company's incurrence of indebtedness in connection with the issuance of the Notes. If a court were to find in a lawsuit by an unpaid creditor or representative of unpaid creditors of the Company that the Company did not receive fair consideration or reasonably equivalent value for incurring such indebtedness or obligation and, at the time of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii) was engaged in a business or transaction for which the assets remaining in the Company constituted unreasonably small capital, or (iv) intended to incur or believed it would incur debts beyond its ability to pay such debts as they mature, such court, subject to applicable statutes of limitation, could determine to invalidate, in whole or in part, such indebtedness and obligations as fraudulent conveyances or subordinate such indebtedness and obligations to existing or future creditors of the Company. If a court were to find that the Company satisfied the measures of insolvency described in (i) through (iv) above, such court could avoid a distribution and order that it be returned to the Company or to a fund for the benefit of the Company's creditors. Further, if a court were to find that, at the time the Company granted security interests to or for the benefit of the Banks, the Company did not receive fair consideration or reasonably equivalent value for the grant of such security interests and came within any of the foregoing clauses (i) through (iv), a creditor or representative of creditors could seek to avoid the grant of such security interests. This could result in an event of default with respect to the Revolver Agreement that, under the terms thereof (subject to applicable law), would allow the lenders thereunder to accelerate such debt. The measure of insolvency for purposes of the foregoing will vary depending on the law of the jurisdiction being applied. Generally, however, either MSC or MGI would be considered insolvent at a particular time if the sum of its debts was then greater than all of its property at a fair valuation or if the present fair salable value of its assets was then less than the amount that would be required to pay its probable liabilities on its existing debts as they become absolute and matured. On the basis of its financial information, its recent operating history as discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition," and other factors, the Company believes that, after giving effect to the issuance of the Notes, it is not rendered insolvent, it has sufficient capital for the businesses in which it is engaged and it is able to pay its debts as they mature. There can be no assurance, however, as to what standard a court would apply in making any such determinations. ABSENCE OF PUBLIC MARKET The Notes have no established trading market and may not be widely distributed. The Initial Purchasers have informed the Company that they currently intend to make a market in the Notes to the extent permitted by applicable laws and regulations; however, the Initial Purchasers are not obligated do so and the Initial Purchasers may discontinue market making at any time without notice. In addition, any such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act and may be limited during the pendency of the Exchange Offer or any Shelf Registration Statement. Although the Old Notes have been accepted for trading on the PORTAL market, the Company does not intend to list the Old Notes or the New Notes on any national securities exchange or stock market. Accordingly, there can be no assurance as to the development of any market or the liquidity of any market that may develop for the Notes. If a market for the Notes does not develop, holders may be unable to resell such securities for an extended period of time, if at all. If a market for the Notes does develop, the price of the Notes may fluctuate and liquidity may be limited. If such a market for the Notes were to exist, the 18 Notes could trade at prices lower than the initial offering price thereof depending on many factors, including, among others, prevailing interest rates, the market for similar securities, the ability to locate a willing buyer, general economic conditions and the financial condition and performance of, and prospects for, the Company. Historically, the market for non-investment grade debt, such as the Notes, has been subject to disruptions that have caused substantial volatility in the prices of such securities. There can be no assurance that the market for the Notes will not be subject to similar disruptions. Any such disruption may have an adverse effect on holders of the Notes. POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL In the event of a Change of Control (as defined in the Indenture), the Company will be required to offer to purchase the Notes at 101% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of repurchase. However, the Revolver Agreement prohibits the Company from repurchasing the Notes and also provides that certain change of control events with respect to the Company will constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. In the event that a Change of Control occurs at a time when the Company is prohibited from purchasing the Notes, the Company could seek the consent of lenders to the purchase of the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such consent or repay such borrowings, the Company will remain prohibited from purchasing the Notes by the relevant Senior Debt. In such case, the Company's failure to purchase the tendered Notes would constitute an event of default under the Indenture which would, in turn, constitute a default under the Revolver Agreement and could constitute a default under other Senior Debt. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the holders of the Notes. Further, no assurance can be given that the Company will have sufficient resources to satisfy its repurchase obligations with respect to the Notes following a Change of Control. FORWARD-LOOKING STATEMENTS The information herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the entertainment industry, especially for music and video product, inflation, changes in costs of goods and services, economic conditions in general and in the Company's business, demographic changes, changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business, the ability to attract and retain qualified personnel, the significant indebtedness of the Company, changes in the Company's acquisition and capital expenditure plans, and other factors referenced herein and in the Company's filings with the Commission. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates," "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 19 THE EXCHANGE OFFER GENERAL Under the Registration Rights Agreement, the Company is obligated (i) to file the Registration Statement of which this Prospectus is a part for a registered exchange offer with respect to an issue of New Notes with terms identical in all material respects to the Old Notes (except that such New Notes will not contain transfer restrictions) within 60 days after the Issue Date and (ii) to use its best efforts to cause the Registration Statement to be declared effective within 150 days after the Issue Date. For each Old Note surrendered pursuant to the Exchange Offer, the holder of such Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note. The Exchange Offer being made hereby if commenced and consummated within such applicable time periods will satisfy those requirements under the Registration Rights Agreement. See "Description of the New Notes--Exchange Offer, Registration Rights." Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal (which together constitute the Exchange Offer), the Company will accept for exchange all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. The Company will issue New Notes in exchange for an equal principal amount at maturity of outstanding Old Notes accepted in the Exchange Offer. As of the date of this Prospectus, there was outstanding $150,000,000 aggregate principal amount at maturity of Old Notes. This Prospectus, together with the Letters of Transmittal, is being sent to all registered holders as of , 1998. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Notes for the purposes of receiving the New Notes from the Company and delivering New Notes to such holders. In the event the Exchange Offer is consummated, subject to certain limited exceptions, the Company will not be required to register the Old Notes. In such event, holders of Old Notes seeking liquidity in their investment would have to rely on exemptions to registration requirements under the U.S. securities laws. See "Risk Factors--Consequences of Failure to Exchange." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term 'Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent of any extension by oral or written notice and will mail to the record holders of Old Notes an announcement thereof, each prior to 9:00 a.m., Eastern Standard Time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period of time. The Company reserves the right (i) to delay accepting any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer and not accept Old Notes not previously accepted if any of the conditions set forth herein under shall have occurred and shall not have been waived by the Company (see the subcaption "Conditions for Exchange", below), by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to be advantageous to the holders of the Old Notes. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Notes of such amendment and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of 20 disclosure to holders of the Old Notes, if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which the Company may choose to make public announcement of any delay, extension, amendment or termination of the Exchange Offer, the Company shall have no obligations to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. NO VOTE OF SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING REQUESTED BY MEANS OF THIS PROSPECTUS OR OTHERWISE. Holders of Old Notes do not have any appraisal or dissenters' rights in connection with the Exchange Offer under the Delaware General Corporation Law, the law of the state of incorporation of the Issuer and the Guarantor. CONTINUING REGISTRATION RIGHTS If (a) the Exchange Offer is not consummated before [30 business days from effectiveness] (the "Completion Deadline") or (b) a holder of Old Notes advises the Company within twenty (20) business days following the Completion Deadline that (i) such holder was prohibited by law from participating in the Exchange Offer, (ii) such holder may not resell New Notes acquired in the Exchange Offer without delivery of a prospectus other than this Prospectus, or (iii) such holder is an Initial Purchaser or otherwise acquired Old Notes directly from the Company or an affiliate of the Company, then the Company will, at its expense, (x) within 60 days, file a shelf registration statement covering resales of the Old Notes (a "Shelf Registration Statement"), (y) use its best efforts to cause a Shelf Registration Statement to be declared effective under the Securities Act within 90 days after filing and (z) keep the Shelf Registration Statement effective until the earlier of 24 months following the Issue Date or such time as all of the Old Notes have been sold thereunder, or otherwise can be sold pursuant to Rule 144 without any limitations under clauses (c), (e), (f) and (h) of Rule 144. In the event a Shelf Registration Statement is filed, the Company will (i) provide to each holder for whom such Shelf Registration Statement was filed, copies of the prospectus which is a part of such Shelf Registration Statement, (ii) notify each such holder when such Shelf Registration Statement has become effective, and (iii) take certain other actions as are required to permit unrestricted resales of the Old Notes. A holder selling Old Notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales, and will be bound by the provisions of the Registration Rights Agreement which are applicable to such a holder (including certain indemnification obligations). PROCEDURES FOR TENDERING To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal or a facsimile thereof, have the signatures thereon guaranteed if required by such Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with any other required documents, to the Exchange Agent prior to 5:00 p.m. Eastern Standard Time, on the Expiration Date. In addition, either (i) certificates for such tendered Old Notes must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is available, into the Exchange Agent's account at the Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date or (iii) the holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY 21 MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. To be tendered effectively, the Old Notes, the Letter of Transmittal and all other required documents must be received by the appropriate Exchange Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. Delivery of all documents must be made to the appropriate Exchange Agent at the addresses set forth herein. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect such tender for such holders. The tender by a holder of Old Notes will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth therein and in the Letter of Transmittal. Only a holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender shall contact such registered holder promptly and instruct such registered holder to tender on his behalf. If such beneficial owner wishes to tender on his own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering his Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by any member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by bond powers, and a proxy which authorizes such person to tender the Old Notes on behalf of the registered holder, in each case as the name of the registered holder or holders appears on the Old Notes. If the Letter of Transmittal of any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such person should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. All questions as the validity, form, eligibility (including time of receipt) and withdrawal of the tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes which, if accepted by the Company, would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letters of Transmittal) will be final and binding on all 22 parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. None of the Company, the Exchange Agent, or any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to such holder by the Exchange Agent to the tendering holders of such Old Notes, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion, subject to the provisions of the Indenture, to (i) purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or, (see the subcaption "Conditions for Exchange", below), to terminate the Exchange Offer in accordance with the terms of the Registration Rights Agreement and (ii) to the extent permitted by applicable law and the Indenture, purchase Old Notes in the open market, in privately negotiated transactions or otherwise, before, during, and after the Exchange Offer. The terms of any such purchase or offers could differ from the terms of the Exchange Offer. By tendering, each holder will represent to the Company that (i) it is not an affiliate of the Company (as defined under Rule 405 of the Securities Act), (ii) any New Notes to be received by it were acquired in the ordinary course of its business and (iii) at the time of commencement of the Exchange Offer, it was not engaged in, and did not intend to engage in, a distribution of such New Notes and had no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of the New Notes. If a holder of Old Notes is an affiliate of the Company, and is engaged in or intends to engage in a distribution of the New Notes or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange offer, such holder cannot rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirement of the Securities Act in connection with any secondary resale transaction. Each broker or dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker or dealer as a result of market-making activities, or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Old Notes properly tendered and will issue the New Notes promptly after acceptance of the Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes for exchange when, as and if the Company has given oral or written notice thereof to the Exchange Agent. For each Old Note for exchanged, the holder of such Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note. If (i) by , 1998 (60 days after the Issue Date), neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the SEC, or (ii) by , 1998 (the Completion Deadline), the Exchange Offer is not consummated, or (iii) a Shelf Registration Statement is not filed and declared effective within the time frame required, if a Shelf Registration Statement is required to be filed, or (iv) after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Old Notes or New Notes, as applicable, in accordance with and during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (i) through (iv) a "Registration Default"), Liquidated Damages will 23 accrue or accumulate on the applicable Old Notes and New Notes, from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured, at the rate of $.05 per week per $1,000 in principal amount of New Notes or Old Notes affected by such Registration Default for the first 90-day period immediately following the occurrence of such Registration Default. The amount of Liquidated Damages shall increase by an additional $.05 per week per $1,000 for each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum of $.50 per week per $1,000. Such Liquidated Damages will be payable in cash and will be in addition to any other interest payable with respect to the Old Notes and the New Notes. No holder of New Notes or Old Notes shall be entitled to any Liquidated Damages if such holder has failed to provide the Company with the information required by applicable regulations of the Commission to be included with respect to such holder in the Registration Statement and Prospectus pursuant to which the holder seeks to sell his Old Notes or New Notes. In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old Notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or nonexchanged Old Notes will be returned without expense to the tendering holder thereof (or, in the case of Old Notes tendered by book-entry transfer procedures described below, such nonexchanged Old Notes will be credited to an account maintained with such Book- Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. BOOK-ENTRY TRANSFER The Exchange Agent will establish an account with respect to the Old Notes, respectively, at the Book-Entry Transfer facility for purposes of the Exchange Offer within two business days after the date of the Prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. Although delivery of Old Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof with any required signature guarantees and any other required documents must, in any case, be transmitted to and received by the Exchange Agent on or prior to the Expiration Date, or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered holder of the Old Notes desires to tender such Old Notes, but the Old Notes are not immediately available, or time will not permit such holder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedures for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of such Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within five (5) business days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes, in proper form to transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible 24 Institution with the appropriate Exchange Agent and (iii) the certificate for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five (5) business days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL OF TENDERS Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. Eastern Standard Time, on the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent prior to 5:00 p.m. Eastern Standard Time on the Expiration Date. Any such notice of withdrawal must specify the name of the person having tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including the principal amount of such Old Notes and (where certificates for Old Notes have been transmitted) specify the name in which such Old Notes are registered, if different from that of the withdrawing holder. If certificates for the Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution, unless such holder is an Eligible Institution. If Old Notes have been tendered pursuant to the procedures of book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and must otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described under the subcaption "Procedures for Tendering" above at any time on or prior to the Expiration Date. CONDITIONS FOR EXCHANGE Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Notes, if because of any changes in law, or applicable interpretations thereof by the Commission, the Company determines that it is not permitted to effect the Exchange Offer. In addition, the Company has no obligation to, and will not knowingly, accept tenders of Old Notes from affiliates of the Company (within the meaning of Rule 405 under the Securities Act) or from any other holder or holders who are not eligible to participate in the Exchange Offer under applicable law or interpretations thereof by the Commission, or if the New Notes to be received by such holder or holders of Old Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder without restriction under the Securities Act and the Exchange Act and without material restriction under the "blue sky" or securities law of substantially all of the states. EXCHANGE AGENT Bank One, N.A. has been appointed as Exchange Agent in connection with the Exchange Offer. Questions and requests for assistance in connection with the Exchange Offer and requests for additional 25 copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Registered or Certified Mail; By Overnight Courier; or By Hand: 235 West Schrock Road Westerville, Ohio 43081 Attention: Corporate Trust Operations By Facsimile: (614) 248-5088 Telephone: (800) 346-5153 FEES AND EXPENSES The expenses to be incurred in connection with the Exchange Offer will be paid by the Company, including fees and expenses of each Exchange Agent, the Trustee (as hereinafter defined), the Transfer Agent (as hereinafter defined) and accounting, legal printing and related fees and expenses. The expenses of soliciting tenders pursuant to the Exchange Offer will also be borne by the Company. The principal solicitation for tender pursuant to the Exchange Offer is being made by mail; however, additional solicitations may be made by telegraph, telephone, telecopy or in person by officers and regular employees of the Company. The Company will not make any payments to brokers, dealers or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay each Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of the Prospectus and related documents to the beneficial owners of the Old Notes, and in handling or forwarding tenders for exchange. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New will be recorded in the Company's accounting records at the same carrying values as the old Notes, respectively, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized upon the consummation of the Exchange Offer. The expense of the Exchange Offer will be amortized by the Company over the term of the New Notes in accordance with generally accepted accounting principles. 26 USE OF PROCEEDS The Company will not receive any proceeds from the issuance of the New Notes offered hereby. In consideration for issuing the New Notes as contemplated in this Prospectus, the Company will receive in exchange Old Notes in like principal amount, the term and form of which are identical in all material respects to the New Notes. The Old Notes surrendered in exchange for New Notes will be retired and cancelled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase in the indebtedness of the Company. The net proceeds to the Company from the sale of the Old Notes (after deducting discounts and commissions and estimated expenses of the Offering) were approximately $144.3 million. The Company used such net proceeds to repay (i) $112.2 million under the Credit Facility; and (ii) $32.1 million of mortgage notes payable pertaining to the financing of the Franklin distribution center and three Media Play stores (the "Mortgage Notes Payable"). After the paydown on the Credit Facility, the combined aggregate available commitments under the Credit Facility were reduced from $295.0 million to $182.0 million. As long as indebtedness of $50.0 million is outstanding under the Term Loan Agreement, the aggregate borrowings available under the Revolver Agreement will be $132.0 million. If the indebtedness under the Term Loan Agreement is paid when due, or prepaid, the aggregate borrowings available under the Revolver Agreement will be $182.0 million. The weighted average interest rate under the Revolver Agreement for 1997 was 8.0%. As of December 31, 1997, the interest rate under the Term Loan Agreement was 8.13%. See "Description of Existing Financing Arrangements." The interest rates on the Mortgage Notes Payable as of December 31, 1997 ranged from 8.24% to 8.37%. The Mortgage Notes Payable matured in March 1999 and May 2000. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources--Financing Activities." 27 CAPITALIZATION The following table, which should be read in conjunction with the Consolidated Financial Statements of the Company and related notes included elsewhere in this Prospectus, sets forth the capitalization of the Company as of December 31, 1997 and as adjusted to reflect the issuance of the Notes. See "Use of Proceeds."
DECEMBER 31, 1997 ----------------------- ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) Cash and cash equivalents(1)(2).......................................................... $ 3,942 $ 115,326 ---------- ----------- ---------- ----------- Long-term debt (including current maturities): Revolver............................................................................... $ -- $ -- (1) Term Loan.............................................................................. 50,000 50,000 Mortgage Notes Payable................................................................. 33,087 -- 9% Senior Subordinated Notes due 2003.................................................. 110,000 110,000 9 7/8% Senior Subordinated Notes due 2008.............................................. -- 148,817(3) ---------- ----------- Total long-term debt................................................................. 193,087 308,817 ---------- ----------- Stockholders' equity: Preferred stock........................................................................ -- -- Common stock........................................................................... 344 344 Additional paid-in capital............................................................. 255,075 255,075 Accumulated deficit.................................................................... (224,678) (224,678) Deferred compensation.................................................................. (6,998) (6,998) Common stock subscriptions............................................................. (4,973) (4,973) ---------- ----------- Total stockholders' equity........................................................... 18,770 18,770 ---------- ----------- Total capitalization............................................................... $ 211,857 $ 327,587 ---------- ----------- ---------- -----------
- - ------------------------ (1) At December 31, 1997, there were no borrowings under the Revolver Agreement. Borrowings under the Revolver Agreement at March 1, 1998 were $146.0 million. Assuming the Offering of the Old Notes had closed on March 1, 1998, the Company would have used $112.2 million of net proceeds from such Offering and $0.8 million of cash to repay borrowings under the Revolver Agreement. (2) At December 31, 1997, outstanding checks in excess of cash balances of $12.1 million were included in accounts payable. Cash and cash equivalents, as adjusted to give effect to the Offering of the Old Notes and the application of the net proceeds therefrom, do not reflect the reduction of $12.1 million for the outstanding checks in excess of cash balances that would not have been included in accounts payable had the actual net amount of cash and cash equivalents at December 31, 1997 exceeded this amount. (3) The Old Notes were issued with original issue discount of $1.2 million which will be amortized as noncash interest expense over the term of the Notes. 28 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following table sets forth selected consolidated financial data for the years indicated. This information should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere herein and "Management's Discussion and Analysis of Results of Operations and Financial Condition."
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 1993 1994 1995 1996 1997 ----------- ----------- ------------ ------------ ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Sales................................... $ 1,181,658 $ 1,478,842 $ 1,722,572 $ 1,821,594 $ 1,768,312 Cost of sales........................... 710,707 936,643 1,116,502 1,209,835 1,153,483 Gross profit............................ 470,951 542,199 606,070 611,759 614,829 Selling, general and administrative expenses.............................. 365,311 450,919 525,213 576,658 529,427 Depreciation and amortization........... 29,057 37,243 45,531 44,819 39,411 Goodwill write-down(1).................. -- -- 138,000 95,253 -- Restructuring charges(2)................ -- -- -- 75,000 -- Operating income (loss)................. 76,583 54,037 (102,674) (179,971) 45,991 Interest expense........................ 19,831 19,555 27,881 32,967 31,720 Earnings (loss) before income taxes and extraordinary charge.................. 56,752 34,482 (130,555) (212,938) 14,271 Income taxes............................ 25,400 17,100 5,195 (19,200) 300 Earnings (loss) before extraordinary charge(3)............................. 31,352 17,382 (135,750) (193,738) 13,971 Ratio of earnings to fixed charges(4)... 2.05x 1.56x -- -- 1.17x Pro forma ratio of earnings to fixed charges(5)............................ 1.11 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) operating activities............................ $ 61,662 $ 71,462 $ (56,227) $ 16,689 $ 74,613 Net cash used in investing activities... (77,139) (109,608) (87,014) (6,376) (10,940) Net cash provided by (used in) financing activities............................ 95,159 (19,042) 106,634 149,692 (221,707) OPERATING DATA: EBITDA(6)............................... $ 105,640 $ 91,280 $ 80,857 $ 35,101 $ 85,402 EBITDA as a percentage of sales......... 8.9% 6.2% 4.7% 1.9% 4.8% Comparable store sales increase (decrease)(7): Mall Stores........................... 4.5% 3.1% (4.9)% (1.7)% 4.7% Superstores........................... 27.6 33.3 4.8 2.0 4.1 Total(8)............................ 4.6 4.6 (3.2) (0.6) 4.5 BALANCE SHEET DATA (AT END OF YEAR): Cash and cash equivalents(9)............ $ 95,766 $ 38,578 $ 1,971 $ 161,976 $ 3,942 Total assets............................ 905,682 1,079,632 996,957 996,915 733,895 Long-term debt, including current maturities............................ 135,000 110,000 163,000 396,599 193,087 Stockholders' equity(1)(2).............. 322,594 340,276 195,811 2,619 18,770 STORE DATA (AT END OF YEAR): Total store square footage (in millions)............................. 4.9 7.2 9.9 9.5 8.3 Store count: Music stores.......................... 875 869 820 777 713 Suncoast stores....................... 320 378 412 422 409 Media Play stores..................... 13 46 89 87 68 On Cue stores......................... 32 77 153 158 157 United Kingdom and other stores....... 11 16 22 22 16 ----------- ----------- ------------ ------------ ----------- Total............................... 1,251 1,386 1,496 1,466 1,363 ----------- ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ -----------
- - -------------------------- (1) The goodwill write-downs were taken following evaluations of goodwill for impairment because of sales declines experienced by the music stores during 1995 and 1996. See Note 2 of Notes to Consolidated Financial Statements. (2) The restructuring charges were recorded during 1996 for the estimated cost of closing the Company's distribution facility in Minneapolis, Minnesota and 114 underperforming stores. See Note 3 of Notes to Consolidated Statements. (3) Amounts for the year ended December 31, 1993 are before an extraordinary charge from early redemption of debt, net of income tax benefit, of $3.9 million. Net earnings for the year ended December 31, 1993 were $27.5 million. 29 (4) Ratio of earnings to fixed charges is computed by dividing (x) pre-tax earnings before extraordinary charge and before fixed charges by (y) fixed charges (consisting of cash interest expense on debt, amortization of debt issuance costs and deferred financing credits plus one-third of total rent expense exclusive of contingent rentals, the portion considered to be representative of the interest factor). For the years ended December 31, 1995 and 1996, earnings (loss) before fixed charges were insufficient to cover fixed charges by $130.6 million and $212.9 million, respectively. (5) On a pro forma basis, after giving effect to the Offering. (6) EBITDA represents earnings (loss) before extraordinary charge plus, interest expense, income taxes, depreciation and amortization, goodwill write-down and restructuring charges. While EBITDA should not be construed as a substitute for income from operations, net earnings or cash flows from operating activities (as defined by generally accepted accounting principles) in analyzing the Company's operating performance, financial position or cash flows, the Company has included EBITDA because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt. In addition, the method of calculating EBITDA set forth above may be different from calculations of EBITDA employed by other companies and, accordingly, may not be directly comparable to such other calculations. (7) Comparable store sales percentages are computed for stores open for a full year during each year. (8) The totals include United Kingdom and other stores. (9) At December 31, 1994, 1995 and 1997, outstanding checks in excess of cash balances of $5.9 million, $69.3 million and $12.1 million, respectively, were included in current liabilities. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Beginning in 1995, the Company's financial results began to deteriorate as a result of: (i) aggressive expansion of product offerings and new store openings by most of the Company's non-mall competitors; (ii) severe price discounting of music products by certain non-mall competitors; (iii) a lack of strong selling hits in the music industry, which depressed sales throughout the industry; and (iv) the Company's own rapid expansion of Media Play stores in response to encouraging initial results. In 1996 management initiated restructuring programs designed to improve the Company's cash flow and profitability. The major components of the restructuring programs included: (i) closing 114 underperforming stores, which in the last full year of their operations lost an aggregate of $17.7 million on an operating contribution basis; (ii) closing one of the Company's two distribution centers, which reduced the Company's working capital investment by approximately $20 million and contributed to a $6.9 million reduction in distribution costs in 1997; and (iii) improving inventory management techniques, which increased the Company's inventory turnover from 1.8 times during 1996 to 2.1 times during 1997. Inventory levels at year-end 1997 were $55.8 million below those of the prior year with approximately $30 million of the reduction due to store closings and the remainder attributable to distribution efficiencies and improved inventory management. The Company reduced Media Play advertising expense by $7.9 million in 1997 from the prior year as a result of closing stores in entire markets and the introduction of a less costly, but more targeted, program of newspaper advertising inserts. In addition, in 1997 the Company began to benefit from positive trends in the music retailing industry, including a retreat from severe price discounting and an increase in unit sales. As a result, the Company's EBITDA increased from $35.1 million in 1996 to $85.4 million in 1997, and comparable store sales improved from a decrease of 0.6% in 1996 to an increase of 4.5% in 1997. In the first quarter of 1997, the Company's largest vendors and a substantial majority of its remaining vendors agreed to temporarily defer existing trade payables and provide continued product supply, subject to payment terms reduced to ten days or less on new purchases. The Company completed repayment of the deferred trade payables during the fourth quarter of 1997. The Company also obtained an amendment to its Revolver Agreement in June 1997 that modified and provided additional flexibility in financial covenants and allowed the $50 million Term Loan. The Company previously obtained waivers of certain financial covenants and technical defaults under the Revolver Agreement that had been extended to allow for adequate time to complete all of the necessary financing agreements and related amendments. See "--Liquidity and Capital Resources." 31 RESULTS OF OPERATIONS The following table presents certain sales and store data for Mall Stores, Superstores and in total for the Company for the last three years. Because both Mall Stores and Superstores are supported by centralized corporate services and have similar economic characteristics, products, customers and retail distribution methods, the stores are reported as one industry segment.
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ----------- ----------- ----------- (DOLLARS AND SQUARE FOOTAGE IN MILLIONS) SALES: Mall Stores................................ $ 1,187.0 $ 1,160.0 $ 1,165.0 Superstores................................ 516.7 643.8 589.5 Total(1)................................. 1,722.6 1,821.6 1,768.3 PERCENTAGE CHANGE FROM PRIOR YEAR: Mall Stores................................ (2.5)% (2.3)% 0.4% Superstores................................ 108.5 24.6 (8.4) Total(1)................................. 16.5 5.7 (2.9) COMPARABLE STORE SALES CHANGE FROM PRIOR YEAR: Mall Stores................................ (4.9)% (1.7)% 4.7% Superstores................................ 4.8 2.0 4.1 Total(1)................................. (3.2) (0.6) 4.5 NUMBER OF STORES OPEN AT YEAR END: Mall Stores................................ 1,232 1,199 1,122 Superstores................................ 242 245 225 Total(1)................................. 1,496 1,466 1,363 TOTAL STORE SQUARE FOOTAGE AT YEAR END: Mall Stores................................ 4.5 4.3 4.0 Superstores................................ 5.3 5.2 4.2 Total(1)................................. 9.9 9.5 8.3
- - ------------------------ (1) The totals include United Kingdom and other stores. SALES. Comparable store sales in 1996 were adversely impacted by the lack of strong product releases in music and video and the challenging retail sales environment. Sales from new Superstores and comparable store sales increases in Superstores open for one year or more accounted for most of the increases in total sales in 1996. Comparable store sales growth in 1997 was led by significant gains in music, driven by strong sales of new releases. Gains were also achieved in educational toys, apparel and video games. These gains were partially offset by flat comparable store sales in video and a decline in book sales, due in part to a reduction in the number of book titles offered by the Superstores. Comparable store sales in video were slowed by the lack of depth in new releases other than strong sales of the Star Wars Trilogy Special Edition video set released during the third quarter of 1997. The Company benefited from a less competitive environment due to the closing of stores by certain mall competitors and less near or below cost pricing of music product by certain non-mall competitors. The reductions in total sales in 1997 resulted from the decreased store count and square footage from closing stores. 32 The following table shows the comparable store sales percentage increase (decrease) attributable to the Company's two principal product categories for the last three years.
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 -------- -------- -------- Music................................... (6.9)% 0.9% 7.5% Video................................... 4.7 (0.8) 0.2
The Company's DVD sales in 1997, the year of DVD introduction, were 1.8% of total video sales. DVD sales accelerated in the months of December 1997 and January 1998 to 3.4% and 8.2%, respectively, of total video sales. Sales of DVD are expected to continue to build during 1998. See "Risk Factors--Risk from New Technologies" and "Business--Products--Video." COMPONENTS OF EARNINGS. The following table sets forth certain operating results as a percentage of sales for the last three years.
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Sales............................................................. 100.0% 100.0% 100.0% Gross profit...................................................... 35.2 33.6 34.8 Selling, general and administrative expenses...................... 30.5 31.7 29.9 Operating income before depreciation, amortization and restructuring charges........................................... 4.7 1.9 4.8 Operating income (loss)........................................... (6.0) (9.9) 2.6
GROSS PROFIT. In 1996, the increase in sales from the lower margin Superstores relative to total Company sales lowered total Company gross margin by 0.5%. An increase in inventory shrinkage negatively impacted gross margin by 0.4%. The balance of the gross margin decrease in 1996 was primarily attributable to increased promotional pricing in both Mall Stores and Superstores and lower prices in Mall Stores in 1996 as compared to 1995. Approximately 1.3% of the gross margin improvement in 1997 was attributable to price increases and less promotional pricing. The proportion of sales from the lower margin Superstores relative to total sales decreased during 1997 due to store closings and resulted in an improvement in total Company gross margin of 0.3%. An increase in inventory shrinkage reduced gross margin by 0.4%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The decrease in selling, general and administrative expenses in 1997 compared with 1996 was primarily due to store closings, a reduction in advertising and efficiencies gained from the consolidation of the Company's distribution facilities into a single facility in 1997. The Company's distribution facility in Franklin, Indiana has more than double the combined capacity of the Company's former facilities in Minneapolis, Minnesota and Edison, New Jersey. The Minneapolis facility closed in January 1997 while the Edison facility closed in May 1995. The Company incurred expenses related to the consolidation of approximately $1.6 million and $1.5 million in 1995 and 1996, respectively. Because of the Company's limited store expansion in 1996 and 1997, costs incurred related to store openings were approximately $4 million in 1996 and were minimal in 1997 compared with $13 million in 1995. Financial and legal advisory services and related expenses, most of which were incurred in conjunction with obtaining amendments to the Company's Revolver Agreement, totaled approximately $3.8 million in 1996 and $2.9 million in 1997. Selling, general and administrative expenses in 1995 are net of nonrecurring items consisting of income of $8.8 million from the termination of certain service and business development agreements and a charge of $5.4 million for the closing of 35 mall based Sam Goody stores. 33 The higher expense rate in 1996 compared with 1997 and 1995 was attributable to the effect of the unusual items previously discussed and the negative impact of fixed costs, principally occupancy costs, in both underperforming existing stores and new Media Play stores opened in 1995 and 1996. Many of these underperforming stores were closed under the Company's restructuring programs. See "--Restructuring Charges." The decrease in selling, general and administrative expenses as a percentage of sales in 1997 was mainly due to the cost savings discussed above. The comparable store sales gains in 1997 also contributed to the rate improvements. DEPRECIATION AND AMORTIZATION. The goodwill write-downs in 1995 and 1996 eliminated goodwill amortization in 1997 while goodwill amortization was $5.8 million, or $0.17 per share, in 1995 and $3.0 million, or $0.09 per share, in 1996. Other depreciation and amortization was $39.7 million, $41.8 million and $39.4 million in 1995, 1996 and 1997, respectively, and primarily related to stores. The increases over the prior years in 1996 and 1997 were attributable to store expansion, net of the decreases related to store closings. GOODWILL WRITE-DOWN. In August 1995, the Company recorded a goodwill write-down of $138.0 million, or $4.07 per share, for the year ended December 31, 1995. An additional goodwill write-down of $95.3 million, or $2.85 per share, was recorded in December 1996, eliminating the remaining goodwill balance and goodwill amortization for years after 1996. Most of the goodwill was established in conjunction with the 1988 leveraged buyout of MGI by MSC. At that time, nearly all of the Company's stores were mall based music stores. The carrying values of long-lived assets, primarily goodwill and property, of the music stores were reviewed for recoverability and possible impairment in both 1995 and 1996 because of sales declines that began in 1995 and continued during 1996. These sales declines resulted from a general decrease in customer traffic in malls, an increase in high-volume, low-price non-mall superstores and a lack of strong music product releases. See Note 2 of Notes to Consolidated Financial Statements. RESTRUCTURING CHARGES. During 1996, the Company recorded pretax restructuring charges of $75.0 million for the estimated cost of programs designed to improve profitability and increase inventory turnover. The restructuring programs included the closing of the Company's distribution facility in Minneapolis, Minnesota and 115 underperforming stores, including 79 Mall Stores and 36 Superstores. The Company closed 53 of these stores in 1996 and completed the restructuring programs in 1997 with the closing of the distribution facility and another 61 stores. The Company removed one Superstore from the closing list after exercising an option in the termination agreement for that store to reinstate the lease. The restructuring charges included $36.3 million of cash payments, primarily related to payments to landlords for the early termination of operating leases and estimated legal and consulting fees, and $38.7 million for non-cash charges related to write-downs of leasehold improvements and certain equipment, net of unamortized lease credits. See "--Liquidity and Capital Resources--Investing Activities." INTEREST EXPENSE. Interest expense consists primarily of interest on Revolver borrowings and the 2003 Notes. Other interest consists primarily of amortization of debt issuance costs. Components of interest expense for the last three years are as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- (IN MILLIONS) Interest on Revolver.............................................. $ 17.0 $ 21.9 $ 19.0 Interest on Term Loan............................................. -- -- 1.2 Interest on 2003 Notes............................................ 9.9 9.9 9.9 Other interest, net............................................... 1.0 1.2 1.6 --------- --------- --------- $ 27.9 $ 33.0 $ 31.7 --------- --------- --------- --------- --------- ---------
34 Interest expense on Revolver borrowings is impacted by the level of outstanding borrowings during the year, interest rates, the Company's credit rating and the number of days borrowings are outstanding during the year. Average daily Revolver borrowings outstanding, weighted average interest rates on the Revolver, based on the average daily borrowings, and the highest balances outstanding under the Revolver were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- (IN MILLIONS) Average daily Revolver borrowings................................ $ 254.0 $ 289.7 $ 238.5 Highest level of Revolver borrowings............................. 350.0 333.0 273.0 Weighted average interest rate................................... 7.1% 7.6% 8.0%
Higher outstanding Revolver borrowings increased interest expense by $2.4 million in 1996. Lower outstanding borrowings on the Revolver decreased interest expense by $3.9 million in 1997, or $2.7 million when netted with interest expense on the Term Loan. The Term Loan proceeds received in September 1997, used to reduce outstanding Revolver borrowings, lowered the average daily Revolver borrowings for the year by $13 million. Increases in the weighted average interest rates increased Revolver interest by $1.2 million in 1996 and $1.1 million in 1997. Most of the increase in interest rates in 1996 and 1997 was the result of amendments to the Company's Revolver Agreement. An amendment in June 1997 increased the margin added to variable interest rates on Revolver borrowings by 0.25% through April 1998 and by 0.50% thereafter. A previous amendment in April 1996 and lower credit ratings had increased the interest rate margin by 0.93% and the annual facility fee rate by 0.2%. INCOME TAXES. The effective income tax rates of (4.0)% in 1995, 9.0% in 1996 and 2.1% in 1997 vary from the federal statutory rate as a result of deferred tax valuation allowances in 1996 and 1997, goodwill amortization and write-downs in 1995 and 1996, which are nondeductible, and state income taxes. Deferred tax valuation allowances of $24.5 million were established in 1996 because of the uncertainty of future earnings and reduced the deferred income tax balances at December 31, 1996 to the approximate amount of remaining recoverable income taxes after carryback of the 1996 taxable loss. The valuation allowances were reduced by $7.5 million in 1997 based on revised estimates of future earnings. See Note 5 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are Revolver borrowings pursuant to the terms of the Revolver Agreement and internally generated cash. Because of the seasonality of the retail industry, the Company's cash needs fluctuate throughout the year and typically peak in November as inventory levels build in anticipation of the Christmas selling season. The Company's cash position is generally highest at the end of December because of the higher sales volume during the Christmas season and extended payment terms typically provided by most vendors for seasonal inventory purchases. The Company's cash needs build during the first quarter as inventories are replenished following the Christmas season and payments for seasonal inventory purchases become due. The Company's practice has generally been to use the excess cash generated from operations in the fourth quarter to repay all or a portion of the outstanding Revolver borrowings. The amount of Revolver borrowings, if any, outstanding at year end depends upon the sales performance during the Christmas season, the timing of vendor payments and other cash flow requirements. Following the Offering and the use of proceeds therefrom, the Company believes that, based on current levels of operations and anticipated growth, cash flow from operating activities, together with cash flow from financing activities, including borrowings under the Revolver, as amended, will be adequate for at least the next two years to make required payments of principal and interest on the Company's indebtedness (including the Notes), to fund anticipated capital expenditures and working capital requirements and to comply with the terms of its debt agreements. 35 In June 1997, the Company completed agreements with its banks to amend the Revolver Agreement and to allow the Term Loan Agreement. Pursuant to the amendment, the maximum available Revolver borrowings are the lesser of: (i) 60% of eligible inventory or (ii) $245.0 million through the expiration of the Revolver Agreement in October 1999. However, for any Revolver borrowings which result in a net increase in total outstanding Revolver borrowings, total trade accounts payable must be equal to or greater than the total outstanding Revolver borrowings. Outstanding Revolver borrowings in excess of $245.0 million and the Term Loan are secured by inventory. The Company had no outstanding Revolver borrowings at December 31, 1997. See "--Financing Activities" and Note 4 of Notes to Consolidated Financial Statements. The Company has received approval for an amendment to the Revolver Agreement from the Banks which permits the issuance of the Notes, reduces the combined aggregate commitments, under the Revolver Agreement and Term Loan Agreement, to $182.0 million, and amends certain other items in the Revolver Agreement. See "Description of Existing Financing Arrangements--Credit Facility." The Revolver Agreement contains financial covenants and covenants that limit additional indebtedness, liens, capital expenditures and cash dividends. The amendment to the Revolver Agreement in June 1997 modified and provided additional flexibility in financial covenants related to fixed charge coverage, consolidated tangible net worth and debt to total capitalization and removed financial covenants related to the maximum debt and trade payables to eligible inventory ratio and the annual one day clean-down requirement of revolver borrowings. The Company had previously obtained waivers of certain financial covenants and technical defaults under the Revolver Agreement that had been extended through June 30, 1997 to allow for adequate time to complete all of the necessary financing agreements and related amendments. Covenants of the Term Loan Agreement require a minimum inventory of $150 million and a minimum operating cash flow and limit additional liens. The agreements related to the Mortgage Notes Payable and 2003 Notes, as amended, also contain certain financial covenants. The Company was in compliance with all covenants at December 31, 1997. The Company used the net proceeds from the Offering of the Old Notes to repay indebtedness. See "Use of Proceeds." OPERATING ACTIVITIES. Net cash provided by (used in) operating activities (including the increase (decrease) in outstanding checks in excess of cash balances which relate to vendor payments) was $7.2 million in 1995, $(52.6) million in 1996 and $86.7 million in 1997. Cash used for inventory purchases, as reflected by the aggregate net changes in inventories, accounts payable and outstanding checks in excess of cash balances, was $31.8 million in 1995 and $38.9 million in 1996. In 1997, the aggregate net changes in these inventory related items contributed $6.4 million to net cash provided by operating activities. Although inventories at December 31, 1996 of $506.1 million decreased $27.6 million from December 31, 1995, the amount of cash used for inventory purchases increased because of early payments made to certain vendors to obtain discounts and to ensure continued availability of product. The significant positive cash flow in 1997 compared with prior years was achieved primarily through a reduced investment in inventory and improvements in operating performance. The consolidation of distribution centers into a single facility, store closings and initiatives designed by management to increase inventory turnover, including better in-stock positions and more frequent purchases closer to the time of sale, enabled the Company to maintain lower inventory levels during 1997, which decreased inventories at December 31, 1997 to $450.3 million from $506.1 million at December 31, 1996. The Company made tax payments of $17.9 million and $9.0 million in 1995 and 1996, respectively, while income tax refunds, net of payments, of $22.9 million were received in 1997 from the carryback of the 1996 taxable loss. Cash expenditures related to store closings under the Company's restructuring programs were $24.1 million and $12.2 million in 1996 and 1997, respectively. 36 INVESTING ACTIVITIES. Capital expenditures and store data for the last three years are as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Capital expenditures, net of sale/leasebacks and other property sales (in millions)...... $ 87.0 $ 6.4 $ 10.9 Store openings: Mall Stores............................................................................ 49 14 2 Superstores............................................................................ 119 19 1 Total(1)............................................................................. 175 35 3 Store closings: Mall Stores............................................................................ (64) (47) (79) Superstores............................................................................ -- (16) (21) Total(1)............................................................................. (65) (65) (106) Net increase (decrease) in store count: Mall Stores............................................................................ (15) (33) (77) Superstores............................................................................ 119 3 (20) Total(1)............................................................................. 110 (30) (103)
- - ------------------------ (1) The totals include United Kingdom and other stores. In 1995 and 1996, capital expenditures were primarily for store expansion, the majority of which were new Media Play stores, while in 1997, most of the Company's capital expenditures consisted of improvements to existing stores. Capital expenditures since 1995 have been significantly lower than in previous years as the Company has shifted its focus to improving profitability in existing stores. The number of stores closed under the restructuring programs were 53 stores and 61 stores in 1996 and 1997, respectively. See "--Results of Operations--Restructuring Charges." Financing of capital expenditures has generally been provided by borrowings under the Revolver Agreement and internally generated cash. The Company typically receives financing from landlords in the form of contributions and rent abatements for a portion of the capital expenditures, primarily related to new stores and relocations of existing stores. In the third quarter of 1996, net proceeds of $11.6 million were received from the sale of the building containing the Company's distribution facilities and certain corporate office facilities in Minneapolis, Minnesota. The Company leased back the entire building through January 1997 and since then leases a portion of the office facilities. A portion of the Media Play capital expenditures in 1995 were financed with proceeds from sale/leaseback transactions totaling $26.2 million. Capital expenditures of approximately $14 million for three new Media Play stores opened in 1996 and $30.0 million for the new Franklin distribution facility and most of the related equipment were financed through special purpose entities. The property and related Mortgage Notes Payable were recorded on the Company's Consolidated Balance Sheet after terms of amendments to the operating leases required consolidation of the special purpose entities as of October 1996 and June 1997, the dates of the respective amendments. See Note 15 of Notes to Consolidated Financial Statements. While management does not currently intend to significantly expand its store base, the Company plans to open selected new stores in order to fill out existing markets or capitalize on attractive leasing opportunities. The Company anticipates capital expenditures in 1998 of approximately $20 million, consisting primarily of improvements to existing stores. The Company anticipates that these capital expenditures will be financed by borrowings under the Revolver and internally generated cash. The Company will continue to assess the profitability of its stores and will close a limited number of underperforming stores in the coming years, if the closings can be accomplished economically. 37 FINANCING ACTIVITIES. The Company's financing activities principally consist of borrowings and repayments under its Revolver. Cash provided by (used in) financing activities (excluding the increase (decrease) in outstanding checks in excess of cash balances which relate to vendor payments) was $43.2 million, $219.0 million and $(233.8) million during the years ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1996, the Company had Revolver borrowings of $272.0 million, or $110.0 million when netted with $162.0 million of cash and cash equivalents. The higher level of Revolver borrowings in 1996 as compared to 1995 was primarily due to diminished liquidity that had resulted from the challenging retail sales environment experienced by the Company and the negative impact of underperforming stores. The $49.5 million of net Term Loan proceeds received in September 1997 were used to reduce Revolver borrowings. Excess cash generated from strong Christmas season sales in 1997 was used to repay all outstanding Revolver borrowings by year end. During the third quarter of 1995, the Company loaned $10.0 million to its 401(k) trust to finance the purchase of 1,042,900 shares of common stock of the Company in the open market. The stock is used for a "KSOP" plan, which combines features of a 401(k) plan and an employee stock ownership plan. See Note 6 of Notes to Consolidated Financial Statements. The Revolver expires in October 1999. The Company expects to enter into a new financing arrangement on or before the expiration date of the Revolver. Maturities of other long-term debt are $26.7 million in 1998, $46.0 million in 1999, $10.3 million in 2000 and $110.0 million in 2003. The Company may, at its option, redeem the 2003 Notes prior to maturity at 103.375% of par on and after June 15, 1998 and thereafter at prices declining annually to 100% of par on and after June 15, 2001. The Mortgage Notes Payable agreements contain one year renewal options which would extend maturities of $21.0 million and $10.3 million to March 2000 and May 2001, respectively. OTHER MATTERS INFLATION, ECONOMIC TRENDS AND SEASONALITY. Although its operations are affected by general economic trends, the Company does not believe that inflation has had a material effect on the results of its operations during the past three fiscal years. The Company's business is highly seasonal, with nearly 40% of the annual revenues and all of the net earnings generated in the fourth quarter. See Note 16 of Notes to Consolidated Financial Statements for quarterly financial data. YEAR 2000 COMPLIANCE. The Company has assessed its systems and equipment with respect to Year 2000 compliance and has developed a project plan. Many of the Year 2000 issues, including the processing of credit card transactions, have been addressed. The remaining Year 2000 issues will either be addressed with scheduled system upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expense as incurred and are not expected to have a material impact on the financial position or results of operations of the Company. However, the Company could be adversely impacted if Year 2000 modifications are not properly completed by either the Company or its vendors, banks or any other entity with whom the Company conducts business. Accordingly, the Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. 38 BUSINESS GENERAL The Company is the leading specialty retailer of prerecorded music in the United States and is one of the largest national full-media retailers of music, video sell-through, books, computer software and related products. The Company's stores operate under two principal strategies: (i) mall based music and video sell-through stores (the "Mall Stores"), operating under the principal trade names Sam Goody and Suncoast Motion Picture Company ("Suncoast"), and (ii) non-mall based full-media superstores (the "Superstores"), operating under the trade names Media Play and On Cue. At December 31, 1997, the Company operated 1,363 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands and the United Kingdom. For the year ended December 31, 1997, the Company had consolidated revenues of $1.8 billion, including $1.2 billion from the Mall stores and $0.6 billion from the Superstores, and EBITDA of $85.4 million. MALL STORES SAM GOODY. Sam Goody is a well established music retailer that provides a broad selection in an exciting, customer friendly shopping environment. Sam Goody stores offer a full line of music, along with video and related products. The music stores are predominantly found in mall locations and range in size from 1,000 to 30,000 square feet, averaging 4,300 square feet. The larger music stores are in more prominent mall or downtown locations and carry a broader inventory of catalog product, including substantial classical offerings and video sell-through, to appeal to the high volume purchaser. Many of the music stores previously operated under the Musicland name have been converted to the Sam Goody name. More than 400,000 Sam Goody store customers participate in the REPLAY program, a frequent shopper program designed to promote customer loyalty and enable targeted marketing. An increased emphasis has been placed on Latin music and other niche music categories as part of efforts to broaden the music store customer base. During 1997, the Company opened two new stores and closed 66 stores, including 33 closings under the Company's restructuring programs and 33 other underperforming stores, most of which were near the end of their lease terms. At December 31, 1997, the Company operated 713 music stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. The total square footage of music stores was approximately three million square feet, or 37% of the Company's total store square footage at December 31, 1997. SUNCOAST. Suncoast is the dominant mall based video sell-through retailer in the United States, offering a broad selection and excellent customer service in an entertaining atmosphere. Suncoast stores average 2,400 square feet in size and typically feature 8,000 to 10,000 video titles along with movie and video related apparel, DVDs, special order video and other related products. The video categories include adventure, comedy, drama, family, animated, musicals, music video, instructional and other special interest. Most of the movies are priced at less than $20 and more than half sell for less than $15. Each store also offers a wide selection of feature films and videos for less than $10. Management plans to establish Suncoast stores as a primary retailer of DVD by offering a broad assortment of titles and developing marketing programs to encourage repeat visits. Suncoast stores currently carry an average of 500 titles on the new DVD format, which will be increased as more titles become available and as the number of homes with DVD players increases. Most of the DVD titles are priced at $20 to $30. Suncoast's marketing programs include sweepstakes, instant rebates and exclusive merchandise events promoting recent video releases. Suncoast stores utilize theme and cross-promotional merchandising that coordinates the display and sale of licensed merchandise with the related movie or genre to maximize total sales. Niche marketing, such as product offerings related to Japanese animation, or "Anime," was recently 39 added in Suncoast stores. Beginning in 1998, new audiences will also be targeted through the expansion of advertising to radio and cable television. At December 31, 1997, there were 409 Suncoast stores in 46 states, the District of Columbia and the Commonwealth of Puerto Rico. The Company opened no new Suncoast stores during 1997 and closed a total of 13 stores, including nine closings under the Company's restructuring programs and four other underperforming stores. The total square footage of Suncoast stores was approximately one million square feet, or 12% of the Company's total store square footage at December 31, 1997. SUPERSTORES MEDIA PLAY STORES. Media Play is a full-media superstore retailer of entertainment software products providing a superior assortment at competitive prices. Media Play stores average 48,000 square feet in size and are in freestanding and strip mall locations primarily in urban and suburban areas. The extensive merchandise assortment of compact discs, books, video and computer software, complemented by other media and related products including magazines, video games, educational toys, greeting cards and apparel appeals to customers of all ages. Media Play stores provide a family oriented and exciting shopping environment featuring easy access to all merchandise categories, lounge areas for relaxed browsing, convenient customer service areas, live performances and other entertainment activities, children's play areas, coffee carts and popcorn stands. A variety of in-store events, such as musician appearances, book clubs and drawing events, are held throughout the year to attract customers. The non-mall locations and largely self-service environment lower operating costs and enable Media Play stores to offer products at competitive prices. See "Business Strategy--Improve Media Play Profitability." The first Media Play store opened in Rockford, Illinois in November 1992. During 1997, 19 Media Play stores were closed under the Company's restructuring programs. At December 31, 1997, the Company operated 68 Media Play stores in 19 states with total square footage of approximately three million square feet, or 39% of the Company's total store square footage. ON CUE STORES. On Cue is a full-media retailer in small towns, generally with populations between 8,000 and 20,000 people, providing a wide assortment of entertainment software products at competitive prices. On Cue stores average 6,200 square feet in size and offer customers a convenient local store to shop for music, books, video, computer software and related products with superior customer service to encourage repeat business. On Cue customers also have access to over 100,000 home entertainment titles through the Company's special order program. Customer loyalty is rewarded through such programs as in-store sweepstakes and unadvertised in-store specials. On Cue stores are promoted through highway billboards, direct mail, cable television and local print and radio. The first On Cue store opened in February 1992. The Company opened one On Cue store and closed two stores in 1997. At December 31, 1997, the Company operated 157 On Cue stores in 28 states with total square footage of approximately one million square feet, or 12% of the Company's total store square footage. INTERNATIONAL STORES The Company operates music stores in the United Kingdom under the name Sam Goody. During 1997, the Company focused on improving the profitability of its United Kingdom stores, closing six underperforming stores while opening no new stores. At December 31, 1997, the Company had 16 stores in operation averaging approximately 2,800 square feet in size. The United Kingdom stores provide for their own corporate services, including purchasing and distribution. Beginning in 1995, the Company's financial results began to deteriorate as a result of: (i) aggressive expansion of product offerings and new store openings by most of the Company's non-mall competitors; (ii) severe price discounting of music products by certain non-mall competitors; (iii) a lack of strong selling 40 hits in the music industry, which depressed sales throughout the industry; and (iv) the Company's own rapid expansion of Media Play stores in response to encouraging initial results. In 1996 management initiated restructuring programs designed to improve the Company's cash flow and profitability. The major components of the restructuring programs included: (i) closing 114 underperforming stores, which in the last full year of their operations lost an aggregate of $17.7 million on an operating contribution basis; (ii) closing one of the Company's two distribution centers, which reduced the Company's working capital investment by approximately $20 million and contributed to a $6.9 million reduction in distribution costs in 1997; and (iii) improving inventory management techniques, which increased the Company's inventory turnover from 1.8 times during 1996 to 2.1 times during 1997. Inventory levels at year-end 1997 were $55.8 million below those of the prior year with approximately $30 million of the reduction due to store closings and the remainder attributable to distribution efficiencies and improved inventory management. The Company reduced Media Play advertising expense by $7.9 million in 1997 from the prior year as a result of closing stores in entire markets and the introduction of a less costly, but more targeted, program of newspaper advertising inserts. In addition, in 1997 the Company began to benefit from positive trends in the music retailing industry, including a retreat from severe price discounting and an increase in unit sales. As a result, the Company's EBITDA increased from $35.1 million in 1996 to $85.4 million in 1997, and comparable store sales improved from a decrease of 0.6% in 1996 to an increase of 4.5% in 1997. COMPETITIVE STRENGTHS The Company believes that it benefits from the following competitive advantages: LARGEST NATIONAL MUSIC RETAILER. The Company is the largest specialty retailer of music in the United States, with music available in all 1,363 stores. The Company's leading market presence allows the Company to: (i) spread its fixed operating costs over a large revenue base; (ii) realize distribution savings through freight consolidation; (iii) take advantage of vendor discounts and cooperative advertising programs; (iv) negotiate more effectively with national landlords; (v) use national advertising media; and (vi) benefit from market clustering. A national distribution of stores also minimizes the impact on the Company of regional business trends. In recent years, as a result of adverse industry conditions, a number of mall based music chains have closed hundreds of stores. Although the Company has also closed underperforming stores, the Company was the single music retailer in 285 malls at the end of 1997 compared to 274 malls at the end of 1996. SOPHISTICATED INVENTORY MANAGEMENT AND DISTRIBUTION SYSTEMS. Management believes that the Company's proprietary retail inventory management ("RIM") and distribution systems are the most sophisticated in the industry, allowing the Company to manage its inventory more effectively than its competitors. The RIM system performs comprehensive merchandise control functions on both an individual store and a company wide basis. It maintains an inventory profile for every store, incorporates an "intelligent" new release allocation system and adjusts and monitors store inventory on a daily basis. The RIM system allows the Company to meet demand for fast selling titles and carry a broad range of current hits and catalog titles while avoiding excess inventory and substantial returns. In January 1997, the Company consolidated its distribution operations into its state-of-the-art, centrally located facility in Franklin, Indiana, that contains 715,000 square feet. This facility incorporates computerized processing and laser technology for receiving, storing, sorting and shipping new product and returns. This technology has enabled the Company to implement "just-in-time" inventory management with certain vendors, which reduces working capital. STRONG BRAND NAME RECOGNITION. The Company benefits from strong national brand name recognition and continually markets to strengthen the brand images for each of its retail concepts. Strong brand name recognition offers advantages in advertising, in-store events and marketing partnerships. A 1997 national survey by Strategic Record Research determined that more music consumers preferred shopping at the Company's stores than at other music stores. The Company is able to attract large corporate 41 partners such as Pepsi-Cola, Sears, VISA, MasterCard and L'Oreal for cross promotions, events and sweepstakes that the Company believes are attractive to shoppers. The Company's monthly REQUEST magazine, with an annual audited circulation of 6 million copies, is an award winning, cutting edge music publication. REQUEST offers numerous cross marketing opportunities with Sam Goody and the Company's other concepts and reinforces the Company's brand names with consumers. LONG-STANDING VENDOR RELATIONSHIPS. The Company believes its relationships with major music and video vendors are among the best in the industry. Strong vendor relations allow the Company to be creative in its marketing programs and business operations. The Company's long-standing relationships with vendors are further enhanced because: (i) the Company's large selection of products provides vendors with a needed outlet for their catalog product, which is generally more profitable than hit product; and (ii) the Company's RIM system allows the Company to manage product returns at rates below the industry average, which is an economic benefit to the vendors. Management believes that the continued support of its vendors in 1996 and 1997 is a testament to the strength of its vendor relationships. BUSINESS STRATEGY The Company's objective is to continue to increase revenue, cash flow and profitability. Management believes that the Company's recent operating results have begun to reflect the successful implementation of its business strategy. The key elements of the Company's business strategy are as follows: STRENGTHEN STORE BASE. After closing 236 underperforming stores over the past three years, management believes that its current store base is well positioned for future growth. Management intends to improve sales by enhancing brand name awareness and increasing store traffic through creative advertising and marketing programs. Management also intends to remodel certain stores in order to enhance their appeal to customers. While management does not currently intend to significantly expand its store base, the Company will open selected new stores in order to fill out existing markets or capitalize on attractive leasing opportunities. The Company will continue to assess the profitability of its stores and will close a limited number of underperforming stores in the coming years, if the closings can be accomplished economically. CAPITALIZE ON FAVORABLE INDUSTRY DYNAMICS. The Company expects sales of its products to increase due to: (i) increased consumer spending; (ii) favorable demographic trends; and (iii) the advent of new technologies. Through 2001, consumer spending on pre-recorded music, video sell-through and trade books is projected to grow at compounded annual growth rates of 5.6%, 11.2% and 5.8%, respectively (according to Veronis, Suhler & Associates). Demographic shifts over the next few years are expected to contribute to sales growth. The 15 to 24 age group, whose members are known to be mall-shoppers and strong music buyers, is projected to be 4.1% larger in the year 2000 than its size in 1995. The principal book buying population, between 35 and 54 years of age, is projected to grow in the same period by 12.3%. Children's music, video, books and toys should benefit by a growth of 6.4% in the 5 to 14 age group in the same period (source: U.S. Bureau of Census 1996). Historically, the introduction of new technology, such as compact discs, has had a positive impact on the Company's business, and the most encouraging new technology today is DVD. Veronis, Suhler & Associates projects that by 2001 annual consumer spending on DVDs will be approximately $1.2 billion. Most of the Company's stores carry DVD, and Suncoast in particular is pursuing the early adopters of this new format. INCREASE GROSS MARGIN. The Company believes the following initiatives will benefit gross margin: (i) selective price decisions in response to the competitive environment in various markets; (ii) adjustments to merchandise assortment to include more higher margin products; and (iii) cross promotions on product lines to increase sales of high margin ancillary products, such as apparel. REDUCE WORKING CAPITAL. The Company plans to continue reducing working capital by: (i) expanding the "just in time" inventory program, which completely eliminates backup inventory, to include more 42 products and selective additional vendors; (ii) implementing more precise buying rules to reduce returns; and (iii) eliminating less profitable product lines. IMPROVE MEDIA PLAY PROFITABILITY. The Company will concentrate on improving profitability in all concepts, but particularly in Media Play. The Company's efforts to increase sales, improve gross margin, increase customer traffic and reduce operating costs in its Media Play stores includes the following initiatives: (i) introducing new merchandise assortments; (ii) altering departmental and store layouts; and (iii) reducing operating costs through improved store management, expense control and inventory management. Of the Company's four concepts, Media Play showed the most significant profitability improvement in 1997. PRODUCTS The following table shows the sales and percentage of total sales attributable to each product group.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- 1995 1996 1997 -------------------- -------------------- -------------------- SALES % SALES % SALES % --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Music................................................ $ 895.0 51.9% $ 931.1 51.1% $ 930.0 52.6% Video................................................ 505.9 29.4 531.2 29.2 509.1 28.8 Books, computer software and other products.......... 321.9 18.7 359.3 19.7 329.2 18.6 --------- --------- --------- --------- --------- --------- Total.............................................. $ 1,722.8 100.0% $ 1,821.6 100.0% $ 1,768.3 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
MUSIC. Sales of compact discs are expected to continue to grow and become a larger portion of total music sales while sales of audio cassettes are expected to continue to decline, although at a slower rate than in recent years. Sam Goody stores typically carry 4,500 to 8,500 compact disc titles, depending upon store size and location, while the largest Sam Goody stores carry up to 45,000 compact disc titles. Media Play and On Cue stores carry up to 50,000 and 5,000 compact disc titles, respectively. These titles include "hits," which are the best selling newer releases, and "catalog" items, which are older but still popular releases that customers purchase to build their collections. The Company also produces and sells music under its "Excelsior" label, which include compilations of public domain classical, jazz, big band and reggae music. VIDEO. Video cassettes are for sale at all of the Company's stores. Suncoast stores feature up to 15,000 video titles. Media Play stores carry up to 16,000 titles. Sam Goody stores typically carry 2,000 titles, while the largest Sam Goody stores carry up to 14,000 titles. On Cue stores carry up to 4,500 titles. Merchandising of DVD, a new video technology, began in 1997. DVD offers the consumer laser technology in a smaller disc format with superior picture quality and audio fidelity. The Company believes that in the next few years, sales of DVD players will begin to replace sales of laserdisc players and video cassette recorders as the new technology becomes widely available. DVD is currently available in Sam Goody, Suncoast and Media Play stores and selected On Cue stores. The Company's DVD sales in 1997 were 1.8% of total video sales, but accelerated in the months of December 1997 and January 1998 to 3.4% and 8.2%, respectively, of total video sales. DVD is expected to grow rapidly and, if successful, to become an important part of the video industry by the year 2000. However, DVD demand could accelerate faster or slower depending upon how consumers react to its technical superiority over the VHS format and the introductory price points of the hardware and software. See "Risk Factors--Risk from New Technologies." BOOKS, COMPUTER SOFTWARE AND OTHER PRODUCTS. Media Play and On Cue stores carry up to 50,000 and 6,500 titles of books, respectively. Computer software is available primarily in Media Play stores, which offer 2,000 computer software programs. "Other Products" refers to video games, brand name blank audio and video tapes, storage containers, carrying cases and sheet music, as well as entertainment related 43 apparel, posters and various other items. Movie and artist related accessories and apparel are highly influenced by the trends and fads surrounding popular movies, actors and artists. The Company's stores also carry a limited variety of portable electronic equipment such as audio cassette players, radios and stereo audio cassette/radios, generally sold at retail prices of approximately $200 or less. SUPPLIERS Substantially all of the home entertainment products (other than computer software) sold by the Company are purchased directly from manufacturers. The Company purchases inventory for its stores from approximately 2,400 suppliers. Approximately 68% of purchases in 1997 were made from the ten largest suppliers. The Company has no long-term contracts with its suppliers and transacts business principally on an order-by-order basis as is typical throughout the industry. See "Risk Factors--Relationships with Vendors." MARKETING The Company uses a high level of advertising and promotions in marketing its products. Marketing and advertising programs include special events, advertising partnerships with vendors and corporate partnerships with nationally known names. Additionally, frequent buyer programs in the Company's mall stores and certain product specific programs in On Cue stores are designed to build customer loyalty and encourage repeat visits. The Company has been sponsoring nationally televised/advertised events such as ESPN's Xtreme Games and the "UnVailed" battle of the bands, which appeal to its target customers. Other advertising programs which are being created in conjunction with vendors include television and billboard ads featuring specific albums or movies. In addition, the Company publishes REQUEST, a cutting-edge music and video entertainment news magazine for younger customers. REQUEST is distributed in the music stores as well as Media Play and On Cue stores and also at limited magazine stand outlets. The magazine has an annual audited circulation of six million copies and an estimated readership in the millions. The Company's major suppliers offer cooperative advertising support and provide funds for the placement and position of product. A significant portion of the Company's total advertising costs have been funded by suppliers through these programs. The Company advertises principally through newspaper inserts. Because of the high concentration of its mall stores in major metropolitan areas such as New York, Chicago and Los Angeles, the Company has been able to expand its radio and local television advertising in those areas. The national distribution of the Company's mall stores has made it practical to advertise in certain national magazines and on nationally syndicated radio programs and cable television, including MTV. STORE OPERATIONS Sam Goody, Suncoast and On Cue stores are typically managed by a store manager and an assistant manager. Media Play stores typically are managed by a general manager, an assistant general manager and three to five department managers. Most stores are open up to 80 hours per week, seven days a week. The Company does not extend credit to customers, but most major credit cards are accepted. COMPETITION The Company operates in highly competitive markets which are generally local or individual in nature. The Company competes on the basis of service, selection and price, with a broad range of specialty, discount and other retailers, and certain national chains, some of whom have greater financial and marketing resources than the Company. The number of stores and types of competitors have increased significantly over recent years, including non-mall discount stores, consumer electronic superstores, and mall based music, video and book specialty retailers expanding into non-mall multimedia stores. The low 44 prices offered by these non-mall stores have created intense price competition and adversely impacted the performance of both the Company's non-mall and mall stores. Although deep discount pricing by many retailers of entertainment products abated somewhat in 1997, there can be no assurance that if such practice returns the Company will continue to achieve satisfactory gross margins while remaining competitive. In addition, the Company competes for consumer time and spending with all leisure time activities, such as movie theaters, television, home computing and internet use, live theater, sporting facilities and spectator events, travel, amusement parks and other family entertainment centers. The Company's ability to compete successfully depends on its ability to secure and maintain attractive and convenient locations, market and manage merchandise attractively and efficiently, offer an extensive product selection and knowledgeable customer service and provide effective management. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Results of Operations--Gross Profits." SEASONALITY The Company's business is highly seasonal, with nearly 40% of the annual revenues and all of the net earnings generated in the fourth quarter. Quarterly results are affected by, among other things, the timing of holidays, new product offerings and new store openings and sales performance of existing stores. See Note 16 of Notes to Consolidated Financial Statements. TRADEMARKS AND SERVICE MARKS The Company operates its stores under various names, including "Sam Goody," "Musicland," "Suncoast Motion Picture Company," "Media Play" and "On Cue," which have become important to the Company's business as a result of its advertising and promotional activities. These names, along with a number of others, including "REQUEST," "REPLAY," "Excelsior" and "Channel 1000," have been registered with the U.S. Patent and Trademark Office. The Company intends to continue to use these names and marks and may use new names for specific stores depending on the type of store and its location. PERSONNEL As of January 26, 1998, the Company employed approximately 5,800 full-time employees, 9,600 part-time employees and 1,000 temporary employees. Hourly employees at 15 of the Company's stores are represented by unions. All other facilities are non-union and the Company believes that its employee relations are good. PROPERTIES CORPORATE HEADQUARTERS AND DISTRIBUTION FACILITIES. The Company owns its corporate headquarters facility in Minneapolis, Minnesota, consisting of an office building with approximately 94,000 square feet of space on approximately 5.4 acres of land. Approximately 73,000 square feet of office and storage space in Minneapolis, Minnesota is under an operating lease that expires in January 2002. The Company's distribution facilities are located in Franklin, Indiana and consist of a 715,000 square foot building on approximately 66.6 acres of land, with options on approximately 33.4 acres of land. See Note 4 and Note 15 of Notes to Consolidated Financial Statements. STORE LEASES. Most of the Company's stores are under operating leases with various remaining terms through the year 2017. The Company owns three Media Play stores. The leases have terms ranging from 3 to 25 years. Certain store leases contain provisions restricting assignment, merger, change of control or transfer. In most instances, the Company pays, in addition to minimum rent, real estate taxes, utilities, common area maintenance costs and percentage rents which are based upon sales volume. Certain store leases provide the Company with an early cancellation option if sales for a designated period do not reach 45 a specified level as defined in the lease. The following table lists the number of leases due to expire or terminate in each fiscal year based on the fixed lease term, giving effect to early cancellation options and excluding renewal options. 1998......................... 157 2003......................... 141 1999......................... 203 2004......................... 127 2000......................... 208 2005......................... 107 2001......................... 185 2006......................... 43 2002......................... 117 2007 and thereafter.......... 72
A total of 168 leases without renewal options will expire in the years 1998 and 1999. Although the Company has historically been successful in renewing most of its store leases when they have expired, there can be no assurance that the Company will continue to be able to do so on acceptable terms or at all in light of the recent restructuring programs. If the Company is unable to renew leases for its stores as they expire, or find favorable locations on acceptable terms, there can be no assurance that such failures will not have a material adverse effect on the Company's financial condition or results of operations. LEGAL PROCEEDINGS The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company. 46 MANAGEMENT The following table sets forth certain information with respect to each person who is an executive officer or director of the Company. All directors and executive officers serve in the same capacities for both MSC and MGI:
NAME AGE TITLE - - --------------------------------------------- --- ------------------------------------------------------------ Jack W. Eugster.............................. 52 Chairman of the Board, President and Chief Executive Officer Keith A. Benson.............................. 53 Vice Chairman, Chief Financial Officer and Director Gilbert L. Wachsman.......................... 50 Vice Chairman and Director Gary A. Ross................................. 51 President, Superstores Division Douglas M. Tracey............................ 44 Senior Vice President of Distribution Marcia F. Appel.............................. 47 Senior Vice President of Corporate Advertising, Partnership Marketing and Communications Richard J. Odette............................ 54 Senior Vice President of Prerecorded Audio Kenneth F. Gorman............................ 58 Director William A. Hodder............................ 66 Director Josiah O. Low, III........................... 58 Director Terry T. Saario.............................. 56 Director Thomas F. Weyl............................... 54 Director Michael W. Wright............................ 59 Director
JACK W. EUGSTER. Mr. Eugster has been Chairman of the Board of the Company since August 1988. He has been the Chairman of the Board, President and Chief Executive Officer of MGI since August 1986 and has served MSC in the same capacity since its acquisition of MGI in August 1988. Mr. Eugster joined MGI in 1980 as Executive Vice President and has held the positions of General Manager, President and Chairman of the Retail Division. Previously, he was with The Gap Stores and Target Stores. Mr. Eugster is also a director of Damark International, Inc., Donaldson Company, Inc., MidAmerican Energy Company, ShopKo Stores, Inc. and Jostens, Inc. He is a director and past president of the National Association of Recording Merchandisers and a past chairman of the Country Music Association. KEITH A. BENSON. Mr. Benson has been a director of the Company since January 1992 and served a prior term as a director from August 1988 until December 1989. Mr. Benson was elected Vice Chairman and Chief Financial Officer on August 4, 1997. Mr. Benson has been an executive officer of the Company since 1988. For the year prior, since August 1996, Mr. Benson was President of the Mall Stores Division. Previously, Mr. Benson had served as President of the Music Stores Division since August 1994. From May 1992 through July 1994, he filled the position of Vice Chairman and Chief Financial Officer for both the Company and MGI. Prior to that he was Executive Vice President and Chief Financial Officer from 1988 through April 1992. Mr. Benson joined MGI in 1980 as its Controller and also served successively as its Senior Vice President and Chief Financial Officer, Senior Vice President and Chief Financial Officer for the Retail Division and Senior Vice President of Finance and Administration for the Retail Division. Previously he was with The May Company and Dayton Hudson Corporation. Mr. Benson is also a director of Premium Wear, Inc. 47 GILBERT L. WACHSMAN. Mr. Wachsman has been a director of the Company since May 1997. He became the Vice Chairman of the Company on July 17, 1996. Prior to joining the Company, Mr. Wachsman held the position of Senior Vice President Hardlines at Kmart Corporation from 1995 to 1996. From 1990 to 1995 Mr. Wachsman was a management consultant for major retail, distribution and manufacturing companies. Prior to that he was Chief Executive Officer at Lieberman Enterprises, Inc., President and Chief Executive Officer for Child World Inc. and Senior Vice President of Marketing/ Merchandising for Target Stores. GARY A. ROSS. Mr. Ross has been President, Superstores Division since August 1996. Prior to that he served in the position of President of the Suncoast Division since 1990. Since joining MGI in 1984, he has served in the positions of Executive Vice President of Marketing and Merchandising, Senior Vice President of Marketing and Merchandising, Senior Vice President of Marketing and Merchandising of the Retail Division and Senior Vice President of Planning and Administration of the Retail Division. Mr. Ross served as a director of the Company from January 1, 1990 to December 31, 1990. Mr. Ross is a past chairman and currently a director of the Video Software Dealers Association. Prior to joining MGI, he was with The Gap Stores and Target Stores. DOUGLAS M. TRACEY. Mr. Ross has been Senior Vice President of Distribution since August 1994. He was first appointed a senior vice president in April 1992 and has served in the positions of General Manager of the On Cue Division, Senior Vice President of Marketing Services and Senior Vice President of Administration and Distribution. Previously, from 1986 through April 1992, he served as Vice President, Distribution. Mr. Tracey joined MGI in 1971 and has held the positions of Managing Director of National Distribution, General Manager Minneapolis Distribution Center, Manager of Policies and Procedures, National Store Operations Manager, District Supervisor and Store Manager. MARCIA F. APPEL. Ms. Appel has been Senior Vice President of Corporate Advertising, Partnership Marketing and Communications since October 1996. Previously, she had served as Vice President, Communications and Music Stores Marketing since February 1996. Ms. Appel joined the Company in April of 1993 as Vice President, Communications and Publications. Prior to joining MGI, Ms. Appel was Executive Director of the National Association of Area Business Publications, and she has also worked for Control Data Corporation and Dorn Communications. Ms. Appel is deputy to the Chief Executive Officer of the Minnesota Business Partnership and sits on the Minnesota Women's Press Advisory Board. RICHARD J. ODETTE. Mr. Odette was elected Senior Vice President, Prerecorded Audio on January 4, 1998. Previously, Mr. Odette had served as Vice President, Prerecorded Audio since 1988. Mr. Odette joined MGI in 1982 and has held the positions of Managing Director of Software, Director of Software Merchandising, National Merchandising Manager of Software, and Zone Merchandising Manager for the Retail Division. Prior to joining MGI, Mr. Odette was with Richard's Inc. and Target Stores, Inc. KENNETH F. GORMAN. Mr. Gorman has been a director of the Company since November 1988. He has been in the merchant banking and private investment fields since 1987 as an owner and Managing Director of Apollo Partners L.L.C. From 1970 until 1987 he was in the communications/entertainment business as a director and Executive Vice President of Viacom International Inc. Mr. Gorman is also a director of Dove Audio, Doane Farm Management Co., and IDC Services, Inc. 48 WILLIAM A. HODDER. Mr. Hodder has been a director of the Company since July 1995. He is the retired Chairman and Chief Executive Officer of Donaldson Company, Inc., a manufacturer of filtration devices. Mr. Hodder joined Donaldson Company in 1973 as its President. Previously, he spent seven years in retailing with Dayton Hudson Corporation including such positions as Senior Vice President and Corporate Group Executive, President of Target Stores and Vice President of Organization Planning and Development. Mr. Hodder is a director of Norwest Corporation, ReliaStar Financial, SUPERVALU INC., and Tennant Company. JOSIAH O. LOW, III. Mr. Low has been a director of the Company since July 1995. He has been an investment banker with Donaldson, Lufkin & Jenrette Securities Corporation since 1985, where he is currently a Managing Director. Previously he spent 24 years with Merrill Lynch, Pierce, Fenner and Smith. Mr. Low is also a director of Centex Development Corporation and St. Laurent Paperboard Inc. TERRY T. SAARIO. Dr. Saario was elected a director of the Company on February 3, 1998. From 1984 to 1996 Dr. Saario served as President of the Northwest Area Foundation, an eight state regional organization. Previously she held the positions of Vice President of Community Relations at the Pillsbury Company, Deputy Assistant Secretary in the Department of Education and Program Officer at the Ford Foundation. Dr. Saario was a director of Cowles Media Company until its recent sale and is a current director of Minnesota Mutual Insurance Company. TOM F. WEYL. Mr. Weyl has been a director of the Company since December 1992. He is the President/ Chief Creative Officer at Martin/Williams Advertising, Minneapolis and has been with that company since 1973. Mr. Weyl is a past Chairman of the Board of Directors of the Twin Cities Council of the American Association of Advertising Agencies. MICHAEL W. WRIGHT. Mr. Wright has been a director of the Company since January 1989. He has been in the food distribution and retail business since 1977 when he joined SUPERVALU INC. as Senior Vice President. He was elected President and Chief Operating Officer of SUPERVALU INC. in 1978 and became its Chief Executive Officer in June 1981. He assumed the additional responsibilities of Chairman of the Board in October 1982. In addition to SUPERVALU INC., Mr. Wright is a director of Cargill, Incorporated, Honeywell Inc., and Norwest Corporation. He also serves as Chairman of the Food Marketing Institute. 49 DESCRIPTION OF NOTES GENERAL The Old Notes have been, and the New Notes will be issued pursuant to an indenture (the "Indenture") among the Issuer, the Issuer's parent corporation, Musicland Stores Corporation (the "Guarantor" or "MSC") and Bank One, NA, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. Copies of the Indenture and Registration Rights Agreement are available as set forth below under "--Additional Information." The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions." The Notes will be general unsecured obligations of the Issuer, subordinated in right of payment to all existing and future Senior Debt of the Issuer, including Indebtedness pursuant to the Credit Facility. The Issuer's obligations under the Notes will be guaranteed (the "Guarantee") on a senior subordinated basis by the Guarantor. See "--Guarantee." As of March 1, 1998, on a pro forma basis giving effect to the issuance of the Notes and the application of the proceeds therefrom, the Issuer would have had $83.0 million of Senior Debt. In addition, on such date and pro forma basis, the Issuer could have borrowed up to an additional $99.0 million under the Revolver Agreement which would also have constituted Senior Debt. In addition, all existing and future liabilities of the Subsidiaries of the Issuer will be effectively senior to the Notes. See "Risk Factors--Subordination" and "Description of Existing Financing Arrangements." The operations of the Issuer are conducted in part through its Subsidiaries, and the Issuer may, therefore, be dependent upon the cash flow of its Subsidiaries to meet its debt obligations, including its obligations under the Notes. See "Risk Factors--Corporate Structure." As of the date of the Indenture, all of the Issuer's Subsidiaries will be Restricted Subsidiaries. However, under certain circumstances, the Issuer will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes will be limited in aggregate principal amount to $150 million and will mature on March 15, 2008. Interest on the Notes will accrue at the rate of 9 7/8% per annum and will be payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 1998, to holders of record on the immediately preceding March 1 and September 1. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium and Liquidated Damages, if any, and interest on the Notes will be payable at the office or agency of the Issuer maintained for such purpose within the City and State of New York or, at the option of the Issuer, payment of interest and Liquidated Damages, if any, may be made by check mailed to the holders of the Notes at their respective addresses set forth in the register of holders of Notes; provided that all payments of principal, premium and Liquidated Damages, if any, and interest with respect to Notes the holders of which have given wire transfer instructions to the Issuer will be required to be made by wire transfer of immediately available funds to the accounts specified by the holders thereof. Until otherwise designated by the Issuer, the Issuer's office or agency in New York will be the office of the Trustee maintained for such purpose. The Notes will be issued in denominations of $1,000 and integral multiples thereof. 50 SUBORDINATION The payment of principal of, premium and Liquidated Damages, if any, and interest on the Notes will be subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Debt in cash, whether outstanding on the date of the Indenture or thereafter created, incurred or assumed and all permissible renewals, extensions, refundings or refinancings thereof. Except to the extent set forth under "--Repurchase at the Option of the Holders--Asset Sales", the Notes will be PARI PASSU in right of payment with the 2003 Notes. The Indenture will provide that, upon any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to creditors in any Insolvency or Liquidation Proceeding with respect to the Issuer all amounts due or to become due under or with respect to all Senior Debt will first be paid in full in cash before any payment is made on account of the Notes. Upon any such Insolvency or Liquidation Proceeding, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to which the holders of the Notes or the Trustee would be entitled will be paid by the Issuer or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the holders of the Notes or by the Trustee if received by them, directly to the holders of Senior Debt (pro rata to such holders on the basis of the amounts of Senior Debt held by such holders) or their Representative or Representatives, as their interests may appear, for application to the payment of the Senior Debt remaining unpaid until all such Senior Debt has been paid in full in cash, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Senior Debt. The Indenture will provide that (a) in the event of and during the continuation of any default in the payment of principal of, interest or premium, if any, on any Senior Debt, or any Obligation owing from time to time under or in respect of Senior Debt, or in the event that any event of default (other than a payment default) with respect to any Senior Debt will have occurred and be continuing and will have resulted in such Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, or (b) if any event of default other than as described in clause (a) above with respect to any Designated Senior Debt will have occurred and be continuing permitting the holders of such Designated Senior Debt (or their Representative or Representatives) to declare such Designated Senior Debt due and payable prior to the date on which it would otherwise have become due and payable, then no payment will be made by or on behalf of the Issuer on account of the Notes (x) in case of any payment or nonpayment default specified in (a), unless and until such default will have been cured or waived in writing in accordance with the instruments governing such Senior Debt or such acceleration will have been rescinded or annulled, or (y) in case of any nonpayment event of default specified in (b), during the period (a "Payment Blockage Period") commencing on the date the Issuer or the Trustee receives written notice (a "Payment Notice") of such event of default (which notice will be binding on the Trustee and the holders of Notes as to the occurrence of such nonpayment event of default) from the Credit Agent (or other holders of Designated Senior Debt or their Representative or Representatives) and ending on the earliest of (A) 179 days after such date, (B) the date, if any, on which such Designated Senior Debt to which such default relates is paid in full in cash or such default is cured or waived in writing in accordance with the instruments governing such Designated Senior Debt by the holders of such Designated Senior Debt and (C) the date on which the Trustee receives written notice from the Credit Agent (or other holders of Designated Senior Debt or their Representative or Representatives), as the case may be, terminating the Payment Blockage Period. During any consecutive 360-day period, the aggregate of all Payment Blockage Periods shall not exceed 179 days and there shall be a period of at least 181 consecutive days in each consecutive 360-day period when no Payment Blockage Period is in effect. No event of default which existed or was continuing with respect to the Senior Debt for which notice commencing a Payment Blockage Period was given on the date such Payment Blockage Period commenced shall be or be made the basis for the commencement of any subsequent Payment Blockage Period unless such event of default is cured or waived for a period of not less than 90 consecutive days. 51 As a result of the subordination provisions described above, in the event of the Issuer's liquidation, dissolution, bankruptcy, reorganization, insolvency, receivership or similar proceeding or in an assignment for the benefit of the creditors or a marshaling of the assets and liabilities of the Issuer, holders of Notes may recover less ratably than creditors of the Issuer who are holders of Senior Debt. See "Risk Factors-- Subordination." The Indenture will limit, subject to certain financial tests, the amount of additional Indebtedness, including Senior Debt, that the Issuer and its Subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." GUARANTEE MSC will unconditionally guarantee the due and punctual payment of the principal of, premium, and Liquidated Damages, if any, and interest on the Notes, when and as the same shall become due and payable, whether at maturity, upon redemption or by declaration or otherwise. The guarantee will represent an unsecured general obligation of MSC, subordinate in right of payment to all Guarantor Senior Debt (as defined in the Indenture), including MSC's obligations under its guarantee of the Issuer's obligations under the Credit Facility. The guarantee will be subordinate to the same extent and on the same terms and conditions as set forth above. See "Subordination." The guarantee will be PARI PASSU in right of payment to MSC's guarantee of the 2003 Notes. The obligations of MSC under its guarantee will be limited so as not to constitute a fraudulent conveyance under applicable law. OPTIONAL REDEMPTION The Notes will not be redeemable at the Issuer's option prior to March 15, 2003. Thereafter, the Notes will be subject to redemption at any time at the option of the Issuer, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 15 of the years indicated below:
YEAR PERCENTAGE - - ---------------------------------------------------------------------------------- ----------- 2003.............................................................................. 104.938% 2004.............................................................................. 103.292 2005.............................................................................. 101.646 2006 and thereafter............................................................... 100.000%
Notwithstanding the foregoing, at any time prior to March 15, 2001, the Issuer may redeem up to 40% of the original aggregate principal amount of Notes at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of a Public Equity Offering; provided that at least 60% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of each such redemption; and provided, further, that such redemption shall occur within 45 days of the date of the closing of such Public Equity Offering. SELECTION AND NOTICE If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis or by lot; provided that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Note. 52 Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. MANDATORY REDEMPTION Except as set forth below under "Repurchase at the Option of Holders," the Issuer is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of Notes will have the right to require the Issuer to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Issuer will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. On the Change of Control Payment Date, the Issuer will, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Issuer. The Paying Agent will promptly mail to each holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Indenture will provide that, prior to complying with the provisions of this covenant, but in any event within 30 days following a Change of Control, the Issuer will either repay all outstanding Indebtedness under the Credit Facility and terminate the commitments thereunder or obtain the requisite consents under the Credit Facility to permit the repurchase of Notes required by this covenant. The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of the Notes to require that the Issuer repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. Any future credit agreements or other agreements relating to Senior Debt to which the Issuer becomes a party may contain certain change of control restrictions and provisions. In the event a Change of Control occurs at a time when the Issuer is prohibited from purchasing Notes, the Issuer could seek the consent of its lenders to purchase the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Issuer does not obtain such consent or repay such borrowings, the Issuer will remain prohibited from purchasing Notes. In such case, the Issuer's failure to purchase tendered Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under the Credit Facility. In such circumstances, the subordination provisions in the Indenture would likely restrict 53 payments to the holders of Notes. See "Risk Factors--Change of Control" and "--Description of Existing Financing Arrangements." The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Issuer and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Notes to require the Issuer to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Issuer and its Subsidiaries taken as a whole to another Person or group may be uncertain. ASSET SALES The Indenture will provide that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 80% of the consideration therefor received by the Issuer or such Restricted Subsidiary is in the form of cash; provided that the amount of (x) any liabilities (as shown on the Issuer's or such Restricted Subsidiary's most recent balance sheet) of the Issuer or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Issuer or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Issuer or any such Restricted Subsidiary from such transferee that are converted by the Issuer or such Restricted Subsidiary into cash within 90 days (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Issuer may apply such Net Proceeds, at its option, (a) to permanently repay Senior Debt (and to correspondingly reduce commitments with respect thereto in the case of revolving borrowings) or existing 2003 Notes or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, the Issuer may temporarily reduce the revolving Indebtedness under the Credit Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Issuer will be required to make an offer to all holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Issuer may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. CERTAIN COVENANTS RESTRICTED PAYMENTS The Indenture will provide that from and after the date of the Indenture the Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any 54 other payment or distribution on account of the Issuer's or any of its Restricted Subsidiaries' Equity Interests or to the direct or indirect holders of the Issuer's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Issuer); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Issuer or any direct or indirect parent of the Issuer; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is PARI PASSU with or subordinated to the Notes (other than the Notes and the 2003 Notes), except a payment of interest or principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Issuer would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage Ratio test set forth in the first paragraph of the covenant described below under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Issuer and its Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (ii) and (iii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Issuer for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Issuer's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Issuer from the issue or sale since the date of the Indenture of Equity Interests of the Issuer or MSC (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Issuer or MSC that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Issuer and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary, the fair market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to the Issuer or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date of the Indenture. The foregoing provisions will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests of the Issuer or MSC in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of the Issuer) of, other Equity Interests of the Issuer or MSC (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of PARI PASSU or subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of the Issuer to the holders of its 55 Equity Interests on a pro rata basis; (v) any repurchase of Equity Interests of the Issuer or MSC from present and former employees and directors of the Issuer or its Subsidiaries or MSC in an aggregate amount not to exceed $5 million; (vi) Permitted Investments; or (vii) other Restricted Payments in an aggregate amount not to exceed $5 million. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Issuer and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Issuer or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Issuer shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Indenture will provide that the Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Issuer will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Issuer may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Cash Flow Coverage Ratio for the Issuer's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a Pro Forma Basis. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Indebtedness"): (i) the incurrence by the Issuer of Indebtedness under the Credit Facility in an aggregate principal amount not to exceed $182.0 million outstanding at any time; (ii) the incurrence by the Issuer and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Issuer of Indebtedness represented by the Notes; (iv) the incurrence by the Issuer or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings, purchase money obligations and Attributable Debt in an aggregate principal amount not to exceed $15 million in any one year; (v) the incurrence by the Issuer or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by the Issuer or one of its Subsidiaries and was not incurred in connection with, or in 56 contemplation of, such acquisition by the Issuer or one of its Subsidiaries; provided further that the principal amount (or accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5 million; (vi) the incurrence by the Issuer or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness that was permitted by the Indenture to be incurred; (vii) the incurrence by the Issuer or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Issuer and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (i) if the Issuer is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Issuer or a Wholly Owned Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Issuer or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Issuer or such Restricted Subsidiary, as the case may be; (viii) the incurrence by the Issuer or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging currency risk or interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding; (ix) the guarantee by the Issuer or any of its Restricted Subsidiaries of Indebtedness of a Restricted Subsidiary of the Issuer that was permitted to be incurred by another provision of this covenant and the guarantee by Subsidiaries of Senior Debt of the Issuer; (x) the incurrence by the Issuer's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Issuer; (xi) Indebtedness incurred by the Issuer or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including without limitation letters of credit in respect to workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) obligations in respect of performance and surety bonds and completion guarantees provided by the Issuer or any Restricted Subsidiary in the ordinary course of business; and (xiii) the incurrence by the Issuer or any of its Restricted Subsidiaries of additional Indebtedness, including Attributable Debt incurred after the date of the Indenture, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xiii), not to exceed $5 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xiii) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Issuer shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. The amount of Indebtedness issued at a price which is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in 57 accordance with GAAP. Neither the accrual of interest nor the issuance of additional Indebtedness in the form of additional promissory notes or otherwise in lieu of the payment of interest nor the accretion of accreted value will be deemed to be an incurrence of Indebtedness for purposes of this covenant. LIENS The Indenture will provide that the Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien that secures obligations under any PARI PASSU Indebtedness or subordinated Indebtedness on any asset or property now owned or hereafter acquired by the Issuer or any of its Subsidiaries, or any income or profits therefrom or assign or convey any right to receive income therefrom, unless the Notes are equally and ratably secured with the obligations so secured until such time as such obligations are no longer secured by a Lien; provided, that in any case involving a Lien securing subordinated Indebtedness, such Lien is subordinated to the Lien securing the Notes to the same extent that such subordinated Indebtedness is subordinated to the Notes. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Indenture will provide that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Issuer or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Issuer or any of its Restricted Subsidiaries, (ii) make loans or advances to the Issuer or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Issuer or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the Credit Facility as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive in the aggregate (as determined by the Board of Directors in good faith) with respect to such dividend and other payment restrictions than those contained in the Credit Facility as in effect on the date of the Indenture, (c) the Indenture and the Notes and the 2003 Indenture and the 2003 Notes, (d) any applicable law, rule, regulation or order, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Issuer or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) Capital Lease Obligations, mortgage financings and purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (i) contracts for the sale of assets, including without limitation customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, and (j) any other agreement or instrument evidencing or relating to secured Indebtedness of the Issuer or any Restricted Subsidiary otherwise permitted to be issued pursuant to the provisions of the covenants described under the captions "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and "--Certain Covenants--Liens" that limit the right of the debtor to dispose of the property or assets securing such Indebtedness. 58 MERGER, CONSOLIDATION, OR SALE OF ASSETS The Indenture will provide that the Issuer may not consolidate or merge with or into (whether or not the Issuer is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Issuer is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Issuer) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Issuer under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Issuer with or into MSC or a Wholly Owned Restricted Subsidiary of the Issuer, the Issuer or the entity or Person formed by or surviving any such consolidation or merger (if other than the Issuer), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and determined on a Pro Forma Basis, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." TRANSACTIONS WITH AFFILIATES The Indenture will provide that the Issuer will not, and will not permit any of its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction") unless (i) such Affiliate Transaction is entered into in good faith and on terms that are no less favorable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Restricted Subsidiary with an unrelated Person and (ii) the Issuer delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10 million, an opinion as to the fairness to the holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following shall not be deemed Affiliate Transactions: (q) any employment agreement entered into by the Issuer or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Issuer or such Restricted Subsidiary, (r) transactions between or among the Issuer and/or its Restricted Subsidiaries, (s) Permitted Investments and Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments," (t) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Issuer or any of its Restricted Subsidiaries, (u) consulting and other advisory fees paid to MSC not to exceed $250,000 in any one year and (v) transactions pursuant to any contract or agreement in effect on the date of the Indenture as the same may be amended, modified or replaced from time to time so long as any such amendment, modification or replacement is no less favorable to the Issuer and its Restricted Subsidiaries than the contract or agreement as in effect on the date of the original issuance of the Notes or is approved by a majority of the disinterested directors of the Issuer. 59 ANTI-LAYERING The Indenture will provide that (i) the Issuer will not, and the Issuer will not permit any of its Subsidiaries to, incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is both (a) subordinate or junior in right of payment to any Senior Debt and (b) senior in any respect in right of payment to the Notes; and (ii) the Guarantor will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is both (a) subordinate or junior in right of payment to its Guarantor Senior Debt and (b) senior in right of payment to its Guarantee of the Notes. SALE AND LEASEBACK TRANSACTIONS The Indenture will provide that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Issuer may enter into a sale and leaseback transaction if (i) the Issuer could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under the caption "--Liens," (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Issuer applies the proceeds of such transaction in compliance with, the covenant described above under the caption "--Asset Sales." LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES The Indenture will provide that the Issuer (i) will not, and will not permit any Wholly Owned Restricted Subsidiary of the Issuer to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary of the Issuer to any Person (other than the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under the caption "Repurchase at the Option of Holders--Asset Sales," and (ii) will not permit any Wholly Owned Restricted Subsidiary of the Issuer to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer except that a Wholly Owned Restricted Subsidiary of the Issuer may issue shares of common stock with no preferences or special rights or privileges and with no redemption or prepayment provisions provided the cash Net Proceeds from such issuance of such common stock are applied in accordance with the covenant described under the caption "Repurchase at the Option of Holders--Asset Sales." LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS The Issuer will not permit any Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of the Issuer which is PARI PASSU with or subordinate in right of payment to the Notes ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Issuer or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation 60 of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Notes. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Issuer, of all of the Issuer's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. BUSINESS ACTIVITIES The Issuer will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Issuer and its Restricted Subsidiaries taken as a whole. REPORTS The Indenture will provide that, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Issuer (or MSC, as the case may be) will furnish to the holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Issuer (or MSC, as the case may be) were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon from certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Issuer (or MSC, as the case may be) were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Issuer (or MSC, as the case may be) will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Issuer and MSC have agreed that, for so long as any Notes remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. RESTRICTIVE COVENANT OF MSC MSC will covenant and agree that it will not engage in any activities other than holding 100% of the capital stock of the Issuer and providing services to and management of the Issuer and it will not incur any liabilities other than any liabilities relating to the Guarantee of the Issuer's obligations pursuant to the Credit Facility, the Guarantee of the Notes, the Guarantee of the 2003 Notes, the Guarantee of any Indebtedness permitted by the covenant "--Incurrence of Indebtedness and Issuance of Preferred Stock" and any other obligations or liabilities incidental to holding 100% of the capital stock of the Issuer. EVENTS OF DEFAULT AND REMEDIES The Indenture will provide that each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Notes (whether or not prohibited by the subordination 61 provisions of the Indenture); (iii) failure by the Issuer to comply with the provisions described under the captions "--Change of Control," "--Asset Sales," or "Merger, Consolidation, or Sale of Assets;" (iv) failure by the Issuer for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under the captions "--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock;" (v) failure by the Issuer for 60 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in the Indenture or the Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Issuer or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $15.0 million or more; (vii) failure by the Issuer or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $15.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (viii) certain events of bankruptcy or insolvency with respect to the Issuer or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately; provided, however, that if any Indebtedness or Obligation is outstanding pursuant to the Credit Facility, upon a declaration of acceleration by the holders of the Notes or the Trustee, all principal and interest under the Indenture shall be due and payable upon the earlier of (x) the day which is five Business Days after the provision to the Issuer, the Credit Agent and the Trustee of such written notice of acceleration or (y) the date of acceleration of any Indebtedness under the Credit Facility; and provided, further, that in the event of an acceleration based upon an Event of Default set forth in clause (vi) above, such declaration of acceleration shall be automatically annulled if the holders of Indebtedness which is the subject of such acceleration have rescinded their declaration of acceleration in respect of such Indebtedness or such Payment Default shall have been cured or waived within 30 days thereof and no other Event of Default has occurred during such 30-day period which has not been cured, paid or waived. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Issuer or any of its Significant Subsidiaries all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Issuer with the intention of avoiding payment of the premium that the Issuer would have had to pay if the Issuer then had elected to redeem the Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to March 15, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Issuer with the intention of avoiding the prohibition on redemption of the Notes prior to March 15, 2003, then the premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Notes. 62 The holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Issuer is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Issuer is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Issuer (other than the Guarantor) or the Guarantor, as such, shall have any liability for any obligations of the Issuer or the Guarantor under the Notes, the Indenture, the Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Issuer may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes and all obligations of the Guarantor under the Guarantee ("Legal Defeasance") except for (i) the rights of holders of outstanding Notes to receive payments in respect of the principal of, premium and Liquidated Damages, if any, and interest on such Notes when such payments are due from the trust referred to below, (ii) the Issuer's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Issuer may, at its option and at any time, elect to have the obligations of the Issuer and the Guarantor released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Issuer must specify whether the Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that 63 the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound; (vi) the Issuer must have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Issuer must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Issuer with the intent of preferring the holders of Notes over the other creditors of the Issuer with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; and (viii) the Issuer must deliver to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer is not required to transfer or exchange any Note selected for redemption. Also, the Issuer is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture or the Notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes). Without the consent of each holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting holder): (i) reduce the principal amount of Notes whose holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of holders"), (iii) reduce the rate of or change the time for payment of interest on any Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Note payable in money other than that stated in the Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of Notes to receive payments of principal of or premium, if any, or interest on the Notes, (vii) waive a redemption payment with respect to any Note (other than a payment required by one of the covenants described above under the caption 64 "--Repurchase at the Option of Holders") or (viii) make any change in the foregoing amendment and waiver provisions. In addition, any amendment to the provisions of Article 10 of the Indenture (which relate to subordination) will require the consent of the holders of at least 75% in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of holders of Notes. Notwithstanding the foregoing, without the consent of any holder of Notes, the Issuer, the Guarantor and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Issuer's and the Guarantor's obligations to holders of Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the holders of Notes or that does not adversely affect the legal rights under the Indenture of any such holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Issuer, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture and Registration Rights Agreement without charge by writing to The Musicland Group, Inc., 10400 Yellow Circle Drive, Minnetonka, Minnesota 55343-9143; Attention: General Counsel. BOOK-ENTRY, DELIVERY AND FORM The New Notes initially will be represented by one or more New Notes in registered, global form without interest coupons (collectively, the "Global Notes") and will be deposited upon issuance with the Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant as described below. Except in the limited circumstances described below, under "Exchange of Book-Entry Notes for Certificated Notes," owners of beneficial interests in a Global Note will not be entitled to receive delivery of certificated Notes. Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be exchanged for Notes in certificated form except in the limited circumstances described below. See "Exchange of Book-Entry Notes for Certificated Notes." The Notes may be presented for registration of transfer and exchange at the offices of the Registrar. 65 DEPOSITORY PROCEDURES DTC has advised the Issuer that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organization. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or Indirect Participants. The ownership interest and transfer of ownership interest of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the Issuer that pursuant to procedures established by it, (i) upon deposit of the Global Notes, DTC will credit the accounts of Participants designated by the Initial Purchaser with portions of the principal amount of Global Notes and (ii) ownership of such interests in the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through records maintained by DTC (with respect to Participants) or by Participants and the Indirect Participants (with respect to other owners of beneficial interests in the Global Notes). Investors in the Global Notes may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations (including Euroclear and Cedel Bank) that are Participants in such system. Euroclear and Cedel Bank will hold interests in the Global Notes on behalf of their Participants through customers' securities accounts in their respective names on the books of their respective depositaries, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A. as operator of Cedel. The depositaries, in turn, will hold such interests in the Global Notes in customers' securities accounts in the depositaries' names on the books of DTC. All interests in a Global Note, including those held through Euroclear or Cedel Bank, may be subject to the procedures and requirements of DTC. Those interests held by Euroclear or Cedel Bank may be also be subject to the procedures and requirements of such system. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interest in a Global Note to such persons may be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having a beneficial interest in a Global Note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of physical certificate evidencing such interest. For certain other restrictions on the transferability of the Notes, see "Exchange of Book-Entry Notes for Certificated Notes." EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Payments in respect of the principal and premium and Liquidated Damages, if any, and interest on a Global Note registered in the name of DTC or its nominee will be payable by the Trustee to DTC or its nominee in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Issuer and the Trustee will treat the persons in whose names the Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee has or will have any responsibility or liability for (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the Global Notes, or for maintaining, supervising or reviewing any of DTC's records 66 or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Issuer that its current practice, upon receipt of any payment in respect of securities such as the Notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the relevant security such as the Global Notes as shown on the records of DTC. Payments by Participants and the Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practices and will not be the responsibility of DTC, the Trustee or the Issuer. Neither the Issuer nor the Trustee will be liable for any delay by DTC or its Participants in identifying the beneficial owners of the Notes, and the Issuer and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the Notes for all purposes. Except for trades involving only Euroclear and Cedel Bank participants, interests in the Global Notes will trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. Transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. Transfers between participants in Euroclear and Cedel Bank will be effected in the ordinary way in accordance with their respective rules and operating procedures. Subject to compliance with the transfer restrictions applicable to the Notes described herein, cross-market transfers between Participants in DTC, on the one hand, and Euroclear or Cedel Bank participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel Bank, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Cedel Bank, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Cedel Bank, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day fund settlement applicable to DTC. Euroclear participants and Cedel Bank participants may not deliver instructions directly to the depositaries for Euroclear or Cedel Bank. Because of time zone differences, the securities accounts of a Euroclear or Cedel Bank participant purchasing an interest in a Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Cedel Bank participant, during the securities settlement processing day (which must be a business day for Euroclear or Cedel Bank) immediately following the settlement date of DTC. Cash received in Euroclear or Cedel Bank as a result of sales of interests in a Global Note by or through a Euroclear or Cedel Bank participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Cedel Bank cash account only as of the business day for Euroclear or Cedel Bank following DTC's settlement date. DTC has advised the Issuer that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more Participants to whose account DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of the Notes as to which such Participant or Participants has or have given direction. However, if there is an Event of Default under the Notes, DTC reserves the right to exchange Global Notes for legended Notes in certificated form, and to distribute such Notes to its Participants. The information in this section concerning DTC, Euroclear and Cedel Bank and their book-entry systems has been obtained from sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof. 67 Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to facilitate transfers of interests in the Global Notes among participants in DTC, Euroclear and Cedel Bank, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer or the Trustee will have any responsibility for the performance by DTC, Euroclear or Cedel Bank or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES A Global Note is exchangeable for definitive Notes in registered certificated form if (i) DTC (x) notifies the Issuer that it is unwilling or unable to continue as depositary for the Global Note and the Issuer thereupon fails to appoint a successor depositary or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Notes in certificated form or (iii) there shall have occurred and be continuing to occur a Default or an Event of Default with respect to the Notes. In addition, beneficial interests in a Global Note may be exchanged for certificated Notes upon request but only upon at least 20 days prior written notice given to the Trustee by or on behalf of DTC in accordance with customary procedures. In all cases, certificated Notes delivered in exchange for any Global Note or beneficial interest therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures). SAME DAY SETTLEMENT AND PAYMENT The Indenture will require that payments in respect of the Notes represented by the Global Note (including principal, premium, if any, interest and Liquidated Damages, if any) be made by wire transfer of immediately available next day funds to the accounts specified by the Global Note Holder. With respect to Certificated Notes, the Issuer will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. The Issuer expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "ACQUIRED DEBT" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "ASSET SALE" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary 68 course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Issuer and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "--Change of Control" and/or the provisions described above under the caption "--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the Issuer or any of its Restricted Subsidiaries of Equity Interests of any of the Issuer's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $2.0 million or (b) for net proceeds in excess of $2.0 million. Notwithstanding the foregoing, the following will not be deemed to be Asset Sales: (i) a transfer of assets by the Issuer to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the Issuer or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the Issuer or to another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment that is permitted by the covenant described above under the caption "--Restricted Payments." "ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CASH FLOW COVERAGE RATIO" means, for any given period and person, the ratio of (i) Consolidated Cash Flow divided by (ii) Consolidated Interest Expense (except dividends paid or payable in additional shares of Capital Stock (other than Disqualified Stock)) in each case, without duplication; provided, however, that if an acquisition or sale of a person, business or asset or the issuance or repayment of Indebtedness occurred during the given period or subsequent to such period on or prior to the date of calculation, then such calculation for such period shall be made on a Pro Forma Basis. "CASH EQUIVALENTS" means (a) United States dollars, (b) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (c) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500.0 million, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) above entered into with any financial institution meeting the qualifications specified in clause (c) above, (e) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and in each case maturing within six months after the date of acquisition and (f) any fund investing exclusively in investments of the types described in clauses (a) through (e) above. "CHANGE OF CONTROL" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of MSC taken as a whole to any "person" (as 69 such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of MSC, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of MSC (measured by voting power rather than number of shares), (iv) the first day on which a majority of the members of the Board of Directors of MSC are not Continuing Directors or (v) MSC consolidates with, or merges with or into, any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, MSC, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of MSC is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of MSC outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance). "CONSOLIDATED CASH FLOW" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) Consolidated Interest Expense of such Person and its Subsidiaries for such period, to the extent deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, minus (v) non-cash items increasing such Consolidated Net Income for such period; provided, however, that if an acquisition or sale of a person, business or asset or the incurrence or repayment of Indebtedness occurred during the given period or subsequent to such period and on or prior to the date of calculation, then such calculation shall be made on a Pro Forma Basis. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent that a corresponding amount would be permitted at the date of determination to be dividended to the Issuer by such Subsidiary without prior governmental approval (that has not been obtained), and without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Subsidiary or its stockholders. "CONSOLIDATED INTEREST EXPENSE" means, for any given period and Person, the aggregate of (i) the interest expense in respect of all Indebtedness of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including, without duplication, amortization of original issue discount on any such Indebtedness, all non-cash interest payments, the interest portion of any deferred payment obligation, the interest component of Capital Lease Obligations, and amortization of deferred financing fees) and (ii) the product of (a) all cash dividend payments (and, in the case of a Person that is a Restricted Subsidiary, dividends paid or payable in additional shares of Disqualified Stock) on any series of preferred stock of such Person and its Restricted Subsidiaries payable 70 to a party other than the Issuer or a wholly owned Subsidiary, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, on a consolidated basis and in accordance with GAAP; provided, however, that for the purpose of the Cash Flow Coverage Ratio, Consolidated Interest Expense shall be calculated on a Pro Forma Basis. "CONSOLIDATED NET INCOME" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Issuer or one of its Restricted Subsidiaries for purposes of the covenant described under the covenant "Incurrence of Indebtedness and Issuance of Preferred Stock." "CONTINUING DIRECTORS" means, as of any date of determination, any member of the Board of Directors of MSC who (i) was a member of such Board of Directors on the date of the original issuance of the Notes or (ii) was nominated for election to such Board of Directors with the approval of, or whose election to the Board of Directors of MSC was ratified by, at least a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election. "CREDIT AGENT" means Morgan Guaranty Trust Company of New York, in its capacity as Agent for the lenders party to the Credit Facility or any successor thereto or any person otherwise appointed. "CREDIT FACILITY" means (i) the Credit Agreement dated October 7, 1994 among the Issuer, MSC, the various lenders party thereto from time to time and Morgan Guaranty Trust Company of New York, as Agent, as amended by an Amendment No. 1 dated as of February 24, 1995, an Amendment No. 2 dated as of April 9, 1996, an Amendment No. 3 dated as of October 18, 1996, an Amendment No. 4 dated as of June 16, 1997 and an Amendment No. 5 effective as of the Closing of the Offering, together with the related documents thereto (including any guarantee agreement and securing documents), and (ii) the Term Loan Agreement dated as of June 16, 1997 among the Issuer, MSC, various financial institutions and Morgan Guaranty Trust Company of New York, as agent, together with the related documents thereto (including any guarantee agreement and securing documents), in each case, as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified or replaced (including with other lenders) from time to time and including any agreement extending the maturity of, refinancing, modifying, increasing, substituting for or otherwise restructuring (including, but not limited to, the inclusion of additional or different or substitute lenders or bank agents thereunder) all or any portion of the Indebtedness, including changing the borrowing limits, under such agreement or any successor or replacement agreement, regardless of whether the Credit Facility or any portion thereof was outstanding or in effect at the time of such replacement, refinancing, increase, substitution, extension, restructuring, supplement or modification. "DEFAULT" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. 71 "DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under the Credit Facility and (ii) any other Senior Debt permitted under the Indenture the principal amount of which is $25 million or more and that has been designated by the Issuer as "Designated Senior Debt". "DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under "--Change of Control" applicable to the holders of the Notes. "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "EXISTING INDEBTEDNESS" means Indebtedness of the Issuer and its Subsidiaries (other than Indebtedness under the Credit Facility) in existence on the date of the Indenture, until such amounts are repaid. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination; provided, however, that except as otherwise provided, all calculations made for purposes of determining compliance with the terms of the covenants set forth in "--Certain Covenants" and other provisions of the Indenture shall utilize GAAP in effect at the date of the Indenture. "GOVERNMENT SECURITIES" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "GUARANTEE" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency rates. "INDEBTEDNESS" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable or obligations with respect to consigned inventory, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. 72 "INSOLVENCY OR LIQUIDATION PROCEEDING" means (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Issuer or to the creditors of the Issuer, as such, or to the assets of the Issuer, or (ii) any liquidation, dissolution, reorganization or winding up of the Issuer, whether voluntary or involuntary and involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Issuer. "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Issuer or any Restricted Subsidiary of the Issuer sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Issuer such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Issuer, the Issuer shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Restricted Payments." "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "NET INCOME" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "NET PROCEEDS" means the aggregate cash proceeds received by the Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Issuer nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than holders of the Notes being offered hereby and lenders under the Credit Facility) of the Issuer or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable 73 prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Issuer or any of its Restricted Subsidiaries. "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "PERMITTED BUSINESS" means any of the businesses and any other businesses related to the businesses engaged in by the Issuer and its respective Restricted Subsidiaries on the date of the Indenture. "PERMITTED INVESTMENTS" means (a) any Investment in the Issuer or in a Wholly Owned Restricted Subsidiary of the Issuer that is engaged in a Permitted Business; (b) any Investment in Cash Equivalents; (c) any Investment by the Issuer or any Restricted Subsidiary of the Issuer in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Issuer that is engaged in a Permitted Business or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer that is engaged in a Permitted Business; (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of holders--Asset Sales"; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Issuer or MSC; (f) stock, obligations or securities received in satisfaction of judgment and (g) Hedging Obligations entered into in the ordinary course of business and otherwise permitted under the Indenture. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Issuer or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Issuer or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded or by the Issuer. "PRINCIPALS" means Messrs. Eugster, Benson, Wachsman and Ross. "PRO FORMA BASIS" means, for purposes of determining Consolidated Net Income in connection with the Cash Flow Coverage Ratio (including in connection with the covenants described above under the captions "--Certain Covenants--Restricted Payments" and "--Merger, Consolation, or Sale of Assets" and the incurrence of Indebtedness pursuant to the first sentence of the covenant described above under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"), giving pro forma effect to (x) any acquisition, by way of merger, consolidation or otherwise, or sale of a person, business or asset, related incurrence, repayment or financing of Indebtedness or other related transactions, including any Restructuring Charges which would otherwise be accounted for as an adjustment permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP, or (y) any incurrence, repayment or refinancing of any Indebtedness and the application of the proceeds therefrom; in each case, which occurred during the relevant period or subsequent to such period and on or prior to the date of 74 calculation, as if such acquisition or sale and related transactions and any Restructuring Charges, incurrence, repayment or refinancing were realized on the first day of the relevant period permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of a person, business or asset, the amount of income or earnings relating thereto, and the amount of Consolidated Interest Expense associated with any Indebtedness issued in connection therewith, the pro forma calculations will be determined in good faith by the chief financial officer of the Issuer as specified in an Officers' Certificate of the Issuer delivered to the Trustee. Furthermore, in calculating the Cash Flow Coverage Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the determination date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the determination date; (2) if interest on any Indebtedness actually incurred on the determination date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the determination date will be deemed to have been in effect during the relevant period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to interest rate swaps or similar interest rate protection Hedging Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "PUBLIC EQUITY OFFERING" means a public offering of Equity Interests (other than Disqualified Stock) of (i) the Issuer; or (ii) MSC to the extent the net proceeds thereof are contributed to the Issuer as a capital contribution, that, in each case, results in the net proceeds to the Issuer of at least $25.0 million. "RELATED PARTY" with respect to any Principal means any spouse or immediate family member or any controlled Affiliate of any such Principal, any trusts for the benefit of any such Principal or such Principal's spouse or immediate family or, in the event of the incompetence or death of any such Principal, such Principal's estate, executor, administrator, committee or other personal representative, in each case who will beneficially own or have the right to acquire, directly or indirectly, Voting Stock of MSC. "REPRESENTATIVE" means the trustee, agent or representative for any Senior Debt. "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "RESTRUCTURING CHARGES" means any charges or expenses in respect of restructuring or consolidating any business, operations or facilities, any compensation or headcount reduction, or any other cost savings, of any persons or businesses either alone or together with the Issuer or any Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act; provided that any cost savings of less than $10.0 million, shall be evidenced by an Officers' Certificate delivered to the Trustee and any cost savings of $10.0 million or more shall be evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee. "SENIOR DEBT" means (i) all Indebtedness outstanding under the Credit Facility, including any Guarantee thereof and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Issuer under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes, (iii) all Obligations with respect to the foregoing, and (iv) all interest with respect to the foregoing clauses (i) and (ii) accruing during the pendency of an Insolvency or Liquidation Proceeding, whether or not allowed or allowable thereunder. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Issuer, (x) any Indebtedness of the Issuer to any of its Subsidiaries or other Affiliates, (y) any trade payables or liability to trade creditors or obligations with respect to consigned inventory arising in the 75 ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of the Indenture. "SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "STATED MATURITY" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "SUBSIDIARY" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the Board of Directors; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Issuer or any Restricted Subsidiary of the Issuer unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Issuer or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Issuer; (c) is a Person with respect to which neither the Issuer nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Issuer or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Issuer or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Issuer or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "Certain Covenants-- Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Issuer as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock," the Issuer shall be in default of such covenant). The Board of Directors of the Issuer may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Issuer of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event of Default would be in existence following such designation. 76 "VOTING STOCK" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Subsidiaries of such Person. "2003 INDENTURE" means the Indenture dated as of June 17, 1993, among the Issuer, MSC and Harris Trust Savings Bank, as Trustee, relating to the 2003 Notes, as amended from time to time. "2003 NOTES" means the 9% Senior Subordinated Notes due 2003 of the Issuer issued pursuant to the 2003 Indenture. 77 DESCRIPTION OF EXISTING FINANCING ARRANGEMENTS The following is a summary of certain indebtedness incurred by the Company, as such indebtedness exists on the date hereof. This summary is qualified in its entirety by reference to the definitive agreements and instruments governing the indebtedness. CREDIT FACILITY REVOLVER AGREEMENT The Revolver Agreement Amendment, which became effective upon the closing of the sale of the Old Notes and is reduces the combined aggregate commitments available under the Credit Facility from $295.0 million to $182.0 million (assuming net proceeds from the Offering of $144.3 million). As long as indebtedness of $50.0 million is outstanding under the Term Loan Agreement, the aggregate borrowings available under the Revolver Agreement, as amended, will be $132.0 million or, if less, 60% of the eligible inventory as of the last day of the most recent fiscal month. If the indebtedness under the Term Loan Agreement is paid when due, or prepaid, the aggregate borrowings available under the Revolver Agreement, as amended, increases to $182.0 million or, if less, 60% of the eligible inventory. "Eligible Inventory" is defined to include readily marketable assets of MGI of the type sold in the ordinary course of its business, provided that the Banks may exclude certain types of inventory that are determined not to be readily marketable or returnable to a vendor. If at any time the amount outstanding under the Revolver Agreement exceeds the amount available under the Eligible Inventory limit, MGI must repay the amount of such excess. Up to $50.0 million of the aggregate available commitments may be borrowed in the form of letters of credit. MGI had no borrowings under the Revolver Agreement at December 31, 1997 and had borrowings of $146.0 million at March 1, 1998. The highest balance outstanding under the Revolver Agreement during the year ended December 31, 1997 was $273.0 million and the average daily balance was $238.5 million. However, in 1997 the Company maintained an average month-end cash balance of $45.8 million and did not borrow the $50 million under the Term Loan Agreement until September 15, 1997. The weighted average interest rate of the Revolver, based on the average daily balance, was 8.0%. The Revolver Agreement will expire, and all amounts outstanding thereunder must be repaid, on October 7, 1999. MGI may borrow and repay amounts under the Revolver Agreement from time to time before such date. Interest is payable monthly on borrowings under the Revolver Agreement at rates based on, at the option of MGI, (i) Morgan's prime lending rate or (ii) the one, two or three months London Interbank Offered Rate for U.S. dollar deposits ("LIBOR"). In each case, MGI has a specified additional margin that is currently 0.25% for loans based on Morgan's prime rate, increasing to 0.5% on April 30, 1998, and 1.75% for loans based on LIBOR, increasing to 2.0% on April 30, 1998. The default interest rate is Morgan's prime rate plus 2.25%, increasing to 2.5% on April 30, 1998. The Revolver Agreement contains covenants that, subject to certain exceptions, restrict the Company's ability to: (i) make investments and capital expenditures; (ii) incur debt and issue guarantees; (iii) pay dividends on or make other distributions with respect to its capital stock or redeem or purchase any capital stock; (iv) make any principal payments on or redeem or purchase any subordinated debt; (v) sell assets; (vi) create, assume or suffer to exist liens on its assets; (vii) engage in transactions with affiliates; (viii) amend the Company's certificates of incorporation; and (ix) engage in mergers or sell, lease or otherwise transfer all or any substantial part of its assets to any other person. The Revolver Agreement Amendment does permit use of proceeds of the Offering to repay the Mortgage Notes Payable and redeem the 2003 Notes in certain circumstances. The Revolver Agreement prohibits MSC from engaging in any activity other than owning MGI and providing services to and management of MGI and prohibits MGI from primarily engaging in any business other than a business of the same general type conducted on the date of the Revolver Agreement. 78 The Revolver Agreement also requires that the Company satisfy certain financial tests and maintain certain financial ratios. In addition, for any borrowings which result in a net increase in total outstanding borrowings, total trade accounts payable must be equal to or greater than the total outstanding borrowings. The Company would not have been in compliance with the financial covenants in the Revolver Agreement without certain amendments and waivers which were received throughout 1996 and 1997, with the last such amendment completed in June 1997 concurrent with entering into the Term Loan Agreement. As amended or waived, all covenants and financial tests were complied with for all quarters through December 31, 1997. Upon the occurrence of an event of default under the Revolver Agreement, the Banks may cease making loans and terminate the Revolver Agreement and declare all amounts outstanding under the Revolver Agreement immediately due and payable. The Revolver Agreement specifies a number of "events of default" including, among others, the failure to make timely principal and interest payments or to perform the covenants or to meet the financial tests or maintain the financial ratios contained therein. MGI's obligations under the Revolver Agreement are guaranteed by MSC and the wholly-owned subsidiaries of MGI and secured by a pledge by MGI of all the capital stock of its wholly-owned consolidated subsidiaries. TERM LOAN AGREEMENT The Term Loan Agreement provides for a loan of $50 million, which amount was borrowed on September 15, 1997 and must be repaid in installments of $25 million on each of December 14, 1998 and February 15, 1999. Interest is payable monthly at rates equal to, at the option of MGI, (i) Morgan's prime lending rate plus 1.0% or (ii) one month LIBOR plus 2.0%. The default interest rate is Morgan's prime rate plus 3.0%. All obligations under the Term Loan are guaranteed by MSC and MGI's wholly-owned consolidated subsidiaries and are secured by a first-priority lien on all inventory of MGI and its wholly-owned consolidated subsidiaries. The Term Loan Agreement contains a trailing four quarters EBITDA test of $25 million and requires that the aggregate value of all inventory of MGI and its wholly-owned consolidated subsidiaries be at all times equal to or greater than $150 million. The Term Loan Agreement prohibits MSC from engaging in any activity other than owning MGI and providing services to and management of MGI and prohibits MGI from primarily engaging in any business other than a business of the same general type conducted on the date of the Term Loan Agreement. In addition, the Term Loan Agreement contains a covenant that, subject to certain exceptions, restricts the Company's ability to create, assume or suffer to exist liens on its assets. All covenants and financial tests have been complied with for all quarters through December 31, 1997. Upon the occurrence of an event of default under the Term Loan Agreement, the Banks may terminate the Term Loan Agreement and declare all amounts outstanding immediately due and payable. The Term Loan Agreement specifies a number of "events of default" including, among others, an acceleration of the Revolver Agreement (but not an event of default under the Revolver Agreement without acceleration) and the failure to make timely principal and interest payments or to perform the covenants or to meet the financial tests contained therein. 9% SENIOR SUBORDINATED NOTES DUE 2003 In 1993 MGI issued $110 million principal amount of 2003 Notes. The 2003 Notes bear interest at the rate of 9%, payable semi-annually. The 2003 Notes beginning on June 15, 1998 may be redeemed, at the option of MSC, at a redemption price of 103.375% of their principal amount. The indenture for the 2003 Notes (the "2003 Indenture") specifies that the redemption price declines annually at June 15th, from 103.375% at June 15, 1998, to 102.250% at June 15, 1999, to 101.125% at June 15, 2000 and to 100% of the principal amount on or after June 15, 2001. The payment of the principal of, and premium, if any, and 79 interest on, the 2003 Notes (other than credit for previously acquired or redeemed 2003 Notes) is subordinated in right of payment as set forth in the 2003 Indenture, to the payment when due of all Senior Debt (as defined in the 2003 Indenture) of the Company. The 2003 Indenture contains certain restrictions with respect to the conduct of the Company's business and certain restrictive covenants, including among others, limitations on the Company's ability to incur additional indebtedness, pay dividends or make other distributions on MSC's capital stock, make investments in, or loans to, any person, dispose of assets, create liens or incur any indebtedness which is subordinate in right of payment to Senior Debt, unless such indebtedness is subordinate in right of payment to, or ranks PARI PASSU with, the 2003 Notes. In addition, MSC may not effect a merger or consolidation unless certain financial tests are met. The 2003 Indenture specifies a number of "events of default" including, among others, a failure to make timely principal or interest payments or to perform the covenants contained therein. If an event of default occurs and is continuing, the Trustee under the 2003 Indenture or the holders of a specified principal amount of the outstanding 2003 Notes may declare the principal of and accrued but unpaid interest on all the 2003 Notes to be due and payable on the date provided for in accordance with the 2003 Indenture. An acceleration of the 2003 Notes may, under certain circumstances, be rescinded by the holders of a majority of the aggregate principal amount of the then outstanding 2003 Notes. In June 1997, the holders of a majority of the aggregate principal amount of the 2003 Notes approved an amendment to the 2003 Indenture which allowed the lien on the Company's inventory required by the Revolver Agreement and the Term Loan Agreement. 80 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of material United States federal income tax considerations applicable to the initial holders of the Notes. This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the "Code"), regulations, rulings and decisions currently in effect, all of which are subject to change (possibly with retroactive effect). The discussion does not purport to deal with all aspects of the United States federal taxation that may be relevant to particular investors in light of their particular circumstances (for example, to persons holding Notes as part of a conversion transaction or as part of a hedge or hedging transaction, or as a position in a straddle for tax purposes), nor does it discuss the United States federal income tax considerations applicable to certain types of investors subject to special treatment under the federal income tax laws (for example, insurance companies, tax-exempt organizations, financial institutions and persons who are not United States Holders or United States Alien Holders (each as defined below)). In addition, the discussion does not consider the effect of any foreign, state, local or other tax laws that may be applicable to a particular investor. The discussion assumes that investors hold the Notes as "capital assets" within the meaning of Section 1221 of the Code. The Issuer intends to treat the Notes as indebtedness and not as equity for United States federal income tax purposes, and the United States federal income tax considerations described below are based on that characterization. Such treatment, however, is not binding on the Internal Revenue Service ("IRS") (or the Courts), and there can be no assurance that the IRS would not argue (or that a court would not hold) that the Notes should be treated as equity for federal income tax purposes. HOLDERS OF THE NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. As used herein, the term "United States Holder" means an owner of a Note that is, for United States federal income tax purposes, (i) a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, or (iii) an estate or trust the income of which is subject to United States federal income taxation regardless of its source. The term also includes certain former citizens and certain former long-term residents of the United States. As used herein, the term "United States Alien Holder" means an owner of a Note that is, for United States federal income tax purposes, (i) a nonresident alien individual, (ii) a foreign corporation, (iii) a nonresident alien fiduciary of a foreign estate or trust or (iv) a foreign partnership one or more of the members of which is, for United States federal income tax purposes, a nonresident alien individual, a foreign corporation or a nonresident alien fiduciary of a foreign estate or trust. TAX CONSEQUENCES TO UNITED STATES HOLDERS INTEREST ON A NOTE The Notes were not issued with original issue discount for United States federal income tax purposes. Accordingly, interest and Liquidated Damages, if any, on a Note will generally be taxable to a United States Holder as ordinary interest income at the time it accrues or is received in accordance with the United States Holder's method of accounting for United States federal income tax purposes. SALE OR RETIREMENT OF A NOTE Upon the sale or retirement of a Note, a United States Holder will recognize taxable gain or loss equal to the difference between the amount realized on the sale or retirement and such Holders adjusted tax basis in the Note. 81 EXCHANGE OFFER The exchange of Old Notes for New Notes pursuant to the Exchange Offer will not result in any United States federal income tax consequences to the United States Holders. When a United States Holder exchanges an Old Note for a New Note pursuant to the Exchange Offer, the Holder will have the same adjusted tax basis and holding period in the New Note as in the Old Note immediately before the exchange. BACKUP WITHHOLDING AND INFORMATION REPORTING Certain noncorporate United States Holders may be subject to backup withholding at a rate of 31% on payments of principal, premium and interest (including Liquidated Damages and/or original issue discount, if any) on, and the proceeds of disposition of, a Note. Backup withholding will apply only if the United States Holder (i) fails to furnish its Taxpayer Identification Number ("TIN") which, for an individual, would be his Social Security number, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed to properly report payments of interest or dividends or (iv) under certain circumstances, fails to certify, under penalties of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. United States Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption if applicable. The amount of any backup withholding from a payment to a United States Holder will be allowed as a credit against such Holders United States federal income tax liability and may entitle such Holder to a refund, provided that the required information is furnished to the IRS. TAX CONSEQUENCES TO UNITED STATES ALIEN HOLDERS Under present United States federal law, and subject to the discussion below concerning backup withholding, payments of principal, interest (including Liquidated Damages, if any) and premium on the Notes by the Issuer or any paying agent to any United States Alien Holder, and gain realized on the sale, exchange or other disposition of such Note, will not be subject to United States federal income or withholding tax, provided that: (i) such Holder does not own, actually or constructively, 10 percent or more of the total combined voting power of all classes of stock of the Issuer entitled to vote, is not a controlled foreign corporation related, directly or indirectly, to the Issuer through stock ownership, and is not a bank receiving interest described in Section 881(c)(3)(A) of the Code; (ii) the statement requirement set forth in Section 871(h) or Section 881(c) of the Code has been fulfilled with respect to the beneficial owner, as discussed below; (iii) such Holder is not an individual who is present in the United States for 183 days or more in the taxable year of disposition, or such individual does not have a "tax home" (as defined in Section 911(d)(3) of the Code) or an office or other fixed place of business in the United States; and (iv) such payments and gain are not effectively connected with the conduct by such Holder of a trade or business in the United States. As noted above, the Issuer intends to treat the Notes as indebtedness for United States federal income tax purposes. No assurance can be given, however, that the Issuer's treatment will not be challenged by the IRS. If the Notes were ultimately treated as equity rather than debt for United States federal income tax purposes, the portfolio interest exception would not apply and withholding tax at a flat rate of 30% (or a lower rate under an applicable income tax treaty) would be imposed on the payments of interest and Liquidated Damages, if any, on Notes to the extent of the Issuer's current or accumulated earnings and profits or on the entire amounts of such payments if the withholding agent does not know or cannot reasonably estimate the amount of such earnings and profits. Further, any such withholding could commence when the IRS first asserted that the Notes constituted equity; in such event, if the IRS did not ultimately prevail, the United States Alien Holders would be able to recover the tax withheld by filing a claim for refund with the IRS. 82 CERTAIN CERTIFICATION REQUIREMENTS Sections 871(h) and 881(c) of the Code require that, in order to obtain the portfolio interest exemption from the withholding tax described in the paragraphs above, either the beneficial owner of the Note, or a securities clearing organization, bank or other financial institution that holds customers securities in the ordinary course of its trade or business (a "Financial Institution") and that is holding the Note on behalf of such beneficial owner, file a statement with the withholding agent to the effect that the beneficial owner of the Note is not a United States Holder. Under current United States Treasury Regulations, such requirement will be fulfilled if the beneficial owner of a Note certifies on IRS Form W-8, under penalties of perjury, that it is not a United States Holder and provides its name and address, and any Financial Institution holding the Note on behalf of the beneficial owner files a statement with the withholding agent to the effect that it has received such a statement from the Holder (and furnishes the withholding agent with a copy thereof). Under recently finalized United States Treasury Regulations, which are generally applicable to payments made after December 31, 1998, certain United States Alien Holders would also need to provide their United States taxpayer identification numbers on such forms in order to fulfill such requirement. If a United States Alien Holder of a Note is engaged in a trade or business in the United States, and if interest on the Note is effectively connected with the conduct of such trade or business, the United States Alien Holder, although exempt from the withholding tax discussed in the preceding paragraphs, will generally be subject to regular United States income tax on interest and on any gain realized on the sale, exchange or other disposition of a Note in the same manner as if it were a United States Holder. In lieu of the certificate described in the preceding paragraph, such a Holder will be required to provide to the withholding agent a properly executed IRS Form 4224 (or the successor W-8 Form), in order to claim an exemption from withholding tax. Under recently finalized United States Treasury Regulations, a United States Alien Holder may also need to provide a United States taxpayer identification number on such form in order to fulfill such requirement. In addition, if such United States Alien Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable treaty) of its effectively connected earnings and profits for the taxable year, subject to certain adjustments. For purposes of the branch profits tax, interest on and any gain recognized on the sale, exchange or other disposition of a Note will be included in the effectively connected earnings and profits of such United States Alien Holder if such interest or gain, as the case may be, is effectively connected with the conduct by the United States Alien Holder of a trade or business in the United States. ESTATE TAXES Under Section 2105(b) of the Code, a Note held by an individual who is not a citizen or resident of the United States at the time of his death will not be subject to United States federal estate tax as a result of such individual's death, provided that the individual does not own, actually or constructively, 10 percent or more of the total combined voting power of all classes of stock of the Issuer entitled to vote and, at the time of such individual's death, payments with respect to such Note would not have been effectively connected to the conduct by such individual of a trade or business in the United States. As noted above, the Issuer intends to treat the Notes as indebtedness for United States federal income tax purposes. No assurance can be given, however, that the Issuer's treatment will not be challenged by the IRS. If the Notes were ultimately treated as equity rather than debt for United States federal income tax purposes, a United States Alien Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in the Notes will be required to include the value thereof in his or her gross estate for United States federal estate tax purposes, and may be subject to United States federal estate tax unless an applicable estate tax treaty provides otherwise. 83 BACKUP WITHHOLDING AND INFORMATION REPORTING Under current Treasury Regulations, backup withholding (31%) will not apply to payments by the Issuer made on a Note if the certifications required by Sections 871(h) and 881(c) of the Code are received, provided in each case that the Issuer or such paying agent, as the case may be, does not have actual knowledge that the payee is a United States person. Under current Treasury Regulations, payments on the sale, exchange or other disposition of a Note made to or through a foreign office of a broker generally will not be subject to backup withholding. However, if such broker is a United States person, a controlled foreign corporation for United States tax purposes, a foreign person 50 percent or more of whose gross income is effectively connected with a United States trade or business for a specified three-year period or another United States related person described in Section 1.6049-5(c)(5) of the Treasury Regulations, information reporting will be required unless the broker has in its records documentary evidence that the beneficial owner is not a United States person and certain other conditions are met or the beneficial owner otherwise establishes an exemption. Under recently finalized Treasury Regulations, backup withholding may apply to any payment made after December 31, 1998 which such broker is required to report if such broker has actual knowledge that the payee is a United States person. Payments to or through the United States office of a broker will be subject to backup withholding and information reporting unless the Holder certifies, under penalties of perjury, that it is not a United States person or otherwise establishes an exemption. United States Alien Holders of Notes should consult their tax advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedure for obtaining such an exemption, if available. Any amounts withheld from a payment to a United States Alien Holder under the backup withholding rules will be allowed as a credit against such Holder's United States federal income tax liability and may entitle such Holder to a refund, provided that the required information is furnished to the IRS. 84 PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with the resale of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ( , 1998) (90 days after the date of this Prospectus), all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of one year after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in a Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the reasonable fees and expenses, if any, of one counsel for the Initial Purchasers of the Old Notes) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the Notes being offered hereby and certain other legal matters relating to the Exchange Offer will be passed upon for the Company by Moss & Barnett, a Professional Association, Minneapolis, Minnesota. EXPERTS The consolidated financial statements of the Company as of December 31, 1996 and 1997 and for each of the three years ended December 31, 1997, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included here in reliance upon the authority of said firm as experts in giving said report. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company hereby incorporates into this Prospectus and the related Registration Statement the following documents: (a) Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Commission (File No. 1-11014); and 85 (b) The Company's Proxy Statement for the Annual Meeting of Shareholders held on May 11, 1998. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 subsequent to the date of this Offering Memorandum and prior to the termination of the Exchange Offer shall be deemed to be incorporated by reference into this Prospectus from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of these documents may be obtained from the Company upon request. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-4 (including all amendments thereto, the "Registration Statement") under the Securities Act of 1933, with respect to the New Notes offered in connection with the Exchange Offer. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information contained in the Registration Statement. For further information with respect to the Company and the New Notes offered in connection with the Exchange Offer, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus concerning the contents of any contract or any other document referred to are not necessarily complete; reference is made in each instance to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference to such exhibits. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from such office after payment of fees prescribed by the Commission. The Commission also maintains a Web site that contains reports, proxy statements and other information regarding registrants, including the Company, that file such information electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. 86 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS OF MUSICLAND STORES CORPORATION AND THE MUSICLAND GROUP, INC. AND SUBSIDIARIES Separate financial statements of Musicland Stores Corporation ("MSC") and The Musicland Group, Inc. and Subsidiaries ("MGI") have not been presented. Since its formation, MSC has engaged in no independent business operations from MGI. The separate financial statements of MGI would be substantially the same as the consolidated financial statements of MSC, as all of the debt of MSC is guaranteed by MGI and would be "pushed down" to the financial statements of MGI. CONSOLIDATED FINANCIAL STATEMENTS OF MUSICLAND STORES CORPORATION AND SUBSIDIARIES
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Consolidated Statements of Operations...................................................................... F-3 Consolidated Balance Sheets................................................................................ F-4 Consolidated Statements of Cash Flows...................................................................... F-5 Consolidated Statements of Stockholders' Equity............................................................ F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Musicland Stores Corporation: We have audited the accompanying consolidated balance sheets of Musicland Stores Corporation (a Delaware Corporation) and Subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Musicland Stores Corporation and Subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, January 21, 1998 F-2 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1996 1997 ------------ ------------ ------------ Sales................................................................... $ 1,722,572 $ 1,821,594 $ 1,768,312 Cost of sales........................................................... 1,116,502 1,209,835 1,153,483 ------------ ------------ ------------ Gross profit.......................................................... 606,070 611,759 614,829 Selling, general and administrative expenses............................ 525,213 576,658 529,427 Depreciation and amortization........................................... 45,531 44,819 39,411 Goodwill write-down..................................................... 138,000 95,253 -- Restructuring charges................................................... -- 75,000 -- ------------ ------------ ------------ Operating income (loss)............................................... (102,674) (179,971) 45,991 Interest expense........................................................ 27,881 32,967 31,720 ------------ ------------ ------------ Earnings (loss) before income taxes................................... (130,555) (212,938) 14,271 Income taxes............................................................ 5,195 (19,200) 300 ------------ ------------ ------------ Net earnings (loss)................................................... $ (135,750) $ (193,738) $ 13,971 ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings (loss) per common share.................................. $ (4.00) $ (5.80) $ 0.42 ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings (loss) per common share................................ $ (4.00) $ (5.80) $ 0.41 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements. F-3 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ------------------------ 1996 1997 ----------- ----------- ASSETS Current assets: Cash and cash equivalents............................................................. $ 161,976 $ 3,942 Inventories........................................................................... 506,093 450,258 Deferred income taxes................................................................. 11,800 10,600 Other current assets.................................................................. 31,492 8,768 ----------- ----------- Total current assets................................................................ 711,361 473,568 Property, net......................................................................... 277,996 250,021 Deferred income taxes................................................................. 1,200 2,400 Other assets.......................................................................... 6,358 7,906 ----------- ----------- Total Assets........................................................................ $ 996,915 $ 733,895 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt.................................................. $ 2,060 $ 26,657 Accounts payable...................................................................... 406,642 357,183 Restructuring reserve................................................................. 33,963 -- Other current liabilities............................................................. 100,866 115,660 ----------- ----------- Total current liabilities........................................................... 543,531 499,500 Long-term debt........................................................................ 394,539 166,430 Other long-term liabilities........................................................... 56,226 49,195 Commitments and contingent liabilities................................................ Stockholders' equity: Preferred stock ($.01 par value; shares authorized: 5,000,000; shares issued and outstanding: none).................................................................. -- -- Common stock ($.01 par value; shares authorized: 75,000,000; shares issued and outstanding: December 31, 1996, 34,301,956; December 31, 1997, 34,372,592).......... 343 344 Additional paid-in capital............................................................ 253,896 255,075 Accumulated deficit................................................................... (238,649) (224,678) Deferred compensation................................................................. (7,998) (6,998) Common stock subscriptions............................................................ (4,973) (4,973) ----------- ----------- Total stockholders' equity.......................................................... 2,619 18,770 ----------- ----------- Total Liabilities and Stockholders' Equity.......................................... $ 996,915 $ 733,895 ----------- ----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements. F-4 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1996 1997 ----------- ----------- ----------- OPERATING ACTIVITIES: Net earnings (loss)...................................................... $ (135,750) $ (193,738) $ 13,971 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................................... 45,531 44,819 39,411 Disposal of property................................................... 7,587 1,733 4,112 Goodwill write-down.................................................... 138,000 95,253 -- Amortization of debt issuance costs and other.......................... 516 658 1,234 Other amortization..................................................... 364 234 1,022 Restructuring charges.................................................. -- 75,000 -- Deferred income taxes.................................................. (3,400) 500 -- Changes in operating assets and liabilities: Inventories............................................................ (41,866) 27,601 55,835 Other current assets................................................... (11,172) (10,353) 22,724 Accounts payable....................................................... (53,388) 2,794 (61,520) Restructuring reserve.................................................. -- (24,092) (12,231) Other current liabilities.............................................. (11,445) (6,767) 14,843 Other assets........................................................... (1,079) (590) (1,483) Other long-term liabilities............................................ 9,875 3,637 (3,305) ----------- ----------- ----------- Net cash provided by (used in) operating activities.................. (56,227) 16,689 74,613 ----------- ----------- ----------- INVESTING ACTIVITIES: Capital expenditures..................................................... (113,983) (17,970) (10,940) Sale/leasebacks and other property sales................................. 26,969 11,594 -- ----------- ----------- ----------- Net cash used in investing activities................................ (87,014) (6,376) (10,940) ----------- ----------- ----------- FINANCING ACTIVITIES: Increase (decrease) in outstanding checks in excess of cash balances..... 63,435 (69,321) 12,061 Borrowings (repayments) under revolver................................... 53,000 219,000 (272,000) Net proceeds from issuance of long-term debt............................. -- -- 49,500 Principal payments on long-term debt..................................... -- -- (11,487) Loan to KSOP............................................................. (9,997) -- -- Proceeds from sale of common stock....................................... 196 13 219 ----------- ----------- ----------- Net cash provided by (used in) financing activities.................. 106,634 149,692 (221,707) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (36,607) 160,005 (158,034) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 38,578 1,971 161,976 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 1,971 $ 161,976 $ 3,942 ----------- ----------- ----------- ----------- ----------- ----------- CASH PAID (RECEIVED) DURING THE YEAR FOR:.................................. Interest................................................................. $ 27,268 $ 31,677 $ 33,035 Income taxes, net........................................................ 17,884 9,010 (22,908)
See accompanying Notes to Consolidated Financial Statements. F-5 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
RETAINED COMMON STOCK ADDITIONAL EARNINGS TOTAL ---------------------- PAID-IN (ACCUMULATED DEFERRED COMMON STOCK STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION SUBSCRIPTIONS EQUITY --------- ----------- ---------- ------------ ------------- ------------- ------------ January 1, 1995.................... 34,247 $ 342 $ 254,068 $ 90,839 $ $ (4,973) $ 340,276 Net loss........................... (135,750) (135,750) Other, including exercise of stock options and related tax benefit.......................... 50 1 670 671 Loan to KSOP....................... (9,997) (9,997) Amortization of deferred compensation and adjustment to fair market value of KSOP shares, net of tax benefit............... (388) 999 611 --------- ----- ---------- ------------ ------------- ------------- ------------ December 31, 1995.................. 34,297 343 254,350 (44,911) (8,998) (4,973) 195,811 Net loss........................... (193,738) (193,738) Other, including exercise of stock options and related tax benefit.......................... 5 -- 13 13 Amortization of deferred compensation and adjustment to fair market value of KSOP shares, net of tax benefit............... (467) 1,000 533 --------- ----- ---------- ------------ ------------- ------------- ------------ December 31, 1996.................. 34,302 343 253,896 (238,649) (7,998) (4,973) 2,619 Net earnings....................... 13,971 13,971 Other, including exercise of stock options and related tax benefit.......................... 71 1 275 276 Issuance of warrants............... 890 890 Amortization of deferred compensation and adjustment to fair market value of KSOP shares, net of tax....................... 14 1,000 1,014 --------- ----- ---------- ------------ ------------- ------------- ------------ December 31, 1997.................. 34,373 $ 344 $ 255,075 $ (224,678) $ (6,998) $ (4,973) $ 18,770 --------- ----- ---------- ------------ ------------- ------------- ------------ --------- ----- ---------- ------------ ------------- ------------- ------------
See accompanying Notes to Consolidated Financial Statements. F-6 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Musicland Stores Corporation ("MSC") and its wholly-owned subsidiary, The Musicland Group, Inc. ("MGI") and MGI's wholly-owned subsidiaries, after elimination of all material intercompany balances and transactions. MSC and MGI are collectively referred to as the "Company." The Company's foreign operations in the United Kingdom and resulting foreign currency translation adjustments have not been material. The preparation of the accompanying consolidated financial statements required management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. BUSINESS. The Company operates principally in the United States as a specialty retailer of home entertainment products, including prerecorded music, video sell-through, books, computer software and related products. The Company's stores operate under two principal strategies: (i) mall based music and video sell-through stores (the "Mall Stores"), operating under the principal trade names Sam Goody and Suncoast Motion Picture Company, and (ii) non-mall based full-media superstores ("Superstores"), operating under the trade names Media Play and On Cue. Because both Mall Stores and Superstores are supported by centralized corporate services and have similar economic characteristics, products, customers and retail distribution methods, the stores are reported as one industry segment. At December 31, 1997, the store count included 1,122 Mall Stores and 225 Superstores, with 4.0 million total store square footage in Mall Stores and 4.2 million total store square footage in Superstores. The Company operated 1,363 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands and the United Kingdom at December 31, 1997. SUMMARY OF SIGNIFICANT RISKS AND UNCERTAINTIES. Over the past few years, the number of stores and types of competitors faced by the Company's stores increased significantly, including non-mall discount stores, consumer electronics superstores and other mall based music, video and book specialty retailers expanding into non-mall multimedia superstores of their own. The intense competitive environment and pricing pressure created by the high-volume low-price superstores eased in 1997 as a result of the closing of stores by certain mall competitors as well as the narrowing of entertainment software product offerings, downsizing of store selling space devoted to media products and less near or below cost pricing by certain non-mall competitors. The Company's stores operate in a retail environment in which many factors that are difficult to predict and outside the Company's control can have a significant impact on store and Company sales and profits. These factors include the timing and strength of new product offerings and technology, pricing strategies of competitors, openings and closings of competitors' stores, the Company's ability to continue to receive adequate product from its vendors on acceptable credit terms and to obtain sufficient financing to meet its liquidity needs, effects of weather and overall economic conditions, including inflation, consumer confidence, spending habits and disposable income. The Company has assessed its systems and equipment with respect to Year 2000 compliance and has developed a project plan. Many of the Year 2000 issues, including the processing of credit card transactions, have been addressed. The remaining Year 2000 issues will either be addressed with scheduled system upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expense as incurred and are not expected to have a material impact on the financial position or results of operations of the Company. However, the Company could be adversely impacted if the Year 2000 modifications are not properly completed by either the Company or its vendors, banks or any other F-7 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) entity with whom the Company conducts business. The Company is devoting and plans to continue to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. CASH AND CASH EQUIVALENTS. Cash equivalents consist principally of short-term investments with original maturities of three months or less and are recorded at cost, which approximates market value. Restricted cash amounts are not material. The Company uses controlled disbursement banking arrangements under its cash management program which provide for the reimbursement of major bank disbursement accounts on a daily basis. At December 31, 1997, outstanding checks in excess of cash balances of $12,061 were included in accounts payable. INVENTORIES. Inventories are valued at the lower of cost or market. Cost is determined using the retail inventory method, on the first-in, first-out (FIFO) basis. PROPERTY. Buildings and improvements, store fixtures and other property are depreciated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of ten years, which is generally equal to or less than the lease term. Accelerated depreciation methods are used for income tax purposes. When assets are sold or retired, the costs and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in operations. Depreciation and amortization expense for property was $39,653, $41,763 and $39,370 for the years ended December 31, 1995, 1996 and 1997, respectively. In the event that facts and circumstances indicate that the carrying amount of property may not be recoverable, an evaluation would be performed using such factors as recent operating results, projected cash flows and management's plans for future operations. DEBT ISSUANCE COSTS. Debt issuance costs are amortized over the terms of the related financing using the interest method. STORE OPENING AND ADVERTISING COSTS. Store opening and advertising costs are charged to expense as they are incurred. STOCK-BASED COMPENSATION. Compensation expense for employee and director stock options is measured based on the excess, if any, of the quoted market price of the Company's stock on the date of grant over the amount that must be paid to acquire the stock. INCOME TAXES. Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities at currently enacted tax rates. A valuation allowance for deferred income tax assets is recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. OTHER COMPREHENSIVE INCOME. The Company has no significant items of other comprehensive income. EARNINGS (LOSS) PER COMMON SHARE. Basic earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during each year of 33,898,000, 33,414,000 and 33,528,000 in 1995, 1996 and 1997, respectively. Diluted earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during each year, adjusted in 1997 for 641,000 of incremental shares assumed issued on F-8 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the exercise of stock options and warrants. Stock options were excluded from diluted computations for the net losses for the years ended December 31, 1995 and 1996 as the effect would be anti-dilutive. For purposes of earnings (loss) per share computations, shares of common stock under the Company's employee stock ownership plan, established in the third quarter of 1995, are not considered outstanding until they are committed to be released. 2. WRITE-DOWN OF GOODWILL In connection with the Company's adoption of Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No. 121"), in 1995, the carrying values of long-lived assets, primarily goodwill and property, of the music stores were reviewed for recoverability and possible impairment in light of recent developments. Goodwill primarily resulted from the acquisition of MGI by MSC in a leveraged buyout in 1988, when nearly all of the Company's stores were mall based music stores. During 1995 and 1996, the music stores experienced sales declines which were a result of a general decrease in customer traffic in malls, an increase in high-volume, low-price non-mall superstores and a lack of strong music product releases. The Company updated its operating projections for the music stores in the third quarter of 1995 and again in the fourth quarter of 1996 to reflect the continued weak retail environment and competitive pricing. An analysis of the projected undiscounted future cash flows indicated impairment had occurred. A goodwill write-down of $138,000 was recorded in August 1995 and a write-down of the remaining goodwill of $95,253 was recorded in December 1996 based on estimates of fair value of the music stores determined primarily from operating projections, future discounted cash flows and other significant market factors related to the Company. Goodwill amortization for the years ended December 31, 1995 and 1996 was $5,793 and $3,005, respectively. 3. RESTRUCTURING CHARGES During 1996, the Company recorded pretax restructuring charges of $75,000 for the estimated cost of programs designed to improve profitability and increase inventory turnover. The restructuring programs included the closing of the Company's distribution facility in Minneapolis, Minnesota and 115 underperforming stores, including 79 Mall Stores and 36 Superstores. The Company closed 53 of these stores in 1996 and completed the restructuring programs in 1997 with the closing of the distribution facility and another 61 stores. The Company removed one Superstore from the closing list after exercising an option in the termination agreement for that store to reinstate the lease. The restructuring charges included $36,300 of cash payments, primarily related to payments to landlords for the early termination of operating leases and estimated legal and consulting fees, and $38,700 for non-cash charges related to write-downs of leasehold improvements and certain equipment, net of unamortized lease credits. F-9 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. LONG-TERM DEBT
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- LONG-TERM DEBT CONSISTS OF THE FOLLOWING: Revolver borrowings, variable rates............................... $ 272,000 $ -- Term loan, variable rate, 8.13% at December 31, 1997.............. -- 50,000 Mortgage notes payable, variable rates, 8.24% to 8.37% at December 31, 1997........................................................ 14,599 33,087 9% senior subordinated notes, unsecured, due 2003................. 110,000 110,000 ---------- ---------- Total........................................................... 396,599 193,087 Less current maturities........................................... 2,060 26,657 ---------- ---------- Total long-term debt.............................................. $ 394,539 $ 166,430 ---------- ---------- ---------- ----------
The Company's bank credit agreement, as amended in June 1997, provides for a revolving credit facility and expires in October 1999. Borrowings under the revolving credit facility are available up to a maximum of the lesser of 60% of eligible inventory or $255,000 through February 15, 1998 and $245,000 thereafter. However, for any borrowings which result in a net increase in total outstanding revolver borrowings, total trade accounts payable must be equal to or greater than the total outstanding revolver borrowings. Facility fees at an annual rate of up to 0.50% are assessed on the maximum credit amount available. Revolver borrowings at December 31, 1996 have been reclassified to long-term debt because of the waiver and subsequent removal in 1997 of the annual one day clean-down requirement of revolver borrowings.
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- REVOLVER DATA IS AS FOLLOWS: Average daily outstanding revolver borrowings........ $ 254,000 $ 289,700 $ 238,500 Highest outstanding revolver borrowings.............. 350,000 333,000 273,000 Weighted average interest rates: Based on average daily borrowings.................. 7.13% 7.56% 8.03% At year end, excluding facility fee rate........... 7.12 7.26 N/A
The Company has pledged the common stock of certain of its wholly owned subsidiaries as collateral for borrowings under the revolving credit facility. Outstanding revolver borrowings in excess of $245,000 and the term loan are secured by the Company's inventory. The mortgage notes payable are collateralized by land, buildings and certain fixtures and equipment of three of the Company's Media Play stores and the Franklin, Indiana distribution facility with an aggregate carrying value, including additional building improvements, of $43,965 at December 31, 1997. The credit agreement contains financial covenants and covenants that limit additional indebtedness, liens, capital expenditures and cash dividends. The amendment to the credit agreement in June 1997 modified and provided additional flexibility in financial covenants related to fixed charge coverage, F-10 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. LONG-TERM DEBT (CONTINUED) consolidated tangible net worth and debt to total capitalization and removed financial covenants related to the maximum debt and trade payables to eligible inventory ratio and the annual one day clean-down requirement of revolver borrowings. Covenants of the term loan agreement require a minimum inventory of $150,000 and a minimum operating cash flow and limit additional liens. The agreements related to the mortgage notes payable and senior subordinated notes, as amended, also contain certain financial covenants. The Company was in compliance with all covenants at December 31, 1997. Maturities of long-term debt are: 1998, $26,657; 1999, $46,000; 2000, $10,276; and 2003, $110,000. The Company may, at its option, redeem the senior subordinated notes prior to maturity at 103.375% of par on and after June 15, 1998 and thereafter at prices declining annually to 100% of par on and after June 15, 2001. The mortgage notes payable agreements contain one year renewal options which would extend maturities of $21,000 and $10,276 to March 2000 and May 2001, respectively. The mortgage notes payable balance at December 31, 1997 includes deferred financing credits of $154 that are being amortized over the term of the related debt. 5. INCOME TAXES
YEARS ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- INCOME TAXES CONSIST OF: Current: Federal............................... $ 7,395 $ (18,300) $ 100 State, local and other................ 1,200 (1,400) 200 ----------- ----------- ----------- 8,595 (19,700) 300 ----------- ----------- ----------- Deferred: Federal............................... (3,200) (1,000) 1,400 State, local and other................ (200) 1,500 (1,400) ----------- ----------- ----------- (3,400) 500 -- ----------- ----------- ----------- Total................................. $ 5,195 $ (19,200) $ 300 ----------- ----------- ----------- ----------- ----------- ----------- THE COMPANY'S EFFECTIVE INCOME TAX RATES DIFFER FROM THE FEDERAL STATUTORY RATE AS FOLLOWS: Federal statutory tax rate.............. (35.0)% (35.0)% 35.0% Goodwill amortization and write-down and other permanent differences........... 38.5 16.7 5.2 State and local income taxes, net of federal benefit....................... 0.5 -- (5.5) Valuation allowance..................... -- 9.3 (32.6) ----------- ----------- ----------- Effective income tax rate............. 4.0% (9.0)% 2.1% ----------- ----------- ----------- ----------- ----------- -----------
F-11 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. INCOME TAXES (CONTINUED)
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- COMPONENTS OF DEFERRED INCOME TAXES ARE AS FOLLOWS: Net current deferred tax asset: Capitalized inventory costs....................................... $ 5,880 $ 5,360 Inventory valuation............................................... 5,564 8,266 Compensation related.............................................. 2,601 2,504 Restructuring charges............................................. 14,388 -- Store closings.................................................... 1,883 2,586 Other accruals.................................................... 2,103 2,303 Other, net........................................................ 581 681 ---------- ---------- Total current deferred income taxes............................. 33,000 21,700 Valuation allowance............................................... (21,200) (11,100) ---------- ---------- Net current deferred income taxes............................... $ 11,800 $ 10,600 ---------- ---------- ---------- ---------- Net noncurrent deferred tax asset: Depreciation...................................................... $ (20,901) $ (15,263) Rent expense...................................................... 17,651 18,279 Amortization of intangible assets................................. (2,011) (2,011) Net pension liability............................................. 881 960 Other, net........................................................ (49) 489 Alternative minimum tax credits................................... 8,929 5,846 ---------- ---------- Total noncurrent deferred income taxes.......................... 4,500 8,300 Valuation allowance............................................... (3,300) (5,900) ---------- ---------- Net noncurrent deferred income taxes.............................. $ 1,200 $ 2,400 ---------- ---------- ---------- ----------
The Company's management believes it is more likely than not that the deferred income tax assets, net of valuation allowances, will be realized based on current income tax laws and estimates of future earnings. However, the amount of deferred tax assets considered realizable could be adjusted in the future if estimates of taxable income are revised. 6. EMPLOYEE BENEFIT PLANS The Company has a non-contributory, defined benefit pension plan covering certain employees. Retirement benefits are a function of both years of service and the level of compensation. The Company's funding policy is to make an annual contribution equal to or exceeding the minimum required by the Employee Retirement Income Security Act of 1974. Effective December 31, 1991, participation in the pension plan was frozen for employees hired on or after July 1, 1990. The Company has been evaluating on F-12 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. EMPLOYEE BENEFIT PLANS (CONTINUED) a year to year basis the continuation of benefit accruals under the pension plan. Accordingly, the projected benefit obligation approximated the accumulated benefit obligation at December 31, 1996 and 1997.
DECEMBER 31, -------------------- 1996 1997 --------- --------- THE FUNDED STATUS OF THE PENSION PLAN AND THE RELATED ACCRUED PENSION COST ARE AS FOLLOWS: Change in benefit obligation: Benefit obligation at beginning of year.............................. $ 9,330 $ 9,604 Service cost......................................................... 446 411 Interest cost........................................................ 715 748 Effect of assumption change.......................................... (456) 448 Actuarial loss (gain)................................................ (13) 257 Benefits paid........................................................ (418) (1,011) --------- --------- Benefit obligation at end of year.................................... 9,604 10,457 --------- --------- Change in plan assets: Fair value of plan assets at beginning of year....................... 9,289 9,468 Actual return on plan assets......................................... 597 2,468 Benefits paid........................................................ (418) (1,011) --------- --------- Fair value of plan assets at end of year............................. 9,468 10,925 --------- --------- Funded status........................................................ (136) 468 Unrecognized gains................................................... (2,273) (3,277) --------- --------- Accrued pension cost................................................. $ (2,409) $ (2,809) --------- --------- --------- --------- ASSUMPTIONS USED IN COMPUTING PENSION DATA ARE AS FOLLOWS: Discount rate for benefit obligations................................ 7.75% 7.50% Expected long-term rate of return on plan assets..................... 8.50 8.50
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- THE COMPONENTS OF NET PENSION EXPENSE ARE AS FOLLOWS: Service cost.................................................... $ 260 $ 446 $ 411 Interest cost................................................... 631 715 748 Expected return on plan assets.................................. (672) (771) (754) Amortization of prior service cost and gain..................... (12) (5) (5) --------- --------- --------- Net pension expense........................................... $ 207 $ 385 $ 400 --------- --------- --------- --------- --------- ---------
F-13 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company established a defined contribution plan in 1992 for employees not covered by the pension plan. The Company has a 401(k) plan, which is based on contributions made through payroll deductions and partially matched by the Company, covering substantially all employees. The Company's matching contribution to the 401(k) plan is paid in stock of MSC under an employee stock ownership plan ("KSOP"). The Company may also, at its discretion, make a supplemental cash matching contribution. In 1995, to establish the KSOP, the Company made a loan to the KSOP trust for the purchase of 1,042,900 shares of the Company's common stock in the open market. In exchange, the Company received a note, the balance of which is recorded as deferred compensation and is reflected as a reduction of stockholders' equity. The Company recognizes compensation expense during the period the match is earned equal to the expected market value of the shares to be released to settle the match liability. The number of KSOP shares committed to be released was 104,290 at December 31, 1996 and 1997. At December 31, 1996 and 1997, the number of shares held in suspense was 834,320 and 730,030, respectively, and the market value of the shares held in suspense was $1,251 and $5,338, respectively. Expenses for the defined contribution and 401(k) plans for the years ended December 31, 1995, 1996 and 1997 totaled $570, $354 and $1,749, respectively. Expenses for postemployment benefits were not material. The Company does not offer or provide postretirement benefits other than pensions to its employees. 7. STOCK PLANS The Company's 1994, 1992 and 1988 Stock Option Plans authorize the grant of stock options and stock appreciation rights to officers and other key employees. The Company's Directors Stock Option Plan authorizes the grant of stock options to its directors who are not employees of the Company or its affiliates. The number of shares of common stock that may be issued to employees and directors under each of these plans is 950,000 shares, 1,500,000 shares, 1,000,000 shares and 200,000 shares, respectively. The stock options become exercisable over a period not to exceed ten years after the date they are granted. Stock options are granted at option prices not less than the fair market value of the Company's common stock on the date of the grant. Accordingly, no compensation expense has been recognized for stock options granted. The Company has not granted any stock appreciation rights. PRO FORMA DISCLOSURES OF NET EARNINGS (LOSS) AND NET EARNINGS (LOSS) PER COMMON SHARE AS IF THE FAIR VALUE BASED METHOD OF ACCOUNTING FOR STOCK OPTIONS HAD BEEN APPLIED ARE AS FOLLOWS:
1995 1996 1997 ----------- ----------- --------- Net earnings (loss): As reported........ $ (135,750) $ (193,738) $ 13,971 Pro forma.......... $ (135,850) $ (194,394) $ 13,168 Net earnings (loss) per common share: As reported Basic............ $ (4.00) $ (5.80) $ .42 Diluted.......... $ (4.00) $ (5.80) $ .41 Pro forma Basic............ $ (4.01) $ (5.82) $ .39 Diluted.......... $ (4.01) $ (5.82) $ .39
The fair value of each employee and director stock option has been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1995, 1996 F-14 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. STOCK PLANS (CONTINUED) and 1997, respectively: risk-free interest rates of 6.31%, 6.17% and 6.27%; expected volatility of 45%, 49% and 56%; expected life of seven years; and no dividend yields. The pro forma disclosures may not be representative of the effects on net earnings in future years because they do not take into consideration pro forma compensation expense related to grants made prior to 1996, the vesting of stock options over several years and the possible grant of additional stock options in the future. STOCK OPTION ACTIVITY FOR THE LAST THREE YEARS WAS AS FOLLOWS:
1995 1996 1997 ----------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ----------- ---------- ----------- ---------- ----------- Outstanding at beginning of year........... 1,748,916 $ 11.90 1,892,984 $ 10.52 2,681,294 $ 7.33 Granted.................................... 398,350 7.84 1,023,973 2.30 734,650 3.16 Exercised.................................. (50,100) 3.93 (5,000) 2.50 (70,636) 3.10 Canceled................................... (204,182) 18.73 (230,663) 11.26 (409,400) 8.67 ---------- ---------- ---------- Outstanding at end of year................. 1,892,984 10.52 2,681,294 7.33 2,935,908 6.20 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable at year end............ 840,838 1,003,916 1,084,642 ---------- ---------- ---------- ---------- ---------- ---------- Options available for future grant......... 1,460,060 666,750 341,500 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average fair value of options granted during the year.................. $ 4.38 $ 1.32 $ 2.00 ---------- ---------- ---------- ---------- ---------- ----------
THE FOLLOWING TABLE SUMMARIZES INFORMATION CONCERNING OUTSTANDING AND EXERCISABLE STOCK OPTIONS AT DECEMBER 31, 1997:
OPTIONS OUTSTANDING --------------------------------------- OPTIONS EXERCISABLE WEIGHTED --------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - - ---------------------------------------------------- ----------- --------------- --------- ---------- --------- $ 1.5000 to $ 2.5625................................ 1,171,459 7.59 $ 2.000 271,503 $ 2.465 3.0000 to 4.5000................................ 592,016 6.42 3.485 228,600 4.500 6.0625 to 6.7500................................ 422,883 8.98 6.402 28,739 6.625 9.3750 to 14.5000................................ 594,700 5.35 12.992 452,567 13.462 21.7500 to 21.7500................................ 154,850 5.83 21.750 103,233 21.750 ----------- ---------- 2,935,908 1,084,642 ----------- ---------- ----------- ----------
8. COMMON STOCK Certain members of current and former management of the Company own 1,991,308 shares of common stock with restrictions ("Restricted Stock") at $0.0025 per share. Although holders of Restricted F-15 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. COMMON STOCK (CONTINUED) Stock have voting and dividend rights, no Restricted Stock is transferable until the Company is paid the balance of the subscription price of $2.4975 or $4.4975 per share. After August 25, 2003, the Company may, at its option, buy back the Restricted Shares for $0.0025 per share. The amount of subscriptions due from the holders of Restricted Stock upon transfer is reflected as a reduction of stockholders' equity. In connection with the term loan agreement completed in June 1997, the Company issued warrants for the purchase of 1,822,087.16 shares of common stock at $1.5625 per share. The warrants can be traded, are exercisable over a period of five years and expire in 2002. The fair value of the warrants at the time of issuance of $890 was recorded as additional debt issuance costs and an increase to additional paid-in capital. 9. PREFERRED STOCK PURCHASE RIGHTS In March 1995, the Company's Board of Directors adopted a stockholder rights plan and declared a dividend of one preferred share purchase right ("Right") per share for each outstanding share of common stock. The Rights will be distributed 20 days after a person or group (an "Acquiring Person") either acquires beneficial ownership of, or commences a tender or exchange offer for, 17.5% or more of the Company's outstanding common stock. Each Right then may be exercised to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, $0.01 par value (the "Preferred Shares"), at an exercise price of $70.00 per one-hundredth Preferred Share. Thereafter, upon the occurrence of certain events, the Rights entitle holders other than the Acquiring Person to acquire common stock having a value of twice the exercise price of the Rights. Alternatively, upon the occurrence of certain other events, the rights would entitle holders other than the Acquiring Person to acquire common stock of the Acquiring Person having a value of twice the exercise price of the Rights. The Rights may be redeemed by the Company at a redemption price of $.001 per Right at any time until the 20th day after a public announcement of an acquisition of 17.5% or more of the common stock of the Company. The Rights expire on March 20, 2005. 10. COMMITMENTS The Company leases most of its retail stores and certain office and storage facilities under operating leases for terms that typically range from three to twenty-five years. Certain store leases provide the Company with an early cancellation option if sales for a designated period do not reach a specified level as defined in the lease. In most instances, the Company pays, in addition to minimum rent, real estate taxes, utilities, common area maintenance costs and percentage rents which are based upon sales volume. Certain store leases contain provisions restricting assignment, merger, change of control or transfer. The Company also leases certain store fixtures and equipment, computers and automobiles under operating leases. F-16 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. COMMITMENTS (CONTINUED) Minimum payments under operating leases with noncancelable terms in excess of one year at December 31, 1997 are: 1998, $137,183; 1999, $131,751; 2000, $111,399; 2001, $85,060; 2002, $70,527; and thereafter, $268,219.
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- TOTAL RENT EXPENSE CONSISTS OF THE FOLLOWING: Minimum cash rents................................... $ 148,736 $ 166,308 $ 152,343 Straight-line recognition of leases with scheduled rent increases..................................... 7,304 3,152 (910) Percentage rents..................................... 2,000 1,733 2,143 ---------- ---------- ---------- Total rent expense................................. $ 158,040 $ 171,193 $ 153,576 ---------- ---------- ---------- ---------- ---------- ----------
11. LITIGATION The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company. 12. RELATED PARTY TRANSACTIONS Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), a wholly owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), acts as a market maker in the Company's senior subordinated notes. A Managing Director of DLJSC is a member of the Company's board of directors. DLJ and certain of its affiliates, excluding DLJ employees, owned approximately 6.9% of the Company's common stock at December 31, 1996. During 1997, DLJ sold its ownership in the Company's common stock. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets at December 31, 1996 and 1997 for cash and cash equivalents, other current assets, accounts payable and other current liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of the outstanding revolver borrowings at December 31, 1996, based on current market rates, was $217,600. As the interest rates on the term loan and mortgage notes payable are reset monthly based on current market rates and the debt is secured, the carrying values approximate fair value. The fair value of the senior subordinated notes at December 31, 1996 and 1997, based on the last quoted price on those dates, was $50,600 and $101,750, respectively. F-17 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 14. SUPPLEMENTAL BALANCE SHEET INFORMATION
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- PROPERTY CONSISTS OF THE FOLLOWING, AT COST: Land and land improvements........................................ $ 9,283 $ 10,003 Buildings......................................................... 10,408 32,055 Leasehold improvements............................................ 248,077 231,831 Store fixtures and other property................................. 162,348 149,973 ---------- ---------- 430,116 423,862 Less accumulated depreciation and amortization.................... (152,120) (173,841) ---------- ---------- Property, net..................................................... $ 277,996 $ 250,021 ---------- ---------- ---------- ---------- DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- OTHER CURRENT LIABILITIES CONSIST OF THE FOLLOWING: Payroll and related taxes and benefits............................ $ 19,598 $ 24,963 Gift certificates payable......................................... 32,792 38,224 Sales taxes payable............................................... 19,924 18,764 Accrued store expenses and other.................................. 28,552 33,709 ---------- ---------- Total............................................................. $ 100,866 $ 115,660 ---------- ---------- ---------- ---------- OTHER LONG-TERM LIABILITIES CONSIST OF THE FOLLOWING: Straight-line recognition of leases with scheduled rent increases....................................................... $ 36,442 $ 32,457 Deferred rent credits............................................. 14,651 12,508 Other............................................................. 5,133 4,230 ---------- ---------- Total............................................................. $ 56,226 $ 49,195 ---------- ---------- ---------- ----------
15. SUPPLEMENTAL CASH FLOW INFORMATION The land, buildings and certain fixtures related to three of the Company's Media Play stores and the land, building and certain equipment related to the Company's distribution facility in Franklin, Indiana were financed under operating leases with special purpose entities that had been formed for the purpose of purchasing the land, fixtures and equipment and constructing the facilities using secured financing. The three Media Play stores, which had an aggregate cost of $14,395, together with the related mortgage note payable and deferred financing credits totaling $14,599, were recorded on the Company's Consolidated Balance Sheet after the terms of an amendment to the operating lease required consolidation of the special purpose entity as of October 1996, the date of the amendment. The financed distribution facility property, which had an original cost of approximately $30,000, and the mortgage note payable were recorded on the Company's Consolidated Balance Sheet after the terms of an amendment to the operating lease required consolidation of the special purpose entity as of June 1997, the date of the amendment. F-18 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
BASIC DILUTED EARNINGS EARNINGS (LOSS) (LOSS) COMMON STOCK PRICE NET PER PER GROSS EARNINGS COMMON COMMON --------------------- SALES PROFIT (LOSS) SHARE SHARE HIGH LOW ------------ ---------- ----------- -------- -------- -------- ---------- 1996: First......................... $ 383,570 $ 129,833 $ (52,636) $ (1.58) $ (1.58) $ 4 3/4 $ 2 Second........................ 372,410 126,582 (24,080) (0.72) (0.72) 5 1/4 3 1/8 Third......................... 366,634 127,702 (24,201) (0.72) (0.72) 3 5/8 1 3/8 Fourth........................ 698,980 227,642 (92,821) (2.77) (2.77) 2 1 1/4 ------------ ---------- ----------- -------- -------- Total....................... $ 1,821,594 $ 611,759 $ (193,738) $ (5.80) $ (5.80) ------------ ---------- ----------- -------- -------- ------------ ---------- ----------- -------- -------- 1997: First......................... $ 376,080 $ 126,463 $ (20,983) $ (0.63) $ (0.63) $ 1 3/4 $ 11/16 Second........................ 342,746 120,428 (18,325) (0.55) (0.55) 2 7/8 15/16 Third......................... 373,283 129,070 (12,384) (0.37) (0.37) 8 1/4 2 1/4 Fourth........................ 676,203 238,868 65,663 1.95 1.89 8 1/2 4 5/8 ------------ ---------- ----------- -------- -------- Total....................... $ 1,768,312 $ 614,829 $ 13,971 $ .42 $ .41 ------------ ---------- ----------- -------- -------- ------------ ---------- ----------- -------- --------
The three months ended December 31, 1996 include a goodwill write-down of $95,253, or $2.85 per share. The three months ended March 31, 1996 and December 31, 1996 include pretax restructuring charges of $35,000 and $40,000, respectively. The totals of basic and diluted earnings (loss) per common share by quarter may not equal the totals for the year as there are changes in the weighted average number of common shares outstanding each quarter and basic and diluted earnings (loss) per common share are calculated independently for each quarter. F-19 - - ------------------------------------------- ------------------------------------------- - - ------------------------------------------- ------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVER OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. -------------- TABLE OF CONTENTS
PAGE Prospectus Summary........................................................ 1 Risk Factors.............................................................. 12 The Exchange Offer........................................................ 20 Use of Proceeds........................................................... 27 Capitalization............................................................ 28 Selected Consolidated Financial and Operating Data........................ 29 Management's Discussion and Analysis of Results of Operations and Financial Condition..................................................... 31 Business.................................................................. 39 Management................................................................ 47 Description of Notes...................................................... 50 Description of Other Financing Arrangements............................... 78 Certain Federal Income Tax Considerations................................. 81 Plan of Distribution...................................................... 85 Legal Matters............................................................. 85 Experts................................................................... 85 Incorporation of Certain Documents by Reference........................... 85 Additional Information.................................................... 86 Index to Consolidated Financial Statements................................ F-1
$150,000,000 [LOGO] 9 7/8% SENIOR SUBORDINATED NOTES DUE 2008 -------------- PROSPECTUS -------------- , 1998 - - ------------------------------------------- ------------------------------------------- - - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article IV of the Registrant's Restated Certificate of Incorporation provides that, to the extent permitted by the General Corporation Law of the State of Delaware, as now in effect and as from time to time amended, or any successor provisions thereto, the Registrant shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether or not such action is an action by or in the right of the Registrant to procure a judgment in its favor, by reason of the fact that he is or was a director, officer, employee or agent of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Registrant's Restated Certificate of Incorporation also provides that the Registrant shall, to the full extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, indemnify each person whom it may indemnify pursuant thereto. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT SEQUENTIAL PAGE NO. DOCUMENT NO. - - ------ -------------------------------------------------------------------------- ----------------- 1.1 Purchase Agreement dated as of April 1, 1998 by and among the Company and [xviii] Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and NationsBanc Montgomery Securities LLC 3.1 Restated Certificate of Incorporation of MSC, as amended [i] 3.2 Bylaws of MSC, as amended [ii] 4.1 Senior Subordinated Note Indenture, including form of Note, dated as of [iii] June 15, 1993 among MGI, MSC and Bank One Columbus, N.A. as Successor Trustee to Harris Trust and Savings Bank 4.1(a) First Supplemental Indenture dated as of June 13, 1997 to the Senior [xv] Subordinated Note Indenture 4.2(a) Credit Agreement dated as of October 7, 1994 (the "Credit Agreement") [iv] among MGI, MSC, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent 4.2(b) Amendment No. 1 dated as of February 28, 1995 to the Credit Agreement [viii] 4.2(c) Amendment No. 2 dated as of April 9, 1996 to the Credit Agreement [xi] 4.2(d) Amendment No. 3 dated as of October 18, 1996 to the Credit Agreement [xii] 4.2(e) Waivers and Agreements under Credit Agreement dated as of March 7, 1997 to [xiii] the Credit Agreement 4.2(f) Waivers and Agreements under Credit Agreement dated as of May 19, 1997 to [xv] the Credit Agreement 4.2(g) Amendment No. 4 and Waiver dated as of June 16, 1997 to the Credit [xv] Agreement
II-1
EXHIBIT SEQUENTIAL PAGE NO. DOCUMENT NO. - - ------ -------------------------------------------------------------------------- ----------------- 4.3 Term Loan Agreement dated as of June 16, 1997 (the "Term Loan") among MGI, [xv] MSC, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent 4.3(a) Security Agreement dated as of June 16, 1997 among MGI and the [xv] subsidiaries listed therein, the Debtors listed therein, and Morgan Guaranty Trust Company of New York, as agent 4.3(b) Warrant and Registration Rights Agreement dated as of June 16, 1997 among [xv] MSC and the Investors listed therein 4.4 Rights Agreement dated as of March 14, 1995, between MSC and Norwest Bank [v] Minnesota, National Association, as Rights Agent 4.5 Indenture dated April 6, 1998 among the MGI, MSC and Bank One, N.A., as [xviii] Trustee, with respect to the 9 7/8% Senior Subordinated Notes Due 2008 4.6 Form of the 9 7/8% Senior Subordinated Notes Due 2008 (included as an [xviii] exhibit to the Indenture, filed herewith as Exhibit 4.5) 4.7 Form of MSC Guarantee of the 9 7/8% Senior Subordinated Notes Due 2008 (included as an exhibit to the Indenture filed herewith as Exhibit 4.5) 4.8 Registration Rights Agreement dated as of April 6, 1998 by and among the [xviii] Company and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and NationsBanc Montgomery Securities LLC, as Initial Purchasers 4.9 Exchange Agent Agreement dated as of April 21, 1998 by and among MGI, MSC [xviii] and Bank One, NA as Exchange Agent for the Exchange Offer 5 Opinion of Moss & Barnett, A Professional Association [xviii] 9 Voting Trust Agreement among DLJ, certain of its affiliates, the Equitable [i] Investors and Meridian Trust Company 10.1(a) Lease Agreement dated as of March 31, 1994 between Shawmut Bank [viii] Connecticut, N.A. as Owner Trustee and Musicland Retail, Inc., as Lessee 10.1(b) Participation Agreement dated as of March 31, 1994 among Musicland Retail, [viii] Inc., as Lessee, Shawmut Bank Connecticut, N.A. as Owner Trustee, Kleinwort Benson Limited, as Owner Participant, Lender and Agent and The Long-Term Credit Bank of Japan, Ltd. Chicago Branch, Credit Lyonnais Cayman Island Branch, The Fuji Bank, Limited, as Lenders 10.1(c) Guaranty of MGI dated March 31, 1994 [viii] 10.1(d) Amendment No. 1 dated as of June 16, 1997 to the Lease Agreement [xv] 10.1(e) Amendment No. 1 dated as of June 16, 1997 to the Participation Agreement [xv] 10.1(f) Amendment No. 1 dated as of June 16, 1997 to the Guaranty [xv]
II-2
EXHIBIT SEQUENTIAL PAGE NO. DOCUMENT NO. - - ------ -------------------------------------------------------------------------- ----------------- 10.2(a) Master Lease dated as of May 12, 1995 between Media Play Trust, as [xv] Landlord, and Media Play, Inc., as Tenant 10.2(b) Participation Agreement dated as of May 12, 1995 among Natwest Leasing [ix] Corporation, as Owner Participant, Media Play Trust, as Trust, Yasuda Bank and Trust Company (U.S.A.), as Owner Trustee, National Westminster Bank PLC, as Agent and Lender, Media Play, Inc., as Tenant, and the Long-Term Credit Bank of Japan, Ltd. Chicago Branch and The Yasuda Trust & Banking Company, Ltd., Chicago Branch, as Other Lenders 10.2(c) Amendment No. 1 dated as of April 9, 1996 to the Participation Agreement [xi] 10.2(d) Lease Guaranty dated as of May 12, 1995 between MGI, as Guarantor, and [ix] Media Play Trust, as Landlord 10.2(e) Amendment No. 1 dated as of April 9, 1996 to the Lease Guaranty [xi] 10.2(f) Second Limited Waiver and Amendment dated as of June 16, 1997 of Certain [xv] Loan Documents and Key Agreements 10.3(a) Subscription Agreement among MSC and the Management Investors [vi] 10.3(b) Form of Amendment to Management Subscription Agreement [i] 10.4 Form of Registration Rights Agreement among MSC, DLJ and the Management [vii] Investors 10.5(a) Employment Agreement with Mr. Eugster [vi] 10.5(b) Form of Amendment to Employment Agreement with Mr. Eugster [i] 10.5(c) Amendment No. 2 to Employment Agreement with Mr. Eugster [x] 10.6(a) Form of Employment Agreement with Messrs. Benson and Ross [vi] 10.6(b) Amendment to Employment Agreement with Mr. Benson [xiii] 10.6(c) Amendment to Employment Agreement with Mr. Ross [xiii] 10.7(a) Form of Employment Agreement with Messrs. Bausman and Henderson [vi] 10.7(b) Form of Amendment to Employment Agreements with Messrs. Bausman and [i] Henderson 10.7(c) Amendment No. 2 to Employment Agreement with Mr. Bausman [x] 10.7(d) Amendment No. 2 to Employment Agreement with Mr. Henderson [x] 10.8(a) Change of Control Agreement with Mr. Eugster [vi] 10.8(b) Form of Amendment to Change of Control Agreement with Mr. Eugster [i] 10.8(c) Amendment No. 2 to Change of Control Agreement with Mr. Eugster [x] 10.8(d) Amendment No. 3 to Change of Control Agreement with Mr. Eugster [xiii] 10.9 Management Incentive Plan dated as of January 1, 1997 [xvii] 10.10 1988 Stock Option Plan, as amended [i] 10.11 Stock Option Plan for Unaffiliated Directors of MSC, as amended on June [xv] 12, 1997 10.12 1992 Stock Option Plan [i]
II-3
EXHIBIT SEQUENTIAL PAGE NO. DOCUMENT NO. - - ------ -------------------------------------------------------------------------- ----------------- 10.13 Musicland Stores Corporation 1994 Employee Stock Option Plan [viii] 10.14 Employment Letter Agreement with Mr. Johnson [viii] 10.15(a) Change of Control Agreement with Mr. Johnson [x] 10.15(b) Amendment No. 1 to Change of Control Agreement with Mr. Johnson [xiii] 10.16(a) Change of Control Agreement with Messrs. Benson and Ross [vi] 10.16(b) Amendment No. 1 to Change of Control Agreement with Mr. Benson [xiii] 10.16(c) Amendment No. 1 to Change of Control Agreement with Mr. Ross [xiii] 10.17 Form of Executive Severance Agreement with Mr. Wachsman [xiii] 10.18 Change of Control Agreement with Mr. Wachsman [xiv] 10.19 Long Term Incentive Plan dated as of January 1, 1996 [xiii] 10.20 Executive Officer Short Term Incentive Plan dated as of November 15, 1996 [xiii] 10.21 Executive Officer Salary Continuation Plan dated as of March 10, 1997 [xiv] 11 Statement re: computation of per share earnings [xvi] 12.1 Statement regarding Computation of Earnings Ratio to Fixed Charges [xvii] 21 Subsidiaries of MSC [ii] 23.1 Consent of Arthur Andersen LLP [xviii] 23.2 Consent of Moss & Barnett, A Professional Association (incorporated by [xviii] reference to Exhibit 5) 24 Power of Attorney (included on the signature page of this Registration Statement) 25 Statement of Eligibility of Bank One, as Trustee [xviii] 27 Financial Data Schedules [xvii] 99.1 Form of Letter of Transmittal for 9 7/8% Senior Subordinated Notes Due [xviii] 2008 of the Company 99.2 Form of Notice of Guaranteed Delivery for 9 7/8% Senior Subordinated Notes [xviii] Due 2008 99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and [xviii] Other Nominees for 9 7/8% Senior Subordinated Notes Due 2008 99.4 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust [xviii] Companies and Other Nominees for 9 7/8% Senior Subordinated Notes Due 2008 99.5 Form of Instruction from Owner of 9 7/8% Senior Subordinated Notes Due [xviii] 2008 of the Company
- - ------------------------ [i] Incorporated by reference to MSC's Form S-1 Registration Statement covering common stock initially filed with the Commission on July 6, 1990 (Commission File No. 33-35774). [ii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Commission on March 2, 1993 (Commission File No. 1-11014). II-4 [iii] Incorporated by reference to MGI's Registration Statement covering 9% Senior Subordinated Notes initially filed with the Commission on May 19, 1993 (Commission File No. 33-62928). [iv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 filed with the Commission on November 11, 1994 (Commission File No. 1-11014). [v] Incorporated by reference to MSC's Form 8-A Exchange Act Registration Statement covering Preferred Share Purchase Rights filed with the Commission on March 16, 1995. [vi] Incorporated by reference to MSC's Form S-1 Registration Statement covering Senior Subordinated Notes initially filed with the Commission on May 20, 1988 (Commission File No. 33-22058). [vii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1993 filed with the Commission on March 25, 1994 (Commission file No. 1-11014). [viii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1994 filed with the Commission on March 27, 1995 (Commission File No. 1-11014). [ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended June 30, 1995 filed with the Commission on August 11, 1995 (Commission File No. 1-11014). [x] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1995 filed with the Commission on April 12, 1996 (Commission file No. 1-11014). [xi] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended March 31, 1996 filed with the Commission on May 10, 1996 (Commission File No. 1-11014). [xii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended September 30, 1996 filed with the Commission on November 13, 1996 (Commission File No. 1-11014). [xiii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Commission on April 11, 1997 (Commission File No. 1-11014). [xiv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended March 31, 1997 filed with the Commission on May 14, 1997 (Commission File No. 1-11014). [xv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended June 30, 1997 filed with the Commission on August 13, 1997 (Commission File No. 1-11014). [xvi] Earnings (loss) per common share amounts are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding. For purposes of earnings (loss) per share computations, shares of common stock under the Company's employee stock ownership plan, established in the third quarter of 1995, are not considered outstanding until they are committed to be released. Common stock equivalents related to stock options are anti-dilutive in 1996 and 1995 due to the net losses. Common stock equivalents related to stock options which would have a dilutive effect based upon current market prices had no material effect on net earnings per common share in 1994. Accordingly, this exhibit is not applicable to the Company. [xvii] Incorporated by reference to MSC's Report on Form 10-K for the year ended December 31, 1997 filed with the Commission on March 13, 1998 (Commission File No. 1-11014). [xviii] Filed herewith. [xix] To be filed by amendment. II-5 ITEM 22. UNDERTAKINGS (a) The undersigned Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (5) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 12 and 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (6) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant and the Additional Registrant have duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on the 23rd day of April, 1998. THE MUSICLAND GROUP, INC. MUSICLAND STORES CORPORATION Registrant Additional Registrant By: By: /s/ JACK W. EUGSTER /s/ JACK W. EUGSTER ---------------------------------------- ---------------------------------------- Jack W. Eugster Jack W. Eugster CHAIRMAN AND C.E.O. CHAIRMAN AND C.E.O.
POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jack W. Eugster, Keith A. Benson, and Linda Alsid Ruehle, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-4 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting upon said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on the 23rd day of April, 1998 by the following persons in the capacities indicated, who serve in such capacities for both the Registrant and the Additional Registrant:
SIGNATURE TITLE - - ------------------------------ -------------------------- Chairman of the Board, /s/ JACK W. EUGSTER President, Chief - - ------------------------------ Executive Officer and Jack W. Eugster Director (principal executive officer) Vice Chairman and Chief /s/ KEITH A. BENSON Financial Officer and - - ------------------------------ Director (principal Keith A. Benson financial and accounting officer) /s/ GILBERT L. WACHSMAN - - ------------------------------ Director Gilbert L. Wachsman
II-7
SIGNATURE TITLE - - ------------------------------ -------------------------- /s/ KENNETH F. GORMAN - - ------------------------------ Director Kenneth F. Gorman /s/ WILLIAM A. HODDER - - ------------------------------ Director William A. Hodder /s/ JOSIAH O. LOW, III - - ------------------------------ Director Josiah O. Low, III /s/ TERRY T. SAARIO - - ------------------------------ Director Terry T. Saario /s/ THOMAS F. WEYL - - ------------------------------ Director Thomas F. Weyl /s/ MICHAEL W. WRIGHT - - ------------------------------ Director Michael W. Wright
II-8 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - - ------ -------------------------------------------------------------------------- 1.1 Purchase Agreement dated as of April 1, 1998 by and among the Company and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and NationsBanc Montgomery Securities LLC 4.5 Indenture dated April 6, 1998 among the MGI, MSC and Bank One, N.A., as Trustee, with respect to the 9 7/8% Senior Subordinated Notes Due 2008 4.6 Form of the 9 7/8% Senior Subordinated Notes Due 2008 (included as an exhibit to the Indenture, filed herewith as Exhibit 4.5) 4.7 Form of MSC Guarantee of the 9 7/8% Senior Subordinated Notes Due 2008 (included as an exhibit to the Indenture filed herewith as Exhibit 4.5) 4.8 Registration Rights Agreement dated as of April 6, 1998 by and among the Company and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, and NationsBanc Montgomery Securities LLC, as Initial Purchasers 4.9 Exchange Agent Agreement dated as of April 21, 1998 by and among MGI, MSC and Bank One, NA as Exchange Agent for the Exchange Offer 5 Opinion of Moss & Barnett, A Professional Association 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Moss & Barnett, A Professional Association (incorporated by reference to Exhibit 5) 24 Power of Attorney (included on the signature page of this Registration Statement) 25 Statement of Eligibility of Bank One, as Trustee 99.1 Form of Letter of Transmittal for 9 7/8% Senior Subordinated Notes Due 2008 of the Company 99.2 Form of Notice of Guaranteed Delivery for 9 7/8% Senior Subordinated Notes Due 2008 99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 9 7/8% Senior Subordinated Notes Due 2008 99.4 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 9 7/8% Senior Subordinated Notes Due 2008 99.5 Form of Instruction from Owner of 9 7/8% Senior Subordinated Notes Due 2008 of the Company
EX-1.1 2 EX 1.1 -- PURCHASE AGREEMENT THE MUSICLAND GROUP, INC. MUSICLAND STORES CORPORATION $150,000,000 9_% Series A Senior Subordinated Notes Due 2008 Purchase Agreement April 1, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC $150,000,000 9_% Series A Senior Subordinated Notes Due 2008 of THE MUSICLAND GROUP, INC. PURCHASE AGREEMENT April 1, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: The Musicland Group, Inc, a Delaware corporation (the "COMPANY"), proposes to issue and sell to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), BT Alex. Brown Incorporated ("BT"), and NationsBanc Montgomery Securities LLC ("NBMS") (each, an "INITIAL PURCHASER" and collectively, the "INITIAL PURCHASERS") an aggregate of $150,000,000 in principal amount of its 9_% Series A Senior Subordinated Notes due 2008 (the "SERIES A NOTES"), subject to the terms and conditions set forth herein. The Series A Notes are to be issued pursuant to the provisions of an indenture (the "INDENTURE"), to be dated as of the Closing Date (as defined below), among the Company, the Guarantor (as defined below) and Bank One, NA, as trustee (the "TRUSTEE"). The Series A Notes and the Series B Notes (as defined below) issuable in exchange therefor are collectively referred to herein as the "NOTES." The Notes will be guaranteed (the "GUARANTEES") by Musicland Stores Corporation (the "GUARANTOR"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. 1. OFFERING MEMORANDUM. The Series A Notes will be offered and sold to the Initial Purchasers pursuant to one or more exemptions from the registration requirements under the Securities Act of 1933, as amended (the "ACT"). The 2 Company and the Guarantor have prepared a preliminary offering memorandum, dated March 13, 1998 (the "PRELIMINARY OFFERING MEMORANDUM") and a final offering memorandum, dated April 1, 1998 (the "OFFERING MEMORANDUM"), relating to the Series A Notes and the Guarantees. Upon original issuance thereof, and until such time as the same is no longer required pursuant to the Indenture, the Series A Notes (and all securities issued in exchange therefor, in substitution thereof or upon conversion thereof) shall bear the following legend: "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (the "ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE NEXT SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (as defined in Rule 144A under the Act)(a "QIB") OR IT HAS ACQUIRED THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE ACT, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (i) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (ii) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (iii) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE ACT, (iv) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE ACT, (v) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (vi) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY 3 STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING." 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations, warranties and covenants contained in this Agreement, and subject to the terms and conditions contained herein, the Company agrees to issue and sell to the Initial Purchasers, and each Initial Purchaser agrees severally and not jointly to purchase from the Company, the principal amounts of Series A Notes set forth opposite the name of such Initial Purchaser on Schedule A at a purchase price equal to 96.631514% of the principal amount thereof (the "PURCHASE PRICE"). 3. TERMS OF OFFERING. The Initial Purchasers have advised the Company that the Initial Purchasers will make offers (the "EXEMPT RESALES") of the Series A Notes purchased hereunder on the terms set forth in the Offering Memorandum, as amended or supplemented, solely to (i) persons whom the Initial Purchasers reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Act ("QIBS"), and (ii) persons permitted to purchase the Series A Notes in offshore transactions in reliance upon Regulation S under the Act (each, a "REGULATION S PURCHASER") (such persons specified in clauses (i) and (ii) being referred to herein as the "ELIGIBLE PURCHASERS"). The Initial Purchasers will offer the Series A Notes to Eligible Purchasers initially at a price equal to 99.211% of the principal amount thereof. Such price may be changed at any time without notice. Holders (including subsequent transferees) of the Series A Notes will have the registration rights set forth in the registration rights agreement (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date, in substantially the form of Exhibit A hereto, for so long as such Series A Notes constitute "Transfer Restricted Securities" (as defined in the Registration Rights 4 Agreement). Pursuant to the Registration Rights Agreement, the Company and the Guarantors will agree to file with the Securities and Exchange Commission (the "COMMISSION") under the circumstances set forth therein, (i) a registration statement under the Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating to the Company's 9_% Series B Senior Subordinated Notes due 2008 (the "SERIES B NOTES"), to be offered in exchange for the Series A Notes (such offer to exchange being referred to as the "EXCHANGE OFFER") and the Guarantees thereof and (ii) a shelf registration statement pursuant to Rule 415 under the Act (the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by certain holders of the Series A Notes and to use its best efforts to cause such Registration Statements to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement and to consummate the Exchange Offer. This Agreement, the Indenture, the Notes, the Guarantees and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "OPERATIVE DOCUMENTS." 4. DELIVERY AND PAYMENT. (a) Delivery of, and payment of the Purchase Price for, the Series A Notes shall be made at the offices of the Company or such other location as may be mutually acceptable. Such delivery and payment shall be made at 9:00 a.m. Minneapolis, Minnesota time, on April 6, 1998 or at such other time on the same date or such other date as shall be agreed upon by the Initial Purchasers and the Company in writing. The time and date of such delivery and the payment for the Series A Notes are herein called the "CLOSING DATE." (b) One or more of the Series A Notes in definitive global form, registered in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"), having an aggregate principal amount corresponding to the aggregate principal amount of the Series A Notes (collectively, the "GLOBAL NOTE"), shall be delivered by the Company to the Initial Purchasers (or as the Initial Purchasers direct) in each case with any transfer taxes thereon duly paid by the Company against payment by the Initial Purchasers of the Purchase Price thereof by wire transfer in same day funds to the order of the Company. The Global Note shall be made available to the Initial Purchasers for inspection not later than 9:30 a.m., New York City time, on the business day immediately preceding the Closing Date. 5. AGREEMENTS OF THE COMPANY AND THE GUARANTOR. Each of the Company and the Guarantor hereby agrees with the Initial Purchasers as follows: 5 (a) To advise the Initial Purchasers promptly and, if requested by the Initial Purchasers, confirm such advice in writing, (i) of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Series A Notes for offering or sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 5(e) hereof, or the initiation of any proceeding by any state securities commission or any other federal or state regulatory authority for such purpose and (ii) of the happening of any event during the period referred to in Section 5(c) below that makes any statement of a material fact made in the Preliminary Offering Memorandum or the Offering Memorandum untrue or that requires any additions to or changes in the Preliminary Offering Memorandum or the Offering Memorandum in order to make the statements therein not misleading. The Company and the Guarantor shall use their best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any Series A Notes under any state securities or Blue Sky laws and, if at any time any state securities commission or other federal or state regulatory authority shall issue an order suspending the qualification or exemption of any Series A Notes under any state securities or Blue Sky laws, the Company and the Guarantor shall use their best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish the Initial Purchasers and those persons identified by the Initial Purchasers to the Company as many copies of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments or supplements thereto, as the Initial Purchasers may reasonably request for the time period specified in Section 5(c). Subject to each Initial Purchaser's compliance with its representations and warranties and agreements set forth in Section 7 hereof, the Company consents to the use of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. (c) During such period as in the opinion of counsel for the Initial Purchasers an Offering Memorandum is required by law to be delivered in connection with Exempt Resales by the Initial Purchasers and in connection with market-making activities of the Initial Purchasers for so long as any Series A Notes are outstanding, (i) not to make any amendment or supplement to the Offering Memorandum of which the Initial Purchasers shall not previously have been advised or to which the Initial Purchasers shall reasonably object after being so advised and (ii) to 6 prepare promptly upon the Initial Purchasers' reasonable request, any amendment or supplement to the Offering Memorandum which may be necessary or advisable in connection with such Exempt Resales or such market-making activities. (d) If, during the period referred to in Section 5(c) above, any event shall occur or condition shall exist as a result of which, in the opinion of counsel to the Initial Purchaser, it becomes necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in the light of the circumstances when such Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if, in the opinion of counsel to the Initial Purchasers, it is necessary to amend or supplement the Offering Memorandum to comply with any applicable law, forthwith to prepare an appropriate amendment or supplement to such Offering Memorandum so that the statements therein, as so amended or supplemented, will not, in the light of the circumstances when it is so delivered, be misleading, or so that such Offering Memorandum will comply with applicable law, and to furnish to the Initial Purchasers and such other persons as the Initial Purchasers may designate such number of copies thereof as the Initial Purchasers may reasonably request. (e) Prior to the sale of all Series A Notes pursuant to Exempt Resales as contemplated hereby, to cooperate with the Initial Purchasers and counsel to the Initial Purchasers in connection with the registration or qualification of the Series A Notes for offer and sale to the Initial Purchasers and pursuant to Exempt Resales under the securities or Blue Sky laws of such jurisdictions as the Initial Purchasers may request and to continue such registration or qualification in effect so long as required for Exempt Resales and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; PROVIDED, HOWEVER, that neither the Company nor the Guarantor shall be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Preliminary Offering Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction in which it is not now so subject. (f) During the period as and to the extent the Company or the Guarantor, as the case may be, may be required by applicable law or by the rules of any exchange or securities association upon which any of the Company's or the Guarantor's securities are listed or quoted, to mail to the record holders of the Securities (i) within 90 days after the end of each 7 fiscal year of the Company or the Guarantor, as the case may be, a financial report of the Company or the Guarantor, as the case may be, and its subsidiaries on a consolidated basis, and a similar financial report of all unconsolidated subsidiaries, if any, all such financial reports to include a consolidated balance sheet as at the end of the preceding fiscal year, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity covering such fiscal year, together with comparable information as of the end of and for the preceding fiscal year, and all to be in reasonable detail and examined and reported on by independent certified public accountants for the Company or the Guarantor, as the case may be, and (ii) within 45 days after the end of each quarterly fiscal period of the Company or the Guarantor, as the case may be, (except for the last quarterly period of each fiscal year) copies of the consolidated statement of operations and statement of cash flows for that period, and the consolidated balance sheet as of the end of that period, of the Company or the Guarantor, as the case may be, and its subsidiaries, and the income statement, statement of changes in financial condition and balance sheet of each unconsolidated subsidiary, if any, of the Company or the Guarantor, as the case may be, as at the end of and for that period, together with comparable information as at the end of and for the same quarterly fiscal period of the preceding fiscal year. (g) During the periods referred to in paragraph (f), to furnish to you as soon as available a copy of each report of the Company or the Guarantor, as the case may be, or other publicly available information which the Company or the Guarantor, as the case may be, shall mail or otherwise make available to the security holders of the Company or the Guarantor, as the case may be, or shall file with the Commission and such other publicly available information concerning the Company or the Guarantor, as the case may be, and its subsidiaries as you may reasonably request. (h) So long as any of the Series A Notes remain outstanding and during any period in which the Company and the Guarantor are not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), to make available to any holder of Series A Notes in connection with any sale thereof and any prospective purchaser of such Series A Notes from such holder, the information ("RULE 144A INFORMATION") required by Rule 144A(d)(4) under the Act. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or 8 cause to be paid all expenses incident to the performance of the obligations of the Company and the Guarantor under this Agreement, including: (i) the fees, disbursements and expenses of counsel to the Company and the Guarantor and accountants of the Company and the Guarantor in connection with the sale and delivery of the Series A Notes to the Initial Purchasers and pursuant to Exempt Resales, and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Preliminary Offering Memorandum, the Offering Memorandum and all amendments and supplements to any of the foregoing (including financial statements), including the mailing and delivering of copies thereof to the Initial Purchasers and persons designated by it in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Series A Notes to the Initial Purchasers and pursuant to Exempt Resales, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement, the other Operative Documents and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Series A Notes, (iv) all expenses in connection with the registration or qualification of the Series A Notes and the Guarantees for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any preliminary and supplemental Blue Sky memoranda in connection therewith (including the filing fees and fees and disbursements of counsel for the Initial Purchasers in connection with such registration or qualification and memoranda relating thereto,) (v) the cost of printing certificates representing the Series A Notes and the Guarantees, (vi) all expenses and listing fees in connection with the application for quotation of the Series A Notes in the National Association of Securities Dealers, Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"), (vii) the fees and expenses of the Trustee and the Trustee's counsel in connection with the Indenture, the Notes and the Guarantees, (viii) the costs and charges of any transfer agent, registrar and/or depositary (including DTC), (ix) any fees charged by rating agencies for the rating of the Notes, (x) all costs and expenses of the Exchange Offer and any Registration Statement, as set forth in the Registration Rights Agreement, and (xi) and all other costs and expenses incident to the performance of the obligations of the Company and the Guarantor hereunder for which provision is not otherwise made in this Section. It is understood that, except as set forth herein, the Initial Purchasers shall pay their own expenses in connection with the Initial Purchase and Exempt Resales of the Series A Notes. 9 (j) To use its best efforts to effect the inclusion of the Series A Notes in PORTAL and to maintain the listing of the Series A Notes on PORTAL for so long as the Series A Notes are outstanding. (k) To obtain the approval of DTC for "book-entry" transfer of the Notes, and to comply with all of its agreements set forth in the representation letters of the Company and the Guarantor to DTC relating to the approval of the Notes by DTC for "book-entry" transfer. (l) During the period beginning on the date hereof and continuing to and including the Closing Date, not to offer, sell, contract to sell or otherwise transfer or dispose of any debt securities of the Company or the Guarantor or any warrants, rights or options to purchase or otherwise acquire debt securities of the Company or the Guarantor substantially similar to the Notes and the Guarantees (other than (i) the Notes and the Guarantees and (ii) commercial paper issued in the ordinary course of business), without the prior written consent of the Initial Purchasers. (m) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Series A Notes to the Initial Purchaser or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Series A Notes under the Act. (n) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Notes and the related Guarantees. (o) To cause the Exchange Offer to be made in the appropriate form to permit Series B Notes and guarantees thereof by the Guarantor registered pursuant to the Act to be offered in exchange for the Series A Notes and the Guarantees and to comply with all applicable federal and state securities laws in connection with the Exchange Offer. (p) To comply with all of its agreements set forth in the Registration Rights Agreement. (q) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by it prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Series A Notes and the Guarantees. 10 (r) To use the net proceeds from the offering in the manner set forth under "Use of Proceeds" in the Offering Memorandum. 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE GUARANTOR. As of the date hereof, each of the Company and the Guarantor represents and warrants to, and agrees with, the Initial Purchasers that: (a) The Preliminary Offering Memorandum and the Offering Memorandum do not, and any supplement or amendment to them will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Section 6(a), 6(b), 6(c) shall not apply to statements in or omissions from the Preliminary Offering Memorandum or the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to the Initial Purchasers furnished to the Company in writing by the Initial Purchasers expressly for use therein. No stop order preventing the use of the Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (b) The Guarantor, the Company and each of their respective subsidiaries are corporations duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation, with corporate power and authority to carry on their respective businesses and to own or lease and operate their respective properties as described in the Offering Memorandum, and each of the Guarantor, the Company and their respective subsidiaries owns or possesses all licenses and permits necessary for the conduct of its respective business and the ownership, leasing and operation of its properties, except such licenses and permits as to which the failure to own or possess such licenses and permits will not in the aggregate have a material adverse effect on the financial condition, earnings or business of the Company; and each is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified will not have a material adverse effect on the financial condition, earnings or business of the Company. All the outstanding shares of capital stock or other securities evidencing equity ownership of each subsidiary of the Guarantor have been duly and validly authorized and issued and are 11 fully paid and non-assessable, and are owned by the Guarantor free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature other than those created relating to the shares of capital stock of the Company pursuant to the Loan Documents (as defined in the Credit Agreement dated as of October 7, 1994, as amended, among the Company, the Guarantor, the various lenders party thereto from time to time and Morgan Guaranty Trust Company of New York, as Agent (the "Credit Agreement")). There are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of cpital stock or other equity interest in any such subsidiary except for the warrants issued pursuant to the Warrant and Registration Rights Agreement dated as of June 16, 1997 among the Guarantor and the Investors listed therein, and options issued pursuant to the Guarantor's stock option plans. (c) The Series A Notes have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to the Initial Purchasers against payment therefor as provided by this Agreement, will be entitled to the benefits of the Indenture, and will be valid and binding obligations of the Company or the Guarantor, as the case may be, enforceable in accordance with their terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (d) On the Closing Date, the Series B Notes will have been duly authorized by the Company. When the Series B Notes are issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Series B Notes will be entitled to the benefits of the Indenture and will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (e) The Guarantee to be endorsed on the Series A Notes by the Guarantor has been duly authorized by such Guarantor and, on the Closing Date, will have been duly executed and delivered by such Guarantor. When the Series A Notes have been issued, executed and authenticated in accordance with the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Guarantee 12 of the Guarantor endorsed thereon will be entitled to the benefits of the Indenture and will be the valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Guarantees to be endorsed on the Series A Notes will conform as to legal matters to the description thereof contained in the Offering Memorandum. (f) The Guarantee to be endorsed on the Series B Notes by the Guarantor has been duly authorized by such Guarantor and, when issued, will have been duly executed and delivered by such Guarantor. When the Series B Notes have been issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Guarantee of the Guarantor endorsed thereon will be entitled to the benefits of the Indenture and will be the valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. When the Series B Notes are issued, authenticated and delivered, the Guarantees to be endorsed on the Series B Notes will conform as to legal matters to the description thereof in the Offering Memorandum. (g) The Indenture has been duly authorized, executed and delivered by the Company and the Guarantor and is a valid and binding agreement of the Company and the Guarantor, enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the "TIA" or "TRUST INDENTURE ACT"), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (h) The Registration Rights Agreement has been duly authorized by the Company and the Guarantor and, on the Closing Date, will have been duly executed and delivered by the Company and the Guarantor. When the Registration Rights Agreement has been duly executed and delivered, the Registration Rights Agreement will be a valid and binding 13 agreement of the Company and the Guarantor, enforceable against the Company and the Guarantor in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Registration Rights Agreement will conform as to legal matters to the description thereof in the Offering Memorandum. (i) Neither the Guarantor, the Company nor any of their respective subsidiaries is in violation of its charter documents or by-laws or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other material indenture, instrument or agreement to which the Guarantor, the Company or any of their respective subsidiaries is a party or which binds the Guarantor, the Company or any of their respective subsidiaries or any of their respective property. Neither the Guarantor, the Company nor any of their respective subsidiaries is in material violation of any law, ordinance, governmental rule or regulation or court decree to which it is subject. The execution, delivery and performance of this Agreement, the Indenture, the Notes and the Guarantees, compliance by the Guarantor and the Company with all provisions hereof and thereof, and the consummation of the transactions contemplated hereby and thereby will not violate or conflict with or constitute a breach of any of the terms or provisions of, or constitute a default under (i) the charter documents or by-laws of the Guarantor, the Company or any of their respective subsidiaries, or (ii) any bond, debenture, note or other evidence of indebtedness or any other material indenture, instrument or agreement to which the Guarantor, the Company or any of their respective subsidiaries is a party or which binds the Guarantor, the Company or any of their respective subsidiaries or any of their respective property, or (iii) (assuming compliance with all applicable state securities or Blue Sky laws in the several states in which the Notes will be offered or sold) any law, regulation or ruling or any order, judgment or decree to which the Guarantor, the Company or any of their respective subsidiaries or any of their respective property may be subject. (j) Except for permits and similar authorizations required under the securities or Blue Sky laws of the several states in which the Notes and Guarantee will be offered or sold, no authorization, consent, approval, license or other order of any regulatory body, administrative agency or other governmental body is required for the valid issuance, sale and delivery of the Notes to the Initial Purchasers as contemplated by this 14 Agreement; no consents or waivers from the holders of the Guarantor's or the Company's capital stock or debt securities are required to consummate the transactions contemplated hereby other than such consents and waivers as have been obtained. (k) Each contract, lease or document of a character described in the Offering Memorandum is so described; the descriptions thereof or references thereto are accurate in all material respects; and each contract, lease or document so described is in full force and effect in accordance with its respective terms. (l) Each of the Guarantor, the Company and their respective subsidiaries has good and marketable title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Offering Memorandum as being owned by it. All leases to which the Guarantor, the Company or any of their respective subsidiaries is a party are valid and binding and no default has occurred or is continuing thereunder, which might result in any material adverse change in the business, prospects, financial condition or results of operation of the Guarantor and its subsidiaries taken as a whole, and the Guarantor and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use made by the Guarantor or such subsidiary. Each of the Guarantor, the Company and their respective subsidiaries has all governmental licenses, certificates, permits, authorizations, approvals, franchises or other rights necessary to engage in the business currently conducted by it, and neither the Guarantor, the Company nor any of their respective subsidiaries has any reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such license, certificate, permit, authorization, approval, franchise or right which might result in any material adverse change in the business, prospects, financial condition or results of operation of the Guarantor and its subsidiaries, taken as a whole. (m) The accountants who have certified the financial statements of the Guarantor and its subsidiaries as a part of (or incorporated by reference in) the Offering Memorandum are independent accountants as required by the Act. The consolidated financial statements of the Guarantor and its subsidiaries included in the Offering Memorandum comply in all material respects with the requirements of the Act and present fairly the financial position and results of operation of the Guarantor and its consolidated subsidiaries at the respective dates and for 15 the respective periods specified. All such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout such periods (except as otherwise noted). (n) Since the dates as of which information is given in the Offering Memorandum, except as otherwise stated or contemplated therein (i) there has been no material adverse change in the financial condition of the Guarantor or any of its subsidiaries, or in their earnings or business affairs, whether or not arising in the ordinary course of business, (ii) there have been no material transactions entered into by the Guarantor or any of its subsidiaries, other than the transactions in the ordinary course of business, that are material to the Guarantor, (iii) neither the Guarantor nor any of its subsidiaries has incurred any obligation, contingent or otherwise, that is material to the Guarantor, (iv) there has been no change in the capital stock or debt of the Guarantor or any of its subsidiaries and (v) there has been no dividend or distribution of any kind declared, paid or made by the Company on its capital stock. (o) Each of the Guarantor and the Company has corporate power and authority to enter into and perform this Agreement and to issue, sell and deliver the Notes and the Guarantees to be sold by the Company and the Guarantor, respectively, hereunder; this Agreement has been duly authorized, executed and delivered by the Guarantor and the Company and is a valid and binding agreement of the Guarantor and the Company except as rights to indemnity and contribution hereunder may be limited under applicable federal and state securities laws. (p) Each of the Guarantor, the Company and their respective subsidiaries owns or possesses adequate licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights and know-how (including trade secrets, and other proprietary and confidential information, systems or procedures) necessary to conduct the businesses now operated by it as described in the Offering Memorandum; and neither the Guarantor, the Company nor any of their respective subsidiaries has received any notice of infringement of or conflict with (and no officer or director of the Guarantor knows of any such infringement of or conflict with) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights or know-how, which might result in any material adverse change in the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. 16 (q) Each of the Guarantor, the Company and their respective subsidiaries maintains reasonably adequate insurance. (r) There is not now pending or, to the knowledge of the Guarantor's officers, threatened, any litigation, action, suite or proceeding, including any such litigation, action, suit or proceeding related to environmental matters or related to discrimination on the basis of age, sex, religion or race, to which the Guarantor or any of its subsidiaries is or will be a party before or by any court or governmental agency or body, which might result in any material adverse charge in the business, prospects, financial condition or results of operation of the Guarantor and its subsidiaries, taken as a whole, or might materially and adversely affect the property or assets of the Guarantor and its subsidiaries, taken as a whole, and no labor disturbance by the employees of the Guarantor or any of its subsidiaries exists or is imminent which might be expected to adversely affect the conduct of the business, financial condition or results of operation of the Guarantor and the officers of the Guarantor are not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers, contractors or customers wich may be expected to result in any material adverse change in the condition, financial or otherwise, or the earnings, affairs or business prospects of the Guarantor and its subsidiaries, taken as a whole. (s) To the knowledge of the officers of the Guarantor neither the Guarantor nor any of its subsidiaries has violated any environmental, safety or similar law applicable to its business, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which in each case might result in any material adverse change in the business, prospects, financial condition or results of operation of the Guarantor and its subsidiaries, taken as a whole. (t) All federal, state and other tax returns of the Guarantor required by law to be filed have been duly filed. The Guarantor and its subsidiaries have properly expended or paid all necessary federal, state, local and foreign income taxes and franchise taxes and, except as disclosed in the Offering Memorandum, there is no tax deficiency that has been asserted or is threatened against the Guarantor or any of its subsidiaries. The provisions and reserves on the books of the Guarantor in respect of federal, state and other taxes are, in the opinion of the Guarantor, adequate. 17 (u) Neither the Guarantor nor the Company is or, after giving effect to the offering and sale of the Series A Notes and the application of the net proceeds thereof as described in the Offering Memorandum, will be, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. (v) No holder of any security of the Guarantor has any right to require registration of shares of common stock or any other security of the Company in connection with the Offering Memorandum with respect to the Notes except for rights pursuant to the Warrant and Registration Rights Agreement dated as of June 16, 1997 among the Guarantor and the Investors listed therein. (w) All indebtedness of the Company and the Guarantor that will be repaid with the proceeds of the issuance and sale of the Series A Notes was incurred, and the indebtedness represented by the Series A Notes is being incurred for proper purposes and in good faith and each of the Company and the Guarantor was, at the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and sale of the Series A Notes, solvent, and had at the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and the sale of the Series A Notes) sufficient capital for carrying on their respective business and were, at the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and sale of the Series A Notes, and will be on the Closing Date (after giving effect to the application of the proceeds from the issuance of the Series A Notes) able to pay their respective debts as they mature. (x) Except for publicly disclosed ratings downgrades prior to the date hereof, no "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act (i) has imposed (or has informed the Company or the Guarantor that it is considering imposing) any condition (financial or otherwise) on the Company's or the Guarantor's retaining any rating assigned to the Company or the Guarantor, any securities of the Company or any Guarantor or (ii) has indicated to the Company or the Guarantor that it is considering (A) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (B) any negative change in the outlook for any rating of the Company, the Guarantor or any securities of the Company or the Guarantor. 18 (y) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its date, contains all the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Act. (z) When the Series A Notes and the Guarantees are issued and delivered pursuant to this Agreement, neither the Series A Notes nor the Guarantees will be of the same class (within the meaning of Rule 144A under the Act) as any security of the Company or the Guarantor that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. (aa) No form of general solicitation or general advertising (as defined in Regulation D under the Act) was used by the Company, the Guarantor or any of their respective representatives (other than the Initial Purchasers, as to whom the Company and the Guarantor make no representation) in connection with the offer and sale of the Series A Notes contemplated hereby, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Series A Notes have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (bb) Prior to the effectiveness of any Registration Statement, the Indenture is not required to be qualified under the TIA. (cc) None of the Company, the Guarantor nor any of their respective affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantor make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Act ("REGULATION S") with respect to the Series A Notes or the Guarantees. (dd) The sale of the Series A Notes pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Act. (ee) No registration under the Act of the Series A Notes or the Guarantee is required for the sale of the Series A Notes and the Guarantees to the Initial Purchasers as contemplated hereby or for the Exempt Resales assuming the accuracy of the Initial Purchasers' representations and warranties and agreements set forth in Section 7 hereof. 19 (ff) Each certificate signed by any officer of the Company or the Guarantor and delivered to the Initial Purchasers or counsel for the Initial Purchasers shall be deemed to be a representation and warranty by the Company or the Guarantor to the Initial Purchasers as to the matters covered thereby. (gg) The Company, the Guarantor and their respective affiliates and all persons acting on their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantor make no representation) have complied with and will comply with the offering restrictions requirements of Regulation S in connection with the offering of the Series A Notes outside the United States and, in connection therewith, the Offering Memorandum will contain the disclosure required by Rule 902(h). (hh) The Series A Notes sold in reliance on Regulation S will be represented upon issuance by a temporary global security that may not be exchanged for definitive securities until the expiration of the 40-day restricted period referred to in Rule 903(c)(3) of the Act and only upon certification of beneficial ownership of such Series A Notes by non-U.S. persons or U.S. persons who purchased such Series A Notes in transactions that were exempt from the registration requirements of the Act. The Company acknowledges that the Initial Purchasers and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 9 hereof, counsel to the Company and the Guarantor and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 7. INITIAL PURCHASERS' REPRESENTATIONS AND WARRANTIES. Each of the Initial Purchasers, severally and not jointly, represents and warrants the Company and the Guarantor: (a) Such Initial Purchaser is either a QIB or an Accredited Institution, in either case, with such knowledge and experience in financial and business matters as is necessary in order to evaluate the merits and risks of an investment in the Series A Notes. (b) Such Initial Purchaser (i) is not acquiring the Series A Notes with a view to any distribution thereof or with any present intention of offering or selling any of the Series A Notes in a transaction that would violate the Act or the securities laws of any state of the United States or 20 any other applicable jurisdiction and (ii) will be reoffering and reselling the Series A Notes only to (x) QIBs in reliance on the exemption from the registration requirements of the Act provided by Rule 144A, and (y) in offshore transactions in reliance upon Regulation S under the Act. (c) Such Initial Purchaser agrees that no form of general solicitation or general advertising (within the meaning of Regulation D under the Act) has been or will be used by such Initial Purchaser or any of its representatives in connection with the offer and sale of the Series A Notes pursuant hereto, including, but not limited to, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (d) Such Initial Purchaser agrees that, in connection with Exempt Resales, such Initial Purchaser will solicit offers to buy the Series A Notes only from, and will offer to sell the Series A Notes only to, Eligible Purchasers. Each Initial Purchaser further agrees that it will offer to sell the Series A Notes only to, and will solicit offers to buy the Series A Notes only from (i) Eligible Purchasers that the Initial Purchaser reasonably believes are QIBs, and (ii) Regulation S Purchasers, in each case, that agree that (x) the Series A Notes purchased by them may be resold, pledged or otherwise transferred within the time period referred to under Rule 144(k) (taking into account the provisions of Rule 144(d) under the Act, if applicable) under the Act, as in effect on the date of the transfer of such Series A Notes, only (A) to the Guarantor, the Company or any of its subsidiaries, (B) to a person whom the seller reasonably believes is a QIB purchasing for its own account or for the account of a QIB in a transaction meeting the requirements of Rule 144A under the Act, (C) in an offshore transaction (as defined in Rule 902 under the Act) meeting the requirements of Rule 904 of the Act, (D) in a transaction meeting the requirements of Rule 144 under the Act, (E) in accordance with another exemption from the registration requirements of the Act (and based upon an opinion of counsel acceptable to the Company) or (F) pursuant to an effective registration statement and, in each case, in accordance with the applicable securities laws of any state of the United States or any other applicable jurisdiction and (y) they will deliver to each person to whom such Series A Notes or an interest therein is transferred a notice substantially to the effect of the foregoing. (e) Such Initial Purchaser and its affiliates or any person acting on its or their behalf have not engaged or will not engage in any directed 21 selling efforts within the meaning of Regulation S with respect to the Series A Notes or the Guarantees. (f) The sale of the Series A Notes offered and sold by such Initial Purchaser pursuant hereto in reliance on Regulation S is not part of a plan or scheme to evade the registration provisions of the Act. (g) Such Initial Purchaser agrees that it has not offered or sold and will not offer or sell the Series A Notes in the United States or to, or for the benefit or account of, a U.S. Person (other than a distributor), in each case, as defined in Rule 902 under the Act (i) as part of its distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering of the Series A Notes pursuant hereto and the Closing Date, other than in accordance with Regulation S of the Act or another exemption from the registration requirements of the Act. Such Initial Purchaser agrees that, during such 40-day restricted period, it will not cause any advertisement with respect to the Series A Notes (including any "tombstone" advertisement) to be published in any newspaper or periodical or posted in any public place and will not issue any circular relating to the Series A Notes, except such advertisements as permitted by and include the statements required by Regulation S. (h) Such Initial Purchaser agrees that, at or prior to confirmation of a sale of Series A Notes by it to any distributor, dealer or person receiving a selling concession, fee or other remuneration during the 40-day restricted period referred to in Rule 903(c)(3) under the Act, it will send to such distributor, dealer or person receiving a selling concession, fee or other remuneration a confirmation or notice to substantially the following effect: "The Series A Notes covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "SECURITIES ACT"), and may not be offered and sold within the United State or to, or for the account or benefit of, U.S. persons (i) as part of your distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the Offering and the Closing Date, except in either case in accordance with Regulation S under the Securities Act (or Rule 144A or to Accredited Institutions in transactions that are exempt from the registration requirements of the Securities Act), and in connection with any subsequent sale by you of the Series A Notes covered hereby in reliance on Regulation S during the period referred to above to any distributor, dealer or person receiving a selling concession, fee or other remuneration, you must 22 deliver a notice to substantially the foregoing effect. Terms used above have the meaning assigned to them in Regulation S." (i) Such Initial Purchaser agrees that the Series A Notes offered and sold in reliance on Regulation S will be represented upon issuance by a global security that may not be exchanged for definitive securities until the expiration of the 40-day restricted period referred to in Rule 903(c)(3) of the Act and only upon certification of beneficial ownership of such Series A Notes by non-U.S. persons or U.S. persons who purchased such Series A Notes in transactions that were exempt from the registration requirements of the Act. Such Initial Purchaser acknowledges that the Company and the Guarantor and, for purposes of the opinions to be delivered to each Initial Purchaser pursuant to Section 9 hereof, counsel to the Company and the Guarantor and counsel to the Initial Purchaser will rely upon the accuracy and truth of the foregoing representations and such Initial Purchaser hereby consents to such reliance. 8. INDEMNIFICATION. (a) The Company and the Guarantor agree, jointly and severally, to indemnify and hold harmless each Initial Purchaser, its directors, its officers and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum (or any amendment or supplement thereto), the Preliminary Offering Memorandum or any Rule 144A Information provided by the Company or the Guarantor to any holder or prospective purchaser of Series A Notes pursuant to Section 5(h) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to such Initial Purchaser furnished in writing to the Company by such Initial Purchaser; PROVIDED, HOWEVER, that the foregoing indemnity agreement with respect to the 23 Preliminary Offering Memorandum shall not inure to the benefit of any Initial Purchaser who failed to deliver the Offering Memorandum, as then amended or supplemented (so long as the Offering Memorandum and any such amendment or supplement was provided by the Company to the several Initial Purchasers in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Offering Memorandum, as so amended or supplemented. (b) Each Initial Purchaser, severally and not jointly, agrees to indemnify and hold harmless the Company and the Guarantor, and their respective directors and officers and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company or the Guarantor, to the same extent as the foregoing indemnity from the Company and the Guarantor to each Initial Purchaser but only with reference to information relating to such Initial Purchaser furnished in writing to the Company by such Initial Purchaser expressly for use in the Preliminary Offering Memorandum or the Offering Memorandum. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), the Initial Purchasers shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Initial Purchasers). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such 24 counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with the indemnifying party's written consent or (ii) effected without the indemnifying party's written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 8 is unavailable to an indemnified party or insufficient in respect of any 25 losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantor, on the one hand, and the Initial Purchasers on the other hand from the offering of the Series A Notes or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantor, on the one hand, and the Initial Purchasers, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantor, on the one hand and the Initial Purchasers, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Series A Notes (after underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total discounts and commissions received by the Initial Purchasers bear to the total price to investors of the Series A Notes, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Company and the Guarantor, on the one hand, and the Initial Purchasers, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Guarantor, on the one hand, or the Initial Purchasers, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Guarantor, and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending 26 any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, the Initial Purchasers shall not be required to contribute any amount in excess of the amount by which the total discounts and commissions received by such Initial Purchasers exceeds the amount of any damages which the Initial Purchasers have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective principal amount of Series A Notes purchased by each of the Initial Purchasers hereunder and not joint. (e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 9. CONDITIONS OF INITIAL PURCHASER'S OBLIGATIONS. The obligations of the Initial Purchasers to purchase the Series A Notes under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company and the Guarantor contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) On or after the date hereof, (i) there shall not have occurred any downgrading, suspension or withdrawal of, nor shall any notice have been given of any potential or intended downgrading, suspension or withdrawal of, or of any review (or of any potential or intended review) for a possible change that does not indicate the direction of the possible change in, any rating of the Company or the Guarantor or any securities of the Company or the Guarantor (including, without limitation, the placing of any of the foregoing ratings on credit watch with negative or developing implications or under review with an uncertain direction) by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act, (ii) there shall not have occurred any change, nor shall any notice have been given of any potential or intended change, in the outlook for any rating of the Company or the Guarantor or any securities of the Company or any Guarantor by 27 any such rating organization and (iii) no such rating organization shall have given notice that it has assigned (or is considering assigning) a lower rating to the Notes than that on which the Notes were marketed. (c) Since the respective dates as of which information is given in the Offering Memorandum other than as set forth in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Guarantor, the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(c)(i), 9(c)(ii) or 9(c)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum. (d) You shall have received on the Closing Date a certificate dated the Closing Date, signed by the President and the Chief Financial Officer of the Company and the Guarantor, confirming the matters set forth in Sections 9(a), 9(b) and 9(c) and stating that each of the Company and the Guarantor has complied with all the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied on or prior to the Closing Date. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Initial Purchaser), dated the Closing Date, of Moss & Barnett, a professional association ("MOSS & BARNETT"), counsel for the Company and the Guarantor substantially as set forth in Exhibit B. With respect to the opinions to be set forth in Exhibit B, Moss & Barnett may state that their opinion and belief are based upon their participation in the preparation of the Offering Memorandum and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. In giving the opinions referred to in Exhibit B, Moss & Barnett may (x) assume, as to any matters governed by the laws of New York, that the laws of Minnesota are substantially comparable to the laws of New York (provided such counsel has no reason to believe that such laws are not substantially comparable) and (y) rely on the opinion of the 28 Vice President and General Counsel of the Company and Guarantor or of Faegre & Benson, L.L.P., ("Faegre & Benson") counsel to the Company and Guarantor, as to certain specified matters. In lieu of reliance on such opinion of the Vice President and General Counsel, such opinion of the Vice President and General Counsel or of Faegre & Benson may be delivered directly to the Initial Purchasers. (f) The Initial Purchasers shall have received on the Closing Date an opinion, dated the Closing Date, of Davis Polk & Wardwell, counsel for the Initial Purchasers, in form and substance reasonably satisfactory to the Initial Purchasers. (g) The Initial Purchasers shall have received, at the time this Agreement is executed and at the Closing Date, letters dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchasers from Arthur Andersen LLP, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to the Initial Purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum. (h) The Series A Notes shall have been approved by the NASD for trading and duly listed in PORTAL. (i) The Initial Purchasers shall have received a counterpart, conformed as executed, of the Indenture which shall have been entered into by the Company, the Guarantor and the Trustee. (j) The Company and the Guarantor shall have executed the Registration Rights Agreement and the Initial Purchasers shall have received an original copy thereof, duly executed by the Company and the Guarantor. (k) Neither the Company nor the Guarantor shall have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company or the Guarantor, as the case may be, at or prior to the Closing Date. (l) The Amendment to the Credit Agreement substantially in the form attached hereto as Exhibit C will have been executed by the Company and the Required Banks as defined therein. 29 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by the Initial Purchasers by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in the Initial Purchasers' judgment, is material and adverse and, in the Initial Purchasers' judgment, makes it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company or the Guarantor on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Guarantor, the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date any one or more of the initial Purchasers shall fail or refuse to purchase the Series A Notes which it or they have agreed to purchase hereunder on such date and the aggregate principal amount of the Series A Notes which such defaulting Initial Purchase or Initial Purchasers, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of the Series A Notes to be purchased on such date by all Initial Purchasers, each non-defaulting Initial Purchaser shall be obligated severally, in the proportion which the principal amount of the Series A Notes set forth opposite its name in Schedule B bears to the aggregate principal amount of the Series A Notes which all the non-defaulting Initial Purchasers, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Series A Notes which such defaulting Initial Purchaser or Initial Purchasers, as the case may be, agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the aggregate principal amount of the Series 30 A Notes which any Initial Purchaser has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 10 by an amount in excess of one-ninth of such principal amount of the Series A Notes without the written consent of such Initial Purchaser. If on the Closing Date any Initial Purchaser or Initial Purchasers shall fail or refuse to purchase the Series A Notes with respect to which such default occurs is more than one-tenth of the aggregate principal amount of the Series A Notes to be purchased by all Initial Purchasers and arrangements satisfactory to the Initial Purchasers and the Company for purchase of such the Series A Notes are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Initial Purchaser, the Company and the Guarantor. If any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Offering Memorandum or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Initial Purchaser from liability in respect of any default of any such Initial Purchaser under this Agreement. 11. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company or the Guarantor, to Musicland Group Inc., 10400 Yellow Circle Drive, Minnetonka, MN 55343, Fax: (612) 931-8047, Attention: General Counsel and (ii) if to the Initial Purchasers, Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Guarantor and the Initial Purchasers set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Series A Notes, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Initial Purchasers, the officers or directors of the Initial Purchasers, any person controlling the Initial Purchasers, the Company, the Guarantor, the officers or directors of the Company or the Guarantor, or any person controlling the Company or the Guarantor, (ii) acceptance of the Series A Notes and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Series A Notes are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10), the Company and the Guarantor, jointly and severally, agree to reimburse the Initial Purchasers for all reasonable out-of-pocket expenses (including the fees and disbursements of counsel) incurred 31 by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company and the Guarantor also agree, jointly and severally, to reimburse each Initial Purchaser and its officers, directors and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act for any and all fees and expenses (including without limitation the fees and expenses of counsel) incurred by them in connection with enforcing their rights under this Agreement (including without limitation its rights under Section 8). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Guarantor, the Initial Purchasers, the Initial Purchasers' directors and officers, any controlling persons referred to herein, the directors of the Company and the Guarantor and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Series A Notes from the Initial Purchasers merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 32 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Guarantor and the Initial Purchasers. Very truly yours, THE MUSICLAND GROUP, INC. By: /s/ Jack W. Eugster ------------------------------------ Name: Jack W. Eugster Title: CEO, Chairman, and President MUSICLAND STORES CORPORATION By: /s/ Jack W. Eugster ------------------------------------ Name: Jack W. Eugster Title: CEO, Chairman, and President DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, on behalf of the Initial Purchaser By: /s/ Ephraim Fields -------------------------------- Name: Ephraim Fields Title: Vice President 33 SCHEDULE A
INITIAL PURCHASERS PRINCIPAL AMOUNT OF NOTES ------------------ ------------------------- Donaldson, Lufkin & Jenrette Securities Corporation $ 90,000,000 BT Alex. Brown Incorporated $ 30,000,000 NationsBanc Montgomery Securities LLC $ 30,000,000 Total $
34 EXHIBIT A FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT B FORM OF OPINIONS TO BE DELIVERED BY COMPANY COUNSEL (i) each of the Guarantor, the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Offering Memorandum and to own, lease and operate its properties; (ii) each of the Guarantor, the Company and its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Guarantor and its subsidiaries, taken as a whole; (iii) this Agreement has been duly and validly authorized, executed and delivered by the Guarantor and the Company and (assuming the due authorization, execution and delivery of this Agreement by the Initial Purchasers) is a valid and binding agreement of the Guarantor and the Company, except as rights to indemnity and contribution hereunder may be limited by applicable law; (iv) all the outstanding shares of capital stock or other securities evidencing equity ownership of the Company by the Guarantor have been duly and validly authorized and issued and are fully paid and non-assessable, and are owned by the Guarantor, free and clear of any security interest, claim, lien or encumbrance other than those created pursuant to the Loan Documents (as defined in the Credit Agreement); to the knowledge of such counsel after due inquiry, there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Guarantor except for rights issued pursuant to the Warrant and Registration Rights Agreement dated as of June 16, 1997 among the Guarantor and the Investors listed therein, and options issued pursuant to the Guarantor's stock option plans; B-2 (v) the Series A Notes have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable in accordance with their terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (vi) the Guarantees have been duly authorized and, when the Series A Notes are executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Guarantees endorsed thereon will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Guarantor, enforceable in accordance with their terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (vii) the Indenture has been duly authorized, executed and delivered by the Company and the Guarantor and is a valid and binding agreement of the Company and the Guarantor, enforceable against the Company and the Guarantor in accordance with its terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (viii) such counsel does not know of any legal or governmental proceeding pending or threatened against the Guarantor or the Company or to which the Guarantor or the Company is a party or to which any of the properties of the Guarantor or the Company is subject which is required to be described in the Offering Memorandum and is not so described, or any contract, lease or other document which is required to be described in the Offering Memorandum which is not described as B-3 required; the descriptions thereof or references thereto are accurate in all material respects; and each contract, lease or document so described is in full force and effect in accordance with its terms; (ix) neither the Guarantor nor the Company is in violation of their respective charter documents or by-laws or, to such counsel's knowledge, in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material indenture, instrument or other agreement material to the conduct of the business of either the Guarantor or the Company to which either the Guarantor or the Company is a party or which binds either the Guarantor or the Company or any of their property; (x) the execution, delivery and performance of this Agreement, the Indenture, the Notes and the Guarantees and compliance by the Guarantor or the Company with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not violate or conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter documents or by-laws of either the Guarantor or the Company or, to the knowledge of such counsel, after due inquiry, any agreement, indenture or other instrument material to either the Guarantor or the Company to which either the Guarantor or the Company is a party or which binds either the Guarantor or the Company or any of their property, or to the knowledge of such counsel after due inquiry, (assuming compliance with all applicable state securities and Blue Sky laws in those several states in which the Notes will be offered or sold), violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to either the Guarantor or the Company or to any of their property; (xi) all proceedings required in connection with the authorization of the Indenture and the authorization and issuance of the Notes and the Guarantees and the sale of the Notes by the Company and the Guarantor in accordance with the terms of this Agreement have been taken and all authorizations, consents, approvals, licenses or other orders of any regulatory body, administrative agency or other governmental body required for the valid issuance, sale and delivery of the Notes hereunder have been obtained (assuming compliance with all applicable Blue Sky or B-4 state securities laws in the several states in which the Notes will be offered or sold); (xii) no consents or waivers from the holders of the Guarantor's capital stock or debt securities are required under any agreement, indenture or other instrument to which either the Company or the Guarantor is a party to consummate the transactions contemplated hereby other than such consents and waivers as have been obtained; (xiii) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and the Guarantor and is a valid and binding agreement of the Company and the Guarantor, enforceable against the Company and the Guarantor in accordance with its terms, except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (xiv) the Series B Notes have been duly authorized; (xv) the statements under the captions "Certain Federal Income Tax Considerations," "Description of Existing Financing Arrangements," "Description of Notes" and "Plan of Distribution" in the Offering Memorandum, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present in all material respects such legal matters, documents and proceedings; (xvi) neither the Guarantor, nor the Company is or, after giving effect to the offering and sale of the Series A Notes and the application of the net proceeds thereof as described in the Offering Memorandum, will be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xvii) the Indenture complies as to form in all material respects with the requirements of the TIA, and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. It is not necessary in connection with the offer, sale and delivery of the Series A Notes to the Initial Purchaser in the manner contemplated by this Agreement or in B-5 connection with the Exempt Resales to qualify the Indenture under the TIA. (xviii) no registration under the Act of the Series A Notes is required for the sale of the Series A Notes to the Initial Purchasers as contemplated by this Agreement or for the Exempt Resales assuming that (A) each Initial Purchaser is a QIB, or a Regulation S Purchaser, (B) the accuracy of, and compliance with, the Initial Purchasers' representations and agreements contained in Section 7 of this Agreement, (C) the accuracy of the representations of the Company and the Guarantor set forth in Sections 6(cc), 6(dd), 6(gg) and 6(hh) of this Agreement. (xix) (i) each of the Incorporated Documents (except for financial statements and schedules as to which no opinion need be expressed) complied when so filed as to form in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder and (ii) such counsel has no reason to believe that, as of the date of the Offering Memorandum or as of the Closing Date, the Offering Memorandum, as amended or supplemented, if applicable (except for the financial statements and other financial data included therein, as to which such counsel need not express any belief) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-6 CROSS-REFERENCE TARGET LIST NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE TARGET PULL-DOWN LIST. (This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME - - ---------------------------- ---------------------------- ---------------------------- ---------------------------- - - ---------------------------- ---------------------------- ---------------------------- ---------------------------- 5(c) . . . . . .off.memo.del 5(e) . . . . .exempt.resales 5(h) . . . . . .series.a.out 5(i) . . . . . .pay.expenses 6(a), 6(b), 6(c) . no.untrue ?. . . . . . .no.mat.adv.chg 6(cc). . . . . . no.dir.sell ?. . . . . . . only.offshore 6(dd). . series.a.not.scheme 7. . . . . ini.purch.rep.war 8. . . . . . . . . . . indem 8(a) . . . . . co.guar.agree 8(b) . . . . ini.purch.agree 8(c) . . . . . . indem.party 8(d) . . . . . indem.unavail 8(d)(i). . . . .appro.propor 9. . . .cond.ini.purch.oblig 9(a) . . . . . .rep.war.true 9(b) . . . . .no.downgrading 9(c) . . . . . . no.pros.chg 9(c)(i). . . . . no.chg.earn 9(c)(ii) . . .no.chg.cap.stk 9(c)(iii). . . . . . no.liab 9(e) . . . . . .co.coun.opin 11(a)(xx). . . .coun.believe 10 . . . . . effect.agt.term
EX-4.5 3 EX 4.5 -- INDENTURE - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- The Musicland Group, Inc. and Musicland Stores Corporation -------------------------------------- $150,000,000 9_% SENIOR SUBORDINATED NOTES DUE 2008 -------------------------------------- ------------------- INDENTURE DATED AS OF APRIL 6, 1998 ------------------- BANK ONE, NA Trustee - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 SECTION 1.02. OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . 20 SECTION 1.04. RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 2 THE NOTES SECTION 2.01. FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.02. EXECUTION AND AUTHENTICATION. . . . . . . . . . . . . . . . . . . 24 SECTION 2.03. REGISTRAR AND PAYING AGENT. . . . . . . . . . . . . . . . . . . . 25 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . 25 SECTION 2.05. HOLDER LISTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 2.06. TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 2.07. REPLACEMENT NOTES . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 2.08. OUTSTANDING NOTES . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 2.09. TREASURY NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 2.10. TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 2.11. CANCELLATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 2.12. DEFAULTED INTEREST. . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 2.13. RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 2.14. COMPUTATION OF INTEREST . . . . . . . . . . . . . . . . . . . . . 38 SECTION 2.15. CUSIP NUMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED . . . . . . . . . . . . . . . . 39 SECTION 3.03. NOTICE OF REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. . . . . . . . . . . . . . . . . . 41 SECTION 3.05. DEPOSIT OF REDEMPTION OR PURCHASE PRICE . . . . . . . . . . . . . 41 SECTION 3.06. NOTES REDEEMED IN PART. . . . . . . . . . . . . . . . . . . . . . 42 SECTION 3.07. OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 3.08. MANDATORY REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 3.09. REPURCHASE OFFERS . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 4 COVENANTS i SECTION 4.01. PAYMENT OF NOTES. . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . 46 SECTION 4.03. COMMISSION REPORTS. . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 4.04. COMPLIANCE CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.05. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 4.06. STAY, EXTENSION AND USURY LAWS. . . . . . . . . . . . . . . . . . 48 SECTION 4.07. RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 4.08. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 4.10. ASSET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 4.11. TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . . . 56 SECTION 4.12. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 4.13. SALE AND LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . . . 57 SECTION 4.14. OFFER TO PURCHASE UPON CHANGE OF CONTROL. . . . . . . . . . . . . 58 SECTION 4.15. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 4.16. LIMITATION ON ISSUANCES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 4.17. LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. . . . . . 60 SECTION 4.18. BUSINESS ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 4.19. PAYMENT FOR CONSENTS. . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 4.20. ANTI-LAYERING . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 4.21. RESTRICTIVE COVENANT OF MSC . . . . . . . . . . . . . . . . . . . 61 ARTICLE 5 SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS . . . . . . . . . . . . . 61 SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . . . . . . . 62 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 6.02. ACCELERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 6.03. OTHER REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 6.04. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . 66 SECTION 6.05. CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 6.06. LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT . . . . . . . . . . 68 SECTION 6.08. COLLECTION SUIT BY TRUSTEE. . . . . . . . . . . . . . . . . . . . 68 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. . . . . . . . . . . . . . . . . 68 ii SECTION 6.10. PRIORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 6.11. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 7.02. RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. . . . . . . . . . . . . . . . . . . 72 SECTION 7.04. TRUSTEE'S DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 7.05. NOTICE OF DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. . . . . . . . . . . . 73 SECTION 7.07. COMPENSATION AND INDEMNITY. . . . . . . . . . . . . . . . . . . . 73 SECTION 7.08. REPLACEMENT OF TRUSTEE. . . . . . . . . . . . . . . . . . . . . . 74 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . 75 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . 75 SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY . . . . . . 76 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. . . . . 76 SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. . . . . . . . . . . . . . . . . . 76 SECTION 8.03. COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. . . . . . . . . . . . 77 SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . 79 SECTION 8.06. REPAYMENT TO THE COMPANY. . . . . . . . . . . . . . . . . . . . . 80 SECTION 8.07. REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 80 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF THE NOTES . . . . . . . . . . . . . 81 SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. . . . . . . . . . . . . . . . . 81 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . 83 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . 83 SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. . . . . . . . . . . . . . . . . 84 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC . . . . . . . . . . . . . . . . . 84 ARTICLE 10 SUBORDINATION SECTION 10.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . . . . . . 84 iii SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . . . . . . 85 SECTION 10.03. DEFAULT ON DESIGNATED SENIOR DEBT. . . . . . . . . . . . . . . . 85 SECTION 10.04. ACCELERATION OF NOTES. . . . . . . . . . . . . . . . . . . . . . 86 SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . . . . . . 86 SECTION 10.06. NOTICE BY THE COMPANY. . . . . . . . . . . . . . . . . . . . . . 87 SECTION 10.07. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 10.08. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY THE COMPANY . . . . . . . . 88 SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . . . . . . 89 SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . . . . . . 89 SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . . . . . . 90 SECTION 10.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 ARTICLE 11 GUARANTEE OF NOTES SECTION 11.01. NOTE GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . . 90 SECTION 11.02. EXECUTION AND DELIVERY OF NOTE GUARANTEE . . . . . . . . . . . . 92 SECTION 11.03. LIMITATION ON GUARANTOR LIABILITY. . . . . . . . . . . . . . . . 92 SECTION 11.04. "TRUSTEE" TO INCLUDE PAYING AGENT. . . . . . . . . . . . . . . . 93 ARTICLE 12 SUBORDINATION OF NOTE GUARANTEE SECTION 12.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . . . . . . 93 SECTION 12.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . . . . . . 93 SECTION 12.03. DEFAULT ON DESIGNATED GUARANTOR SENIOR DEBT. . . . . . . . . . . 94 SECTION 12.04. ACCELERATION OF NOTE GUARANTEE . . . . . . . . . . . . . . . . . 95 SECTION 12.05. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . . . . . . 95 SECTION 12.06. NOTICE BY GUARANTOR. . . . . . . . . . . . . . . . . . . . . . . 95 SECTION 12.07. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 96 SECTION 12.08. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 96 SECTION 12.09. SUBORDINATION MAY NOT BE IMPAIRED BY GUARANTOR . . . . . . . . . 96 SECTION 12.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . . . . . . 98 SECTION 12.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . . . . . . 98 SECTION 12.12. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . . . . . . 98 SECTION 12.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 ARTICLE 13 MISCELLANEOUS SECTION 13.01. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . 99 SECTION 13.02. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 SECTION 13.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101 iv SECTION 13.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . .101 SECTION 13.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. . . . . . . . . .102 SECTION 13.06. RULES BY TRUSTEE AND AGENTS. . . . . . . . . . . . . . . . . . .102 SECTION 13.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102 SECTION 13.08. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . .103 SECTION 13.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. . . . . . . . . .103 SECTION 13.10. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . .103 SECTION 13.11. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . .103 SECTION 13.12. COUNTERPART ORIGINALS. . . . . . . . . . . . . . . . . . . . . .103 SECTION 13.13. TABLE OF CONTENTS, HEADINGS, ETC . . . . . . . . . . . . . . . .103
v
PAGE EXHIBITS Exhibit A FORM OF NOTE Exhibit B FORM OF CERTIFICATE OF TRANSFEROR Exhibit C FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Exhibit D FORM OF NOTE GUARANTEE
vi Indenture, dated as of April 6, 1998 among The Musicland Group, Inc., a Delaware corporation (the "COMPANY"), Musicland Stores Corporation, a Delaware corporation (the "GUARANTOR" or "MSC") and Bank One, NA, as trustee (the "TRUSTEE"). The Company, the Guarantor and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the holders of the Company's 9_% Senior Subordinated Notes due 2008 (the "SENIOR SUBORDINATED NOTES") and the new 9_% Senior Subordinated Notes due 2008 (the "NEW SENIOR SUBORDINATED NOTES" and, together with the Senior Subordinated Notes, the "NOTES"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1. DEFINITIONS. "ACQUIRED DEBT" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "CONTROL" (including, with correlative meanings, the terms "CONTROLLING," "CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; PROVIDED that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "AGENT" means any Registrar, Paying Agent or co-registrar. "APPLICABLE PROCEDURES" means, with respect to any transfer or exchange of beneficial interests in a Global Note, the rules and procedures of the Depositary that apply to such transfer and exchange. 1 "ASSET SALE" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business consistent with past practices (PROVIDED that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by Section 4.14 and/or Article 5 hereof and not by the provisions of Section 4.10 hereof), and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $2.0 million or (b) for net proceeds in excess of $2.0 million. Notwithstanding the foregoing, the following will not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment that is permitted by Section 4.07 hereof. "ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "BOARD OF DIRECTORS" means the board of directors of the Company or any authorized committee of such board of directors. "BUSINESS DAY" means any day other than a Legal Holiday. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or 2 participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and in each case maturing within six months after the date of acquisition and (vi) any fund investing exclusively in investments of the types described in clauses (i) through (v) above. "CASH FLOW COVERAGE RATIO" means, for any given period and person, the ratio of (i) Consolidated Cash Flow divided by (ii) Consolidated Interest Expense (except dividends paid or payable in additional shares of Capital Stock (other than Disqualified Stock)) in each case, without duplication; provided, however, that if an acquisition or sale of a person, business or asset or the issuance or repayment of Indebtedness occurred during the given period or subsequent to such period on or prior to the date of calculation, then such calculation for such period shall be made on a Pro Forma Basis. "CEDEL" means Cedel Bank, societe anonyme. "CHANGE OF CONTROL" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of MSC taken as a whole to any "PERSON" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of MSC, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "PERSON" (as defined above), other than the Principals and their Related Parties, becomes the "BENEFICIAL OWNER" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "BENEFICIAL OWNERSHIP" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of 3 the Voting Stock of MSC (measured by voting power rather than number of shares), (iv) the first day on which a majority of the members of the Board of Directors of MSC are not Continuing Directors or (v) MSC consolidates with, or merges with or into, any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, MSC, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of MSC is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of MSC outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance). "COMMISSION" means the Securities and Exchange Commission. "COMPANY" means The Musicland Group, Inc. "CONSOLIDATED CASH FLOW" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) Consolidated Interest Expense of such Person and its Subsidiaries for such period, to the extent deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, minus (v) non-cash items increasing such Consolidated Net Income for such period; provided, however, that if an acquisition or sale of a person, business or asset or the incurrence or repayment of Indebtedness occurred during the given period or subsequent to such period and on or prior to the date of calculation, then such calculation shall be made on a Pro Forma Basis. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent that a corresponding amount would be permitted at the date of determination to be 4 dividended to the Company by such Subsidiary without prior governmental approval (that has not been obtained), and without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Subsidiary or its stockholders. "CONSOLIDATED INTEREST EXPENSE" means, for any given period and Person, the aggregate of (i) the interest expense in respect of all Indebtedness of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including, without duplication, amortization of original issue discount on any such Indebtedness, all non-cash interest payments, the interest portion of any deferred payment obligation, the interest component of Capital Lease Obligations, and amortization of deferred financing fees) and (ii) the product of (a) all cash dividend payments (and, in the case of a Person that is a Restricted Subsidiary, dividends paid or payable in additional shares of Disqualified Stock) on any series of preferred stock of such Person and its Restricted Subsidiaries payable to a party other than the Company or a wholly owned Subsidiary, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, on a consolidated basis and in accordance with GAAP; provided, however, that for the purpose of the Cash Flow Coverage Ratio, Consolidated Interest Expense shall be calculated on a Pro Forma Basis. "CONSOLIDATED NET INCOME" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; PROVIDED that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries for purposes of Section 4.09 hereof. 5 "CONTINUING DIRECTORS" means, as of any date of determination, any member of the Board of Directors of MSC who (i) was a member of such Board of Directors on the date of the original issuance of the Senior Subordinated Notes, or (ii) was nominated for election to such Board of Directors with the approval of, or whose election to the Board of Directors of MSC was ratified by, at least a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election. "CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the Trustee specified in Section 13.02 hereof or such other address as to which the Trustee may give notice to the Company. "CREDIT AGENT" means Morgan Guaranty Trust Company of New York, in its capacity as Agent for the lenders party to the Credit Facility or any successor thereto or any person otherwise appointed. "CREDIT FACILITY" means (i) the Credit Agreement dated October 7, 1994 among the Company, MSC, the various lenders party thereto from time to time and Morgan Guaranty Trust Company of New York, as Agent, as amended by an Amendment No. 1 dated as of February 24, 1995, an Amendment No. 2 dated as of April 9, 1996, an Amendment No. 3 dated as of October 18, 1996, an Amendment No. 4 dated as of June 16, 1997 and an Amendment No. 5 effective as of the closing of the Offering, together with the related documents thereto (including any guarantee agreement and securing documents), and (ii) the Term Loan Agreement dated as of June 16, 1997 among the Company, MSC, various financial institutions and Morgan Guaranty Trust Company of New York, as agent, together with the related documents thereto (including any guarantee agreement and securing documents), in each case, as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified or replaced (including with other lenders) from time to time and including any agreement extending the maturity of, refinancing, modifying, increasing, substituting for or otherwise restructuring (including, but not limited to, the inclusion of additional or different or substitute lenders or bank agents thereunder) all or any portion of the Indebtedness, including changing the borrowing limits, under such agreement or any successor or replacement agreement, regardless of whether the Credit Facility or any portion thereof was outstanding or in effect at the time of such replacement, refinancing, increase, substitution, extension, restructuring, supplement or modification. "DEFAULT" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "DEFINITIVE NOTES" means Notes that are in the form of EXHIBIT A-1 attached hereto (but without including the text referred to in footnotes 1 and 3 thereto). 6 "DEPOSITARY" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, until a successor shall have been appointed and become such pursuant to Section 2.06 of this Indenture, and, thereafter, "DEPOSITARY" shall mean or include such successor. "DESIGNATED GUARANTOR SENIOR DEBT" means (i) any Indebtedness of the Guarantor outstanding under the Credit Facility, including any Guarantee thereof, and (ii) any other Guarantor Senior Debt permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by the Guarantor as "DESIGNATED GUARANTOR SENIOR DEBT". "DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under the Credit Facility and (ii) any other Senior Debt permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by the Company as "DESIGNATED SENIOR DEBT". "DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; PROVIDED, HOWEVER, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under Section 4.14 hereof. "DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation. "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "EUROCLEAR" means Morgan Guaranty Trust Company of New York, the Brussels office, as operator of the Euroclear system. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCHANGE OFFER" means the offer by the Company to Holders to exchange Senior Subordinated Notes for New Senior Subordinated Notes. "EXCHANGE OFFER REGISTRATION STATEMENT" has the meaning set forth in the Registration Rights Agreement. 7 "EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Credit Facility) in existence on the date of the Indenture, until such amounts are repaid. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination; provided, however, that except as otherwise provided, all calculations made for purposes of determining compliance with the terms of the covenants set forth in Articles 4 and 5 and other provisions of the Indenture shall utilize GAAP in effect at the date of the Indenture. "GLOBAL NOTES" means the Rule 144A Global Notes, the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes. "GOVERNMENT SECURITIES" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "GUARANTEE" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "GUARANTOR SENIOR DEBT" means (i) all Indebtedness of the Guarantor outstanding under the Credit Facility, including any Guarantee thereof and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Guarantor under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Note Guarantee, (iii) all Obligations with respect to the foregoing, and (iv) all interest with respect to the foregoing clauses (i) and (ii) accruing during the pendency of an Insolvency or Liquidation Proceeding, whether or not allowed or allowable thereunder. Notwithstanding anything to the contrary in the foregoing, Guarantor Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Guarantor, (x) any Indebtedness of the Guarantor to any of its Subsidiaries or other Affiliates, (y) any trade payables or liability to trade creditors or obligations with respect to consigned inventory arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of the Indenture. 8 "HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency rates. "HOLDER" means a Person in whose name a Note is registered. "INDEBTEDNESS" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable or obligations with respect to consigned inventory, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "INDENTURE" means this Indenture, as amended or supplemented from time to time. "INDIRECT PARTICIPANT" means a Person who holds an interest through a Participant. "INITIAL PURCHASERS" means Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC. "INSOLVENCY OR LIQUIDATION PROCEEDING" means (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to the creditors of the Company, as such, or to the assets of the Company, or (ii) any liquidation, dissolution, reorganization or winding up of the Company, whether voluntary or involuntary and involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company. 9 "INSTITUTIONAL ACCREDITED INVESTOR" means an "ACCREDITED INVESTOR" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described under Section 4.07 hereof. "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, the city in which the principal Corporate Trust Office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment shall be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "NET INCOME" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of 10 any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "NET PROCEEDS" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "NEW SENIOR SUBORDINATED NOTES" means the Company's 9_% Senior Subordinated Notes due 2008, which will be issued in exchange for the Company's Senior Subordinated Notes. "NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than Holders of the Notes being offered hereby and lenders under the Credit Facility) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "NOTE CUSTODIAN" means the Trustee, when serving as custodian for the Depositary with respect to the Notes in global form, or any successor entity thereto. "NOTE GUARANTEE" means any guarantee of the Guarantor under Article 11 and any guarantee of the Guarantor endorsed on a Note authenticated and delivered pursuant to this Indenture. 11 "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "OFFERING" means the offer and sale of the Senior Subordinated Notes as contemplated by the Offering Memorandum. "OFFERING MEMORANDUM" means the Offering Memorandum, dated April 1, 1998, relating to the Company's offering and placement of the Senior Subordinated Notes. "OFFICER" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 13.05 hereof. "OPINION OF COUNSEL" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 13.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "PARTICIPANT" means, with respect to DTC, Euroclear or Cedel, a Person who has an account with DTC, Euroclear or Cedel, respectively (and, with respect to DTC, shall include Euroclear and Cedel). "PAYMENT IN FULL" (together with any correlative phrases E.G. "PAID IN FULL" and "PAY IN FULL") means (i) with respect to any Senior Debt other than Senior Debt under or in respect of the Credit Facility, payment in full thereof or due provision for payment thereof (x) in accordance with the terms of the agreement or instrument pursuant to which such Senior Debt was issued or is governed or (y) otherwise to the reasonable satisfaction of the holders of such Senior Debt, which shall include, in any Insolvency or Liquidation Proceeding, approval by such holders individually or as a class, of the provision for payment thereof, and (ii) with respect to Senior Debt under or in respect of the Credit Facility, payment in full thereof in cash or Cash Equivalents. "PERMITTED BUSINESS" means any of the businesses and any other businesses related to the businesses engaged in by the Company and its respective Restricted Subsidiaries on the date of the Indenture. 12 "PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted Business; (b) any Investment in Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted Business or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the Company that is engaged in a Permitted Business; (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company or MSC; (f) stock, obligations or securities received in satisfaction of judgement and (g) Hedging Obligations entered into in the ordinary course of business and otherwise permitted under the Indenture. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; PROVIDED that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded or by the Company. "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. 13 "PRINCIPALS" means Messrs. Eugster, Benson, Wachsman and Ross. "PRIVATE PLACEMENT LEGEND" means the legend initially set forth on the Senior Subordinated Notes in the form set forth in Section 2.06(g) hereof. "PRO FORMA BASIS" means, for purposes of determining Consolidated Net Income in connection with the Cash Flow Coverage Ratio (including in connection with the covenants described under Section 4.07 and Article 5 and the incurrence of Indebtedness pursuant to the first sentence of the covenant described under Section 4.09), giving pro forma effect to (x) any acquisition, by way of merger, consolidation or otherwise, or sale of a person, business or asset, related incurrence, repayment or financing of Indebtedness or other related transactions, including any Restructuring Charges which would otherwise be accounted for as an adjustment permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP, or (y) any incurrence, repayment or refinancing of any Indebtedness and the application of the proceeds therefrom; in each case, which occurred during the relevant period or subsequent to such period and on or prior to the date of calculation, as if such acquisition or sale and related transactions and any Restructuring Charges, incurrence, repayment or refinancing were realized on the first day of the relevant period permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of a person, business or asset, the amount of income or earnings relating thereto, and the amount of Consolidated Interest Expense associated with any Indebtedness issued in connection therewith, the pro forma calculations will be determined in good faith by the chief financial officer of the Company as specified in an Officers' Certificate of the Company delivered to the Trustee. Furthermore, in calculating the Cash Flow Coverage Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the determination date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the determination date; (2) if interest on any Indebtedness actually incurred on the determination date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the determination date will be deemed to have been in effect during the relevant period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to interest rate swaps or similar interest rate protection Hedging Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "PUBLIC EQUITY OFFERING" means a public offering of Equity Interests (other than Disqualified Stock) of (i) the Company; or (ii) MSC to the extent the net proceeds thereof are contributed to the Company as a capital contribution, 14 that, in each case, results in the net proceeds to the Company of at least $25.0 million. "QIB" means a "QUALIFIED INSTITUTIONAL BUYER" as defined in Rule 144A under the Securities Act. "REGISTRATION RIGHTS AGREEMENT" means the A/B Exchange Registration Rights Agreement, dated as of the date hereof, by and among the Company, the Guarantor and the Initial Purchasers. "REGULATION S" means Regulation S promulgated under the Securities Act. "REGULATION S GLOBAL NOTES" means the Regulation S Temporary Global Notes or the Regulation S Permanent Global Notes as applicable. "REGULATION S PERMANENT GLOBAL NOTES" means the permanent global notes that do not contain the paragraphs referred to in footnote 1 to the form of the Note attached hereto as Exhibit A-2, and that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "REGULATION S TEMPORARY GLOBAL NOTES" means the temporary global notes that contain the paragraphs referred to in footnote 1 to the form of the Note attached hereto as Exhibit A-2, and that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "RELATED PARTY" with respect to any Principal means any spouse or immediate family member or any controlled Affiliate of any such Principal, any trusts for the benefit of any such Principal or such Principal's spouse or immediate family or, in the event of the incompetence or death of any such Principal, such Principal's estate, executor, administrator, committee or other personal representative, in each case who will beneficially own or have the right to acquire, directly or indirectly, Voting Stock of MSC. "REPRESENTATIVE" means the trustee, agent or representative for any Senior Debt. "RESPONSIBLE OFFICER" when used with respect to the Trustee, means any officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to 15 whom such matter is referred because of his knowledge of and familiarity with the particular subject. "RESTRICTED BENEFICIAL INTEREST" means any beneficial interest of a Participant or Indirect Participant in the Rule 144A Global Note or the Regulation S Global Note. "RESTRICTED BROKER DEALER" has the meaning set forth in the Registration Rights Agreement. "RESTRICTED GLOBAL NOTES" means the Rule 144A Global Notes and the Regulation S Global Notes, all of which shall bear the Private Placement Legend. "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "RESTRUCTURING CHARGES" means any charges or expenses in respect of restructuring or consolidating any business, operations or facilities, any compensation or headcount reduction, or any other cost savings, of any persons or businesses either alone or together with the Company or any Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act; provided that any cost savings of less than $10.0 million, shall be evidenced by an Officers' Certificate delivered to the Trustee and any cost savings of $10.0 million or more shall be evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee. "RULE 144A" means Rule 144A promulgated under the Securities Act. "RULE 144A GLOBAL NOTES" means the permanent global notes that contain the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 3 to the form of the Note attached hereto as Exhibit A-1, and that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Rule 144A. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SENIOR DEBT" means (i) all Indebtedness outstanding under the Credit Facility, including any Guarantee thereof and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Company under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes, (iii) all Obligations with respect to 16 the foregoing, and (iv) all interest with respect to the foregoing clauses (i) and (ii) accruing during the pendency of an Insolvency or Liquidation Proceeding, whether or not allowed or allowable thereunder. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or liability to trade creditors or obligations with respect to consigned inventory arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of the Indenture. "SENIOR SUBORDINATED NOTES" means the Company's 9_% Senior Subordinated Notes due 2008. "SHELF REGISTRATION STATEMENT" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "STATED MATURITY" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "SUBSIDIARY" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb), as amended, as in effect on the date hereof. "TRANSFER RESTRICTED SECURITIES" means Notes or beneficial interests therein that bear or are required to bear the Private Placement Legend. 17 "TRUSTEE" means Bank One, NA until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter means the successor. "UNRESTRICTED GLOBAL NOTES" means one or more Global Notes that do not and are not required to bear the Private Placement Legend. "UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the Board of Directors; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.07 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.09 hereof, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under Section 4.09 hereof, and (ii) no Default or Event of Default would be in existence following such designation. 18 "VOTING STOCK" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Subsidiaries of such Person. "2003 INDENTURE" means the Indenture dated as of June 17, 1993, among the Company, MSC and Harris Trust Savings Bank, as Trustee, relating to the 2003 Notes, as amended from time to time. "2003 NOTES" means the 9 1/4% Senior Subordinated Notes due 2003 of the Company issued pursuant to the 2003 Indenture. SECTION 1.2. OTHER DEFINITIONS.
TERM DEFINED IN SECTION Affiliate Transaction 4.11 Asset Sale Offer 4.10 Change of Control Offer 4.14 Change of Control Payment 4.14 Change of Control Payment Date 4.14 Covenant Defeasance 8.03 Custodian 6.01 DTC 2.03 Event of Default 6.01 Excess Proceeds 4.10 incur 4.09 Legal Defeasance 8.02 Offer Amount 3.09 Offer Period 3.09 19 Paying Agent 2.03 Payment Default 6.01 Permitted Indebtedness 4.09 Purchase Date 3.09 Registrar 2.03 Repurchase Offer 3.09 Restricted Payments 4.07
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "INDENTURE SECURITIES" means the Notes; "INDENTURE SECURITY HOLDER" means a Holder of a Note; "INDENTURE TO BE QUALIFIED" means this Indenture; "INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee; "OBLIGOR" on the Notes means the Company, the Guarantor and any successor obligor upon the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by the Commission rule under the TIA have the meanings so assigned to them therein. SECTION 1.4. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it herein; (2) an accounting term not otherwise defined herein has the meaning assigned to it in accordance with GAAP; (3) "OR" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; 20 (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time. ARTICLE 2 The Notes SECTION 2.1. FORM AND DATING. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 or Exhibit A-2 attached hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes initially shall be issued in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company, the Guarantor and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (a) GLOBAL NOTES. Notes offered and sold to QIBs in reliance on Rule 144A shall be issued initially in the form of Rule 144A Global Notes, which shall be deposited on behalf of the purchasers of the Notes represented thereby with a custodian of the Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The "40-day restricted period" (as defined in Regulation S) shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear 21 and Cedel certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Notes (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a Rule 144A Global Note, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company certifying as to the same matters covered in clause (i) above. Following the termination of the 40-day restricted period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Notes. The aggregate principal amount of the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions and transfers of interests. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. The provisions of the "OPERATING PROCEDURES OF THE EUROCLEAR SYSTEM" and "TERMS AND CONDITIONS GOVERNING USE OF EUROCLEAR" and the "MANAGEMENT REGULATIONS" and "INSTRUCTIONS TO PARTICIPANTS" of Cedel shall be applicable to interests in the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Cedel. The Trustee shall have no obligation to notify Holders of any such procedures or to monitor or enforce compliance with the same. Except as set forth in Section 2.06 hereof, the Global Notes may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee. (b) BOOK-ENTRY PROVISIONS. This Section 2.01(b) shall apply only to Rule 144A Global Notes and Regulation S Permanent Global Notes deposited with or on behalf of the Depositary. 22 The Company shall execute and the Trustee shall, in accordance with this Section 2.01(b), authenticate and deliver the Global Notes that (i) shall be registered in the name of the Depositary or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for the Depositary. Participants shall have no rights either under this Indenture with respect to any Global Note held on their behalf by the Depositary or by the Note Custodian as custodian for the Depositary or under such Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Participants, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Note. (c) DEFINITIVE NOTES. Notes issued in certificated form shall be substantially in the form of Exhibit A-1 attached hereto (but without including the text referred to in footnotes 1 and 3 thereto). SECTION 2.2. EXECUTION AND AUTHENTICATION. An Officer shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in Exhibit A-1 or Exhibit A-2 hereto. The Trustee shall, upon a written order of the Company signed by an Officer directing the Trustee to authenticate the Notes, authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes. The Trustee shall, upon written order of the Company signed by an Officer, authenticate New Senior Subordinated Notes for original issuance in exchange for a like principal amount of Senior Subordinated Notes exchanged in the Exchange Offer or otherwise exchanged for New Senior Subordinated Notes pursuant to the terms of the Registration Rights Agreement. The aggregate 23 principal amount of Notes outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may (at the Company's expense) appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.3. REGISTRAR AND PAYING AGENT. The Company shall maintain (i) an office or agency where Notes may be presented for registration of transfer or for exchange ("REGISTRAR") and (ii) an office or agency where Notes may be presented for payment ("PAYING AGENT"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more additional paying agents. The term "PAYING AGENT" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Note Custodian with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent with respect to the Definitive Notes. SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Notes, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the 24 Holders all money held by it as Paying Agent. Upon the occurrence of events specified in Section 6.01(vii) through (ix) hereof, the Trustee shall serve as Paying Agent for the Notes. SECTION 2.5. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company and/or the Guarantor shall furnish to the Trustee at least seven (7) Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company and the Guarantor shall otherwise comply with TIA Section 312(a). SECTION 2.6. TRANSFER AND EXCHANGE. (a) TRANSFER AND EXCHANGE OF GLOBAL NOTES. The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in a Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Global Note in accordance with the transfer restrictions set forth in the legend in subsection (g) of this Section 2.06. Transfers of beneficial interests in the Global Notes to Persons required to take delivery thereof in the form of an interest in another Global Note shall be permitted as follows: (i) RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE. If, at any time, an owner of a beneficial interest in a Rule 144A Global Note deposited with the Depositary (or the Trustee as custodian for the Depositary) wishes to transfer its beneficial interest in such Rule 144A Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Regulation S Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Regulation S Global Note as provided in this Section 2.06(a)(i). Upon receipt by the Trustee of (1) instructions given in accordance with the Applicable Procedures from a Participant directing the Trustee to credit or cause to be credited a beneficial interest in the Regulation S Global Note in an amount equal to the beneficial interest in the Rule 144A Global Note to be exchanged, (2) a written order given in accordance with the 25 Applicable Procedures containing information regarding the Participant account of the Depositary and the Euroclear or Cedel account to be credited with such increase, and (3) a certificate in the form of Exhibit B-1 hereto given by the owner of such beneficial interest stating that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Rule 144A Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Regulation S Global Note by the principal amount at maturity of the beneficial interest in the Rule 144A Global Note to be exchanged or transferred, to credit or cause to be credited to the account of the Person specified in such instructions, a beneficial interest in the Regulation S Global Note equal to the reduction in the aggregate principal amount at maturity of the Rule 144A Global Note, and to debit, or cause to be debited, from the account of the Person making such exchange or transfer the beneficial interest in the Rule 144A Global Note that is being exchanged or transferred. (ii) REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE. If, at any time, after the expiration of the 40-day restricted period, an owner of a beneficial interest in a Regulation S Global Note deposited with the Depositary or with the Trustee as custodian for the Depositary wishes to transfer its beneficial interest in such Regulation S Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Rule 144A Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Rule 144A Global Note as provided in this Section 2.06(a)(ii). Upon receipt by the Trustee of (1) instructions from Euroclear or Cedel, if applicable, and the Depositary, directing the Trustee, as Registrar, to credit or cause to be credited a beneficial interest in the Rule 144A Global Note equal to the beneficial interest in the Regulation S Global Note to be exchanged, such instructions to contain information regarding the Participant account with the Depositary to be credited with such increase, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary and (3) a certificate in the form of Exhibit B-2 attached hereto given by the owner of such beneficial interest stating (A) if the transfer is pursuant to Rule 144A, that the Person transferring such interest in a Regulation S Global Note reasonably believes that the Person acquiring such interest in a Rule 144A Global Note is a QIB and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A and any applicable 26 blue sky or securities laws of any state of the United States, (B) that the transfer complies with the requirements of Rule 144 under the Securities Act, (C) if the transfer is to an Institutional Accredited Investor that such transfer is in compliance with the Securities Act and a certificate in the form of Exhibit C attached hereto and, if such transfer is in respect of an aggregate principal amount of less than $100,000, an Opinion of Counsel acceptable to the Company that such transfer is in compliance with the Securities Act or (D) if the transfer is pursuant to any other exemption from the registration requirements of the Securities Act, that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the requirements of the exemption claimed, such statement to be supported by an Opinion of Counsel from the transferee or the transferor in form reasonably acceptable to the Company and to the Registrar and in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of such Regulation S Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Rule 144A Global Note by the principal amount at maturity of the beneficial interest in the Regulation S Global Note to be exchanged or transferred, and the Trustee, as Registrar, shall instruct the Depositary, concurrently with such reduction, to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the applicable Rule 144A Global Note equal to the reduction in the aggregate principal amount at maturity of such Regulation S Global Note and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Regulation S Global Note that is being exchanged or transferred. (b) TRANSFER AND EXCHANGE OF DEFINITIVE NOTES. When Definitive Notes are presented by a Holder to the Registrar with a request to register the transfer of the Definitive Notes or to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested only if the Definitive Notes are presented or surrendered for registration of transfer or exchange, are endorsed and contain a signature guarantee or accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney and contains a signature guarantee, duly authorized in writing and the Registrar received the following documentation (all of which may be submitted by facsimile): 27 (i) in the case of Definitive Notes that are Transfer Restricted Securities, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, or such Transfer Restricted Security is being transferred to the Company or any of its Subsidiaries, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or (B) if such Transfer Restricted Security is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or (C) if such Transfer Restricted Security is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 904 under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); (D) if such Transfer Restricted Security is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) and (C) above, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto), a certification substantially in the form of Exhibit C hereto, and, if such transfer is in respect of an aggregate principal amount of Notes of less than $100,000, an Opinion of Counsel acceptable to the Company that such transfer is in compliance with the Securities Act; or (E) if such Transfer Restricted Security is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto) and an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act. 28 (c) TRANSFER OF A BENEFICIAL INTEREST IN A RULE 144A GLOBAL NOTE OR REGULATION S PERMANENT GLOBAL NOTE FOR A DEFINITIVE NOTE. (i) Any Person having a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note may upon request, subject to the Applicable Procedures, exchange such beneficial interest for a Definitive Note. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depositary (or Euroclear or Cedel, if applicable), from the Depositary or its nominee on behalf of any Person having a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note, and, in the case of a Transfer Restricted Security, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depositary as being the beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B-4 hereto); (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto); (C) if such beneficial interest is being transferred to an Institutional Accredited Investor, pursuant to a private placement exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B-4 hereto) and a certificate from the applicable transferee (in substantially the form of Exhibit C hereto); or (D) if such beneficial interest is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto) and an Opinion of Counsel from the transferee or the transferor reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, in which case the Trustee or the Note Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and 29 procedures existing between the Depositary and the Note Custodian, cause the aggregate principal amount of Rule 144A Global Notes or Regulation S Permanent Global Notes, as applicable, to be reduced accordingly and, following such reduction, the Company shall execute and, the Trustee shall authenticate and deliver to the transferee a Definitive Note in the appropriate principal amount. (ii) Definitive Notes issued in exchange for a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note, as applicable, pursuant to this Section 2.06(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or Indirect Participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Following any such issuance of Definitive Notes, the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Global Note to reflect the transfer. (d) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL NOTES. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06), a Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (e) TRANSFER AND EXCHANGE OF A DEFINITIVE NOTE FOR A BENEFICIAL INTEREST IN A GLOBAL NOTE. A definitive Note may not be transferred or exchanged for a beneficial interest in a Global Note. (f) AUTHENTICATION OF DEFINITIVE NOTES IN ABSENCE OF DEPOSITARY. If at any time: (i) the Depositary for the Notes notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Notes and a successor Depositary for the Global Notes is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Notes under this Indenture, then the Company shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02 hereof, authenticate and deliver, Definitive Notes in an aggregate principal 30 amount equal to the principal amount of the Global Notes in exchange for such Global Notes. (g) LEGENDS. (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Note certificate evidencing Global Notes and Definitive Notes (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend (the "PRIVATE PLACEMENT LEGEND") in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES, FOR THE BENEFIT OF THE COMPANY, THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF CLAUSE (b), (c), OR (d), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND 31 EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Note) pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security upon receipt of a certification from the transferring holder substantially in the form of Exhibit B-4 hereto; and (B) in the case of any Transfer Restricted Security represented by a Global Note, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof; PROVIDED, HOWEVER, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Note for a Definitive Note that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B-4 hereto). (iii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Note) in reliance on any exemption from the registration requirements of the Securities Act (other than exemptions pursuant to Rule 144A or Rule 144 under the Securities Act) in which the Holder or the transferee provides an Opinion of Counsel to the Company and the Registrar in form and substance reasonably acceptable to the Company and the Registrar (which Opinion of Counsel shall also state that the transfer restrictions contained in the legend are no longer applicable): (A) in the case of any Transfer Restricted Security that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security; and 32 (B) in the case of any Transfer Restricted Security represented by a Global Note, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof. (iv) Notwithstanding the foregoing, upon the consummation of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in aggregate principal amount equal to the principal amount of the Restricted Beneficial Interests tendered for acceptance by persons that are not (x) broker-dealers, (y) Persons participating in the distribution of the Notes or (z) Persons who are affiliates (as defined in Rule 144) of the Company and accepted for exchange in the Exchange Offer and (ii) Definitive Notes that do not bear the Private Placement Legend in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. (h) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTES. At such time as all beneficial interests in Global Notes have been exchanged for Definitive Notes, redeemed, repurchased or cancelled, all Global Notes shall be returned to or retained and cancelled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for Definitive Notes, redeemed, repurchased or cancelled, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note, by the Trustee or the Notes Custodian, at the direction of the Trustee, to reflect such reduction. (i) GENERAL PROVISIONS RELATING TO TRANSFERS AND EXCHANGES. (1) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes at the Registrar's request. 33 (2) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any stamp or transfer tax or similar governmental charge payable in connection therewith (other than any such stamp or transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 4.10, 4.14 and 9.05 hereto). (3) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (4) The Registrar shall not be required:(A) to issue, to register the transfer of or to exchange Notes during a period beginning at the opening of fifteen (15) Business Days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part, or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (5) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (6) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. SECTION 2.7. REPLACEMENT NOTES. 34 If any mutilated Note is surrendered to the Trustee, or the Company and the Trustee receives evidence to their satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon the written order of the Company signed by an Officer of the Company, shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company and the Trustee may charge for their expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. SECTION 2.8. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or the Guarantor or an Affiliate of the Company or the Guarantor holds the Note. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, the Guarantor, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.9. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or the Guarantor, or by any Affiliate of the Company or the Guarantor shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes shown on the Trustee's register as being 35 so owned shall be so disregarded. Notwithstanding the foregoing, Notes that are to be acquired by the Company or the Guarantor or an Affiliate of the Company or the Guarantor pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by such entity until legal title to such Notes passes to such entity. SECTION 2.10. TEMPORARY NOTES. Until Definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes upon a written order of the Company signed by an Officer of the Company. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall upon receipt of a written order of the Company signed by an Officer authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder or which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly cancelled by the Trustee. All Notes surrendered for registration of transfer, exchange or payment, if surrendered to any Person other than the Trustee, shall be delivered to the Trustee. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation. Subject to Section 2.07 hereof, the Company may not issue new Notes to replace Notes that it has redeemed or paid or that have been delivered to the Trustee for cancellation. All cancelled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company, unless by a written order, signed by an Officer of the Company, the Company shall direct that cancelled Notes be returned to it. SECTION 2.12. DEFAULTED INTEREST. If the Company or the Guarantor defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five (5) Business Days prior to the payment date, in 36 each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall fix or cause to be fixed each such special record date and payment date, and shall promptly thereafter, notify the Trustee of any such date. At least fifteen (15) days before the special record date, the Company (or the Trustee, in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.13. RECORD DATE. The record date for purposes of determining the identity of Holders of the Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA Section 316(c). SECTION 2.14. COMPUTATION OF INTEREST. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 2.15. CUSIP NUMBER. The Company in issuing the Notes may use a "CUSIP" number, and if it does so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; PROVIDED that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.1. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30 days but not more than 60 days before a redemption date (unless a shorter period is acceptable to the Trustee) an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the redemption price. 37 If the Company is required to make an offer to purchase Notes pursuant to Section 4.10 or 4.14 hereof, it shall furnish to the Trustee, at least 30 days before the scheduled purchase date, an Officers' Certificate setting forth (i) the section of this Indenture pursuant to which the offer to purchase shall occur, (ii) the terms of the offer, (iii) the principal amount of Notes to be purchased, (iv) the purchase price, (v) the purchase date and (vi) and further setting forth a statement to the effect that (a) the Company or one its Subsidiaries has affected an Asset Sale and there are Excess Proceeds aggregating more than $5.0 million or (b) a Change of Control has occurred, as applicable. SECTION 3.2. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a PRO RATA basis or by lot; PROVIDED that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. SECTION 3.3. NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (1) the redemption date; (2) the redemption price for the Notes and accrued interest, and Liquidated Damages, if any; (3) if any Note is being redeemed in part, the portion of the principal amount of such Notes to be redeemed and that, after the redemption date, upon surrender of such Note, a new Note or Notes in principal 38 amount equal to the unredeemed portion shall be issued upon surrender of the original Note; (4) the name and address of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that, unless the Company defaults in making such redemption payment, interest and Liquidated Damages, if any, on Notes called for redemption cease to accrue on and after the redemption date; (7) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense; PROVIDED, HOWEVER, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date (or such shorter period as shall be acceptable to the Trustee), an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in the notice as provided in the preceding paragraph. The notice mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Note shall not affect the validity of the proceeding for the redemption of any other Note. SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price plus accrued and unpaid interest and Liquidated Damages, if any, to such date. A notice of redemption may not be conditional. SECTION 3.5. DEPOSIT OF REDEMPTION OR PURCHASE PRICE. 39 On or before 10:00 a.m. (New York City time) on each redemption date or the date on which Notes must be accepted for purchase pursuant to Section 4.10 or 4.14, the Company shall deposit with the Trustee or with the Paying Agent in immediately available funds money sufficient to pay the redemption or purchase price of and accrued and unpaid interest and Liquidated Damages, if any, on all Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent shall promptly return to the Company upon its written request any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption or purchase price of (including any applicable premium) and accrued and unpaid interest and Liquidated Damages, if any, on all Notes to be redeemed or purchased. If Notes called for redemption or tendered in an Asset Sale Offer or Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent money sufficient to pay the redemption or purchase price of and unpaid and accrued interest and Liquidated Damages, if any, on all Notes to be redeemed or purchased, on and after the redemption or purchase date interest and Liquidated Damages, if any, shall cease to accrue on the Notes or the portions of Notes called for redemption or tendered and not withdrawn in an Asset Sale Offer or Change of Control Offer (regardless of whether certificates for such securities are actually surrendered). If a Note is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal and Liquidated Damages, if any, from the redemption or purchase date until such principal and Liquidated Damages, if any, is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Notes and in Section 4.01 hereof. SECTION 3.6. NOTES REDEEMED IN PART. Upon surrender of a Note that is redeemed in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.7. OPTIONAL REDEMPTION. (a) Except as set forth in the next paragraph, the Notes will not be redeemable at the Company's option prior to March 15, 2003. Thereafter, the Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the 40 redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 15 of the years indicated below:
YEAR PERCENTAGE 2003 104.938% 2004 103.292% 2005 101.646% 2006 and thereafter 100.000%
(b) Notwithstanding the foregoing, at any time prior to March 15, 2001, the Company may redeem up to 40% of the original aggregate principal amount of Notes at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of a Public Equity Offering; PROVIDED that at least 60% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of each such redemption; and PROVIDED, further, that such redemption shall occur within 45 days of the date of the closing of such Public Equity Offering. SECTION 3.8. MANDATORY REDEMPTION. Except as set forth under Sections 3.09, 4.10 and 4.14 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.9. REPURCHASE OFFERS. In the event that the Company shall be required to commence an offer to all Holders to repurchase Notes (a "REPURCHASE OFFER") pursuant to Section 4.10 hereof, an "ASSET SALE OFFER," or pursuant to Section 4.14 hereof, a "CHANGE OF CONTROL OFFER," the Company shall follow the procedures specified below. Within 30 days following any Change of Control or the date on which the aggregate amount of Excess Proceeds exceeds $5 million pursuant to Section 4.10 hereof, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control or give rise to the Asset Sale Offer and offering to repurchase Notes as required by Section 4.10 hereof, in the case of an Asset Sale Offer, or by Section 4.14 hereof, in the case of a Change of Control Offer, on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "PURCHASE DATE"). A Repurchase Offer shall remain open for a period of twenty (20) Business Days following its commencement and no longer, except to the 41 extent that a longer period is required by applicable law (the "OFFER PERIOD"). On the Purchase Date, the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof, in the case of an Asset Sale Offer, or 4.14 hereof, in the case of a Change of Control Offer (the "OFFER AMOUNT") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Repurchase Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest or Liquidated Damages, if any, shall be payable to Holders who tender Notes pursuant to the Repurchase Offer. Upon the commencement of a Repurchase Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to such Repurchase Offer. The Repurchase Offer shall be made to all Holders. The notice, which shall govern the terms of the Repurchase Offer, shall describe the transaction or transactions that constitute the Change of Control or gave rise to the Asset Sale Offer, as the case may be and shall state: (a) that the Repurchase Offer is being made pursuant to this Section 3.09 and Section 4.10 or 4.14 hereof, as the case may be, and the length of time the Repurchase Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Note not tendered or accepted for payment shall continue to accrue interest; (d) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest and Liquidated Damages, if any, after the Purchase Date; (e) that Holders electing to have a Note purchased pursuant to a Repurchase Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note, duly completed, or transfer by book-entry transfer, to the Company, the Depositary, or the Paying Agent at the address specified in the notice not later than the close of business on the last day of the Offer Period; 42 (f) that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (g) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a PRO RATA basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and (h) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On the Purchase Date, the Company shall, to the extent lawful, (i) accept for payment, on a PRO RATA basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Repurchase Offer, or if less than the Offer Amount has been tendered, all Notes tendered, (ii) deliver or cause the Paying Agent or depository, as the case may be, to deliver to the Trustee Notes so accepted and (iii) deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than two (2) Business Days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, plus any accrued and unpaid interest and Liquidated Damages, if any, thereon, and the Company shall promptly issue a new Note, and the Trustee shall authenticate and mail or deliver such new Note, to such Holder, equal in principal amount to any unpurchased portion of such Holder's Notes surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce in a newspaper of general circulation or in a press release provided to a nationally recognized financial wire service the results of the Repurchase Offer on the Purchase Date. Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01, 3.02, 3.05 and 3.06 hereof. 43 ARTICLE 4 COVENANTS SECTION 4.1. PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. Principal, premium and Liquidated Damages, if any, and interest, shall be considered paid for all purposes hereunder on the date the Paying Agent if other than the Company, the Guarantor or a Subsidiary thereof holds, as of 10:00 a.m. (New York City time) money deposited by the Company in immediately available funds and designated for and sufficient to pay all such principal, premium and Liquidated Damages, if any, and interest, then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.2. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York an office or agency (which may be an office of the Trustee or an affiliate of the Trustee or Registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give 44 prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. SECTION 4.3. COMMISSION REPORTS. Whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company (or MSC, as the case may be) shall furnish to the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company (or MSC, as the case may be) were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon from certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company (or MSC, as the case may be) were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company (or MSC, as the case may be) shall file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and MSC shall furnish to the Holders, and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. The Company shall at all times comply with TIA Section 314(a). The financial information to be distributed to Holders of Notes shall be filed with the Trustee and mailed to the Holders at their addresses appearing in the register of Notes maintained by the Registrar, within 15 days after the same would be required to be filed with the Commission if the Company were required to file the Forms containing such financial information. The Company shall provide the Trustee with a sufficient number of copies of all reports and other documents and information and, if requested by the Company, the Trustee will deliver such reports to the Holders under this Section 4.03. SECTION 4.4. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, no later than the date year-end financial statements are required to be filed with the Trustee and mailed to the Holders under Section 4.03 hereof, an Officers' Certificate stating that a review of 45 the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture (including, with respect to any Restricted Payments made during such year, the basis upon which the calculations required by Section 4.07 hereof were computed, which calculations may be based on the Company's latest available financial statements), and further stating, as to each such Officer signing such certificate, that, to the best of his or her knowledge, each entity has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that, to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of the principal of, premium or Liquidated Damages, if any, or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, in connection with the year-end financial statements delivered pursuant to Section 4.03 hereof, the Company shall use its best efforts to deliver a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Section 5.01 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. In the event that such written statement of the Company's independent public accountants cannot be obtained, the Company shall deliver an Officers' Certificate certifying that it has used its best efforts to obtain such statements and was unable to do so. The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.5. TAXES. 46 Each of the Company and the Guarantor shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency all material taxes, assessments and governmental levies, except such as are contested in good faith and by appropriate proceedings and with respect to which appropriate reserves have been taken in accordance with GAAP. SECTION 4.6. STAY, EXTENSION AND USURY LAWS. Each of the Company and the Guarantor covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and each of the Company and the Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.7. RESTRICTED PAYMENTS. From and after the date hereof the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any direct or indirect parent of the Company; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is PARI PASSU with or subordinated to the Notes (other than the Notes and the 2003 Notes), except a payment of interest or principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "RESTRICTED PAYMENTS"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to 47 incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (ii) and (iii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the date of the Indenture of Equity Interests of the Company or MSC (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company or MSC that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary, the fair market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to the Company or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date of the Indenture. The foregoing provisions shall not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests of the Company or MSC in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company or MSC (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of PARI PASSU or subordinated Indebtedness with the net cash proceeds from an 48 incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; (v) any repurchase of Equity Interests of the Company or MSC from present and former employees and directors of the Company or its Subsidiaries or MSC in an aggregate amount not to exceed $5 million; (vi) Permitted Investments; or (vii) other Restricted Payments in an aggregate amount not to exceed $5 million. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation shall only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this covenant were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. SECTION 4.8. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the 49 Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the Credit Facility as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive in the aggregate (as determined by the Board of Directors in good faith) with respect to such dividend and other payment restrictions than those contained in the Credit Facility as in effect on the date of the Indenture, (c) the Indenture and the Notes and the 2003 Indenture and the 2003 Notes, (d) any applicable law, rule, regulation or order, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) Capital Lease Obligations, mortgage financings and purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (i) contracts for the sale of assets, including without limitation customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, and (j) any other agreement or instrument evidencing or relating to secured Indebtedness of the Company or any Restricted Subsidiary otherwise permitted to be issued pursuant to Section 4.09 and Section 4.12 that limit the right of the debtor to dispose of the property or assets securing such Indebtedness. SECTION 4.9. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. 50 The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "INCUR") any Indebtedness (including Acquired Debt) and the Company will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Cash Flow Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a Pro Forma Basis. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "PERMITTED INDEBTEDNESS"): (i) the incurrence by the Company of Indebtedness under the Credit Facility in an aggregate principal amount not to exceed $182.0 million outstanding at any time; (ii) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company of Indebtedness represented by the Notes; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings, purchase money obligations and Attributable Debt in an aggregate principal amount not to exceed $15 million in any one year; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by the Company or one of its Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Subsidiaries; PROVIDED FURTHER that the principal amount (or accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5 million; 51 (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace, Indebtedness that was permitted by the Indenture to be incurred; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging currency risk or interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding; (ix) the guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this covenant and the guarantee by Subsidiaries of Senior Debt of the Company; (x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (xi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including without limitation letters of credit in respect to workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit 52 or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; and (xiii) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness, including Attributable Debt incurred after the date of the Indenture, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xiii), not to exceed $5 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xiii) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. The amount of Indebtedness issued at a price which is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in accordance with GAAP. Neither the accrual of interest nor the issuance of additional Indebtedness in the form of additional promissory notes or otherwise in lieu of the payment of interest nor the accretion of accreted value will be deemed to be an incurrence of Indebtedness for purposes of this covenant. SECTION 4.10. ASSET SALES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 80% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash; PROVIDED that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or 53 such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 90 days (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, (a) to permanently repay Senior Debt (and to correspondingly reduce commitments with respect thereto in the case of revolving borrowings) or existing 2003 Notes, or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the Credit Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "EXCESS PROCEEDS." When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be required to make an offer to all Holders of Notes (an "ASSET SALE OFFER") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in Section 3.09 hereof. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a PRO RATA basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. SECTION 4.11. TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "AFFILIATE TRANSACTION") unless (i) such Affiliate Transaction is entered into in good faith and on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any 54 Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; PROVIDED that the following shall not be deemed Affiliate Transactions: (q) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (r) transactions between or among the Company and/or its Restricted Subsidiaries, (s) Permitted Investments and Restricted Payments that are permitted by the provisions of Section 4.07 hereof, (t) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any of its Restricted Subsidiaries, (u) consulting and other advisory fees paid to MSC not to exceed $250,000 in any one year, and (v) transactions pursuant to any contract or agreement in effect on the date hereof as the same may be amended, modified or replaced from time to time so long as any such amendment, modification or replacement is no less favorable to the Company and its Restricted Subsidiaries than the contract or agreement as in effect on the date hereof or is approved by a majority of the disinterested directors of the Company. SECTION 4.12. LIENS. The Company shall not and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or otherwise cause or suffer to exist any Lien that secures obligations under any PARI PASSU Indebtedness or subordinated Indebtedness on any asset or property now owned or hereafter acquired by the Company or any of its Subsidiaries, or any income or profits therefrom or assign or convey any right to receive income therefrom, unless the Notes are equally and ratably secured with the obligations so secured until such time as such obligations are no longer secured by a Lien; PROVIDED, that in any case involving a Lien securing subordinated Indebtedness, such Lien is subordinated to the Lien securing the Notes to the same extent that such subordinated Indebtedness is subordinated to the Notes. SECTION 4.13. SALE AND LEASEBACK TRANSACTIONS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; PROVIDED that the 55 Company may enter into a sale and leaseback transaction if (i) the Company could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to Section 4.09 hereof and (b) incurred a Lien to secure such Indebtedness pursuant to Section 4.12 hereof, (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, Section 4.10 hereof. SECTION 4.14. OFFER TO PURCHASE UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "CHANGE OF CONTROL PAYMENT"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "CHANGE OF CONTROL PAYMENT DATE"), pursuant to the procedures required by Section 3.09 hereof and described in such notice. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; PROVIDED that each such new Note will be in a principal 56 amount of $1,000 or an integral multiple thereof. Prior to complying with the provisions of this Section 4.14, but in any event within 30 days following a Change of Control, the Company shall either repay all outstanding Indebtedness under the Credit Facility and terminate the commitments thereunder or obtain the requisite consents under the Credit Facility to permit the repurchase of Notes required by this Section 4.14. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of this Indenture are applicable. Except as described above with respect to a Change of Control, this Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. SECTION 4.15. CORPORATE EXISTENCE. Subject to Section 4.14 and Article 5 hereof, as the case may be, each of the Company and the Guarantor shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Subsidiaries in accordance with the respective organizational documents (as the same may be amended from time to time) of the Guarantor, the Company or any such Subsidiary and the rights (charter and statutory), licenses and franchises of the Guarantor, the Company and its Subsidiaries; PROVIDED that neither the Guarantor nor the Company shall be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of the Guarantor or any Subsidiaries, if the Board of Directors of the Company or the Guarantor shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Guarantor, the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. SECTION 4.16. LIMITATION ON ISSUANCES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES. The Company (i) shall not, and shall not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof, and (ii) will not permit any Wholly Owned Restricted Subsidiary of the Company to 57 issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company except that a Wholly Owned Restricted Subsidiary of the Company may issue shares of common stock with no preferences or special rights or privileges and with no redemption or prepayment provisions provided the cash Net Proceeds from such issuance of such common stock are applied in accordance with Section 4.10 hereof. SECTION 4.17. LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. The Company shall not permit any Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU with or subordinate in right of payment to the Notes ("GUARANTEED INDEBTEDNESS"), unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee (a "SUBSIDIARY GUARANTEE") of payment of the Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Notes. Notwithstanding the foregoing, any such Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. SECTION 4.18. BUSINESS ACTIVITIES. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as 58 would not be material to the Company and its Restricted Subsidiaries taken as a whole. SECTION 4.19. PAYMENT FOR CONSENTS. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions hereof or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. SECTION 4.20. ANTI-LAYERING. The Company shall not, and the Company will not permit any of its Subsidiaries to, incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is both (a) subordinate or junior in right of payment to any Senior Debt and (b) senior in any respect in right of payment to the Notes; and the Guarantor shall not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is both (a) subordinate or junior in right of payment to its Guarantor Senior Debt and (b) senior in right of payment to its Note Guarantee. SECTION 4.21. RESTRICTIVE COVENANT OF MSC. MSC shall not engage in any activities other than holding 100% of the Capital Stock of the Company and providing services to and management of the Company and it will not incur any liabilities other than any liabilities relating to the Guarantee of the Company's obligations pursuant to the Credit Facility, the Guarantee of the Notes, the Guarantee of the 2003 Notes, the Guarantee of any Indebtedness permitted by Section 4.09 and any other obligations or liabilities incidental to holding 100% of the Capital Stock of the Company. ARTICLE 5 SUCCESSORS SECTION 5.1. MERGER, CONSOLIDATION OR SALE OF ASSETS. The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or 59 more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; (iv) except in the case of a merger of the Company with or into MSC or a Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and determined on a Pro Forma Basis, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof. SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets, of the Company in accordance with Section 5.01 hereof, the successor entity or Person formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition, the provisions of this Indenture referring to the "COMPANY" shall refer instead to the successor entity or Person and not to the Company), and shall exercise every right and power of, the Company under this Indenture with the same effect as if such successor entity or Person had been named as the Company herein; PROVIDED, that, (i) solely for the purposes of computing Consolidated Net Income for purposes of clause (c) of the first paragraph of Section 4.07 hereof, the Consolidated Net Income of any person other than the Company and its Subsidiaries shall be included only for periods subsequent to the effective time of such merger, consolidation, sale, assignment, transfer, lease, conveyance or other disposition; and (ii) in the case of any sale, assignment, transfer, lease, conveyance or other disposition of less than all of the assets of the predecessor Company, the predecessor Company shall not be released or discharged from the obligation to pay the principal of or interest and Liquidated Damages, if any, on the Notes. 60 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.1. EVENTS OF DEFAULT. Each of the following constitutes an "EVENT OF DEFAULT": (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes (whether or not prohibited by the Subordination provisions of the Indenture); (ii) default in payment when due of principal of or premium, if any, on the Notes (whether or not prohibited by the Subordination provisions of the Indenture); (iii) failure by the Company to comply with the provisions described under Sections 4.10 or 4.14 or Article 5 hereof; (iv) failure by the Company for 30 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under Section 4.07 or 4.09 hereof; (v) failure by the Company for 60 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in this Indenture or the Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date hereof, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "PAYMENT DEFAULT") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $15.0 million or more; 61 (vii) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $15.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (viii) the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, pursuant to or within the meaning of Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) generally is not paying its debts as they become due; or (ix) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (C) orders the liquidation of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. 62 The term "CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. SECTION 6.2. ACCELERATION. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately; PROVIDED, HOWEVER, that if any Indebtedness or Obligation is outstanding pursuant to the Credit Facility, upon a declaration of acceleration by the Holders of the Notes or the Trustee, all principal and interest under this Indenture shall be due and payable upon the earlier of (x) the day which is five Business Days after the provision to the Company, the Credit Agent and the Trustee of such written notice of acceleration or (y) the date of acceleration of any Indebtedness under the Credit Facility; and PROVIDED, FURTHER, that in the event of an acceleration based upon an Event of Default set forth in clause (vi) of Section 6.01 hereof, such declaration of acceleration shall be automatically annulled if the holders of Indebtedness which is the subject of such acceleration have rescinded their declaration of acceleration in respect of such Indebtedness or such Payment Default shall have been cured or waived within 30 days thereof and no other Event of Default has occurred during such 30-day period which has not been cured, paid or waived. Notwithstanding the foregoing, in the case of an Event of Default as described in clause (viii) or (ix) of Section 6.01 hereof, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce this Indenture or the Notes except as provided in this Indenture. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to the optional redemption provisions of Section 3.07(a) hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to March 15, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to March 15, 2003, then, to the extent permitted by law, the amount payable in respect of such Notes for purposes of this paragraph for each of the twelve-month periods beginning on March 15 of the years indicated below shall be set forth below, expressed as percentages of the principal amount that would otherwise be due but for the provisions of this sentence, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of payment:
YEAR PERCENTAGE 63 1998 109.875% 1999 108.888% 2000 107.900% 2001 106.913% 2002 105.925%
SECTION 6.3. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, interest and Liquidated Damages, if any, on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. SECTION 6.4. WAIVER OF PAST DEFAULTS. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under this Indenture (including any acceleration (other than an automatic acceleration resulting from an Event of Default under clause (viii) or (ix) of Section 6.01 hereof) except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes (other than as a result of an acceleration), which shall require the consent of all of the Holders of the Notes then outstanding. SECTION 6.5. CONTROL BY MAJORITY. The Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust power conferred on it. However, (i) the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly 64 prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability, and (ii) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. In case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Notwithstanding any provision to the contrary in this Indenture, the Trustee is under no obligation to exercise any of its rights or powers under this Indenture at the request of any Holder of Notes, unless such Holder shall offer to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. SECTION 6.6. LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect to this Indenture, the Note Guarantee or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default or the Trustee receives such notice from the Company; (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.7. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, interest, and Liquidated Damages, if any, on the Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to 65 bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.8. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(i) or (ii) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium and Liquidated Damages, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other securities or property payable or deliverable upon the conversion or exchange of the Notes or on any such claims and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. 66 If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; SECOND: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, interest, and Liquidated Damages, if any, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, interest, and Liquidated Damages, if any, respectively; THIRD: without duplication, to the Holders for any other Obligations owing to the Holders under this Indenture and the Notes; and FOURTH: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7 TRUSTEE SECTION 7.1. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing of which a Responsible Officer of the Trustee has knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of 67 care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture or the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture or the TIA and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. 68 (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.2. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely on the truth of the statements and correctness of the opinions contained in, and shall be protected from acting or refraining from acting upon, any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. Prior to taking, suffering or admitting any action, the Trustee may consult with counsel of the Trustee's own choosing and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company or the Guarantor shall be sufficient if signed by an Officer of the Company or the Guarantor, as applicable. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE. 69 The Trustee in its individual or any other capacity may become the owner of Notes and may otherwise deal with the Company, the Guarantor or any Affiliate of the Company or the Guarantor with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.4. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Note Guarantee or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.5. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note pursuant to Section 6.01(i) or (ii) hereof, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the Commission and each stock exchange on which the Company has informed the Trustee in writing the Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify 70 the Trustee when the Notes are listed on any stock exchange and of any delisting thereof. SECTION 7.7. COMPENSATION AND INDEMNITY. The Company and the Guarantor shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. To the extent permitted by law, the Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company and the Guarantor shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company and the Guarantor (including this Section 7.07) and defending itself against any claim (whether asserted by the Company, the Guarantor or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company and the Guarantor promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company and the Guarantor shall not relieve the Company and the Guarantor of its obligations hereunder. The Company and the Guarantor shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company and the Guarantor shall pay the reasonable fees and expenses of such counsel. The Company and the Guarantor need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company and the Guarantor under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's and the Guarantor' payment obligations in this Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal, interest and Liquidated Damages, if any, on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(viii) or (ix) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and 71 counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.8. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10 hereof, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 72 A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and the duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to the Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, PROVIDED that all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee or any Agent consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee or any Agent, as applicable. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities. The Trustee and its direct parent shall at all times have a combined capital surplus of at least $50.0 million as set forth in its most recent annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE 73 SECTION 8.1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company and the Guarantor may, at the option of their respective Boards of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes and Note Guarantee upon compliance with the conditions set forth below in this Article 8. SECTION 8.2. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and the Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their respective obligations with respect to all outstanding Notes and Note Guarantee on the date the conditions set forth below are satisfied (hereinafter, "LEGAL DEFEASANCE"). For this purpose, Legal Defeasance means that the Company and the Guarantor shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes and Note Guarantee, which shall thereafter be deemed to be "OUTSTANDING" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all their respective other obligations under such Notes and Note Guarantee and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to in Section 8.04(a); (b) the Company's obligations with respect to such Notes under Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.10 and 4.02 hereof; (c) the rights, powers, trusts, duties and immunities of the Trustee including without limitation thereunder Section 7.07, 8.05 and 8.07 hereof and the Company's obligations in connection therewith and (d) the provisions of this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. SECTION 8.3. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, each of the Company and the Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Sections 3.09, 4.05, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19, 4.20, 4.21 and 5.01 hereof with respect to the outstanding Notes and Note Guarantee on 74 and after the date the conditions set forth below are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the Notes and Note Guarantee shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes and Note Guarantee shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes and Note Guarantee, the Company or any of its Subsidiaries or the Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes and Note Guarantee shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(iii) through 6.01(v) hereof shall not constitute Events of Default. SECTION 8.4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Notes and Note Guarantee: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as shall be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.02 hereof, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Notes shall not recognize income, gain or loss for federal income tax purposes as a result of 75 such Legal Defeasance and shall be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.03 hereof, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and shall be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that after the 91st day following the deposit, the trust funds shall not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.5. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. 76 Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "TRUSTEE") pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, interest and Liquidated Damages, if any, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the written request of the Company and be relieved of all liability with respect to any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.6. REPAYMENT TO THE COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, interest or Liquidated Damages, if any, on any Note and remaining unclaimed for one year after such principal, and premium, if any, or interest or Liquidated Damages, if any, has become due and payable shall be paid to the Company on its written request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less 77 than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. SECTION 8.7. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company and the Guarantor under this Indenture, the Notes and the Note Guarantee shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; PROVIDED, HOWEVER, that, if the Company makes any payment of principal of, premium, if any, interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 Amendment, Supplement and Waiver SECTION 9.1. WITHOUT CONSENT OF HOLDERS OF THE NOTES. Notwithstanding Section 9.02 of this Indenture, without the consent of any Holder of Notes, the Company, the Guarantor and the Trustee may amend or supplement this Indenture, the Notes or the Note Guarantee: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for the assumption of the Company's or the Guarantor's obligations to the Holders of the Notes in the case of a merger or consolidation; (d) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights hereunder of any Holder of the Notes; (e) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; or 78 (f) to allow any Subsidiary to Guarantee the Notes. Upon the written request of the Company accompanied by a resolution of its Board of Directors of the Company authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company and the Guarantor in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.2. WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.02, or as provided in Section 10.13 or Section 12.13, this Indenture, the Notes or the Note Guarantee may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer, for Notes), and, any existing Default or Event of Default or compliance with any provision of this Indenture, the Notes or the Note Guarantee may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with or a tender offer or exchange offer for the Notes). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company and the Guarantor in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may, but shall not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of each Note affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any 79 way impair or affect the validity of any such amended or supplemental indenture or waiver. Subject to Sections 6.02, 6.04, 6.07, 10.13 and 12.13 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding may amend or waive compliance in a particular instance by the Company or the Guarantor with any provision of this Indenture, the Notes or the Note Guarantee. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 3.09, 4.10 and 4.14 hereof); (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in Section 6.04 or 6.07 hereof; (g) waive a redemption or repurchase payment with respect to any Note (other than a payment required by Section 4.10 or 4.14 hereof); or (h) make any change in the amendment and waiver provisions of this Article 9. SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture, the Note Guarantee or the Notes shall be set forth in an amended or supplemental indenture that complies with the TIA as then in effect. SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every 80 subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. When an amendment, supplement or waiver becomes effective in accordance with its terms, it thereafter binds every Holder. The Company may, but shall not be obligated to, fix a record date for determining which Holders of the Notes must consent to such amendment, supplement or waiver. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders of Notes furnished for the Trustee prior to such solicitation pursuant to Section 2.05 hereof or (ii) such other date as the Company shall designate. SECTION 9.5. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company and the Guarantor may not sign an amendment or supplemental indenture until their respective Boards of Directors approve it. In signing or refusing to sign any amended or supplemental indenture the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon, in addition to the documents required by Section 13.04 hereof, an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company and the Guarantor in accordance with its terms. ARTICLE 10 81 SUBORDINATION SECTION 10.1. AGREEMENT TO SUBORDINATE. The Company agrees, and each Holder of Notes by accepting a Note agrees, that the Indebtedness evidenced by the Note is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full in cash of all Senior Debt (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt. Except to the extent set forth under Section 4.10, the Notes shall be PARI PASSU in right of payment with the 2003 Notes. SECTION 10.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors in any Insolvency or Liquidation Proceeding with respect to the Company, all amounts due or to become due under or with respect to all Senior Debt shall first be paid in full in cash before any payment is made on account of the Notes. Upon any such Insolvency or Liquidation Proceeding, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Notes or the Trustee would be entitled shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holders of the Notes or by the Trustee if received by them, directly to the holders of Senior Debt (PRO RATA to such holders on the basis of the amounts of Senior Debt held by such holders) or their Representative or Representatives, as their interests may appear, for application to the payment of the Senior Debt remaining unpaid until all such Senior Debt has been paid in full in cash, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Senior Debt. SECTION 10.3. DEFAULT ON DESIGNATED SENIOR DEBT. (a) In the event of and during the continuation of any default in the payment of principal of, interest or premium, if any, on any Senior Debt, or any Obligation owing from time to time under or in respect of Senior Debt, or in the event that any event of default (other than a payment default) with respect to any Senior Debt shall have occurred and be continuing and shall have resulted in such Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, or (b) if any event of default other than as described in clause (a) above with respect to any Designated Senior Debt shall have occurred and be continuing permitting the holders of such Designated Senior Debt (or their Representative or Representatives) to declare 82 such Designated Senior Debt due and payable prior to the date on which it would otherwise have become due and payable, then no payment shall be made by or on behalf of the Company on account of the Notes (x) in case of any payment or nonpayment default specified in (a), unless and until such default shall have been cured or waived in writing in accordance with the instruments governing such Senior Debt or such acceleration shall have been rescinded or annulled, or (y) in case of any nonpayment event of default specified in (b), during the period (a "PAYMENT BLOCKAGE PERIOD") commencing on the date the Company or the Trustee receives written notice (a "PAYMENT NOTICE") of such event of default (which notice shall be binding on the Trustee and the Holders of Notes as to the occurrence of such nonpayment event of default) from the Credit Agent (or other holders of Designated Senior Debt or their Representative or Representatives) and ending on the earliest of (A) 179 days after such date, (B) the date, if any, on which such Designated Senior Debt to which such default relates is paid in full in cash or such default is cured or waived in writing in accordance with the instruments governing such Designated Senior Debt by the holders of such Designated Senior Debt and (C) the date on which the Trustee receives written notice from the Credit Agent (or other holders of Designated Senior Debt or their Representative or Representatives), as the case may be, terminating the Payment Blockage Period. During any consecutive 360-day period, the aggregate of all Payment Blockage Periods shall not exceed 179 days and there shall be a period of at least 181 consecutive days in each consecutive 360-day period when no Payment Blockage Period is in effect. No event of default which existed or was continuing with respect to the Senior Debt for which notice commencing a Payment Blockage Period was given on the date such Payment Blockage Period commenced shall be or be made the basis for the commencement of any subsequent Payment Blockage Period unless such event of default is cured or waived for a period of not less than 90 consecutive days. SECTION 10.4. ACCELERATION OF NOTES. If payment of the Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. SECTION 10.5. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder of a Note receives any payment of any Obligations with respect to the Notes at a time when such payment is prohibited by Section 10.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remain- 83 ing unpaid to the extent necessary to pay such Obligations in full in cash in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders of the Notes or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.6. NOTICE BY THE COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Notes to violate this Article, which notice shall specifically refer to this Article 10, but failure to give such notice shall not affect the subordination of the Notes to the Senior Debt as provided in this Article. SECTION 10.7. SUBROGATION. After all Senior Debt is paid in full in cash and until the Notes are paid in full, Holders of the Notes shall be subrogated (equally and ratably with all other PARI PASSU indebtedness) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of the Notes have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders of the Notes is not, as between the Company and Holders of the Notes, a payment by the Company on the Senior Debt. SECTION 10.8. RELATIVE RIGHTS. This Article defines the relative rights of Holders of the Notes and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders of the Notes, the obligations of the Company, which are absolute and unconditional, to pay principal of and interest on the Notes in accordance with their terms; 84 (2) affect the relative rights of Holders of the Notes and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder of the Notes from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of the Notes. If the Company fails because of this Article to pay principal of or interest on a Note on the due date, the failure is still a Default or Event of Default. SECTION 10.9. SUBORDINATION MAY NOT BE IMPAIRED BY THE COMPANY. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt, or any of them, may, at any time and from time to time, without the consent of or notice to the Holders of the Notes, without incurring any liabilities to any Holder of any Notes and without impairing or releasing the subordination and other benefits provided in this Indenture or the obligations of the Holders of the Notes to the holders of the Senior Debt, even if any right of reimbursement or subrogation or other right or remedy of any Holder of Notes is affected, impaired or extinguished thereby, do any one or more of the following: (1) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend, increase or alter, the terms of any Senior Debt, any security therefor or guaranty thereof or any liability of any obligor thereon (including any guarantor) to such holder, or any liability incurred directly or indirectly in respect thereof or otherwise amend, renew, exchange, extend, modify, increase or supplement in any manner any Senior Debt or any instrument evidencing or guaranteeing or securing the same or any agreement under which Senior Debt is outstanding; (2) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise 85 securing Senior Debt or any liability of any obligor thereon, to such holder, or any liability incurred directly or indirectly in respect thereof; (3) settle or compromise any Senior Debt or any other liability of any obligor of the Senior Debt to such holder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Senior Debt) in any manner or order; and (4) fail to take or to record or to otherwise perfect, for any reason or for no reason, any lien or security interest securing Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other person, elect any remedy and otherwise deal freely with any obligor and any security for the Senior Debt or any liability of any obligor to such holder or any liability incurred directly or indirectly in respect thereof. SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of the Notes for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on 86 the Notes, unless the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Notes to violate this Article, which notice shall specifically refer to this Article 10. Only the Company or a Representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes, including without limitation the timely filing of a claim for the unpaid balance of the Notes held by such Holder in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time to file such claim, the Representatives of the Designated Senior Debt, including the Credit Agent, are hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. SECTION 10.13. AMENDMENTS. Any amendment to the provisions of this Article 10 shall require the consent of the Holders of at least 75% in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of the Holders of Notes. ARTICLE 11 Guarantee of Notes SECTION 11.1. NOTE GUARANTEE. Subject to Section 11.03 hereof, the Guarantor hereby unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and 87 enforceability of this Indenture, the Notes and the Obligations of the Company hereunder and thereunder, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Notes will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal, premium, if any, (to the extent permitted by law) interest and Liquidated Damages, if any, on the Notes, and all other payment Obligations of the Company to the Holders or the Trustee hereunder or thereunder, will be promptly paid in full and performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed for whatever reason the Guarantor will be obligated to pay the same immediately. An Event of Default under this Indenture or the Notes shall constitute an event of default under the Note Guarantee, and shall entitle the Holders to accelerate the Obligations of the Guarantor hereunder in the same manner and to the same extent as the Obligations of the Company. The Guarantor hereby agree that its Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any acion to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of the Guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that, subject to the provisions of Article 8 of the Indenture, this Note Guarantee will not be discharged except by complete performance of the Obligations contained in the Notes and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantor, or any Note Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Guarantor, any amount paid by either to the Trustee or such Holder, this Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor agrees that it shall not be entitled to, and hereby waives, any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby. The Guarantor further agrees that, as between the Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of this Note Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such Obligations as provided in Article 6 88 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purpose of this Note Guarantee. SECTION 11.2. EXECUTION AND DELIVERY OF NOTE GUARANTEE. To evidence its Note Guarantee set forth in Section 11.01, the Guarantor hereby agrees that a notation of such Note Guarantee substantially in the form of Exhibit D shall be endorsed by an Officer of the Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of the Guarantor, by manual or facsimile signature, by an Officer of the Guarantor. The Guarantor hereby agrees that its Note Guarantee set forth in Section 11.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Note Guarantee. If an Officer whose signature is on this Indenture or on the Note Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Note Guarantee is endorsed, the Note Guarantee shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Note Guarantee set forth in this Indenture on behalf of the Guarantor. SECTION 11.3. LIMITATION ON GUARANTOR LIABILITY. For purposes hereof, the Guarantor's liability shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Notes and this Indenture and (ii) the amount, if any, which would not have (A) rendered the Guarantor "INSOLVENT" (as such term is defined in the United States Bankruptcy Code and in the Debtor and Creditor Law of the State of New York) or (B) left the Guarantor with unreasonably small capital at the time its Note Guarantee of the Notes was entered into; PROVIDED that, it will be a presumption in any lawsuit or other proceeding in which the Guarantor is a party that the amount guaranteed pursuant to the Note Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of the Guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Guarantor is the amount set forth in clause (ii) above. In making any determination as to solvency or sufficiency of capital of the Guarantor in accordance with the previous sentence, the right of the Guarantor to contribution from another guarantor, and any other rights the Guarantor may have, contractual or otherwise, shall be taken into account. SECTION 11.4. "TRUSTEE" TO INCLUDE PAYING AGENT. 89 In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "TRUSTEE" as used in this Article 11 shall in each case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully and for all intents and purposes as if such Paying Agent were named in this Article 11 in place of the Trustee. ARTICLE 12 Subordination of Note Guarantee SECTION 12.1. AGREEMENT TO SUBORDINATE. The Guarantor agrees, and each Holder by accepting a Note agrees, that all Obligations evidenced by the Note Guarantee shall be subordinated in right of payment, to the extent and in the manner provided in this Article 12, to the prior payment in full in cash of all Guarantor Senior Debt (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Guarantor Senior Debt. The Note Guarantee shall be PARI PASSU in right of payment with the Guarantee of the 2003 Notes. SECTION 12.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any payment or distribution of assets of the Guarantor of any kind or character, whether in cash, property or securities, to creditors in any Insolvency or Liquidation Proceeding with respect to the Guarantor, all amounts due or to become due under or with respect to all Guarantor Senior Debt shall first be paid in full in cash before any payment is made on account of the Note Guarantee. Upon any such Insolvency or Liquidation Proceeding, any payment or distribution of assets of the Guarantor of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee would be entitled shall be paid by the Guarantor or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holders or by the Trustee if received by them, directly to the holders of Guarantor Senior Debt (PRO RATA to such holders on the basis of the amounts of Guarantor Senior Debt held by such holders) or their Representative or Representatives, as their interests may appear, for application to the payment of the Guarantor Senior Debt remaining unpaid until all such Guarantor Senior Debt has been paid in full in cash, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Guarantor Senior Debt. SECTION 12.3. DEFAULT ON DESIGNATED GUARANTOR SENIOR DEBT. 90 (a) In the event of and during the continuation of any default in the payment of principal of, interest or premium, if any, on any Guarantor Senior Debt, or any Obligation owing from time to time under or in respect of Guarantor Senior Debt, or in the event that any event of default (other than a payment default) with respect to any Guarantor Senior Debt shall have occurred and be continuing and shall have resulted in such Guarantor Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, or (b) if any event of default other than as described in clause (a) above with respect to any Designated Guarantor Senior Debt shall have occurred and be continuing permitting the holders of such Designated Guarantor Senior Debt (or their Representative or Representatives) to declare such Designated Guarantor Senior Debt due and payable prior to the date on which it would otherwise have become due and payable, then no payment shall be made by or on behalf of the Guarantor on account of the Note Guarantee (x) in case of any payment or nonpayment default specified in (a), unless and until such default shall have been cured or waived in writing in accordance with the instruments governing such Guarantor Senior Debt or such acceleration shall have been rescinded or annulled, or (y) in case of any nonpayment event of default specified in (b), during the period (a "PAYMENT BLOCKAGE PERIOD") commencing on the date the Guarantor or the Trustee receives written notice (a "PAYMENT NOTICE") of such event of default (which notice shall be binding on the Trustee and the Holders as to the occurrence of such nonpayment event of default) from the Credit Agent (or other holders of Designated Guarantor Senior Debt or their Representative or Representatives) and ending on the earliest of (A) 179 days after such date, (B) the date, if any, on which such Designated Guarantor Senior Debt to which such default relates is paid in full in cash or such default is cured or waived in writing in accordance with the instruments governing such Designated Guarantor Senior Debt by the holders of such Designated Guarantor Senior Debt and (C) the date on which the Trustee receives written notice from the Credit Agent (or other holders of Designated Guarantor Senior Debt or their Representative or Representatives), as the case may be, terminating the Payment Blockage Period. During any consecutive 360-day period, the aggregate of all Payment Blockage Periods shall not exceed 179 days and there shall be a period of at least 181 consecutive days in each consecutive 360-day period when no Payment Blockage Period is in effect. No event of default which existed or was continuing with respect to the Guarantor Senior Debt for which notice commencing a Payment Blockage Period was given on the date such Payment Blockage Period commenced shall be or be made the basis for the commencement of any subsequent Payment Blockage Period unless such event of default is cured or waived for a period of not less than 90 consecutive days. SECTION 12.4. ACCELERATION OF NOTE GUARANTEE. 91 If payment of the Note Guarantee is accelerated because of an Event of Default, the Guarantor shall promptly notify holders of Guarantor Senior Debt of the acceleration. SECTION 12.5. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Note Guarantee at a time when such payment is prohibited by Section 12.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Guarantor Senior Debt or their Representative under the indenture or other agreement (if any) pursuant to which Guarantor Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Guarantor Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in cash in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Debt. With respect to the holders of Guarantor Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 12, and no implied covenants or obligations with respect to the holders of Guarantor Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Guarantor or any other Person money or assets to which any holders of Guarantor Senior Debt shall be entitled by virtue of this Article 12, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 12.6. NOTICE BY GUARANTOR. The Guarantor shall promptly notify the Trustee and the Paying Agent of any facts known to the Guarantor that would cause a payment of any Obligations with respect to the Note Guarantee to violate this Article, which notice shall specifically refer to this Article 12, but failure to give such notice shall not affect the subordination of the Note Guarantee to the Guarantor Senior Debt as provided in this Article. SECTION 12.7. SUBROGATION. After all Guarantor Senior Debt is paid in full in cash and until the Note Guarantee is paid in full, Holders shall be subrogated (equally and ratably with all PARI PASSU indebtedness) to the rights of holders of Guarantor Senior Debt to receive distributions applicable to Guarantor Senior Debt to the extent that 92 distributions otherwise payable to the Holders have been applied to the payment of Guarantor Senior Debt. A distribution made under this Article to holders of Guarantor Senior Debt that otherwise would have been made to Holders is not, as between the Guarantor and Holders, a payment by the Guarantor on the Guarantor Senior Debt. SECTION 12.8. RELATIVE RIGHTS. This Article defines the relative rights of Holders and holders of Guarantor Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Guarantor and Holders, the obligations of the Guarantor, which are absolute and unconditional, to pay principal of and interest on the Notes in accordance with the terms of the Note Guarantee; (2) affect the relative rights of Holders and creditors of the Guarantor other than their rights in relation to holders of Guarantor Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Guarantor Senior Debt to receive distributions and payments otherwise payable to Holders. If the Guarantor fails because of this Article to pay principal of or interest on a Note in accordance with the terms of the Note Guarantee, the failure is still a Default or Event of Default. SECTION 12.9. SUBORDINATION MAY NOT BE IMPAIRED BY GUARANTOR. No right of any holder of Guarantor Senior Debt to enforce the subordination of the Obligations evidenced by the Note Guarantee shall be impaired by any act or failure to act by the Guarantor or any Holder or by the failure of the Guarantor or any Holder to comply with this Indenture. Without in any way limiting the generality of the foregoing paragraph, the holders of Guarantor Senior Debt, or any of them, may, at any time and from time to time, without the consent of or notice to the Holders, without incurring any liabilities to any Holder and without impairing or releasing the subordination and other benefits provided in this Indenture or the obligations of the Holders to the holders of the Guarantor Senior Debt, even if any right of reimbursement or subrogation or other right or remedy of any Holder is affected, impaired or extinguished thereby, do any one or more of the following: 93 (1) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend, increase or alter, the terms of any Guarantor Senior Debt, any security therefor or guaranty thereof or any liability of any obligor thereon (including any guarantor) to such holder, or any liability incurred directly or indirectly in respect thereof or otherwise amend, renew, exchange, extend, modify, increase or supplement in any manner any Guarantor Senior Debt or any instrument evidencing or guaranteeing or securing the same or any agreement under which Guarantor Senior Debt is outstanding; (2) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing Guarantor Senior Debt or any liability of any obligor thereon, to such holder, or any liability incurred directly or indirectly in respect thereof; (3) settle or compromise any Guarantor Senior Debt or any other liability of any obligor of the Guarantor Senior Debt to such holder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Guarantor Senior Debt) in any manner or order; and (4) fail to take or to record or to otherwise perfect, for any reason or for no reason, any lien or security interest securing Guarantor Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other person, elect any remedy and otherwise deal freely with any obligor and any security for the Guarantor Senior Debt or any liability of any obligor to such holder or any liability incurred directly or indirectly in respect thereof. SECTION 12.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Guarantor Senior Debt, the distribution may be made and the notice given to their Representative. 94 Upon any payment or distribution of assets of the Guarantor referred to in this Article 12, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Guarantor Senior Debt and other Indebtedness of the Company or the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. SECTION 12.11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 12 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes or the Note Guarantee, unless the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Notes or the Note Guarantee to violate this Article, which notice shall specifically refer to this Article 12. Only the Company, the Guarantor or a Representative may give the notice. Nothing in this Article 12 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Guarantor Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 12.12. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 12, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes, including without limitation the timely filing of a claim for the unpaid balance of the Notes held by such Holder in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time to file such claim, the Representatives of the Designated Guarantor Senior Debt, including the Credit Agent, are hereby authorized to file an appropriate claim for and on behalf of the Holders. SECTION 12.13. AMENDMENTS. 95 Any amendment to the provisions of this Article 12 shall require the consent of the Holders of at least 75% in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of the Holders. ARTICLE 13 Miscellaneous SECTION 13.1. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 13.2. NOTICES. Any notice or communication by the Company, the Guarantor or the Trustee to the others is duly given if in writing and delivered in person or mailed by registered or certified mail, return receipt requested, telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company or the Guarantor: The Musicland Group, Inc. 10400 Yellow Circle Drive Minnetonka, Minneapolis 55343 Telecopier No.: (612) 931-8047 Attention: General Counsel With a copy to: Faegre & Benson LLP 2200 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 Telecopier No.: (612) 336-3026 Attention: Susan Jacobson and Moss & Barnett 4800 Norwest Center 90 South Seventh Street 96 Minneapolis, MN 55402 Telecopier No.: (612) 339-6686 Attention: Janna Severance If to the Trustee: Bank One, NA 100 East Broad Street Columbus, OH 43271 Telecopier No.: (614) 248-5195 Attention: Corporate Trust Department The Company, the Guarantor or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier promising next Business Day delivery. Any notice or communication to a Holder shall be mailed by first class mail or by overnight air courier promising next Business Day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 13.3. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). 97 SECTION 13.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company or the Guarantor to the Trustee to take any action under this Indenture (other than the initial issuance of the Senior Subordinated Notes), the Company or Guarantor shall furnish to the Trustee upon request: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 13.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 13.6. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. 98 SECTION 13.7. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of the Company (other than the Guarantor) or the Guarantor, as such, shall have any liability for any obligations of the Company or the Guarantor under the Notes, this Indenture, the Note Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. SECTION 13.8. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE NOTE GUARANTEE. SECTION 13.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 13.10. SUCCESSORS. All agreements of the Company and the Guarantor in this Indenture, the Notes and the Note Guarantee shall bind their respective successors and assigns. All agreements of the Trustee in this Indenture shall bind its successors and assigns. SECTION 13.11. SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 13.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of 99 reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 100 SIGNATURES Dated as of April 6, 1998 THE MUSICLAND GROUP, INC. By: /s/ Jack W. Eugster ------------------------------------ Name: Jack W. Eugster Title: CEO and Chairman MUSICLAND STORES CORPORATION By: /s/ Jack W. Eugster ------------------------------------ Name: Jack W. Eugster Title: CEO and Chairman BANK ONE, NA, as Trustee By: /s/ Joseph C. Ludes ------------------------------ Name: Joseph C. Ludes Title: Vice President 101 EXHIBIT A-1 (Face of Senior Subordinated Note) 9_% Senior Subordinated Notes due 2008 No. $ CUSIP NO. 627578AB3 --- --------------- THE MUSICLAND GROUP, INC. promises to pay to ________________ or registered assigns, the principal sum of ___________ Dollars on March 15, 2008. Interest Payment Dates: March 15 and September 15 Record Dates: March 1 and September 1 THE MUSICLAND GROUP, INC. By: ------------------------------- Name: Title: This is one of the Senior Subordinated Notes referred to in the within-mentioned Indenture: Dated: ------------------------ BANK ONE, NA, as Trustee By: ---------------------------------- 1 (Back of Senior Subordinated Note) 9_% Senior Subordinated Notes due 2008 [Unless and until it is exchanged in whole or in part for Senior Subordinated Notes in definitive form, this Senior Subordinated Note may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York)("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL in as much as the registered owner hereof, Cede & Co., has an interest herein.](1) - - ------------------ (1) This paragraph should be included only if the Senior Subordinated Note is issued in global form. 2 [THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES, FOR THE BENEFIT OF THE COMPANY, THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF CLAUSE (b), (c) or (d), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.](2) Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. The Musicland Group, Inc., a Delaware corporation, or its successor (the "COMPANY"), promises to pay interest on the principal amount of this Senior Subordinated Note at the rate of 9_% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on March 15 and September 15, commencing on September 15, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (each an "INTEREST - - ------------------------- (2) This paragraph should be removed upon the exchange of Senior Subordinated Notes for New Senior Subordinated Notes in the Exchange Offer or upon the registration of the Senior Subordinated Notes pursuant to the terms of the Registration Rights Agreement. 3 PAYMENT DATE"). Interest on the Senior Subordinated Notes shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; PROVIDED that if there is no existing Default or Event of Default in the payment of interest, and if this Senior Subordinated Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Senior Subordinated Notes, in which case interest shall accrue from the date of authentication. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Senior Subordinated Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Senior Subordinated Notes (except defaulted interest) and Liquidated Damages, if any, on the applicable Interest Payment Date to the Persons who are registered Holders of Senior Subordinated Notes at the close of business on the March 1 or September 1 next preceding the Interest Payment Date, even if such Senior Subordinated Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Senior Subordinated Notes shall be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders at their respective addresses set forth in the register of Holders; PROVIDED that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium and Liquidated Damages, if any, and interest on, all Global Notes and all other Senior Subordinated Notes the Holders of which shall have provided written wire transfer instructions to the Company and the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, Bank One, NA, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Senior Subordinated Notes under an Indenture dated as of April 6, 1998 ("INDENTURE") among the Company, the Guarantor and the Trustee. The terms of the Senior Subordinated Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Senior Subordinated Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Senior Subordinated Notes are general unsecured Obligations of the Company limited to $150,000,000 in aggregate principal amount, plus amounts, if any, sufficient to pay premium or Liquidated Damages, if any, and interest on outstanding Senior Subordinated Notes as set forth in Paragraph 2 hereof. 4 5. OPTIONAL REDEMPTION. Except as set forth in the next paragraph, the Senior Subordinated Notes shall not be redeemable at the Company's option prior to March 15, 2003. Thereafter, the Senior Subordinated Notes shall be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on March 15 of the years indicated below:
YEAR PERCENTAGE 2003 104.938% 2004 103.292% 2005 101.646% 2006 and thereafter 100.000%
Notwithstanding the foregoing, at any time prior to March 15, 2001, the Company may redeem up to 40% of the original aggregate principal amount of Senior Subordinated Notes at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net proceeds of a Public Equity Offering; PROVIDED that at least 60% of the original aggregate principal amount of Senior Subordinated Notes remains outstanding immediately after the occurrence of each such redemption; and PROVIDED, FURTHER, that such redemption shall occur within 45 days of the date of the closing of such Public Equity Offering. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Senior Subordinated Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Senior Subordinated Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Senior Subordinated Notes pursuant to the offer described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to purchase Senior Subordinated Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures governing the Change of Control Offer required by the Indenture. (b) When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall offer to all Holders of Senior Subordinated Notes (an "ASSET SALE OFFER") to purchase the maximum principal amount of Senior Subordinated Notes that may be purchased out of the Excess Proceeds at an offer price in cash equal to 100% of principal amount thereof, plus accrued and unpaid interest and Liquidated 5 Damages thereon, if any, to the date of purchase in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Senior Subordinated Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for any general corporate purposes. If the aggregate principal amount of Senior Subordinated Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Senior Subordinated Notes to be purchased on a PRO RATA basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Senior Subordinated Notes that are the subject of an offer to purchase will receive a Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Senior Subordinated Notes purchased by completing the form titled "OPTION OF HOLDER TO ELECT PURCHASE" appearing below. 8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Senior Subordinated Notes are to be redeemed at its registered address. Senior Subordinated Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Senior Subordinated Notes held by a Holder are to be redeemed. On and after the redemption date, interest and Liquidated Damages, if any, ceases to accrue on the Senior Subordinated Notes or portions thereof called for redemption. 9. SUBORDINATION. The Senior Subordinated Notes are subordinated to Senior Debt, which is: (i) all Indebtedness outstanding under the Credit Facility, including any Guarantee thereof and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Company under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Senior Subordinated Notes, (iii) all Obligations with respect to the foregoing, and (iv) all interest with respect to the foregoing clauses (i) and (ii) accruing during the pendency of an Insolvency or Liquidation Proceeding, whether or not allowed or allowable thereunder. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or liability to trade creditors or obligations with respect to consigned inventory arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of the Indenture. To the extent provided in the Indenture, Senior Debt must be paid before the Senior Subordinated Notes may be paid. The Company agrees and each Holder of Senior Subordinated Notes by accepting a Senior Subordinated Note consents and agrees to the subordination provided in the Indenture and authorizes the Trustee to give it effect. 10. DENOMINATIONS, TRANSFER, EXCHANGE. The Senior Subordinated Notes are in registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Senior Subordinated Notes may be registered and the Senior Subordinated Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The 6 Company need not exchange or register the transfer of any Senior Subordinated Note or portion of a Senior Subordinated Note selected for redemption, except for the unredeemed portion of any Senior Subordinated Note being redeemed in part. Also, it need not exchange or register the transfer of any Senior Subordinated Notes for a period of 15 days before a selection of Senior Subordinated Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 11. PERSONS DEEMED OWNERS. The registered Holder of a Senior Subordinated Note may be treated as its owner for all purposes. 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to the following paragraph and certain other provisions set forth in the Indenture, the Indenture, the Senior Subordinated Notes and the Note Guarantee may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Senior Subordinated Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of or, tender offer or exchange offer for Senior Subordinated Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture, the Senior Subordinated Notes or the Note Guarantee may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Senior Subordinated Notes (including consents obtained in connection with a tender offer or exchange offer for Senior Subordinated Notes). Without the consent of any Holder of Senior Subordinated Notes, the Company, the Guarantor and the Trustee may amend or supplement the Indenture, the Note Guarantee or the Senior Subordinated Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Senior Subordinated Notes in addition to or in place of certificated Senior Subordinated Notes, to provide for the assumption of the Company's or the Guarantor's obligations to Holders of Senior Subordinated Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Senior Subordinated Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Subsidiary to guarantee the Senior Subordinated Notes. Any amendments with respect to subordination provisions of the Senior Subordinated Notes or the Note Guarantee would require the consent of the Holders of at least 75% in aggregate principal amount of the Senior Subordinated Notes then outstanding if such amendment would adversely affect the rights of the Holders of the Senior Subordinated Notes. 13. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on or Liquidated Damages, if any, with respect to the Senior Subordinated Notes; (ii) default in payment when due of the principal of or premium, if any, on the Senior Subordinated Notes; (iii) failure by the Company to comply with the provisions described in Section 4.10 or 4.14 or Article 5 of the Indenture; (iv) failure by the Company for 30 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Senior Subordinated Notes then outstanding to comply with the provisions described in Section 4.07 or 4.09 of the Indenture; (v) failure by the Company for 60 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Senior Subordinated Notes then outstanding to comply with its other agreements in the Indenture or the Senior Subordinated Notes; (vi) default under any mortgage, indenture or instrument under 7 which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "PAYMENT DEFAULT") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $15.0 million or more; (vii) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $15.0 million, which judgments are not paid, discharged or stayed within 60 days after their entry; and (viii) certain events of bankruptcy or insolvency with respect to the Company, any of its Significant Subsidiaries or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Senior Subordinated Notes may declare all the Senior Subordinated Notes to be due and payable immediately; PROVIDED, HOWEVER, that if any Indebtedness or Obligation is outstanding pursuant to the Credit Facility, upon a declaration of acceleration by the Holders of the Senior Subordinated Notes or the Trustee, all principal and interest under the Indenture shall be due and payable upon the earlier of (x) the day which is five Business Days after the provision to the Company, the Credit Agent and the Trustee of such written notice of acceleration or (y) the date of acceleration of any Indebtedness under the Credit Facility; and PROVIDED, FURTHER, that in the event of an acceleration based upon an Event of Default set forth in clause (vi) above, such declaration of acceleration shall be automatically annulled if the holders of Indebtedness which is the subject of such acceleration have rescinded their declaration of acceleration in respect of such Indebtedness or such Payment Default shall have been cured or waived within 30 days thereof and no other Event of Default has occurred during such 30-day period which has not been cured, paid or waived. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries, all outstanding Senior Subordinated Notes will become due and payable without further action or notice. Holders of the Senior Subordinated Notes may not enforce the Indenture or the Senior Subordinated Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Senior Subordinated Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Senior Subordinated Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. 14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Guarantor or their respective Affiliates, and may otherwise deal with the Company, the Guarantor or their respective Affiliates, as if it were not the Trustee. 8 15. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder of the Company or the Guarantor, as such, shall have any liability for any obligations of the Company or the Guarantor under the Senior Subordinated Notes, the Indenture or the Note Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Senior Subordinated Notes by accepting a Senior Subordinated Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Senior Subordinated Notes and any Note Guarantee. 16. AUTHENTICATION. This Senior Subordinated Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In addition to the rights provided to Holders of the Senior Subordinated Notes under the Indenture, Holders of Transferred Restricted Securities (as defined in the Registration Rights Agreement) shall have all the rights set forth in the A/B Exchange Registration Rights Agreement, dated as of the date hereof, among the Company, the Guarantor and the Initial Purchaser (the "REGISTRATION RIGHTS AGREEMENT"). 19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Senior Subordinated Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Senior Subordinated Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: The Musicland Group, Inc. 10400 Yellow Circle Drive Minnetonka, MN 55343 Telecopy: (612) 931-8047 General Counsel 9 ASSIGNMENT FORM To assign this Senior Subordinated Note, fill in the form below: (I) or (we) assign and transfer this Senior Subordinated Note to - - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - - -------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ to transfer this Senior Subordinated Note on the books of the Company. The agent may substitute another to act for him. - - -------------------------------------------------------------------------------- Date: Your Signature:_______________________________________ (Sign exactly as your name appears on the face of this Senior Subordinated Note) Signature Guarantee: 10 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Senior Subordinated Note purchased by the Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below: / / Section 4.10 Section 4.14 If you want to elect to have only part of the Senior Subordinated Note purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $___________ Date: Your Signature:____________________________________________ (Sign exactly as your name appears on the Senior Subordinated Note) Tax Identification No.:_________ Signature Guarantee: 11 SCHEDULE OF EXCHANGES OF SENIOR SUBORDINATED NOTES (3) THE FOLLOWING EXCHANGES OF A PART OF THIS GLOBAL NOTE FOR OTHER SENIOR SUBORDINATED NOTES HAVE BEEN MADE:
Principal Amount Signature of Amount of decrease Amount of increase of this Global authorized officer in Principal Amount in Principal Note following of Trustee or Senior Date of Exchange of this Global Note Amount of this such decrease (or Subordinated Note Global Note increase) Custodian
- - ------------------------- (3) This should be included only if the Senior Subordinated Note is issued in global form. 12 EXHIBIT A-2 (Face of Regulation S Temporary Global Note) 9_% Senior Subordinated Notes due 2008 No. $ ----- --------------- CINS NO. U61809AA4 THE MUSICLAND GROUP, INC. promises to pay to ________________ or registered assigns, the principal sum of ________ Dollars on March 15, 2008. Interest Payment Dates: March 15 and September 15 Record Dates: March 1 and September 1 THE MUSICLAND GROUP, INC. By: ------------------------------ Name: Title: This is one of the Senior Subordinated Notes referred to in the within-mentioned Indenture: Dated: ------------------------- BANK ONE, NA, as Trustee By: ----------------------------- 1 (Back of Regulation S Temporary Global Note) 9_% Senior Subordinated Note due 2008 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SENIOR SUBORDINATED NOTES IN DEFINITIVE FORM, THIS SENIOR SUBORDINATED NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. [THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES, FOR THE BENEFIT OF THE COMPANY, THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S OF THE SECURITIES ACT, OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF CLAUSES (b), (c) OR (d), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR 2 DEFINITIVE SENIOR SUBORDINATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON PRIOR TO THE EXCHANGE OF THIS REGULATION S TEMPORARY GLOBAL NOTE FOR A REGULATION S PERMANENT GLOBAL NOTE AS CONTEMPLATED BY THE INDENTURE.] Until this Regulation S Temporary Global Note is exchanged for Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to receive payments of interest or Liquidated Damages, if any, hereon although interest and Liquidated Damages, if any, will continue to accrue; until so exchanged in full, this Regulation S Temporary Global Note shall in all other respects be entitled to the same benefits as other Senior Subordinated Notes under the Indenture. This Regulation S Temporary Global Note is exchangeable in whole or in part for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of this Regulation S Temporary Global Note for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes, the Trustee shall cancel this Regulation S Temporary Global Note. This Regulation S Temporary Global Note shall not become valid or obligatory until the certificate of authentication hereon shall have been duly manually signed by the Trustee in accordance with the Indenture. This Regulation S Temporary Global Note shall be governed by and construed in accordance with the laws of the State of the New York. All references to "$," "Dollars," "dollars" or "U.S. $" are to such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts therein. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. The Musicland Group, Inc., a Delaware corporation, or its successor (the "COMPANY"), promises to pay interest on the principal amount of this Senior Subordinated Note at the rate of 9_% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on March 15 and September 15, commencing on September 15, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (each an "INTEREST PAYMENT DATE"). Interest on the Senior Subordinated Notes shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; PROVIDED that if there is no existing Default or Event of Default in the payment of interest, and if this Senior Subordinated Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the - - ------------------------------ 1 These paragraphs should be removed upon the exchange of Regulation S Temporary Global Notes for Regulation S Permanent Global Notes pursuant to the Indenture. 3 original issuance of Senior Subordinated Notes, in which case interest shall accrue from the date of authentication. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Senior Subordinated Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Senior Subordinated Notes (except defaulted interest) and Liquidated Damages, if any, on the applicable Interest Payment Date to the Persons who are registered Holders of Senior Subordinated Notes at the close of business on the March 1 or September 1 next preceding the Interest Payment Date, even if such Senior Subordinated Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Senior Subordinated Notes shall be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders at their respective addresses set forth in the register of Holders; PROVIDED that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium and Liquidated Damages, if any, and interest on, all Global Notes and all other Senior Subordinated Notes the Holders of which shall have provided written wire transfer instructions to the Company and the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, Bank One, NA, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Senior Subordinated Notes under an Indenture dated as of April 6, 1998 ("INDENTURE") among the Company, the Guarantor and the Trustee. The terms of the Senior Subordinated Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Senior Subordinated Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Senior Subordinated Notes are general unsecured Obligations of the Company limited to $150,000,000 in aggregate principal amount, plus amounts, if any, sufficient to pay premium or Liquidated Damages, if any, and interest on outstanding Senior Subordinated Notes as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. Except as set forth in the next paragraph, the Senior Subordinated Notes shall not be redeemable at the Company's option prior to March 15, 2003. Thereafter, the Senior Subordinated Notes shall be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor 4 more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on March 15 of the years indicated below:
YEAR PERCENTAGE 2003 . . . . . . . . . . . . . . . . . . . 104.938% 2004 . . . . . . . . . . . . . . . . . . . 103.292% 2005 . . . . . . . . . . . . . . . . . . . 101.646% 2006 and thereafter . . . . . . . . . . . 100.000%
Notwithstanding the foregoing, at any time prior to March 15, 2001, the Company may redeem up to 40% of the original aggregate principal amount of Senior Subordinated Notes at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net proceeds of a Public Equity Offering; PROVIDED that at least 60% of the original aggregate principal amount of Senior Subordinated Notes remains outstanding immediately after the occurrence of each such redemption; and PROVIDED, FURTHER, that such redemption shall occur within 45 days of the date of the closing of such Public Equity Offering. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Senior Subordinated Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Senior Subordinated Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Senior Subordinated Notes pursuant to the offer described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to purchase Senior Subordinated Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures governing the Change of Control Offer required by the Indenture. (b) When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall offer to all Holders of Senior Subordinated Notes (an "ASSET SALE OFFER") to purchase the maximum principal amount of Senior Subordinated Notes that may be purchased out of the Excess Proceeds at an offer price in cash equal to 100% of principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Senior Subordinated Notes tendered pursuant to an Asset Sale Offer is less than the Excess 5 Proceeds, the Company may use any remaining Excess Proceeds for any general corporate purposes. If the aggregate principal amount of Senior Subordinated Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Senior Subordinated Notes to be purchased on a PRO RATA basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Senior Subordinated Notes that are the subject of an offer to purchase will receive a Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Senior Subordinated Notes purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Senior Subordinated Notes are to be redeemed at its registered address. Senior Subordinated Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Senior Subordinated Notes held by a Holder are to be redeemed. On and after the redemption date, interest and Liquidated Damages, if any, ceases to accrue on the Senior Subordinated Notes or portions thereof called for redemption. 9. SUBORDINATION. The Senior Subordinated Notes are subordinated to Senior Debt, which is: (i) all Indebtedness outstanding under the Credit Facility, including any Guarantee thereof and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Company under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Senior Subordinated Notes, (iii) all Obligations with respect to the foregoing, and (iv) all interest with respect to the foregoing clauses (i) and (ii) accruing during the pendency of an Insolvency or Liquidation Proceeding, whether or not allowed or allowable thereunder. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or liability to trade creditors or obligations with respect to consigned inventory arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of the Indenture. To the extent provided in the Indenture, Senior Debt must be paid before the Senior Subordinated Notes may be paid. The Company agrees and each Holder of Senior Subordinated Notes by accepting a Senior Subordinated Note consents and agrees to the subordination provided in the Indenture and authorizes the Trustee to give it effect. 10. DENOMINATIONS, TRANSFER, EXCHANGE. The Senior Subordinated Notes are in registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Senior Subordinated Notes may be registered and the Senior Subordinated Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Senior Subordinated Note or portion of a Senior Subordinated Note 6 selected for redemption, except for the unredeemed portion of any Senior Subordinated Note being redeemed in part. Also, it need not exchange or register the transfer of any Senior Subordinated Notes for a period of 15 days before a selection of Senior Subordinated Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 11. PERSONS DEEMED OWNERS. The registered Holder of a Senior Subordinated Note may be treated as its owner for all purposes. 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to the following paragraph and certain other provisions set forth in the Indenture, the Indenture, the Senior Subordinated Notes and the Note Guarantee may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Senior Subordinated Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of or, tender offer or exchange offer for Senior Subordinated Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture, the Senior Subordinated Notes or the Note Guarantee may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Senior Subordinated Notes (including consents obtained in connection with a tender offer or exchange offer for Senior Subordinated Notes). Without the consent of any Holder of Senior Subordinated Notes, the Company, the Guarantor and the Trustee may amend or supplement the Indenture, the Note Guarantee or the Senior Subordinated Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Senior Subordinated Notes in addition to or in place of certificated Senior Subordinated Notes, to provide for the assumption of the Company's or the Guarantor's obligations to Holders of Senior Subordinated Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Senior Subordinated Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Subsidiary to guarantee the Senior Subordinated Notes. Any amendments with respect to subordination provisions of the Senior Subordinated Notes or the Note Guarantee would require the consent of the Holders of at least 75% in aggregate principal amount of the Senior Subordinated Notes then outstanding if such amendment would adversely affect the rights of the Holders of Senior Subordinated Notes. 13. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on or Liquidated Damages, if any, with respect to the Senior Subordinated Notes; (ii) default in payment when due of the principal of or premium, if any, on the Senior Subordinated Notes; (iii) failure by the Company to comply with the provisions described in Section 4.10 or 4.14 or Article 5 of the Indenture; (iv) failure by the Company for 30 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Senior Subordinated Notes to comply with the provisions described in Section 4.07 or 4.09 of the Indenture; (v) failure by the Company for 60 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Senior Subordinated Notes then outstanding to comply with its other agreements in the Indenture or the Senior 7 Subordinated Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "PAYMENT DEFAULT") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any such other Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $15.0 million or more; (vii) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $15.0 million, which judgments are not paid, discharged or stayed within 60 days after their entry; and (viii) certain events of bankruptcy or insolvency with respect to the Company, any of its Significant Subsidiaries or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Senior Subordinated Notes may declare all the Senior Subordinated Notes to be due and payable immediately; PROVIDED, HOWEVER, that if any Indebtedness or Obligation is outstanding pursuant to the Credit Facility, upon a declaration of acceleration by the Holders of the Senior Subordinated Notes or the Trustee, all principal and interest under the Indenture shall be due and payable upon the earlier of (x) the day which is five Business Days after the provision to the Company, the Credit Agent and the Trustee of such written notice of acceleration or (y) the date of acceleration of any Indebtedness under the Credit Facility; and PROVIDED, FURTHER, that in the event of an acceleration based upon an Event of Default set forth in clause (vi) above, such declaration of acceleration shall be automatically annulled if the holders of Indebtedness which is the subject of such acceleration have rescinded their declaration of acceleration in respect of such Indebtedness or such Payment Default shall have been cured or waived within 30 days thereof and no other Event of Default has occurred during such 30-day period which has not been cured, paid or waived. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries, all outstanding Senior Subordinated Notes will become due and payable without further action or notice. Holders of the Senior Subordinated Notes may not enforce the Indenture or the Senior Subordinated Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Senior Subordinated Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Senior Subordinated Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. 14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Guarantor or their respective Affiliates, and may otherwise deal with 8 the Company, the Guarantor or their respective Affiliates, as if it were not the Trustee. 15. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder of the Company or the Guarantor, as such, shall have any liability for any obligations of the Company or the Guarantor under the Senior Subordinated Notes, the Indenture or the Note Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Senior Subordinated Notes by accepting a Senior Subordinated Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Senior Subordinated Notes and any Note Guarantee. 16. AUTHENTICATION. This Senior Subordinated Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In addition to the rights provided to Holders of the Senior Subordinated Notes under the Indenture, Holders of Transferred Restricted Securities (as defined in the Registration Rights Agreement) shall have all the rights set forth in the A/B Exchange Registration Rights Agreement, dated as of the date hereof, among the Company, the Guarantor and the Initial Purchaser (the "REGISTRATION RIGHTS AGREEMENT"). 19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Senior Subordinated Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Senior Subordinated Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: 9 The Musicland Group, Inc. 10400 Yellow Circle Drive Minnetonka, MN 55343 Telecopy: (612) 931-8047 General Counsel 10 ASSIGNMENT FORM To assign this Senior Subordinated Note, fill in the form below: (I) or (we) assign and transfer this Senior Subordinated Note to - - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint ____________________________________________________ to transfer this Senior Subordinated Note on the books of the Company. The agent may substitute another to act for him. - - -------------------------------------------------------------------------------- Date: Your Signature: ---------------------------------- (Sign exactly as your name appears on the face of this Senior Subordinated Note) Signature Guarantee: 11 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Senior Subordinated Note purchased by the Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below: / / Section 4.10 Section 4.14 If you want to elect to have only part of the Senior Subordinated Note purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $___________ Date: Your Signature: ---------------------------------- (Sign exactly as your name appears on the face of this Senior Subordinated Note) Tax Identification No.: --------- Signature Guarantee: 12 SCHEDULE OF EXCHANGES FOR GLOBAL NOTES The following exchanges of a part of this Regulation S Temporary Global Note for other Global Notes have been made:
Amount of decrease in Amount of increase in Principal Amount of this Signature of Date of Exchange Principal Amount Principal Amount Global Note authorized officer of Trustee or - - ---------------- of this Global of this Global following such decrease Senior Subordinated Note Note Note (or increase) Custodian ---- ---- ------------- ---------
13 EXHIBIT B-1 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE (Pursuant to Section 2.06(a)(i) of the Indenture) Bank One, NA c/o Corporate Trust Office 235 West Shrock Road Westerville, OH 43081 Re: 9_% Senior Subordinated Notes due 2008 The Musicland Group, Inc. Reference is hereby made to the Indenture, dated as of April 6, 1998 (the "INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the "COMPANY"), and Musicland Stores Corporation, a Delaware corporation, ("MSC" or the "GUARANTOR") and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $ _______________ principal amount of Senior Subordinated Notes which are evidenced by one or more Rule 144A Global Notes and held with the Depositary in the name of ______________________ (the "TRANSFEROR"). The Transferor has requested a transfer of such beneficial interest in the Senior Subordinated Notes to a Person who will take delivery thereof in the form of an equal principal amount of Senior Subordinated Notes evidenced by one or more Regulation S Global Notes, which amount, immediately after such transfer, is to be held with the Depositary through Euroclear or Cedel or both. In connection with such request and in respect of such Senior Subordinated Notes, the Transferor hereby certifies that such transfer has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and accordingly the Transferor hereby further certifies that: (1) The offer of the Senior Subordinated Notes was not made to a person in the United States; (2) either: (a) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed and believes that the transferee was outside the United States; or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor 1 nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; (3) no directed selling efforts have been made in contravention of the requirements of Rule 904(b) of Regulation S; (4) the transaction is not part of a plan or scheme to evade the registration provisions of the Securities Act; and (5) upon completion of the transaction, the beneficial interest being transferred as described above is to be held with the Depositary through Euroclear or Cedel or both. Upon giving effect to this request to exchange a beneficial interest in a Rule 144A Global Note for a beneficial interest in a Regulation S Global Note, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Regulation S Global Notes pursuant to the Indenture and the Securities Act and, if such transfer occurs prior to the end of the 40-day restricted period associated with the initial offering of Senior Subordinated Notes, the additional restrictions applicable to transfers of interest in the Regulation S Temporary Global Note. This certificate and the statements contained herein are made for your benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC, the initial purchasers of such Senior Subordinated Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: ------------------------------------- Name: Title: Dated: cc: The Musicland Group, Inc. Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated NationsBanc Montgomery Securities LLC 2 EXHIBIT B-2 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE (Pursuant to Section 2.06(a)(ii) of the Indenture) Bank One, NA c/o Corporate Trust Office 235 West Shrock Road Westerville, OH 43081 Re: 9_% Senior Subordinated Notes due 2008 The Musicland Group, Inc. Reference is hereby made to the Indenture, dated as of April 6, 1998 (the "INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the "COMPANY"), and Musicland Stores Corporation, a Delaware corporation, ("MSC" or the "GUARANTOR") and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $_________ principal amount of Senior Subordinated Notes which are evidenced by one or more Regulation S Global Notes and held with the Depositary through Euroclear or Cedel in the name of ______________________ (the "TRANSFEROR"). The Transferor has requested a transfer of such beneficial interest in the Senior Subordinated Notes to a Person who will take delivery thereof in the form of an equal principal amount of Senior Subordinated Notes evidenced by one or more Rule 144A Global Notes, to be held with the Depositary. In connection with such request and in respect of such Senior Subordinated Notes, the Transferor hereby certifies that: [CHECK ONE] / / such transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and, accordingly, the Transferor hereby further certifies that the Senior Subordinated Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Senior Subordinated Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A; or / / such transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; 1 or / / such transfer is being effected pursuant to an exemption under the Securities Act other than Rule 144A, Rule 144 or Rule 904 and the Transferor further certifies that the Transfer complies with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Senior Subordinated Notes bearing the Private Placement Legend and the requirements of the exemption claimed, which certification is supported by (x) if such transfer is in respect of a principal amount of Senior Subordinated Notes at the time of Transfer of $100,000 or more, a certificate executed by the Transferee in the form of Exhibit C to the Indenture, or (y) if such Transfer is in respect of a principal amount of Senior Subordinated Notes at the time of transfer of less than $100,000, (1) a certificate executed in the form of Exhibit C to the Indenture and (2) an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that (1) such Transfer is in compliance with the Securities Act and (2) such Transfer complies with any applicable blue sky securities laws of any state of the United States; or / / such transfer is being effected pursuant to an effective registration statement under the Securities Act; or / / such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Senior Subordinated Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and such Senior Subordinated Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. Upon giving effect to this request to exchange a beneficial interest in Regulation S Global Notes for a beneficial interest in 144A Global Notes, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Rule 144A Global Notes pursuant to the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC, the initial purchasers of such Senior Subordinated Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. 2 [Insert Name of Transferor] By: ------------------------------------- Name: Title: Dated: cc: The Musicland Group, Inc. Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated NationsBanc Montgomery Securities LLC 3 EXHIBIT B-3 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER OF DEFINITIVE SENIOR SUBORDINATED NOTES (Pursuant to Section 2.06(b) of the Indenture) Bank One, NA c/o Corporate Trust Office 235 West Shrock Road Westerville, OH 43081 Re: 9_% Senior Subordinated Notes due 2008 of The Musicland Group, Inc. Reference is hereby made to the Indenture, dated as of April 6, 1998 (the "INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporation, a Delaware corporation ("MSC" or the "GUARANTOR") and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $_______________ principal amount of Senior Subordinated Notes which are evidenced by one or more Definitive Senior Subordinated Notes in the name of ________________ (the "TRANSFEROR"). The Transferor has requested an exchange or transfer of such Definitive Senior Subordinated Note(s) in the form of an equal principal amount of Senior Subordinated Notes evidenced by one or more Definitive Senior Subordinated Notes, to be delivered to the Transferor or, in the case of a transfer of such Senior Subordinated Notes, to such Person as the Transferor instructs the Trustee. In connection with such request and in respect of the Senior Subordinated Notes surrendered to the Trustee herewith for exchange (the "SURRENDERED SENIOR SUBORDINATED NOTES"), the Holder of such Surrendered Senior Subordinated Notes hereby certifies that: [CHECK ONE] / / the Surrendered Senior Subordinated Notes are being acquired for the Transferor's own account, without transfer; or / / the Surrendered Senior Subordinated Notes are being transferred to the Company; or / / the Surrendered Senior Subordinated Notes are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and, accordingly, the Transferor hereby further certifies that the Surrendered Senior Subordinated Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Senior Subordinated Notes for its own account, or for one or more accounts with 1 respect to which such Person exercises sole investment discretion, and such Person and each such account is a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or / / the Surrendered Senior Subordinated Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act; or / / the Surrendered Senior Subordinated Notes are being transferred pursuant to an exemption under the Securities Act other than Rule 144A, Rule 144 or Rule 904 and the Transferor further certifies that the Transfer complies with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Senior Subordinated Notes bearing the Private Placement Legend and the requirements of the exemption claimed, which certification is supported by (x) if such transfer is in respect of a principal amount of Senior Subordinated Notes at the time of Transfer of $100,000 or more, a certificate executed by the Transferee in the form of Exhibit C to the Indenture, or (y) if such Transfer is in respect of a principal amount of Senior Subordinated Notes at the time of transfer of less than $100,000, (1) a certificate executed in the form of Exhibit C to the Indenture and (2) an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that (1) such Transfer is in compliance with the Securities Act and (2) such Transfer complies with any applicable blue sky securities laws of any state of the United States; or / / the Surrendered Senior Subordinated Notes are being transferred pursuant to an effective registration statement under the Securities Act; or / / such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Senior Subordinated Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Senior Subordinated Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. 2 This certificate and the statements contained herein are made for your benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC, the initial purchasers of such Senior Subordinated Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: ------------------------------------- Name: Title: Dated: ---------------------- cc: The Musicland Group, Inc. Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated NationsBanc Montgomery Securities LLC 3 EXHIBIT B-4 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL NOTE OR REGULATION S PERMANENT GLOBAL NOTE TO DEFINITIVE SENIOR SUBORDINATED NOTE (Pursuant to Section 2.06(c) of the Indenture) Bank One, NA c/o Corporate Trust Office 235 West Shrock Road Westerville, OH 43081 Re: 9_% Senior Subordinated Notes due 2008 of The Musicland Group, Inc. Reference is hereby made to the Indenture, dated as of April 6, 1998 (the "INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporation, a Delaware corporation ("MSC" or the "GUARANTOR"), and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________ principal amount of Senior Subordinated Notes which are evidenced by a beneficial interest in one or more Rule 144A Global Notes or Regulation S Permanent Global Notes in the name of ____________ ______ (the "TRANSFEROR"). The Transferor has requested an exchange or transfer of such beneficial interest in the form of an equal principal amount of Senior Subordinated Notes evidenced by one or more Definitive Senior Subordinated Notes, to be delivered to the Transferor or, in the case of a transfer of such Senior Subordinated Notes, to such Person as the Transferor instructs the Trustee. In connection with such request and in respect of the Senior Subordinated Notes surrendered to the Trustee herewith for exchange (the "SURRENDERED SENIOR SUBORDINATED NOTES"), the Holder of such Surrendered Senior Subordinated Notes hereby certifies that: [CHECK ONE] / / the Surrendered Senior Subordinated Notes are being transferred to the beneficial owner of such Senior Subordinated Notes; or / / the Surrendered Senior Subordinated Notes are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and, accordingly, the Transferor hereby further certifies that the Surrendered Senior Subordinated Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Senior Subordinated Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is 1 a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or / / the Surrendered Senior Subordinated Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act; or / / the Surrendered Senior Subordinated Notes are being transferred pursuant to an effective registration statement under the Securities Act; or / / the Surrendered Senior Subordinated Notes are being transferred pursuant to an exemption under the Securities Act other than Rule 144A, Rule 144 or Rule 904 and the Transferor further certifies that the Transfer complies with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Senior Subordinated Notes bearing the Private Placement Legend and the requirements of the exemption claimed, which certification is supported by (x) if such transfer is in respect of a principal amount of Senior Subordinated Notes at the time of Transfer of $100,000 or more, a certificate executed by the Transferee in the form of Exhibit C to the Indenture, or (y) if such Transfer is in respect of a principal amount of Senior Subordinated Notes at the time of transfer of less than $100,000, (1) a certificate executed in the form of Exhibit C to the Indenture and (2) an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that (1) such Transfer is in compliance with the Securities Act and (2) such Transfer complies with any applicable blue sky securities laws of any state of the United States; or / / such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Senior Subordinated Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Senior Subordinated Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company, the Guarantor and Donaldson, Lufkin & Jenrette Securities 2 Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC, the initial purchasers of such Senior Subordinated Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: ------------------------------------- Name: Title: Dated: ---------------------- cc: The Musicland Group, Inc. Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated NationsBanc Montgomery Securities LLC 3 EXHIBIT C FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Bank One, NA c/o Corporate Trust Office 235 West Shrock Road Westerville, OH 43081 Re: 9_% Senior Subordinated Notes due 2008 of The Musicland Group, Inc. Reference is hereby made to the Indenture, dated as of April 6, 1998 (the "INDENTURE"), among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporation, a Delaware corporation ("MSC" or the "GUARANTOR"), and Bank One, NA, as trustee (the "TRUSTEE"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $__________ aggregate principal amount of: / / (a) Beneficial interests, or / / (b) Definitive Senior Subordinated Notes, we confirm that: 1. We understand that any subsequent transfer of the Senior Subordinated Notes of any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Senior Subordinated Notes or any interest therein except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "SECURITIES ACT"). 2. We understand that the offer and sale of the Senior Subordinated Notes have not been registered under the Securities Act, and that the Senior Subordinated Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Senior Subordinated Notes or any interest therein, (A) we will do so only (1)(a) to a person who the Seller reasonably believes is a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in a transaction meeting the requirements of 144A, (b) in a transaction meeting the requirements of Rule 144 under the Securities Act, (c) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 of the Securities Act, or (d) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel), (2) to the Company or any of its subsidiaries or (3) pursuant to an effective registration statement and, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction and (B) 1 we will, and each subsequent holder will be required to, notify any purchaser from it of the security evidenced hereby of the resale restrictions set forth in (A) above." 3. We understand that, on any proposed resale of the Senior Subordinated Notes or beneficial interests, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Senior Subordinated Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "ACCREDITED INVESTOR" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Senior Subordinated Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Senior Subordinated Notes or beneficial interests therein purchased by us for our own account or for one or more accounts (each of which is an institutional "ACCREDITED INVESTOR") as to each of which we exercise sole investment discretion. 6. We are not acquiring the Senior Subordinated Notes with a view to any distribution thereof that would violate the Securities Act or the securities laws of any State of the United States. 2 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. ---------------------------------------- [Insert Name of Accredited Investor] By: ------------------------------------- Name: Title: Dated: , -------------- ---- 3 EXHIBIT D NOTE GUARANTEE Subject to Section 11.03 of the Indenture, the Guarantor hereby unconditionally guarantees to each Holder of a Senior Subordinated Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Senior Subordinated Notes and the Obligations of the Company under the Senior Subordinated Notes or under the Indenture, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Senior Subordinated Notes will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on overdue principal, premium, if any, (to the extent permitted by law) interest and Liquidated Damages, if any, on the Senior Subordinated Notes and all other payment Obligations of the Company to the Holders or the Trustee under the Indenture or under the Senior Subordinated Notes will be promptly paid in full and performed, all in accordance with the terms thereof; and (b) in case of any extension of time of payment or renewal of any Senior Subordinated Notes or any of such other payment Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantor will be obligated to pay the same immediately. The obligations of the Guarantor to the Holders and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article 11 of the Indenture, and reference is hereby made to such Indenture for the precise terms of this Note Guarantee. The terms of Article 11 of the Indenture are incorporated herein by reference. This is a continuing Guarantee and, subject to the provisions of Article 8 of the Indenture, shall remain in full force and effect and shall be binding upon the Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's Obligations under the Senior Subordinated Notes and the Indenture and shall inure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Note Guarantee of payment and not a guarantee of collection. This Note Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Senior Subordinated Note upon which this Note Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. 1 For purposes hereof, the Guarantor's liability shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Senior Subordinated Notes and the Indenture and (ii) the amount, if any, which would not have (A) rendered such Guarantor "INSOLVENT" (as such term is defined in the United States Bankruptcy Code and in the Debtor and Creditor Law of the State of New York) or (B) left the Guarantor with unreasonably small capital at the time its Note Guarantee of the Senior Subordinated Notes was entered into; PROVIDED that, it will be a presumption in any lawsuit or other proceeding in which the Guarantor is a party that the amount guaranteed pursuant to the Note Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of the Guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Guarantor is limited to the amount set forth in clause (ii) above. The Indenture provides that, in making any determination as to the solvency or sufficiency of capital of the Guarantor in accordance with the previous sentence, the right of the Guarantor to contribution from another guarantor and any other rights such Guarantor may have, contractual or otherwise, shall be taken into account. The Indenture provides that all Obligations evidenced by this Note Guarantee shall be subordinated in right of payment, to the extent and in the manner provided in Article 12 of the Indenture, to the prior payment in full in cash of all Guarantor Senior Debt (whether outstanding on the date of the Indenture or created, incurred, assumed or guaranteed thereafter), and that the subordination is for the benefit of the holders of Guarantor Senior Debt. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. Dated as of , 1998 MUSICLAND STORES CORPORATION ----------- By: ------------------------------------- Name: Title: 1 CROSS-REFERENCE TABLE*
TRUST INDENTURE ACT SECTION INDENTURE SECTION 310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.03; 7.10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.03 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 7.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06;13.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03;13.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.04 (c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.04 (c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05,13.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a)(last sentence). . . . . . . . . . . . . . . . . . . . . . 2.09 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 (a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.13 317(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.01 N.A. means not applicable.
i *This Cross-Reference Table is not part of the Indenture. ii EX-4.8 4 EX 4.8 -- REGISTRATION RIGHTS AGREEMENT A/B EXCHANGE REGISTRATION RIGHTS AGREEMENT Dated as of April 6, 1998 by and among The Musicland Group, Inc. Musicland Stores Corporation and Donaldson Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated NationsBanc Montgomery Securities LLC This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of April 6, 1998, by and among The Musicland Group, Inc., a Delaware corporation (the "COMPANY"), Musicland Stores Corporation, a Delaware corporation (the "GUARANTOR"), and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC (each an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each of whom has agreed to purchase the Company's 9_% Series A Senior Subordinated Notes due 2008 (the "SERIES A NOTES") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement, dated April 1, 1998, (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantor and the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Indenture, dated as of April 6, 1998, between the Company, the Guarantor and Bank One, NA, as Trustee, relating to the Series A Notes and the Series B Notes (the "INDENTURE"). The parties hereby agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following capitalized terms shall have the following meanings: ACT: The Securities Act of 1933, as amended. AFFILIATE: As defined in Rule 144 of the Act. BROKER-DEALER: Any broker or dealer registered under the Exchange Act. BUSINESS DAY: Any day other than a Saturday, Sunday or other day in the City of New York on which banks are authorized to close. CLOSING DATE: The date hereof. COMMISSION: The Securities and Exchange Commission. CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (b) the maintenance of such 2 Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. CONSUMMATION DEADLINE: As defined in Section 3(b) hereof. EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof. EXCHANGE ACT: The Securities Exchange Act of 1934, as amended. EXCHANGE OFFER: The exchange and issuance by the Company of a principal amount of Series B Notes (which shall be registered pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Series A Notes that are tendered by such Holders in connection with such exchange and issuance. EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating to the Exchange Offer, including the related Prospectus. EXEMPT RESALES: The transactions in which the Initial Purchasers propose to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and pursuant to Regulation S under the Act. FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof. HOLDERS: As defined in Section 2 hereof. PROSPECTUS: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. RECOMMENCEMENT DATE: As defined in Section 6(d) hereof. REGISTRATION DEFAULT: As defined in Section 5 hereof. REGISTRATION STATEMENT: Any registration statement of the Company and the Guarantor relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant 3 to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. REGULATION S: Regulation S promulgated under the Act. RULE 144: Rule 144 promulgated under the Act. SERIES B NOTES: The Company's 9_% Series B Senior Subordinated Notes due 2008 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as contemplated by Section 6(b) hereof. SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof. SUSPENSION NOTICE: As defined in Section 6(d) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. TRANSFER RESTRICTED SECURITIES: Each Series A Note, until the earliest to occur of (a) the date on which such Series A Note is exchanged in the Exchange Offer for a Series B Note which is entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Series A Note has been disposed of in accordance with a Shelf Registration Statement (and the purchasers thereof have been issued Series B Notes), or (c) the date on which such Series A Note is distributed to the public pursuant to Rule 144 under the Act (and purchasers thereof have been issued Series B Notes) and each Series B Note until the date on which such Series B Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including the delivery of the Prospectus contained therein). SECTION 2. HOLDERS. A Person is deemed to be a holder of Transfer Restricted Securities (each, a "HOLDER") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER. (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company and the Guarantor shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 60 days after the Closing Date (such 60th day being the "FILING DEADLINE"), (ii) use its best efforts 4 to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 150 days after the Closing Date (such 150th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Securities and (ii) resales of Series B Notes by Broker-Dealers that tendered into the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below. (b) The Company and the Guarantor shall use their respective best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; PROVIDED, HOWEVER, that in no event shall such period be less than 20 Business Days. The Company and the Guarantor shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Series B Notes shall be included in the Exchange Offer Registration Statement. The Company and the Guarantor shall use their respective best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th day being the "CONSUMMATION DEADLINE"). (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any Affiliate of the Company), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales 5 pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. See the Shearman & Sterling no-action letter (available July 2, 1993). Because such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of any Series B Notes received by such Broker-Dealer in the Exchange Offer, the Company and Guarantor shall permit the use of the Prospectus contained in the Exchange Offer Registration Statement by such Broker-Dealer to satisfy such prospectus delivery requirement. To the extent necessary to ensure that the prospectus contained in the Exchange Offer Registration Statement is available for sales of Series B Notes by Broker-Dealers, the Company and the Guarantor agree to use their respective best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(a) and 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the Consummation Deadline or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. The Company and the Guarantor shall provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers, promptly upon request, and in no event later than one day after such request, at any time during such period. SECTION 4. SHELF REGISTRATION. (a) SHELF REGISTRATION. If (i) the Exchange Offer is not permitted by applicable law (after the Company and the Guarantor have complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities shall notify the Company within 20 Business Days following the Consummation Deadline that (A) such Holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from the Company or any of its Affiliates, then the Company and the Guarantor shall: 6 (x) cause to be filed, on or prior to 60 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause 4(a)(i) above and (ii) the date on which the Company receives the notice specified in clause 4(a)(ii) above, (such earlier date, the "FILING DEADLINE"), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement (the "SHELF REGISTRATION STATEMENT")), relating to all Transfer Restricted Securities, and (y) shall use their respective best efforts to cause such Shelf Registration Statement to become effective on or prior to 90 days after the Filing Deadline for the Shelf Registration Statement (such 90th day the "EFFECTIVENESS DEADLINE"). If, after the Company has filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable federal law (I.E., clause 4(a)(i) above), then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; PROVIDED that, in such event, the Company shall remain obligated to meet the Effectiveness Deadline set forth in clause (y). To the extent necessary to ensure that the Shelf Registration Statement is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a) and the other securities required to be registered therein pursuant to Section 6(b)(ii) hereof, the Company and the Guarantor shall use their respective best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(b) and 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least two years (as extended pursuant to Section 6(d)) following the Closing Date, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant thereto. (b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH THE SHELF REGISTRATION STATEMENT. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, either with such Holder's notice specified in 4(a)(ii) or 7 within 10 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such information. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 5. LIQUIDATED DAMAGES. If (a) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (b) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (c) the Exchange Offer has not been Consummated on or prior to the Consummation Deadline or (d) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (a) through (d), a "REGISTRATION DEFAULT"), then the Company and the Guarantor hereby jointly and severally agree to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.50 per week per $1,000 in principal amount of Transfer Restricted Securities; PROVIDED that the Company and the Guarantor shall in no event be required to pay liquidated damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (i) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (a) above, (ii) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (b) above, (iii) upon Consummation of the Exchange Offer, in the case of clause (c) above, or (iv) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf 8 Registration Statement) to again be declared effective or made usable in the case of clause (d) above, the liquidated damages payable with respect to the Transfer Restricted Securities as a result of such clause (a), (b), (c) or (d), as applicable, shall cease. All accrued liquidated damages shall be paid to the Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. Notwithstanding the fact that any securities for which liquidated damages are due cease to be Transfer Restricted Securities, all obligations of the Company and the Guarantor to pay liquidated damages with respect to securities shall survive until such time as such obligations with respect to such securities shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES. (a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection with the Exchange Offer, the Company and the Guarantor shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective best efforts to effect such exchange and to permit the resale of Series B Notes by Broker-Dealers that tendered in the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of its market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof, and (z) comply with all of the following provisions: (i) If, following the date hereof there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantor hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Company and the Guarantor to Consummate an Exchange Offer for such Transfer Restricted Securities. The Company and the Guarantor hereby agree to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company and the Guarantor hereby agree to take all such other actions as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that 9 such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker Dealer) shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company and the Guarantor (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. As a condition to its participation in the Exchange Offer each Holder using the Exchange Offer to participate in a distribution of the Series B Notes shall acknowledge and agree that, if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired directly from the Company or an Affiliate thereof, then (1) it could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in MORGAN STANLEY AND CO., INC. (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), as interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to Section 6(a)(i) above), and (2) it must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantor shall provide a supplemental letter to the Commission (A) stating that the Company and the Guarantor are registering the Exchange Offer in reliance on the position of the Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), MORGAN STANLEY AND CO., INC. (available June 5, 1991) as interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2, 1993, and, if applicable, any no-action letter obtained pursuant to Section 6(a)(i) above, (B) including a representation that neither the Company nor any Guarantor has entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's and 10 the Guarantor's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to Section 6(a)(i) above, if applicable. (b) SHELF REGISTRATION STATEMENT. In connection with the Shelf Registration Statement, the Company and the Guarantor shall (i) comply with all the provisions of Section 6(c) below and use their respective best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company and the Guarantor will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof, and (ii) issue, upon the request of any Holder or purchaser of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes having an aggregate principal amount equal to the aggregate principal amount of Series A Notes sold pursuant to the Shelf Registration Statement and surrendered to the Company for cancellation; the Company shall register Series B Notes on the Shelf Registration Statement for this purpose and issue the Series B Notes to the purchaser(s) of securities subject to the Shelf Registration Statement in the names as such purchaser(s) shall designate; provided that the Company shall not be required to pay duplicate registration filing fees to the Commission when registering Series B Notes previously registered as Series A Notes. The Company shall use its best efforts to cause the CUSIP Service Bureau to issue the same CUSIP No. for the Series A Notes sold pursuant to the Shelf Registration Statement and the Series B Notes. (c) GENERAL PROVISIONS. In connection with any Registration Statement and any related Prospectus required by this Agreement, the Company and the Guarantor shall: 11 (i) use their respective best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company and the Guarantor shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use their respective best efforts to cause such amendment to be declared effective as soon as practicable. (ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as the case may be; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise each Holder promptly and, if requested by such Holder, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, and (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that 12 requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company and the Guarantor shall use their respective best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to the designated representative of each Holder as specified in Section 7(b) in connection with such exchange or sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Holders in connection with such sale, if any, for a period of at least five Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Holders shall reasonably object within five Business Days after the receipt thereof. A Holder shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act; 13 (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to the designated representative of each Holder as specified in Section 7(b) in connection with such exchange or sale, if any, make the Company's and the Guarantor's representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Holders may reasonably request; (vii) make available, at reasonable times, for inspection by the designated representative of each Holder as specified in Section 7(b) or any accountant retained by such Holders, all financial and other records, pertinent corporate documents of the Company and the Guarantor and cause the Company's and the Guarantor's officers, directors and employees to supply all information reasonably requested by any such designated representative or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (viii) if requested by any Holders in connection with such exchange or sale, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Holders may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish to the designated representative of each Holder as specified in Section 7(b) in connection with such exchange or sale, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (x) deliver to each Holder without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company and the Guarantor hereby consent to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Holder in connection with the offering and the sale of the Transfer 14 Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (xi) upon the request of any Holder who holds at least 5% in aggregate principal amount of such class of Transfer Restricted Securities, enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any applicable Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder in connection with any sale or resale pursuant to any applicable Registration Statement provided, that, the Company and the Guarantor shall not be required to enter into any such agreements more than once with respect to all of the Transfer Restricted Securities. In such connection, the Company and the Guarantor shall: (A) upon request of any Holder, furnish (or in the case of Sections 6(c)(xi)(A)(2) and 6(c)(xi)(A)(3), use its best efforts to cause to be furnished) to each Holder, upon Consummation of the Exchange Offer or upon the effectiveness of the Shelf Registration Statement, as the case may be: (1) a certificate, dated such date, signed on behalf of the Company and the Guarantor by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company and the Guarantor, confirming, as of the date thereof, the matters set forth in Sections 9(a), 9(b) and 9(c) of the Purchase Agreement and such other similar matters as such Holders may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company and the Guarantor covering matters similar to those set forth in paragraph (e) of Section 9 of the Purchase Agreement and such other matter as such Holder may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company and the Guarantor, representatives of the independent public accountants for the Company and the Guarantor and have considered the matters required to be 15 stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to the extent such counsel deems appropriate upon the statements of officers and other representatives of the Company and the Guarantor) and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated the date of Consummation of the Exchange Offer, or as of the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement; and 16 (B) deliver such other documents and certificates as may be reasonably requested by the selling Holders to evidence compliance with the matters covered in Section 6(c)(xi)(A) above and with any customary conditions contained in any agreement entered into by the Company and the Guarantor pursuant to this Section 6(c)(xi); (xii) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; PROVIDED, HOWEVER, that neither the Company nor the Guarantor shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use their respective best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in Section 6(c)(xii) above; (xv) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with the Depository Trust Company; 17 (xvi) otherwise use their respective best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xvii) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and (xviii) provide promptly to each Holder, upon request, each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) RESTRICTIONS ON HOLDERS. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of the notice referred to in Section 6(c)(iii)(C) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Holder has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT DATE"). Each Holder receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Holder's possession which have been replaced by the Company with more recently dated Prospectuses or (ii) deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and 18 including the date of delivery of the Suspension Notice to the date of delivery of the Recommencement Date. (e) The Company's obligation to file the Registration Statements, and to cause such Registration Statements to become effective, shall be limited to the filing and effectiveness of one (1) Exchange Offer Registration Statement and, if required under Section 4 of this Agreement, one (1) Shelf Registration Statement. SECTION 7. REGISTRATION EXPENSES. (a) All expenses incident to the Company's and the Guarantor's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company and the Guarantor and, to the extent provided in Section 7(b), the fees and disbursements of counsel for the Holders of Transfer Restricted Securities; (v) all application and filing fees, if any, in connection with listing the Series B Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company and the Guarantor (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its and the Guarantor internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantor. (b) In connection with any Registration Statement required by this Agreement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement), the Company and the Guarantor will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities who are tendering Series A Notes in the Exchange Offer and/or selling or reselling Series A Notes or Series B Notes pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Davis Polk & Wardwell, unless another firm shall be chosen by the Holders of a majority in principal amount of 19 the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. SECTION 8. INDEMNIFICATION. (a) The Company and the Guarantor agree, jointly and severally, to indemnify and hold harmless each Holder, its directors, officers and each Person, if any, who controls such Holder (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, liabilities, judgments, (including without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any Holder or any prospective purchaser of Series B Notes or registered Series A Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders; PROVIDED, HOWEVER, that the foregoing indemnity agreement with respect to the preliminary prospectus shall not inure to the benefit of any Holder who failed to deliver the Prospectus, as then amended or supplemented (so long as the Prospectus and any such amendment or supplement was provided by the Company to the Holders in the requisite quantity and on a timely basis to permit proper delivery) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Prospectus, as so amended or supplemented.. (b) Each Holder of Transfer Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantor, and their respective directors and officers, and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, or the Guarantor to the same extent as the foregoing indemnity from the Company and the Guarantor set forth in Section 8(a) above, but only with reference to information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any Registration Statement. In no 20 event shall any Holder, its directors, officers or any Person who controls such Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Holder with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds (i) the amount paid by such Holder for such Transfer Restricted Securities and (ii) the amount of any damages that such Holder, its directors, officers or any Person who controls such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PERSON") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impeded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company and Guarantor, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all 21 losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with the indemnifying party's written consent or (ii) effected without the indemnifying party's written consent if the settlement is entered into more than twenty Business Days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantor, on the one hand, and the Holders, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantor, on the one hand, and of the Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantor, on the one hand, and of the Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Guarantor, on the one hand, or by the Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 22 The Company, the Guarantor and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder, its directors, its officers or any Person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds (i) the amount paid by such Holder for such Transfer Restricted Securities and (ii) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each Holder hereunder and not joint. SECTION 9. RULE 144A AND RULE 144. The Company and the Guarantor agree with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company or the Guarantor (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. MISCELLANEOUS. (a) REMEDIES. The Company and the Guarantor acknowledge and agree that any failure by the Company and/or the Guarantor to comply with their 23 respective obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantor's obligations under Sections 3 and 4 hereof. (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor the Guarantor will, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor the Guarantor has previously entered into any agreement granting any registration rights with respect to its securities to any Person, except for the Warrant and Registration Rights Agreement dated as of June 16, 1997 among the Guarantor and the Investors listed therein. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantor's securities under any agreement in effect on the date hereof. (c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless (i) in the case of Section 5 hereof and this clause 10(c)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (d) THIRD PARTY BENEFICIARY. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. 24 (e) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company or the Guarantor: The Musicland Group, Inc. 10400 Yellow Circle Drive Minnetonka, MN 55343-9134 Telecopier No.: (612) 931-8047 Attention: General Counsel With a copy to: Moss & Barnett 4800 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 Telecopier No.: (612) 339-6686 Attention: Janna R. Severance All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders; PROVIDED, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by 25 operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Musicland Group, Inc. By: /s/ Jack W. Eugster -------------------------------- Name: Jack W. Eugster Title: CEO and Chairman Musicland Stores Corporation By: /s/ Jack W. Eugster -------------------------------- Name: Jack W. Eugster Title: CEO and Chairman Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated NationsBanc Montgomery Securities LLC By: Donaldson, Lufkin & Jenrette Securities Corporation, on behalf of the Initial Purchasers By: /s/ Ephraim Fields ------------------------------------- Name: Ephraim Fields Title: Vice President 27 EXHIBIT A NOTICE OF FILING OF A/B EXCHANGE OFFER REGISTRATION STATEMENT Date:___, 1998 To: Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Attention: Louise Guarneri (Compliance Department) Fax: (212) 892-7272 From: The Musicland Group, Inc. 9_% Series A Senior Subordinated Notes due 2008 For your information only (NO ACTION REQUIRED): Today, ______, 1998, we filed [an A/B Exchange Registration Statement/a Shelf Registration Statement] with the Securities and Exchange Commission. We currently expect this registration statement to be declared effective within __ business days of the date hereof. CROSS-REFERENCE TARGET LIST NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE TARGET PULL-DOWN LIST. (This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME - - -------------------------------- ---------------------------- ---------------------------- ---------------------------- - - -------------------------------- ---------------------------- ---------------------------- ---------------------------- 2. . . . . . . . . . . . holders 3. . . . . . . . . .reg.exch.off 3(a) . . . . . . . . . .deadline 3(b) . . . . . . . . . . off.eff 3(c) . . . . . . . . . plan.dist 4. . . . . . . . . . . shelf.reg 4(a) . . . . . . .shelf.reg.dead 4(a)(i). . . . exch.off.not.perm 4(a)(ii) . . . . . holder.notify 4(b) . . . . . . .prov.cert.info 5. . . . . . . . . . . . liq.dam 6. . . . . . . . . . . . reg.pro 6(a) . . . . . exch.off.reg.stmt 6(a)(i). . . . . chg.comm.policy 6(b) . . . . . . .shelf.reg.stmt 6(b)(i). . . sale.trans.restrict 6(b)(ii) . . . . .series.b.notes 6(c) . . . . . . . . . .gen.prov 6(c)(i). . . . . . .reg.cont.eff 6(c)(iii). . . . aff.mark.marker 6(c)(iii)(C) . . .iss.stop.order 6(c)(iii)(D) . exist.fact.untrue 6(c)(iv) . . . . . .prepare.supp 6(c)(xi) . . . . . . .holder.req 6(c)(xi)(A). . . . . .req.holder 6(c)(xi)(A)(2) . . .co.coun.opin 6(c)(xi)(A)(3) . . . comfort.ltr 6(c)(xii). . . . . . . .blue.sky 6(d) . . . . . .restrict.holders 7(b) . . . . . company.reimburse 8. . . . . . . . . . . . . indem 8(a) . . . . . . . . . .co.indem 8(b) . . . . . . . .holder.indem 8(c) . . . . . . . . indem.party 8(d) . . . . . . . indem.unavail 8(d)(i). . . . . . .appro.propor 10(c)(i) . . writ.consent.holder
EX-4.9 5 EX 4.9 -- EXCHANGE AGENT AGREEMENT EXCHANGE AGENT AGREEMENT THIS EXCHANGE AGENT AGREEMENT (this "Agreement") is made and entered into as of April 21, 1998, by and between Musicland Stores Corporation ("MSC"), a Delaware corporation, and its wholly-owned subsidiary, The Musicland Group, Inc. ("MGI"), a Delware corporation (as to MSC and MGI, together, the "Company"), and Bank One, N.A., a national banking association incorporated and existing under the laws of the United States, as exchange agent ("Exchange Agent"). RECITALS The Company is making an offer to exchange (the "Exchange Offer") the Series A 9 7/8% Senior Subordinated Notes due 2008 of MGI and associated Guarantee of MSC (the "Outstanding Notes") for an equal principal amount of Series B 9 7/8% Senior Subordinated Notes of MGI due 2008 and associated Guarantee of MSC (the "Exchange Notes") upon the terms and subject to the conditions set forth in the Company's Registration Statement on Form S-4 (Commission File No. 333-_________) and related final prospectus (the "Prospectus"); The Exchange Offer will commence as soon as practicable after the Company's Registration Statement on Form S-4 relating to the Exchange Offer is declared effective under the Securities Act of 1933, as certified in writing to Exchange Agent by the Company (the "Effective Time"); and This Agreement shall be deemed to take effect at the Effective Time. AGREEMENT NOW, THEREFORE, Exchange Agent is hereby appointed by the Company, and Exchange Agent hereby accepts such appointment and shall act as Exchange Agent in connection with the Exchange Offer. In connection therewith, the undersigned parties hereby agree as follows: 1. MAILING TO HOLDERS OF THE OUTSTANDING NOTES. Immediately upon receipt of certification from the Company as to the Effective Time and copies of the Prospectus, Letter of Transmittal and Notice of Guaranteed Delivery, Exchange Agent will mail to each Holder (as defined in the Indenture) of any Outstanding Notes (i) a Letter of Transmittal with instructions (including instructions for completing a substitute Form W-9), substantially in the form attached hereto as EXHIBIT A (the "Letter of Transmittal"), (ii) a Prospectus, (iii) a return envelope for use in effecting the surrender of the Outstanding Notes in exchange for the Exchange Notes and (iv) a Notice of Guaranteed Delivery attached hereto as EXHIBIT B (the "Notice of Guaranteed Delivery"). 1 Copies of the Prospectus, Letter of Transmittal and Notice of Guaranteed Delivery will be furnished to Exchange Agent by the Company in quantities agreed to between Exchange Agent and the Company. Exchange Agent, in its capacity as transfer agent and registrar of the Outstanding Notes, possesses a list (including mailing addresses) of the Holders of the Outstanding Notes. 2. ATOP REGISTRATION. As of the date hereof, the Exchange Agent shall have established an account with The Depository Trust Company ("DTC") in its name to facilitate book-entry tender of Outstanding Notes through DTC's Automated Tender Offer Program. 3. RECEIPT OF LETTERS OF TRANSMITTAL AND RELATED ITEMS. From and after the Effective Time, Exchange Agent is hereby authorized and directed to accept (subject to withdrawal rights described in the Prospectus) (i) Letters of Transmittal, duly executed in accordance with the instructions thereto (or a manually signed facsimile thereof), and any requisite collateral documents from Holders of the Outstanding Notes and (ii) surrendered Outstanding Notes to which such Letters of Transmittal relate. Exchange Agent is authorized to request from any person tendering Outstanding Notes such additional documents as Exchange Agent or the Company deems appropriate. 4. DEFECTIVE OR DEFICIENT OUTSTANDING NOTES AND INSTRUMENTS. As soon as practicable after receipt, Exchange Agent shall examine the Outstanding Notes, the Letters of Transmittal and the other documents delivered to Exchange Agent in connection with tenders of Outstanding Notes to ascertain whether (i) the Letters of Transmittal are completed and executed in accordance with the instructions set forth therein, (ii) the Outstanding Notes have otherwise been properly tendered in accordance with the Prospectus and the Letters of Transmittal and (iii) if applicable, the other documents (including the Notice of Guaranteed Delivery) are properly completed and executed. If any Letter of Transmittal or other document has been improperly completed or executed or the Outstanding Notes accompanying such Letter of Transmittal are not in proper form for transfer, or have been improperly tendered, or if some other irregularity in connection with any tender of any Outstanding Notes exists, Exchange Agent shall promptly report such information to the Company and, upon consultation with the Company and its counsel, endeavor, subject to the terms and conditions of the Exchange Offer, to cause such action to be taken as is necessary to correct such irregularity. Determination of all questions as to the validity, form, eligibility (including timeliness of receipt), acceptance and withdrawal of any Outstanding Notes tendered or delivered shall be determined by the Company, it its sole discretion. Notwithstanding the above, the Exchange Agent shall not be under any duty to give notification of defects in such tenders and shall not incur any liability for failure to give such notification. The Company reserves the absolute right (i) to reject any or all tenders of any particular Outstanding Notes determined by the Company not to be in proper form or the acceptance or exchange of which may, in the opinion of Company counsel, be unlawful and (ii) to waive any of the conditions of the Exchange Offer or any defect or irregularity in the tender of any particular Outstanding Notes, and the Company's interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and Notice of Guaranteed Delivery and the instructions set forth therein) will be final and binding. 2 5. REQUIREMENTS OF TENDERS. Tenders of Outstanding Notes shall be made only as set forth in the Prospectus and the Letter of Transmittal, and Outstanding Notes shall be considered properly tendered only when the conditions set forth in subparagraphs: (a) (i) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with any required signature guarantee and any other required documents, are received by the Exchange Agent at the address set forth in the Letter of Transmittal and Outstanding Notes (in any integral multiple of $1,000) are received by the Exchange Agent at its address or by book-entry transfer through DTC's Automated Tender Offer Program into its account at or prior to the Expiration Date or (ii) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by the Company (by facsimile transmission, mail, telegram, or hand delivery), with an appropriate guarantee of signature and delivery from an Eligible Guarantor Institution within the meaning of Rule 17 Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are received by the Exchange Agent at or prior to the Expiration Date and the Letter of Transmittal (or a facsimile thereof), together with the certificate(s) representing the Outstanding Notes in proper form for transfer or a book-entry confirmation through DTC's Automated Tender Offer Program, as the case may be, and any other required documents required by the Letters of Transmittal are received by the Exchange Agent within five (5) business days after the Expiration Date; and (b) the adequacy of the items relating to Outstanding Notes, and the Letters of Transmittal therefor and any Notice of Guaranteed Delivery and any other required documents has been favorably passed upon by the Company. Notwithstanding the provisions of the preceding subparagraph, Outstanding Notes that the Company otherwise shall approve as having been properly tendered shall be considered to be properly tendered for all purposes of the Exchange Offer. 6. CERTAIN DEFINITIONS. For purposes of this Agreement, an "Eligible Guarantor Institution" within the meaning of Rule 17 Ad-15 under the Exchange Act shall mean a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States; "business day" shall mean a day upon which the New York Stock Exchange is open for trading; and "Expiration Date" shall mean 5:00 p.m., New York City time, on _______________, 1998, unless the Exchange Offer is extended by the Company in its sole discretion, in which case, the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. 7. EXCHANGE OF THE OUTSTANDING NOTES. Promptly after the Expiration Date, upon surrender of the Outstanding Notes in accordance with the Letter of Transmittal and Prospectus, Exchange Agent is hereby directed to deliver or cause to be delivered as promptly as possible to the Holders of such surrendered Outstanding Notes, in accordance with this Agreement and the terms of the Exchange Offer, the amount of the Exchange Notes to which such Holders of the Outstanding Notes are entitled. The principal amount of the Exchange Notes to be delivered to a Holder shall equal the principal amount of the Outstanding Notes surrendered. 3 The Exchange Notes shall be mailed by Exchange Agent, in accordance with the instructions contained in the Letter of Transmittal, by first class or registered mail, and under coverage of Exchange Agent's blanket surety bond for first class or registered mail losses protecting the Company from loss or liability arising out of the non-receipt or non-delivery of such Exchange Notes or the replacement thereof. 8. APPLICATION OF THE EXCHANGE NOTES. The Exchange Notes and any other property (the "Property") to be deposited with, or received by Exchange Agent from the Company as exchange agent constitute a special, segregated account, held solely for the benefit of the Company and Holders tendering Outstanding Notes, as their interests may appear, and the Property shall not be commingled with the securities, money, assets or property of Exchange Agent or any other person. Exchange Agent hereby waives any and all rights of lien (including banker's lien), attachment or set-off whatsoever, if any, against the Property, whether such rights arise by reason of statutory or common law, by contract or otherwise except to the extent set forth in the Indenture with respect to the Outstanding Notes and the Exchange Notes. 9. REQUESTS. On each business day after receipt of the first Letter of Transmittal, and up to and including the Expiration Date, Exchange Agent shall advise the Company (or such other persons as the Company may direct) by telephone, not later than 5:00 p.m., Minneapolis, Minnesota time, of the principal amount of the Outstanding Notes which have been duly tendered on such day, stating separately (i) the principal amount of the Outstanding Notes tendered pursuant to DTC's Automated Tender Offer Program, (ii) the principal amount of the Outstanding Notes tendered about which Exchange Agent has questions concerning validity, (iii) the number of Outstanding Notes tendered and not withdrawn that are represented by certificates, (iv) the number of Outstanding Notes tendered and not withdrawn that are represented by Notices of Guaranteed Delivery and (v) the aggregate principal amount of the Outstanding Notes tendered and not withdrawn through the time of such telephone call. Promptly thereafter (by the next business day), Exchange Agent shall confirm such advice in writing, to be transmitted by telecopier, overnight courier or other special form of delivery. In addition, the Exchange Agent shall provide, and cooperate in making available to the Company, such other information as it may reasonably request upon written request made from time to time. The Exchange Agent shall, without limitation, permit the Company, and such other persons as it may reasonably request, access to those persons on the Exchange Agent's staff who are responsible for receiving tenders of Outstanding Notes in order to insure that, immediately prior to the Expiration Date, the Company shall have received information in sufficient detail to enable it to decide whether to extend the Expiration Date of the Exchange Offer. 10. RECORD KEEPING. Each Letter of Transmittal, Outstanding Note, Notice of Guaranteed Delivery and any other documents received by the Exchange Agent in connection with the Exchange Offer shall be stamped by the Exchange Agent to show the date of the receipt (or if Outstanding Notes are tendered by book-entry delivery, such form of record keeping of receipt as is customary for tenders through DTC's Automated Tender Offer Program) and, if defective, the date and time the last defect was waived by the Company or was cured. Each Letter of Transmittal and Outstanding Note that is accepted by the Company shall be retained in the Exchange Agent's possession until the Expiration Date. As promptly as practicable 4 thereafter, the Exchange Agent will deliver those items, together with all properly tendered and canceled Outstanding Notes, to the Company, by certified mail with proper insurance. If after the Expiration Date the Exchange Agent receives any Letters of Transmittal (or functional equivalent thereof), the Exchange Agent shall return the same together with all enclosures to the party from whom such documents were received. 11. DISCREPANCIES IN THE AMOUNT OF THE OUTSTANDING NOTES OWNED. Exchange Agent shall endeavor to reconcile any discrepancies between the amount of the Outstanding Notes, claimed to be owned by a surrendering Holder of the Outstanding Notes and the amount of the Outstanding Notes indicated on the books of the Transfer Agent as of the "record date" (as defined in the section of the Prospectus captioned "The Exchange Offer"). If, based upon reliable documentation, Exchange Agent determines that the Outstanding Notes with respect to which such discrepancy exists are valid Outstanding Notes, then Exchange Agent shall deliver the Exchange Notes provided for herein to the holder surrendering such Outstanding Notes. In case of any questions about whether the Outstanding Notes are valid Outstanding Notes, Exchange Agent shall be entitled to receive instructions from the Company and proceed based upon such instructions. 12. OUTSTANDING NOTES AND OTHER NAMES. If an Exchange Note is to be registered in a name other than that of the record Holder of surrendered Outstanding Notes, conditions to the issuance thereof shall be (i) that the Outstanding Note so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall pay to Exchange Agent any transfer or other taxes required by reason of the registration of such Exchange Note in any name other than that of the Holder of the Outstanding Note surrendered, or otherwise required, or shall establish to Exchange Agent's satisfaction that such tax has been paid or is not payable and (ii) that the record Holder deliver such other documents and instruments as Company counsel or Exchange Agent shall require. If the Letter of Transmittal is signed by a person other than the registered Holder of the tendered Outstanding Note or the Exchange Note is to be issued (or any untendered principal amount of the Outstanding Note is to be reissued) to a person other than the registered Holder of the tendered Outstanding Note, the registered Holder must either properly endorse the Outstanding Note tendered or transmit a properly completed separate bond power guaranteed by an Eligible Guarantor Institution, and such Outstanding Note must otherwise be in proper form for transfer. In addition, such registered Holder and/or such other person shall deliver such other documents and instruments as Company counsel or Exchange Agent shall require, in which case the Exchange Note shall be mailed to such assignee or transferee at the address so required. 13. PARTIAL TENDERS. If, pursuant to the Exchange Offer, less than all of the principal amount of any Outstanding Notes submitted to Exchange Agent is to be tendered, Exchange Agent shall, promptly after the Expiration Date, cause a new Outstanding Note for the principal amount not being tendered to be returned to, or in accordance with the instruction of, each Holder who has made a partial tender of Outstanding Notes. 5 14. WITHDRAWALS. A tendering Holder may withdraw tendered Outstanding Notes as set forth in the Prospectus, in which event Exchange Agent shall, as promptly as practicable after proper notification of such withdrawal, return such Outstanding Notes to, or in accordance with the instructions of, such Holder and such Outstanding Notes shall no longer be considered properly tendered. All questions as to the form and validity of notices of withdrawal, including timeliness of receipt, shall be determined by the Company, in its sole discretion, which determination shall be final and binding. A withdrawal of tender of Outstanding Notes may not be rescinded and any Outstanding Notes withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer, provided, however, that withdrawn Outstanding Notes may be retendered at any time on or prior to the Expiration Date. 15. REJECTION OF TENDERS. If, pursuant to the Exchange Offer, the Company does not accept for exchange any of the Outstanding Notes tendered by a Holder of Outstanding Notes, Exchange Agent shall, promptly after the Expiration Date, cause the Outstanding Notes not accepted to be returned to, or in accordance with the instructions of, such Holder of Outstanding Notes. 16. CANCELLATION OF EXCHANGED OUTSTANDING NOTES. Exchange Agent is authorized and directed to cancel all Outstanding Notes received by Exchange Agent upon delivering the Exchange Notes to tendering holders of the Outstanding Notes as provided herein. Exchange Agent shall maintain a record as to which Outstanding Notes have been exchanged and cancelled and shall deliver the same to the registrar and transfer agent for the Outstanding Notes and the Exchange Notes. 17. REQUESTS FOR INFORMATION. Exchange Agent shall accept and comply with telephone and mail requests from Holders or persons acting on behalf of Holders for information concerning the proper surrender of the Outstanding Notes. Upon request, Exchange Agent shall furnish copies of the Prospectus, any supplements to the Prospectus, the Letter of Transmittal and the other materials referred to in the Prospectus as being available to holders of Outstanding Notes. The Company will supply Exchange Agent with copies of such documents upon request by Exchange Agent. Notwithstanding anything herein to the contrary, the Exchange Agent is not authorized to offer any concessions or to pay any commissions to any brokers, dealers, banks or other persons or to engage or to utilize any persons to solicit tenders. 18. TAX MATTERS. Exchange Agent shall comply with applicable requirements of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder in connection with the Exchange Offer and shall file with the Internal Revenue Service all reports and other information required to be filed with the Internal Revenue Service in connection with the Exchange Offer, provided, however, that if Exchange Agent has questions with respect to any such information, it shall so notify, and request direction from, the Company. 19. REPORTS. Within 5 days after the Expiration Date, Exchange Agent shall furnish the Company a final report detailing the receipt and cancellation of Outstanding Notes and the issuance of the Exchange Notes. 6 20. FEES. For Exchange Agent's services as exchange agent hereunder, the Company will pay Exchange Agent $100 per Letter of Transmittal mailed by the Exchange Agent pursuant to Section 1 hereof, plus reasonable out-of-pocket expenses, including reasonable counsel fees and disbursements. 21. MISCELLANEOUS. As exchange agent hereunder, Exchange Agent: a. shall have no duties or obligations other than those specifically set forth in this Agreement; b. will make no representation and will have no responsibility as to the validity, value or genuineness of the Exchange Offer and shall not make any recommendation as to whether a Holder of Outstanding Notes should or should not tender its Outstanding Notes; c. shall not be obligated to take any legal action hereunder which might by Exchange Agent's reasonable judgment involve any expense or liability unless Exchange Agent shall have been furnished with reasonable indemnity; d. may rely on and shall be protected in acting in good faith upon any certificate, instrument, opinion, notice, instruction, letter, telegram or other document, or any security, delivered to Exchange Agent and believed by Exchange Agent to be genuine and to have been signed by the proper party or parties; e. may rely on and shall be protected in acting in good faith upon the written instructions of the Chief Financial Officer, President, or Vice President/General Counsel of the Company, or such other employees and representatives as the Company may hereafter designate in writing; f. shall not be liable for any claim, loss, liability or expense, incurred without Exchange Agent's negligence or willful misconduct, arising out of or in connection with the administration of Exchange Agent's duties hereunder; g. may consult with counsel reasonably satisfactory to the Company, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by Exchange Agent hereunder in good faith and in accordance with the opinion of such counsel; and h. shall follow and act upon such instructions in connection with the Exchange Offer which may be given to Exchange Agent by the Company, counsel for the Company or such other persons as the Company may authorize. 22. INDEMNIFICATION. THE COMPANY CONVENANTS AND AGREES TO REIMBURSE, INDEMNIFY AND HOLD EXCHANGE AGENT HARMLESS AGAINST ANY COSTS, EXPENSES (INCLUDING REASONABLE EXPENSES OF EXCHANGE AGENT'S LEGAL 7 COUNSEL), LOSSES OR DAMAGE WHICH, WITHOUT NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH ON EXCHANGE AGENT'S PART OR ARISING OUT OF OR ATTRIBUTABLE THERETO, MAY BE PAID, INCURRED OR SUFFERED BY EXCHANGE AGENT, OR TO WHICH EXCHANGE AGENT MAY BECOME SUBJECT BY REASON OF OR AS A RESULT OF: (I) THE ADMINISTRATION OF EXCHANGE AGENT'S DUTIES HEREUNDER, INCLUDING ANY CLAIMS AGAINST EXCHANGE AGENT BY ANY HOLDER TENDERING OUTSTANDING NOTES FOR EXCHANGE, OR (II) BY REASON OF OR AS A RESULT OF EXCHANGE AGENT'S COMPLIANCE WITH THE INSTRUCTIONS SET FORTH HEREIN OR WITH ANY WRITTEN OR ORAL INSTRUCTIONS DELIVERED TO EXCHANGE AGENT PURSUANT HERETO. The Company shall be entitled to participate at its own expense in the defense, and if the Company so elects at any time after receipt of such notice, the Company shall assume the defense of any suit brought to enforce any such claim. In the event that the Company assumes the defense of any such suit, the Company shall not be liable for the fees and expenses thereafter accruing of any counsel retained by Exchange Agent, unless in the reasonable judgment of the Company's counsel it is advisable for Exchange Agent to be represented by separate counsel. In no case shall the Company be liable under this indemnity with respect to any claim or action against Exchange Agent unless the Company shall be promptly notified by Exchange Agent, by letter or by facsimile confirmed by letter, of the written assertion of a claim or shall have been served with a summons or other first legal process giving information as to the nature and basis of an action, but failure so to promptly notify the Company shall not relieve the Company from any liability which it may have otherwise than on account of this indemnity, except to the extent the Company is materially prejudiced or forfeits substantial rights and defenses by reason of such failure. 23. APPLICABLE LAW. This Agreement and appointment of Exchange Agent as exchange agent shall be construed and enforced in accordance with the laws of the State of Minnesota and shall inure to the benefit of, and the obligations created hereby shall be binding upon, the successor and assigns of the parties hereto. 24. NOTICES. Notices or demands authorized by this Agreement to be given or made by Exchange Agent or by a holder of the Outstanding Notes to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with Exchange Agent) as follows: Musicland Stores Corporation 10400 Yellow Circle Drive Minnetonka, MN 55343 Attn: Heidi Hoard, Vice President and General Counsel 8 With copy to: Moss & Barnett 4800 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 Attn: Janna R. Severance Any notice or demand authorized by this Agreement to be given or made by the Company or by a holder of the Outstanding Notes to or in Exchange Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address if filed in writing with the Company) as follows: Bank One, N.A. 235 West Schrock Road Westerville, Ohio 43271-0184 Attention: Ms. Lora Marsch Corporate Trust Operations With copy to: Bank One, N.A. 100 East Broad Street Columbus, Ohio 43271-0181 Attention: Mr. Joseph C. Ludes Corporate Trust Administration Any notice or demand authorized by this Agreement to be given or made by the Company or Exchange Agent to or on a holder of the Outstanding Notes shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the Company's books. 25. CHANGE OF EXCHANGE AGENT. Exchange Agent may resign and be discharged from its duties under this Agreement by giving to the Company thirty days prior written notice, by first-class mail, postage prepaid, specifying a date when such resignation shall take effect. If Exchange Agent resigns or becomes incapable of acting as exchange agent and the Company fails to appoint a new exchange agent within a period of 30 days after it has been notified in writing of such resignation or incapacity by Exchange Agent, the Company shall become the exchange agent and any Holder of the Outstanding Notes may apply to any court of competent jurisdiction for the appointment of a successor to Exchange Agent. Pending the appointment of a successor to Exchange Agent, either by the Company or by such a court, the duties of the exchange agent shall be carried out by the Company. After appointment, the successor exchange agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally name as exchange agent without the further act or deed; but the Exchange Agent shall 9 deliver and transfer to the successor exchange agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. 26. TERM. This Agreement shall terminate, except for Section 22 hereof, 30 days after the Expiration Date; provided, however, that the term of this Agreement may be extended at the request of the Company and the agreement of Exchange Agent. Any portion of the Exchange Notes which remain undistributed to the holders of the Outstanding Notes after the expiration of this Agreement shall be marked, canceled and delivered to the Company upon demand, and any holders of unsurrendered Outstanding Notes shall thereafter have no right to exchange their Outstanding Notes for Exchange Notes. 27. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and Exchange Agent have caused this Agreement to be signed by their respective officers thereunto authorized as of the date first written above. MUSICLAND STORES CORPORATION By: /s/ ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- THE MUSICLAND GROUP, INC. By: /s/ ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- BANK ONE, N.A. By: /s/ ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- 10 EX-5.0 6 EX 5.0 -- OPINION OF MOSS & BARNETT April 24, 1998 Board of Directors Musicland Stores Corporation The Musicland Group, Inc. 10400 Yellow Circle Drive Minnetonka, MN 55343 Ladies and Gentlemen: This opinion is rendered in connection with the filing by The Musicland Group, Inc. ("MGI") and its sole shareholder, Musicland Stores Corporation (the "Guarantor"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of a Registration Statement on Form S-4 (the "Registration Statement") with respect to the issuance by MGI of $150,000,000 of its 9 7/8% Series B Senior Subordinated Notes Due 2008 (the "New Notes") and the guaranty of the New Notes by the Guarantor (the "New Note Guarantee") in exchange for MGI's 9 7/8% Series A Senior Subordinated Notes Due 2008, in the amount of $150,000,000 (the "Old Notes") and a Guarantee of the Old Notes by the Guarantor (the "Old Notes Guarantee"). The Old Notes and the New Notes are issued under an Indenture (the "Indenture") among MGI, the Guarantor and Bank One, N.A., as Trustee (the "Trustee"). We have examined the originals or copies, certified to our satisfaction, of such corporate instruments and certificates of public officials and officers and representatives of MGI and the Guarantor, and have made such examination of law, as we have deemed relevant and necessary as a basis for the opinions hereafter set forth. In such examination, we have assumed the genuineness of all signatures and the authenticity and conformity to original documents submitted to us as certified or photocopies. Based upon the foregoing and subject to the qualifications noted below, we are of the opinion that: (1) The Indenture has been duly authorized by MGI and the Guarantor and constitutes a valid and legally binding instrument enforceable against MGI and the Guarantor in accordance with its terms. Board of Directors _______, 1998 Page 2 (2) The Old Notes and the New Notes have been duly authorized by MGI and, upon their execution and delivery by MGI and authentication by the Trustee under the Indenture, will constitute valid and legally binding obligations of MGI entitled to the benefits of the Indenture. (3) The Old Note Guarantee and the New Note Guarantee have been duly authorized by the Guarantor and constitute the valid and legally binding obligations of the Guarantor. The foregoing opinion with respect to the enforceability and valid and legally binding nature of the Indenture, the Old Notes, the New Notes, the Old Note Guarantee and the New Note Guarantee is subject to bankruptcy, insolvency, reorganization, fraudulent conveyance and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. Further, this opinion is based upon an examination of the Federal laws of the United States and the laws of the state of Minnesota and no opinion is expressed as to the application of the laws of any other jurisdiction. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name in the Prospectus included therein. Very truly yours, MOSS & BARNETT, A PROFESSIONAL ASSOCIATION By /s/ Janna R Severance -------------------------------------- EX-23.1 7 EX 23.1 -- CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion herein of our report dated January 21, 1998 and the incorporation by reference in this Registration Statement on Form S-4 of our report dated January 21, 1998, included in Musicland Stores Corporation and Subsidiaries Form 10-K for the year ended December 31, 1997, and to all references to our firm included in this Registration Statement. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, April 24, 1998 EX-25 8 EX 25 -- FORM T-1 Registration No. ------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE BANK ONE, N.A. f/k/a BANK ONE, COLUMBUS, N.A. Not Applicable 31-4148768 (State of Incorporation (I.R.S. Employer if not a national bank) Identification No.) 100 East Broad Street, Columbus, Ohio 43271-0181 (Address of trustee's principal (Zip Code) executive offices) c/o Bank One Trust Company, NA 100 East Broad Street Columbus, Ohio 43271-0181 (614) 248-5579 (Name, address and telephone number of agent for service) The Musicland Group, Inc. (Exact name of obligor as specified in its charter) Delaware 41-1307776 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 10400 Yellow Circle Drive, Minnetonka, MN 55343 (Address of principal executive (Zip Code) office) 9 7/8% Senior Subordinated Notes due 2008 (Title of the Indenture securities) GENERAL 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Comptroller of the Currency, Washington, D.C. Federal Reserve Bank of Cleveland, Cleveland, Ohio Federal Deposit Insurance Corporation, Washington, D.C. The Board of Governors of the Federal Reserve System, Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee. 16. LIST OF EXHIBITS LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY AND QUALIFICATION. (EXHIBITS IDENTIFIED IN PARENTHESES, ON FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS EXHIBITS HERETO.) Exhibit 1 - A copy of the Articles of Association of the trustee as now in effect. Exhibit 2 - A copy of the Certificate of Authority of the trustee to commence business, see Exhibit 2 to Form T-1, filed in connection with Form S-3 relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities and Exchange Commission File No. 33-50709. Exhibit 3 - A copy of the Authorization of the trustee to exercise corporate trust powers, see Exhibit 3 to Form T-1, filed in connection with Form S-3 relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities and Exchange Commission File No. 33-50709. Exhibit 4 - A copy of the Bylaws of the trustee as now in effect. Exhibit 5 - Not applicable. Exhibit 6 - The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended. Exhibit 7 - Report of Condition of the trustee as of the close of business on December 31, 1997, published pursuant to the requirements of the Comptroller of the Company, see attached. Exhibit 8 - Not applicable. Exhibit 9 - Not applicable. Items 3 through 15 are not answered pursuant to General Instruction B which requires responses to Item 1, 2 and 16 only, if the obligor is not in default. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, Bank One, NA, a national banking association organized under the National Banking Act, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in Columbus, Ohio, on April 13, 1998. Bank One, NA By: /s/ ---------------------------------- Authorized Signer Exhibit 1 BANK ONE, COLUMBUS, NATIONAL ASSOCIATION ARTICLES OF ASSOCIATION For the purpose of organizing an association to carry on the business of banking under the laws of the United States, the following Articles of Association are entered into: FIRST. The title of this Association shall be BANK ONE, COLUMBUS, NATIONAL ASSOCIATION. SECOND. The main office of the Association shall be in Columbus, County of Franklin, State of Ohio. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five Directors, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time-to-time by resolution of the shareholders at any annual or special meeting thereof, provided, however, that the Board of Directors, by resolution of a majority thereof, shall be authorized to increase the number of its members by not more than two between regular meetings of the shareholders. Each Director, during the full term of his directorship, shall own, as qualifying shares, the minimum number of shares of either this Association or of its parent bank holding company in accordance with the provisions of applicable law. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. -4- FOURTH. The annual meeting of the shareholders for the election of Directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office of this Association or such other place as the Board of Directors may designate, on the day of each year specified therefor in the By-Laws, but if no election is held on that day, it may be held on any subsequent business day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. FIFTH. The authorized amount of capital stock of this Association shall be 2,073,750 shares of common stock of the par value of Ten Dollars ($10) each; but said capital stock may be increased or decreased from time-to-time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the Association shall have the preemptive or preferential right of subscription to any share of any class of stock of this Association, whether now or hereafter authorized or to any obligations convertible into stock of this Association, issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, may from time-to-time determine and at such price as the Board of Directors may from time-to-time fix. This Association, at any time and from time-to-time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SIXTH. The Board of Directors shall appoint one of its members President of the Association, who shall be Chairman of the Board, unless the Board appoints another director to be the Chairman. The Board of Directors shall have the power to appoint one or more Vice Presidents and to appoint a Secretary and such other officers and employees as may be required to transact the business of this Association. The Board of Directors shall have the power to define the duties of the officers and employees of this Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of this Association shall be made; to manage and administer the business and affairs of this Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place within the limits of the City of Columbus, Ohio, -5- without the approval of the shareholders but subject to the approval of the Comptroller of the Currency; and shall have the power to establish or change the location of any branch or branches of this Association to any other location, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than 10 percent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. -6- TENTH. Every person who is or was a Director, officer or employee of the Association or of any other corporation which he served as a Director, officer or employee at the request of the Association as part of his regularly assigned duties may be indemnified by the Association in accordance with the provisions of this paragraph against all liability (including, without limitation, judgments, fines, penalties and settlements) and all reasonable expenses (including, without limitation, attorneys' fees and investigative expenses) that may be incurred or paid by him in connection with any claim, action, suit or proceeding, whether civil, criminal or administrative (all referred to hereafter in this paragraphs as "Claims") or in connection with any appeal relating thereto in which he may become involved as a party or otherwise or with which he may be threatened by reason of his being or having been a Director, officer or employee of the Association or such other corporation, or by reason of any action taken or omitted by him in his capacity as such Director, officer or employee, whether or not he continues to be such at the time such liability or expenses are incurred, provided that nothing contained in this paragraph shall be construed to permit indemnification of any such person who is adjudged guilty of, or liable for, willful misconduct, gross neglect of duty or criminal acts, unless, at the time such indemnification is sought, such indemnification in such instance is permissible under applicable law and regulations, including published rulings of the Comptroller of the Currency or other appropriate supervisory or regulatory authority, and provided further that there shall be no indemnification of directors, officers, or employees against expenses, penalties, or other payments incurred in an administrative proceeding or action instituted by an appropriate regulatory agency which proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals n the form of payments to the Association. Every person who may be indemnified under the provisions of this paragraph and who has been wholly successful on the merits with respect to any Claim shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification under this paragraph shall be at the sole discretion of the Board of Directors and shall be made only if the Board of Directors or the Executive Committee acting by a quorum consisting of Directors who are not parties to such Claim shall find or if independent legal counsel (who may be the regular counsel of the Association) selected by the Board of Directors or Executive Committee whether or not a disinterested quorum exists shall render their opinion that in view of all of the circumstances then surrounding the Claim, such indemnification is equitable and in the best interests of the Association. Among the circumstances to be taken into consideration in arriving at such a finding or opinion is the existence or non-existence of a contract of insurance or indemnity under which the Association would be wholly or partially reimbursed for such indemnification, but the existence or non-existence of such insurance is not the sole circumstance to be considered nor shall it be wholly determinative of whether such -7- indemnification shall be made. In addition to such finding or opinion, no indemnification under this paragraph shall be made unless the Board of Directors or the Executive Committee acting by a quorum consisting of Directors who are not parties to such Claim shall find or if independent legal counsel (who may be the regular counsel of the Association) selected by the Board of Directors or Executive Committee whether or not a disinterested quorum exists shall render their opinion that the Director, officer or employee acted in good faith in what he reasonably believed to be the best interests of the Association or such other corporation and further in the case of any criminal action or proceeding, that the Director, officer or employee reasonably believed his conduct to be lawful. Determination of any Claim by judgment adverse to a Director, officer or employee by settlement with or without Court approval or conviction upon a plea of guilty or of NOLO CONTENDERE or its equivalent shall not create a presumption that a Director, officer or employee failed to meet the standards of conduct set forth in this paragraph. Expenses incurred with respect to any Claim may be advanced by the Association prior to the final disposition thereof upon receipt of an undertaking satisfactory to the Association by or on behalf of the recipient to repay such amount unless it is ultimately determined that he is entitled to indemnification under this paragraph. The rights of indemnification provided in this paragraph shall be in addition to any rights to which any Director, officer or employee may otherwise be entitled by contract or as a matter of law. -8- Every person who shall act as a Director, officer or employee of this Association shall be conclusively presumed to be doing so in reliance upon the right of indemnification provided for in this paragraph. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. -9- Exhibit 4 BY-LAWS OF BANK ONE, COLUMBUS, NATIONAL ASSOCIATION ARTICLE I MEETING OF SHAREHOLDERS SECTION 1.01. ANNUAL MEETING. The regular annual meeting of the Shareholders of the Bank for the election of Directors and for the transaction of such business as may properly come before the meeting shall be held at its main banking house, or other convenient place duly authorized by the Board of Directors, on the third Monday of January of each year, or on the next succeeding banking day, if the day fixed falls on a legal holiday. If from any cause, an election of directors is not made on the day fixed for the regular meeting of shareholders or, in the event of a legal holiday, on the next succeeding banking day, the Board of Directors shall order the election to be held on some subsequent day, as soon thereafter as practicable, according to the provisions of law; and notice thereof shall be given in the manner herein provided for the annual meeting. Notice of such annual meeting shall be given by or under the direction of the Secretary or such other officer as may be designated by the Chief Executive Officer by first-class mail, postage prepaid, to all shareholders of record of the Bank at their respective addresses as shown upon the books of the Bank mailed not less than ten days prior to the date fixed for such meeting. SECTION 1.02. SPECIAL MEETINGS. A special meeting of the shareholders of this Bank may be called at any time by the Board of Directors or by any three or more shareholders owning, in the aggregate, not less than ten percent of the stock of this Bank. The notice of any special meeting of the shareholders called by the Board of Directors, stating the time, place and purpose of the meeting, shall be given by or under the direction of the Secretary, or such other officer as is designated by the Chief Executive Officer, by first-class mail, postage prepaid, to all shareholders of -10- record of the Bank at their respective addresses as shown upon the books of the Bank, mailed not less than ten days prior to the date fixed for such meeting. Any special meeting of shareholders shall be conducted and its proceedings recorded in the manner prescribed in these By-Laws for annual meetings of shareholders. SECTION 1.03. SECRETARY OF SHAREHOLDERS' MEETING. The Board of Directors may designate a person to be the Secretary of the meetings of shareholders. In the absence of a presiding officer, as designated in these By-Laws, the Board of Directors may designate a person to act as the presiding officer. In the event the Board of Directors fails to designate a person to preside at a meeting of shareholders and a Secretary of such meeting, the shareholders present or represented shall elect a person to preside and a person to serve as Secretary of the meeting. The Secretary of the meetings of shareholders shall cause the returns made by the judges and election and other proceedings to be recorded in the minute book of the Bank. The presiding officer shall notify the directors-elect of their election and to meet forthwith for the organization of the new board. The minutes of the meeting shall be signed by the presiding officer and the Secretary designated for the meeting. SECTION 1.04. JUDGES OF ELECTION. The Board of Directors may appoint as many as three shareholders to be judges of the election, who shall hold and conduct the same, and who shall, after the election has been held, notify, in writing over their signatures, the secretary of the shareholders' meeting of the result thereof and the names of the Directors elected; provided, however, that upon failure for any reason of any judge or judges of election, so appointed by the directors, to serve, the presiding officer of the meeting shall appoint other shareholders or their proxies to fill the vacancies. The judges of election at the request of the chairman of the meeting, shall act as tellers of any other vote by ballot taken at such meeting, and shall notify, in writing over their signatures, the secretary of the Board of Directors of the result thereof. SECTION 1.05. PROXIES. In all elections of Directors, each shareholder of record, who is qualified to vote under the provisions of Federal Law, shall have the right to vote the number of shares of record in his name for as many persons as there are Directors to be elected, or to cumulate such shares as provided by Federal Law. In deciding all other questions at meetings of shareholders, each shareholder shall be entitled to one vote on each share of stock of record in his name. Shareholders may -11- vote by proxy duly authorized in writing. All proxies used at the annual meeting shall be secured for that meeting only, or any adjournment thereof, and shall be dated, and if not dated by the shareholder, shall be dated as of the date of receipt thereof. No officer or employee of this Bank may act as proxy. SECTION 1.06. QUORUM. Holders of record of a majority of the shares of the capital stock of the Bank, eligible to be voted, present either in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders, but shareholders present at any meeting and constituting less than a quorum may, without further notice, adjourn the meeting from time to time until a quorum is obtained. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. -12- ARTICLE II DIRECTORS SECTION 2.01. MANAGEMENT OF THE BANK. The business of the Bank shall be managed by the Board of Directors. Each director of the Bank shall be the beneficial owner of a substantial number of shares of BANC ONE CORPORATION and shall be employed either in the position of Chief Executive Officer or active leadership within his or her business, professional or community interest which shall be located within the geographic area in which the Bank operates, or as an executive officer of the Bank. A director shall not be eligible for nomination and re-election as a director of the Bank if such person's executive or leadership position within his or her business, professional or community interests which qualifies such person as a director of Bank terminates. The age of 70 is the mandatory retirement age as a director of the Bank. When a person's eligibility as director of the Bank terminates, whether because of change in share ownership, position, residency or age, within 30 days after such termination, such person shall submit his resignation as a director to be effective at the pleasure of the Board provided, however, that in no event shall such person be nominated or elected as a director. Provided, however, following a person's retirement or resignation as a director because of the age limitations herein set forth with respect to election or re-election as a director, such person may, in special or unusual circumstances, and at the discretion of the Board, be elected by the directors as a Director Emeritus of the Bank for a limited period of time. A Director Emeritus shall have the right to participate in board meetings but shall be without the power to vote and shall be subject to re-election by the Board at its organizational meeting following the Bank's annual meeting of shareholders. SECTION 2.02. QUALIFICATIONS. Each director shall have the qualification prescribed by law. No person elected a director may exercise any of the powers of his office until he has taken the oath of such office. SECTION 2.03. TERM OF OFFICE/VACANCIES. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to his prior death, resignation, or removal from office. Whenever any vacancy shall occur among the directors, the remaining directors shall constitute the directors of the Bank until such vacancy is filled by the remaining directors, and any director so appointed shall hold office for the unexpired term of his or her successor. Notwithstanding the foregoing, each director shall hold office and serve at the pleasure of the Board. SECTION 2.04. ORGANIZATION MEETING. The directors elected by the share- holders shall meet for organization of the new board at the time fixed by the -13- presiding officer of the annual meeting. If at the time fixed for such meeting there is no quorum present, the Directors in attendance may adjourn from time to time until a quorum is obtained. A majority of the number of Directors elected by the shareholders shall constitute a quorum for the transaction of business. SECTION 2.05. REGULAR MEETINGS. The regular meetings of the Board of Directors shall be held on the third Monday of each calendar month excluding March and July, which meeting will be held at 4:00 p.m. When any regular meeting of the Board falls on a holiday, the meeting shall be held on such other day as the Board may previously designate or should the Board fail to so designate, on such day as the Chairman of the Board of President may fix. Whenever a quorum is not present, the directors in attendance shall adjourn the meeting to a time not later than the date fixed by the Bylaws for the next succeeding regular meeting of the Board. SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held at the call of the Chairman of the Board or President, or at the request of two or more Directors. Any special meeting may be held at such place in Franklin County, Ohio, and at such time as may be fixed in the call. Written or oral notice shall be given to each Director not later than the day next preceding the day on which special meeting is to be held, which notice may be waived in writing. -14- The presence of a Director at any meeting of the Board shall be deemed a waiver of notice thereof by him. Whenever a quorum is not present the Directors in attendance shall adjourn the special meeting from day to day until a quorum is obtained. SECTION 2.07. QUORUM. A majority of the Directors shall constitute a quorum at any meeting, except when otherwise provided by law; but a lesser number may adjourn any meeting, from time-to-time, and the meeting may be held, as adjourned, without further notice. When, however, less than a quorum as herein defined, but at least one-third and not less than two of the authorized number of Directors are present at a meeting of the Directors, business of the Bank may be transacted and matters before the Board approved or disapproved by the unanimous vote of the Directors present. SECTION 2.08. COMPENSATION. Each member of the Board of Directors shall receive such fees for, and transportation expenses incident to, attendance at Board and Board Committee Meetings and such fees for service as a Director irrespective of meeting attendance as from time to time are fixed by resolution of the Board; provided, however, that payment hereunder shall not be made to a Director for meetings attended and/or Board service which are not for the Bank's sole benefit and which are concurrent and duplicative with meetings attended or board service for an affiliate of the Bank for which the Director receives payment; and provided further, that payment hereunder shall not be made in the case of any Director in the regular employment of the Bank or of one of its affiliates. SECTION 2.09. EXECUTIVE COMMITTEE. There shall be a standing committee of the Board of Directors known as the Executive Committee which shall possess and exercise, when the Board is not in session, all powers of the Board that may lawfully be delegated. The Executive Committee shall also exercise the powers of the Board of Directors in accordance with the Provisions of the "Employees Retirement Plan" and the "Agreement and Declaration of Trust" as the same now exist or may be amended hereafter. The Executive Committee shall consist of not fewer than four board members, including the Chairman of the Board and President of the Bank, one of whom, as hereinafter required by these By-laws, shall be the Chief Executive Officer. The other members of the Committee shall be appointed by the Chairman of the Board or by the President, with the approval of the Board and shall continue as members of the Executive Committee until their successors are appointed, provided, however, that any member of the Executive Committee may be removed by the Board upon a majority vote thereof at any regular or special meeting of the Board. The Chairman or President shall fill any vacancy in the Committee by the appointment of another Director, subject to the approval of the Board of -15- Directors. The regular meetings of the Executive Committee shall be held on a regular basis as scheduled by the Board of Directors. Special meetings of the Executive Committee shall be held at the call of the Chairman or President or any two members thereof at such time or times as may be designated. In the event of the absence of any member or members of the Committee, the presiding member may appoint a member or members of the Board to fill the place or places of such absent member or members to serve during such absence. Not fewer than three members of the Committee must be present at any meeting of the Executive Committee to constitute a quorum, provided, however that with regard to any matters on which the Executive Committee shall vote, a majority of the Committee members present at the meeting at which a vote is to be taken shall not be officers of the Bank and, provided further, that if, at any meeting at which the Chairman of the Board and President are both present, Committee members who are not officers are not in the majority, then the Chairman of the Board or President, which ever of such officers is not also the Chief Executive Officer, shall not be eligible to vote at such meeting and shall not be recognized for purposes of determining if a quorum is present at such meeting. When neither the Chairman of the Board nor President are present, the Committee shall appoint a presiding officer. The Executive Committee shal keep a record of its proceedings and report its proceedings and the action taken by it to the Board of Directors. SECTION 2.10 COMMUNITY REINVESTMENT ACT AND COMPLIANCE POLICY COMMITTEE. There shall be a standing committee of the Board of Directors known as the Community Reinvestment Act and Compliance Policy Committee the duties of which shall be, at least once in each calendar year, to review, develop and recommend policies and programs related to the Bank's Community Reinvestment Act Compliance and regulatory compliance with all existing statutes, rules and regulations affecting the Bank under state and federal law. Such Committee shall provide and promptly make a full report of such review of current Bank policies with regard to Community Reinvestment Act and regulatory compliance in writing to the Board, with recommendations, if any, which may be necessary to correct any unsatisfactory conditions. Such Committee may, in its discretion, in fulfilling its duties, utilize the Community Reinvestment Act officers of the Bank, Banc One Ohio Corporation and Banc One Corporation and may engage outside Community Reinvestment Act experts, as approved by the Board, to review, develop and recommend policies and programs as herein required. The Community Reinvestment Act and regulatory compliance policies and procedures established and the recommendations made shall be consistent with, and shall supplement, the Community Reinvestment Act and regulatory compliance programs, policies and procedures of Banc One Corporation and Banc One Ohio Corporation. The Community Reinvestment Act and Compliance Policy Committee shall consist of not fewer than four board members, one of whom shall be the Chief Executive Officer -16- and a majority of whom are not officers of the Bank. Not fewer than three members of the Committee, a majority of whom are not officers of the Bank, must be present to constitute a quorum. The Chairman of the Board or President of the Bank, whichever is not the Chief Executive Officer, shall be an ex officio member of the Community Reinvestment Act and Compliance Policy Committee. The Community Reinvestment Act and Compliance Policy Committee, whose chairman shall be appointed by the Board, shall keep a record of its proceedings and report its proceedings and the action taken by it to the Board of Directors. SECTION 2.11. TRUST COMMITTEES. There shall be two standing Committees known as the Trust Management Committee and the Trust Examination Committee appointed as hereinafter provided. SECTION 2.12. OTHER COMMITTEES. The Board of Directors may appoint such special committees from time to time as are in its judgment necessary in the interest of the Bank. -17- ARTICLE III OFFICERS, MANAGEMENT STAFF AND EMPLOYEES SECTION 3.01. OFFICERS AND MANAGEMENT STAFF. (a) The officers of the Bank shall include a President, Secretary and Security Officer and may include a Chairman of the Board, one or more Vice Chairmen, one or more Vice Presidents (which may include one or more Executive Vice Presidents and/or Senior Vice Presidents) and one or more Assistant Secretaries, all of whom shall be elected by the Board. All other officers may be elected by the Board or appointed in writing by the Chief Executive Officer. The salaries of all officers elected by the Board shall be fixed by the Board. The Board from time-to-time shall designate the President or Chairman of the Board to serve as the Bank's Chief Executive Officer. (b) The Chairman of the Board, if any, and the President shall be elected by the Board from their own number. The President and Chairman of the Board shall be re-elected by the Board annually at the organizational meeting of the Board of Directors following the Annual Meeting of Shareholders. Such officers as the Board shall elect from their own number shall hold office from the date of their election as officers until the organization meeting of the Board of Directors following the next Annual Meeting of Shareholders, provided, however, that such officers may be relieved of their duties at any time by action of the Board in which event all the powers incident to their office shall immediately terminate. (c) Except as provided in the case of the elected officers who are members of the Board, all officers, whether elected or appointed, shall hold office at the pleasure of the Board. Except as otherwise limited by law or these By-laws, the Board assigns to Chief Executive Officer and/or his designees the authority to appoint and dismiss any elected or appointed officer or other member of the Bank's management staff and other employees of the Bank, as the person in charge of and responsible for any branch office, department, section, operation, function, assignment or duty in the Bank. (d) The management staff of the Bank shall include officers elected by the Board, officers appointed by the Chief Executive Officer, and such other persons in the employment of the Bank who, pursuant to written appointment and authorization by a duly authorized officer of the Bank, -18- perform management functions and have management responsibilities. Any two or more offices may be held by the same person except that no person shall hold the office of Chairman of the Board and/or President and at the same time also hold the office of Secretary. (e) The Chief Executive Officer of the Bank and any other officer of the Bank, to the extent that such officer is authorized in writing by the Chief Executive Officer, may appoint persons other than officers who are in the employment of the Bank to serve in management positions and in connection therewith, the appointing officer may assign such title, salary, responsibilities and functions as are deemed appropriate by him, provided, however, that nothing contained herein shall be construed as placing any limitation on the authority of the Chief Executive Officer as provided in this and other sections of these By-Laws. SECTION 3.02. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Bank shall have general and active management of the business of the Bank and shall see that all orders and resolutions of the Board of Directors are carried into effect. Except as otherwise prescribed or limited by these By-Laws, the Chief Executive Officer shall have full right, authority and power to control all personnel, including elected and appointed officers, of the Bank, to employ or direct the employment of such personnel and officers as he may deem necessary, including the fixing of salaries and the dismissal of them at pleasure, and to define and prescribe the duties and responsibility of all Officers of the Bank, subject to such further limitations and directions as he may from time-to-time deem proper. The Chief Executive Officer shall perform all duties incident to his office and such other and further duties, as may, from time-to-time, be required of him by the Board of Directors or the shareholders. The specification of authority in these By-Laws wherever and to whomever granted shall not be construed to limit in any manner the general powers of delegation granted to the Chief Executive Officer in conducting the business of the Bank. The Chief Executive Officer or, in his absence, the Chairman of the Board or President of the Bank, as designated by the Chief Executive Officer, shall preside at all meetings of shareholders and meetings of the Board. In the absence of the Chief Executive Officer, such officer as is designated by the Chief Executive Officer shall be vested with all the powers and perform all the duties of the Chief Executive Officer as defined by these By-Laws. When designating an officer to serve in his absence, the Chief Executive Officer shall select an officer who is a member of the Board of Directors whenever such officer is available. SECTION 3.03. POWERS OF OFFICERS AND MANAGEMENT STAFF. The Chief Executive Officer, the Chairman of the Board, the President, and those officers so -19- designated and authorized by the Chief Executive Officer are authorized for an on behalf of the Bank, and to the extent permitted by law, to make loans and discounts; to purchase or acquire drafts, notes, stock, bonds, and other securities for investment of funds held by the Bank; to execute and purchase acceptances; to appoint, empower and direct all necessary agents and attorneys; to sign and give any notice required to be given; to demand payment and/or to declare due for any default any debt or obligation due or payable to the Bank upon demand or authorized to be declared due; to foreclose any mortgages, to exercise any option, privilege or election to forfeit, terminate, extend or renew any lease; to authorize and direct any proceedings for the collection of any money or for the enforcement of any right or obligation; to adjust, settle and compromise all claims of every kind and description in favor of or against the Bank, and to give receipts, releases and discharges therefor; to borrow money and in connection therewith to make, execute and deliver notes, bonds or other evidences of indebtedness; to pledge or hypothecate any securities or any stocks, bonds, notes or any property real or personal held or owned by the Bank, or to rediscount any notes or other obligations held or owned by the Bank, to employ or direct the employment of all personnel, including elected and appointed officers, and the dismissal of them at pleasure, and in furtherance of and in addition to the powers hereinabove set forth to do all such acts and to take all such proceedings as in his judgment are necessary and incidental to the operation of the Bank. Other persons in the employment of the Bank, including but not limited to officers and other members of the management staff, may be authorized by the Chief Executive Officer, or by an officer so designated and authorized by the chief Executive Officer, to perform the powers set forth above, subject, however, to such limitations and conditions as are set forth in the authorization given to such persons. SECTION 3.04. SECRETARY. The Secretary or such other officers as may be designated by the Chief Executive Officer shall have supervision and control of the records of the Bank and, subject to the direction of the Chief Executive Officer, shall undertake other duties and functions usually performed by a corporate secretary. Other officers may be designated by the Chief Executive Officer or the Board of Directors as Assistant Secretary to perform the duties of the Secretary. SECTION 3.05. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of the Board, President, any officer being a member of the Bank's management staff who is also a person in charge of and responsible for any department within the Bank and any other officer to the extent such officer is so designated and authorized by the Chief Executive Officer, the Chairman of the -20- Board, the President, or any other officer who is a member of the Bank's management staff who is in charge of and responsible for any department within the Bank, are hereby authorized on behalf of the Bank to sell, assign, lease, mortgage, transfer, deliver and convey any real or personal property now or hereafter owned by or standing in the name of the Bank or its nominee, or held by this Bank as collateral security, and to execute and deliver such deeds, contracts, leases, assignments, bills of sale, transfers or other papers or documents as may be appropriate in the circumstances; to execute any loan agreement, security agreement, commitment letters and financing statements and other documents on behalf of the Bank as a lender; to execute purchase orders, documents and agreements entered into by the Bank in the ordinary course of business, relating to purchase, sale, exchange or lease of services, tangible personal property, materials and equipment for the use of the Bank; to execute powers of attorney to perform specific or general functions in the name of or on behalf of the Bank; to execute promissory notes or other instruments evidencing debt of the Bank; to execute instruments pledging or releasing securities for public funds, documents submitting public fund bids on behalf of the Bank and public fund contracts; to purchase and acquire any real or personal property including loan portfolios and to execute and deliver such agreements, contracts or other papers or documents as may be appropriate in the circumstances; to execute any indemnity and fidelity bonds, proxies or other papers or documents of like or different character necessary, desirable or incidental to the conduct of its banking business; to execute and deliver settlement agreements or other papers or documents as may be appropriate in connection with a dismissal authorized by Section 3.01(c) of these By-laws; to execute agreements, instruments, documents, contracts or other papers of like or difference character necessary, desirable or incidental to the conduct of its banking business; and to execute and deliver partial releases from and discharges or assignments of mortgages, financing statements and assignments or surrender of insurance policies, now or hereafter held by this Bank. The Chief Executive Officer, Chairman of the Board, President, any officer being a member of the Bank's management staff who is also a person in charge of and responsible for any department within the Bank, and any other officer of the Bank so designated and authorized by the Chief Executive Officer, Chairman of the Board, President or any officer who is a member of the Bank's management staff who is in charge of and responsible for any department within the Bank are authorized for and on behalf of the Bank to sign and issue checks, drafts, and certificates of deposit; to sign and endorse bills of exchange, to sign and countersign foreign and domestic letters of credit, to receive and receipt for payments of principal, interest, dividends, rents, fees and payments of every kind and description paid to the Bank, to sign receipts for property acquired by or entrusted to the Bank, to guarantee the genuineness of signatures on assignments -21- of stocks, bonds or other securities, to sign certifications of checks, to endorse and deliver checks, drafts, warrants, bills, notes, certificates of deposit and acceptances in all business transactions of the Bank. Other persons in the employment of the Bank and of its subsidiaries, including but not limited to officers and other members of the management staff, may be authorized by the Chief Executive Officer, Chairman of the Board, President or by an officer so designated by the Chief Executive Officer, Chairman of the Board, or President to perform the acts and to execute the documents set forth above, subject, however, to such limitations and conditions as are contained in the authorization given to such person. SECTION 3.06. PERFORMANCE BOND. All officers and employees of the Bank shall be bonded for the honest and faithful performance of their duties for such amount as may be prescribed by the Board of Directors. -22- ARTICLE IV TRUST DEPARTMENT SECTION 4.01. TRUST DEPARTMENT. Pursuant to the fiduciary powers granted to this Bank under the provisions of Federal Law and Regulations of the Comptroller of the Currency, there shall be maintained a separate Trust Department of the Bank, which shall be operated in the manner specified herein. SECTION 4.02. TRUST MANAGEMENT COMMITTEE. There shall be a standing Committee known as the Trust Management Committee, consisting of at least five members, a majority of whom shall not be officers of the Bank. The Committee shall consist of the Chairman of the Board who shall be Chairman of the Com- mittee, the President, and at least three other Directors appointed by the Board of Directors and who shall continue as members of the Committee until their successors are appointed. Any vacancy in the Trust Management Committee may be filled by the Board at any regular or special meeting. In the event of the absence of any member or members, such Committee may, in its discretion, appoint members of the Board to fill the place of such absent members to serve during such absence. Three members of the Committee shall constitute a quorum. Any member of the Committee may be removed by the Board by a majority vote at any regular or special meeting of the Board. The Committee shall meet at such times as it may determine or at the call of the Chairman, or President or any two members thereof. The Trust Management Committee, under the general direction of the Board of Directors, shall supervise the policy of the Trust Department which shall be formulated and executed in accordance with Law, Regulations of the Comptroller of the Currency, and sound fiduciary principles. -23- SECTION 4.03. TRUST EXAMINATION COMMITTEE. There shall be a standing Commit- tee known as the Trust Examination Committee, consisting of three directors appointed by the Board of Directors and who shall continue as members of the committee until their successors are appointed. Such members shall not be active officers of the Bank. Two members of the Committee shall constitute a quorum. Any member of the Committee may be removed by the Board by a majority vote at any regular or special meeting of the Board. The Committee shall meet at such times as it may determine or at the call of two members thereof. This Committee shall, at least once during each calendar year and within fifteen months of the last such audit, or at such other time(s) as may be required by Regulations of the Comptroller of the Currency, make suitable audits of the Trust Department or cause suitable audits to be made by auditors responsible only to the Board of Directors, and at such time shall ascertain whether the Department has been administered in accordance with Law, Regulations of the Comptroller of the Currency and sound fiduciary principles. The Committee shall promptly make a full report of such audits in writing to the Board of Directors of the Bank, together with a recommendation as to what action, if any, may be necessary to correct any unsatisfactory condition. A report of the audits together with the action taken thereon shall be noted in the Minutes of the Board of Directors and such report shall be a part of the records of this Bank. SECTION 4.04. MANAGEMENT. The Trust Department shall be under the management and supervision of an officer of the Bank or of the trust affiliate of the Bank designated by and subject to the advice and direction of the Chief Executive Officer. Such officer having supervisory responsibility over the Trust Department shall do or cause to be done all things necessary or proper in carrying on the business of the Trust Department in accordance with provisions of law and applicable regulations. SECTION 4.05. HOLDING OF PROPERTY. Property held by the Trust Department may be carried in the name of the Bank in its fiduciary capacity, in the name of Bank, or in the name of a nominee or nominees. SECTION 4.06. TRUST INVESTMENTS. Funds held by the Bank in a fiduciary capacity awaiting investment or distribution shall not be held uninvested or undistributed any longer than is reasonable for the proper management of the account and shall be invested in accordance with the instrument establishing a fiduciary relationship and local law. Where such instrument does not specify the character or class of investments to be made and does not vest in the Bank any -24- discretion in the matter, funds held pursuant to such instrument shall be invested in any investment which corporate fiduciaries may invest under local law. The investments of each account in the Trust Department shall be kept separate from the assets of the Bank, and shall be placed in the joint custody or control of not less than two of the officers or employees of the Bank or of the trust affiliate of the Bank designated for the purpose by the Trust Management Committee. SECTION 4.07. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of the Board, President, any officer of the Trust Department, and such other officers of the trust affiliate of the Bank as are specifically designated and authorized by the Chief Executive Officer, the President, or the officer in charge of the Trust Department, are hereby authorized, on behalf of this Bank, to sell, assign, lease, mortgage, transfer, deliver and convey any real property or personal property and to purchase and acquire any real or personal property and to execute and deliver such agreements, contracts, or other papers and documents as may be appropriate in the circumstances for property now or hereafter owned by or standing in the name of this Bank, or its nominee, in any fiduciary capacity, or in the name of any principal for whom this Bank may now or hereafter be acting under a power of attorney, or as agent and to execute and deliver partial releases from any discharges or assignments or mortgages and assignments or surrender of insurance policies, to execute and deliver deeds, contracts, leases, assignments, bills of sale, transfers or such other papers or documents as may be appropriate in the circumstances for property now or hereafter held by this Bank in any fiduciary capacity or owned by any principal for whom this Bank may now or hereafter be acting under a power of attorney or as agent; to execute and deliver settlement agreements or other papers or documents as may be appropriate in connection with a dismissal authorized by Section 3.01(c) of these By-laws; provided that the signature of any such person shall be attested in each case by any officer of the Trust Department or by any other person who is specifically authorized by the Chief Executive Officer, the President or the officer in charge of the Trust Department. The Chief Executive Officer, Chairman of the Board, President, any officer of the Trust Department and such other officers of the trust affiliate of the Bank as are specifically designated and authorized by the Chief Executive Officer, the President, or the officer in charge of the Trust Department, or any other person or corporation as is specifically authorized by the Chief Executive Officer, the President or the officer in charge of the Trust Department, are hereby authorized on behalf of this Bank, to sign any and all pleadings and papers in probate and other court proceedings, to execute any indemnity and fidelity bonds, trust agreements, proxies or other papers or documents of like or different character necessary, desirable or -25- incidental to the appointment of the Bank in any fiduciary capacity and the conduct of its business in any fiduciary capacity; also to foreclose any mortgage, to execute and deliver receipts for payments of principal, interest, dividends, rents, fees and payments of every kind and description paid to the Bank; to sign receipts for property acquired or entrusted to the Bank; also to sign stock or bond certificates on behalf of this Bank in any fiduciary capacity and on behalf of this Bank as transfer agent or registrar; to guarantee the genuineness of signatures on assignments of stocks, bonds or other securities, and to authenticate bonds, debentures, land or lease trust certificates or other forms of security issued pursuant to any indenture under which this Bank now or hereafter is acting as Trustee. Any such person, as well as such other persons as are specifically authorized by the Chief Executive Officer or the officer in charge of the Trust Department, may sign checks, drafts and orders for the payment of money executed by the Trust Department in the course of its business. SECTION 4.08. VOTING OF STOCK. The Chairman of the Board, President, any officer of the Trust Department, any officer of the trust affiliate of the Bank and such other persons as may be specifically authorized by Resolution of the Trust Management Committee or the Board of Directors, may vote shares of stock of a corporation of record on the books of the issuing company in the name of the Bank or in the name of the Bank as fiduciary, or may grant proxies for the voting of such stock of the granting if same is permitted by the instrument under which the Bank is acting in a fiduciary capacity, or by the law applicable to such fiduciary account. In the case of shares of stock which are held by a nominee of the Bank, such shares may be voted by such person(s) authorized by such nominee. -26- ARTICLE V STOCKS AND STOCK CERTIFICATES SECTION 5.01. STOCK CERTIFICATES. The shares of stock of the Bank shall be evidenced by certificates which shall bear the signature of the Chairman of the Board, the President, or a Vice President (which signature may be engraved, printed or impressed), and shall be signed manually by the Secretary, or any other officer appointed by the Chief Executive Officer for that purpose. In case any such officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such before such certificate is issued, it may be issued by the Bank with the same effect as if such officer had not ceased to be such at the time of its issue. Each such certificate shall bear the corporate seal of the Bank, shall recite on its fact that the stock represented thereby is transferable only upon the books of the Bank properly endorsed and shall recite such other information as is required by law and deemed appropriate by the Board. The corporate seal may be facsimile engraved or printed. SECTION 5.02. STOCK ISSUE AND TRANSFER. The shares of stock of the Bank shall be transferable only upon the stock transfer books of the Bank and except as hereinafter provided, no transfer shall be made or new certificates issued except upon the surrender for cancellation of the certificate or certificates previously issued therefor. In the case of the loss, theft, or destruction of any certificate, a new certificate may be issued in place of such certificate upon the furnishing of any affidavit setting forth the circumstances of such loss, theft, or destruction and indemnity satisfactory to the Chairman of the Board, the President, or a Vice President. The Board of Directors, or the Chief Executive Officer, may authorize the issuance of a new certificate therefor without the furnishing of indemnity. Stock Transfer Books, in which all transfers of stock shall be recorded, shall be provided. The stock transfer books may be closed for a reasonable period and under such conditions as the Board of Directors may at any time determine for any meeting of shareholders, the payment of dividends or any other lawful purpose. In lieu of closing the transfer books, the Board may, in its discretion, fix a record date and hour constituting a reasonable period prior to the day designated for the holding of any meeting of the shareholders or the day appointed for the payment of any dividend or for any other purpose at the time as of which shareholders entitled to notice of and to vote at any such meeting or to receive such dividend or to be treated as shareholders for such other purpose shall be determined, and only shareholders of record at such time shall be entitled to notice of or to vote at such -27- meeting or to receive such dividends or to be treated as shareholders for such other purpose. -28- ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.01. SEAL. The impression made below is an impression of the seal adopted by the Board of Directors of BANK ONE, NA f/k/a Bank One, Columbus, NA. The Seal may be affixed by any officer of the Bank to any document executed by an authorized officer on behalf of the Bank, and any officer may certify any act, proceedings, record, instrument or authority of the Bank. SECTION 6.02. BANKING HOURS. Subject to ratification by the Executive Committee, the Bank and each of its Branches shall be open for business on such days and during such hours as the Chief Executive Officer of the Bank shall, from time to time, prescribe. SECTION 6.03. MINUTE BOOK. The organization papers of this Bank, the Articles of Association, the returns of the judges of elections, the By-Laws and any amendments thereto, the proceedings of all regular and special meetings of the shareholders and of the Board of Directors, and reports of the committees of the Board of Directors shall be recorded in the minute book of the Bank. The minutes of each such meeting shall be signed by the presiding Officer and attested by the secretary of the meetings. SECTION 6.04. AMENDMENT OF BY-LAWS. These By-Laws may be amended by vote of a majority of the Directors. -29- EXHIBIT 6 Securities and Exchange Commission Washington, D.C. 20549 CONSENT The undersigned, designated to act as Trustee under the Indenture for The Musicland Group, Inc. described in the attached Statement of Eligibility and Qualification, does hereby consent that reports of examinations by Federal, State, Territorial, or District Authorities may be furnished by such authorities to the Commission upon the request of the Commission. This Consent is given pursuant to the provision of Section 321(b) of the Trust Indenture Act of 1939, as amended. Bank One, NA Dated: By: /s/ ------------------------------- Authorized Signer -30- EXHIBIT 7 TO FORM T-1 CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1997
DOLLAR AMOUNTS IN THOUSANDS - - --------------------------------------------------------------------------------------------------------------------- ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin (1) $1,128,083 Interest-bearing balances (2) 1,100 Securities Held-to-maturity securities 154,157 Available-for-sale securities 2,151,270 Federal funds sold and securities purchased under agreements to resell 653,609 Loans and lease financing receivables: Loans and leases, net of unearned income 19,222,789 LESS: Allowance for loan and lease losses 459,898 LESS: Allocated transfer risk reserve 0 Loans and leases, net of unearned income, allowance, and reserve 18,762,891 Trading assets 24,918 Premises and fixed assets (including capitalized leases) 229,647 Other real estate owned 10,612 Investments in consolidated subsidiaries and associated companies 14,371 Customers' liability to this bank on acceptances outstanding 3,932 Intangible assets 130,801 Other assets 2,161,573 --------- TOTAL ASSETS $25,426,964 ----------- ----------- LIABILITIES Deposits: In domestic offices $14,741,933 Noninterest-bearing (1) 3,690,379 Interest-bearing 11,051,554 In foreign offices, Edge and Agreement subsidiaries, and IBFs 1,079,509 Noninterest-bearing 0 Interest-bearing 1,079,508 Federal funds purchased and securities sold under agreements to repurchase 3,642,733 Demand notes issued to the U.S. Treasury 86,152 Trading liabilities 0 Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases): With a remaining maturity of one year or less 1,667,046 With a remaining maturity of more than one year through three years 470,970 With a remaining maturity of more than three years 164,948 Bank's liability on acceptances executed and outstanding 3,932 Subordinated notes and debentures (2) 729,196 Other liabilities 977,170 --------- TOTAL LIABILITIES $23,563,589 ----------- ----------- EQUITY CAPITAL Perpetual preferred stock and related surplus $ 0 Common stock 127,043 Surplus (exclude all surplus related to preferred stock) 738,352 Undivided profits and capital reserves 971,777 Net unrealized holding gains (losses) on available-for-sale securities 26,203 Cumulative foreign currency translation adjustments 0 TOTAL EQUITY CAPITAL $1,863,375 ---------- ---------- TOTAL LIABILITIES AND EQUITY CAPITAL $26,426,964 ----------- -----------
- - --------------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. I, C. William Willen, Senior Vice President of the named bank, do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. /s/ - - --------------------------------------- C. William Willen, Vice President January 30, 1998 EX-99.1 9 EX 99.1 -- LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL THE MUSICLAND GROUP, INC. OFFER TO EXCHANGE ITS REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 FOR ANY AND ALL OF ITS UNREGISTERED 9 7/8% SERIES A OUTSTANDING SENIOR SUBORDINATED NOTES DUE 2008 PURSUANT TO THE PROSPECTUS, DATED , 1998. - - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. ON [ , 1998] UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS SHALL BE MADE TO THE EXCHANGE AGENT AT THE ADDRESS STATED BELOW. TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE. - - -------------------------------------------------------------------------------- By Registered or Certified Mail, By Overnight Courier, or By Hand: Bank One, N.A. 235 West Schrock Road Westerville, Ohio 43081 Attention: Corporate Trust Operations By Facsimile: (614) 248-5088 Telephone: (800) 346-5153 Delivery of this Letter of Transmittal to an address other than as set forth above, or transmission of instructions via a facsimile number other than the one listed above will not constitute a valid delivery. The instructions accompanying this Letter of Transmittal should be read carefully before this Letter of Transmittal is completed. The undersigned acknowledges that he or she has received the Prospectus, dated [ ], 1998 (the "Prospectus"), of The Musicland Group, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (this "Letter") which, together with the Prospectus, constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount at maturity of $ of 9 7/8% Series B Senior Subordinated Notes Due 2008 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for an equal principal amount of the Company's outstanding 9 7/8% Series A Senior Subordinated Notes Due 2008 (the "Old Notes"). For each Old Note accepted for exchange, the holder of such Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note. The Company reserves the right, at anytime or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent of any extension by oral or written notice and will mail to the record holders of Old Notes an announcement thereof, each prior to 9:00 a.m., Eastern Standard Time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period of time. This Letter is to be completed by holders of Old Notes if (i) certificates of the Old Notes are to be forwarded herewith or (ii) delivery of Old Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer" section of the Prospectus. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, must tender their Old Notes in accordance with the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Old Notes must complete this Letter of Transmittal in its entirety. List below the Old Notes to which this Letter relates. If the space below is inadequate, the certificate numbers and principal amount of Old Notes should be listed on a separate signed schedule affixed hereto.
------------------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES ------------------------------------------------------------------------------------------- AGGREGATE PRINCIPAL PRINCIPAL NAME(S) AND ADDRESSES OF REGISTERED CERTIFICATE AMOUNT AMOUNT HOLDER(S) (PLEASE FILL IN, IF BLANK) NUMBER(S)(1) OF OLD NOTE(S) TENDERED (2) - - --------------------------------------------------------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- TOTAL - - ---------------------------------------------------------------------------------------------
(1) Need not be completed if Old Notes are being tendered by book-entry transfer. (2) Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1. / / CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH. / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ Account Number _________________ Transaction Code Number ________________ / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (For use by Eligible Institutions Only) Name(s) of Registered Old Note Holder(s) ___________________________________ Window Ticket Number (if any) ______________________________________________ Date of Execution of Note of Guaranteed Delivery ___________________________ Name of Institution which guaranteed delivery ______________________________ If Delivered by Book-Entry Transfer, Complete the Following: Account Number _________________ Transaction Code Number ________________ / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENT OR SUPPLEMENTS THERETO: Name: ______________________________________________________________________ Address: ___________________________________________________________________ PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Old Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Company all rights, title and interest in and to the Old Notes tendered hereby. The undersigned hereby represents and warrants that (i) the undersigned is the owner of the Old Notes tendered hereby, (ii) the undersigned has full power and authority to tender, exchange, sell, assign and transfer the Old Notes tendered hereby and (iii) the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby further represents to the Company that (i) any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the undersigned or such other person receiving such New Notes, (ii) neither the holder of such Old Notes nor any such other person is engaged in, or intends to engage in a distribution of such New Notes, or has an arrangement or understanding with any person to participate in the distribution of such New Notes, and (iii) neither the holder of such old Notes nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), of the Company. The undersigned also acknowledges that this Exchange Offer is being made by the Company based upon the Company's understanding of an interpretation by the staff of the Securities and Exchange Commission (the "Commission") as set forth in no-action letters issued to third parties, that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: (1) such holders are not affiliates of the Company within the meaning of Rule 405 under the Securities Act; (2) such New Notes are acquired in the ordinary course of such holders' business; and (3) such holders are not engaged in, and do not intend to engage in, a distribution of such New Notes and have no arrangement or understanding with any person to participate in the distribution of such New Notes. However, the staff of the Commission has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. If a holder of Old Notes is an affiliate of the Company, or is engaged in or intends to engage in a distribution of the New Notes or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder cannot rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes, it represents that the Old Notes to be exchanged for the New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal of Tenders" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any old Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Notes." THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE. - - ------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person(s) whose signatures) appear(s) on this Letter above, or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue New Notes and/or Old Notes to: Name(s) ____________________________________________________________________ (PLEASE TYPE OR PRINT) __________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ (INCLUDING ZIP CODE) (COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)* / / Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) - - ------------------------------------------------------ - - ------------------------------------------------------ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be sent to someone other than the person(s) whose signatures) appear(s) on this Letter above, or to such person(s) at an address other than shown in the box entitled "Description of Old Notes" on this Letter above. Mail New Notes and/or Old Notes to: Name(s) ____________________________________________________________________ (PLEASE TYPE OR PRINT) __________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ (INCLUDING ZIP CODE) ----------------------------------------------------------- IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., EASTERN STANDARD TIME, ON THE EXPIRATION DATE. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. - - -------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) (COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE) Dated: ______________________________________________________________ , 1998 __________________________________ , 1998 _____________________ _____________________ , 1998 (SIGNATURE OF OWNER) (DATE) Area Code and Telephone Number: ____________________________________________ If a holder is tendering any Old Notes, this Letter of Transmittal must be signed by the registered holder(s) as the name(s) appear(s) on the certificates for the Old Notes or by an Persons) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s): ___________________________________________________________________ ____________________________________________________________________________ (PLEASE TYPE OR PRINT) Capacity: __________________________________________________________________ Address: ___________________________________________________________________ (INCLUDING ZIP CODE) SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) Signature(s) Guaranteed by an Eligible Institution: ________________________________________________ (AUTHORIZED SIGNATURE) __________________________________________________________________________ (TITLE) __________________________________________________________________________ (NAME AND FIRM) Dated _______________________________________________________________ , 1998 - - -------------------------------------------------------------------------------- INSTRUCTIONS Forming Part of the Terms and Conditions of the Offer to Exchange Registered 9 7/8% Series B Senior Subordinated Notes Due 2008 for any and all Outstanding Unregistered 9 7/8% Series A Senior Subordinated Notes Due 2008 of The Musicland Group, Inc. 1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES. This Letter is to be completed by holders of Old Notes either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry set forth in "The Exchange Offer-Book--Entry Transfer" section of the Prospectus. Certificates for all physically tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount of maturity of $1,000 and any integral multiple thereof. Holders of Old Notes whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer-- Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution (as defined below), (ii) prior to the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within five business days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes, or a Book-Entry Confirmation, as the case may be, and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, are received by the Exchange Agent within five business days after the date of execution of the Notice of Guaranteed Delivery. The method of delivery of this Letter, the Old Notes and all other required documents is at the election and risk of tendering holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If Old Notes are sent by mail, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY BOOK ENTRY TRANSFER). If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering holder(s) should fill in the aggregate principal amount of Old Notes to be tendered in the box above entitled "Description of Old Notes--Principal Amount Tendered." A reissued certificate representing the balance of nontendered Old Notes will be sent to such tendering holder, unless otherwise provided in the appropriate box on this Letter, promptly after the Expiration Date. All of the Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter is signed by the registered holder of the Old Notes tendered hereby, the signature must correspond with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered holder of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificates must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered holder of any certificates specified herein, such certificates must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name of the registered holder appears on the certificates and the signatures on such certificates must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorney-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Old Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States (an "Eligible Institution"). Signatures on this Letter need not be guaranteed by an Eligible Institution, provided the Old Notes are tendered: (i) by a registered holder of Old Notes (which term, for purposes of the Exchange Offer, includes any participant in the Book-Entry Transfer Facility system whose name appears on a security position listing as the holder of such Old Notes) tendered who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter, or (ii) for the account of an Eligible Institution. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Old Notes not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. A holder of Old Notes tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such holder of Old Notes may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name and address of the person signing this Letter. 5. TAX IDENTIFICATION NUMBER. Federal income tax law generally requires that a tendering holder whose old Notes are accepted for exchange must provide the Company (as payor) with such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 below, which, in the case of a tendering holder who is an individual, is his or her social security number. If the Company is not provided with the current TIN or an adequate basis for as exemption, such tendering holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery of New Notes to such tendering holder may be subject to backup withholding in an amount equal to 31% of all reportable payments made after the exchange. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt holders of Old Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines of Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. To prevent backup withholding, each tendering holder of Old Notes must provide its correct TIN by completing the "Substitute Form W-9" set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject to a backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the tendering holder of Old Notes is a nonresident, alien or foreign entity not subject to backup withholding, such holder must give the Company a completed Form W-8, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Old Notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Company within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Company. 6. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New Notes and/or substitute Old Notes not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering holder. Except as provided in this Instruction 6, it not be necessary for transfer tax stamps to be affixed to the Old Notes specified in this Letter. 7. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 8. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Old Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. 9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, may be directed to the Exchange Agent, at the address and telephone number indicated above. TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5) PAYOR'S NAME: THE MUSICLAND GROUP, INC. - - ----------------------------------------------------------------------------------------- SUBSTITUTE Part 1-PLEASE PROVIDE TIN: ------------------- FORM W-9 YOUR TIN IN THE BOX Social Security Number OR Department of the Treasury AT RIGHT AND CERTIFY Employer Identification Number Internal Revenue Service BY SIGNING AND DATING BELOW - - ------------------------------------------------------- Payer's Request for Taxpayer Part 2 TIN Applied For [ ] Identification Number (TIN) and Certification ------------------------------------------------------- CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT: (1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me); (2) I am not subject to backup withholding either because: (a) I am (exempt from backup withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interests or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding; and (3) any other information provided on this form is true and correct.
Signature ________________________________ Date _______________ You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. ---------------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER - - -------------------------------------------------------------------------------- I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of the exchange, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. Signature ________________________________ Date _______________ - - -------------------------------------------------------------------------------- EX-99.2 10 EX 99.2 -- NOTICE OF GUARANTEE FORM OF NOTICE OF GUARANTEED DELIVERY FOR THE MUSICLAND GROUP, INC. This form or one substantially equivalent thereto must be used to accept the Exchange Offer of The Musicland Group, Inc. (the "Company") made pursuant to the Prospectus, dated , 1998 (the "Prospectus") , and the enclosed Letter of Transmittal (the "Letter of Transmittal") if certificates for Old Notes of the Company are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Company prior to 5:00 P.M., Eastern Standard Time, on the Expiration Date of the Exchange Offer. Such form may be delivered or transmitted by facsimile transmission, mail or hand delivery to (the "Exchange Agent") as set forth below. In addition, in order to utilize the guaranteed delivery procedure to tender Old Notes pursuant to the Exchange Offer, a completed signed and dated Letter of Transmittal (or facsimile thereof) must also be received by the Exchange Agent prior to 5:00 P.M., Eastern Standard Time, on the Expiration Date. Capitalized terms not defined herein are defined in the Prospectus. By Registered or Certified Mail, By Overnight Courier, or By Hand: Bank One, NA 235 West Schrock Road Westerville, Ohio 43081 Attention: Corporate Trust Operations By Facsimile: (614) 248-5088 Telephone: (800) 346-5153 Delivery of this instrument to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus and the accompanying Letter of Transmittal, the undersigned hereby tenders to the Company the principal amount of Old Notes set forth below, pursuant to the guaranteed delivery procedure described in "The Exchange Offer Guaranteed Delivery Procedures" section of the Prospectus. Principal Amount of Old Notes Tendered: $ If Old Notes will be delivered by book entry transfer to The Depository Trust Company, provide account number. Certificate Nos. (if available Total Principal Amount Represented by old Notes Certificate (s): $ Account Number
All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned any every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. PLEASE SIGN HERE Signature(s) of Owner(s) or Authorized Signatory Area Code and Telephone Number:
Must be signed by the holder(s) of Old Notes as the name(s) of such holder(s) appear(s) on the Old Notes certificates or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If any signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. Please print name(s) and address(s) Name(s): Capacity: Address(es)
2 GUARANTEE The undersigned, a member of a registered national securities exchange, or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States, hereby guarantees that the certificates representing the principal amount of Old Notes tendered hereby in proper form for transfer, or timely confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company pursuant to the procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus, together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantee and any other documents required by the Letter of Transmittal, will be received by the Exchange Agent at the address set forth above, no later than five business days after the date of execution hereof. ________________________________________________________________________________ Name of Firm Authorized Signature Address Title Zip Code (Please Type or Print) Area Code and Tel. No. Dated:
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL 3 EX-99.3 11 EX 99.3 -- LTR TO BROKERS FORM OF THE MUSICLAND GROUP, INC. OFFER TO EXCHANGE ITS REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 FOR ANY AND ALL OF ITS OUTSTANDING UNREGISTERED 9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 To: Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: The Musicland Group, Inc. (the "Company") is offering to exchange (the "Exchange Offer"), upon and subject to the terms and conditions set forth in the Prospectus, dated , 1998 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), its registered 9 7/8% Series B Senior Discount Notes Due 2008 (the "New Notes") for any and all of its outstanding 9 7/8% Series A Senior Discount Notes Due 2008 (the "Old Notes"). The Exchange Offer is being made in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement dated as of April 6, 1998, between the Company and the Initial Purchasers. We are requesting that you contact your clients for whom you hold Old Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Old Notes registered in your name or in the name of your nominee, or who hold Old Notes registered in their own names, we are enclosing the following documents: 1. Prospectus dated , 1998; 2. The Letter of Transmittal for your use and for the information of your clients; 3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer if certificates for Old Notes are not immediately available or time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date (as defined below) or if the procedure for book-entry transfer cannot be completed on a timely basis; 4. A form of letter which may be sent to your clients for whose account you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer; 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 6. Return envelopes addressed to Bank One, N.A., the Exchange Agent for the Old Notes. Your prompt action is requested. The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on , 1998 (the "Expiration Date") (30) business days following commencement of the Exchange Offer), unless extended by the Company. The Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time before 5:00 p.m., Eastern Standard Time, on the Expiration Date. To participate in the Exchange Offer, a duly executed and properly completed Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, should be sent to the Exchange Agent and certificates representing the Old Notes should be delivered to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and the Prospectus. If holders of Old Notes wish to tender, but it is impracticable for them to forward their certificates for Old Notes prior to the expiration of the Exchange Offer or to comply with the book-entry transfer procedures on a timely basis, a tender may be effected by following guaranteed delivery procedures described in the Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures." The Company will, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable and necessary costs and expenses incurred by them in forwarding the Prospectus and the related documents to the beneficial owners of Old Notes held by them as nominee or in a fiduciary capacity. The Company will pay or cause to be paid all stock transfer taxes applicable to the exchange of Old Notes pursuant to the Exchange Offer, except as set forth in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Exchange Offer, or requests for additional copies of the enclosed materials, should be directed to the Exchange Agent for the Old Notes, at its address and telephone number set forth on the front of the Letter of Transmittal. Very truly yours, THE MUSICLAND GROUP, INC. NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL. 2 EX-99.4 12 EX 99.4 -- LTR TO CLIENTS FORM OF THE MUSICLAND GROUP, INC. OFFER TO EXCHANGE ITS REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 FOR ANY AND ALL OF ITS OUTSTANDING UNREGISTERED 9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 To: Our Clients Enclosed for your consideration is a Prospectus, dated , 1998 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), relating to the offer (the "Exchange Offer") of The Musicland Group, Inc. (the "Company") to exchange its registered 9 7/8% Series B Senior Subordinated Notes Due 2008 (the "New Notes") for any and all of its outstanding 9 7/8% Series A Senior Subordinated Notes Due 2008 (the "Old Notes"), upon the terms and subject to the conditions described in the Prospectus. The Exchange Offer is being made in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement dated as of April 6, 1998, between the Company and the Initial Purchasers thereto. This material is being forwarded to you as the beneficial owner of the Old Notes carried by us in your account but not registered in your name. A tender of such Old Notes may only be made by us as the holder of record and pursuant to your instructions. Accordingly, we request instructions as to whether you wish us to tender on your behalf the Old Notes held by us for your account, pursuant to the terms and conditions set forth in the enclosed Prospectus and Letter of Transmittal. Your instructions should be forwarded to us as promptly as possible in order to permit us to tender the Old Notes on your behalf in accordance with the provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on , 1998 (the "Expiration Date") (30 business days following the commencement of the Exchange Offer) unless extended by the Company. Any Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time before 5:00 p.m., Eastern Standard Time, on the Expiration Date. Your attention is directed to the following: 1. The Exchange Offer is for any and all Old Notes. 2. The Exchange Offer is subject to certain conditions set forth in the Prospectus in the section captioned "The Exchange Offer--Conditions." 3. Any transfer taxes incident to the transfer of Old Notes from the holder to the Company will be paid by the Company, except as otherwise provided in the Instructions in the Letter of Transmittal. 4. The Exchange Offer expires at 5:00 p.m., Eastern Standard Time, on the Expiration Date, unless extended by the Company. If you wish to have us tender your Old Notes, please so instruct us by completing, executing and returning to us the instruction form on the back of this letter. The Letter of Transmittal is furnished to you for your information only and may not be used directly by you to tender Old Notes. INSTRUCTIONS WITH RESPECT TO EXCHANGE OFFER The undersigned acknowledges receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer made by the Company with respect to the Old Notes. This will instruct you to tender the Old Notes held by you for the account of the undersigned, upon and subject to the terms and conditions set forth in the Prospectus and the related Letter of Transmittal. Aggregate Principal Amount of Old Notes 9 7/8% Series A Senior Notes Due 2008 ------------------------------------------- Please do not tender any Old Notes held by you for my account ------------------------------------------- Dated: --------------, 1998 ------------------------------------------------------------- --------------------------------Signature(s) - - ---------------------------------------------------------------------------------------- - - ------------------------------------------- Please print name(s) here ------------------------------------------- --------------------------------Address(es) ---------------------------Area Code(s) and Telephone Number(s) ------------------------------------------- Tax Identification or Social Security No(s).
None of the Old Notes held by us for your account will be tendered unless we receive written instructions from you to do so. Unless a specific contrary instruction is given in the space provided, your signatures) hereon shall constitute an instruction to us to tender all the Old Notes held by us for your account. 2 EX-99.5 13 EX 99.5 -- FORM OF INSTRUCTION INSTRUCTION TO REGISTERED HOLDER AND/OR BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER OF THE MUSICLAND GROUP, INC. 9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #627578 AB 3) (CINS #U61809 AA 4) To: Registered Holder and/or Participant of the Book-Entry Transfer Facility: The undersigned hereby acknowledges receipt of the Prospectus dated , 1998 (the "Prospectus") of The Musicland Group, Inc., a Delaware corporation (the "Company"), and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Company's offer (the "Exchange Offer") to exchange its registered % Series B Senior Subordinated Notes Due 2008 (the "New Notes") for any outstanding % Series A Senior Subordinated Notes Due 2008 (the "Old Notes"). Capitalized terms used but not defined herein have the meaning as ascribed to them in the Prospectus. This will instruct you, the registered holder and/or book-entry transfer facility participant, as to the action to be taken by you relating to the Exchange Offer with respect to the Old Notes held by you for the account of the undersigned. The aggregate face amount of the Old Notes held by you for the account of the undersigned is (fill in amount) : $ of the 9 7/8% Series A Senior Subordinated Notes due 2008 (CUSIP #627578 AB 3 or CINS #U61809 AA 4). With respect to the Exchange Offer, the undersigned hereby instructs you (check appropriate box): [ ] To TENDER the following Old Notes held by you for the account of the undersigned (insert principal amount of Old Notes to be tendered, if any) $ of the 9 7/8% Series A Senior Subordinated Notes Due 2008 (CUSIP #627578 AB 3 or CINS #U61809 AA 4). [ ] NOT to TENDER any Old Notes held by you for the account of the undersigned. If the undersigned instructs you to tender the Old Notes held by you for the account of the undersigned, it is understood that you are authorized to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representations and warranties contained in the Letter of Transmittal that are to be made with respect to the undersigned as a beneficial owner, including but not limited to the representations, that (i) the holder is not an "affiliate" of the Company, (ii) any New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder and (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes, it represents that such Old Notes were acquired as a result of market-making activities or other trading activities, and it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes, such broker-dealer is not deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933, as amended. SIGN HERE NAME OF BENEFICIAL OWNER(S): _________________________ SIGNATURE(S): ________________________________________ NAME (S) (PLEASE PRINT) ______________________________ ADDRESS: _____________________________________________ TELEPHONE NUMBER _____________________________________ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER: ___ _______________________________________________________ DATE: ________________________________________________ 2 -----END PRIVACY-ENHANCED MESSAGE-----