<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
REGISTRATION NO. 333-10491
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GUITAR CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5733 95-4600862
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(818) 735-8800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
BRUCE ROSS
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
GUITAR CENTER, INC.
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(818) 735-8800
(Name and address, including zip code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Mark Bonenfant Nicholas P. Saggese
Buchalter, Nemer, Fields & Younger, Skadden, Arps, Slate, Meagher & Flom
a Professional Corporation 300 South Grand Avenue
601 South Figueroa Street, Suite 2400 Los Angeles, California 90017
Los Angeles, California 90017 (213) 687-5000
(213) 891-0700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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(b)
under the Securities Act, check the following box and list the Securities Act
registration statement 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. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
------------------------------------------------ ---------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover of the Prospectus.......... Facing Page of the Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of the
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front Cover Page of the Prospectus; Additional
Information; Outside Back Cover Page of the Prospectus
3. Summary Information; Risk Factors............... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. The Recapitalization
5. Determination of Offering Price................. Not Applicable
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page of the Prospectus; Prospectus
Summary; the Recapitalization; The Exchange Offer
9. Description of Securities to be Registered...... Description of the Notes
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information with Respect to the Registrant...... Outside Front Cover Page of the Prospectus; Prospectus
Summary; Risk Factors; Recapitalization; Dividend
Policy; Capitalization; Selected Financial Data;
Unaudited Pro Forma Condensed Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Certain
Transactions; Description of Capital Stock; Description
of the Notes; Description of the New Credit Facility
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
, 1996
$100,000,000
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2006
FOR ANY AND ALL OUTSTANDING
11% SENIOR NOTES DUE 2006
OF
GUITAR CENTER, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1996, UNLESS EXTENDED.
Guitar Center, Inc., a Delaware corporation (successor to Guitar Center
Management, Inc., a California Corporation, "Guitar Center" or the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange its outstanding 11%
Senior Notes due 2006 (the "Old Notes"), of which an aggregate of $100 million
principal amount is outstanding as of the date hereof, for an equal amount of
newly issued 11% Senior Notes due 2006 (the "New Notes"). The New Notes will be
general, unsecured obligations of the Company. The New Notes will rank senior in
right of payment to all subordinate indebtedness of the Company, and PARI PASSU
in right of payment with all other senior indebtedness of the Company, including
the Company's outstanding indebtedness under the New Credit Facility. Other than
the $5.4 million of indebtedness outstanding under the New Credit Facility as of
June 30, 1996, the Company has not issued, and does not have any present
intention to issue, any significant indebtedness to which the Notes would be
senior or PARI PASSU in right of payment. The New Credit Facility, upon the
occurrence of certain events, will be secured by substantially all of the assets
of the Company. See "The New Credit Facility." The indebtedness outstanding
under the New Credit Facility is PARI PASSU to the New Notes in right of
payment. After giving effect to the Exchange Offer and the Recapitalization (as
defined herein), on a PRO FORMA basis, as of June 30, 1996, the Company would
have had approximately $105.4 million of outstanding Indebtedness (as defined
herein) and remaining capacity under the New Credit Facility (as defined herein)
of approximately $13.7 million.
The New Notes are being offered hereby in order to satisfy certain
obligations of the Company under the Registration Rights Agreement, dated July
2, 1996, among the Company and certain other signatories thereto (the
"Registration Rights Agreement"). The form and terms of the Old Notes will be
the same as those of the New Notes except that the New Notes will have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and hence will not be subject to certain transfer restrictions, registration
rights and related liquidated damages provisions applicable to the Old Notes.
The New Notes will evidence the same debt as the Old Notes and will be entitled
to the benefits of an indenture (the "Indenture"), dated as of July 2, 1996, by
and between the Company and U.S. Trust Company of California, N.A., as trustee
(the "Trustee"). The Indenture provides for the issuance of both the Old Notes
and the New Notes. The Old Notes and the New Notes are referred to herein
collectively as the "Notes" and holders of the Notes are sometimes referred to
herein as the "Holders."
The Notes will mature on July 1, 2006. Interest on the Notes will be payable
in cash semi-annually on January 1 and July 1 of each year commencing on January
1, 1997. The Company will not be required to make any mandatory redemption or
sinking fund payment with respect to the Notes prior to maturity. The Notes will
be redeemable at the option of the Company, in whole or in part, on or after
July 1, 2001, at the redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. Notwithstanding the foregoing,
prior to July 1, 1999, the Company may redeem up to 33 1/3% of the aggregate
principal amount of the Notes originally outstanding, at a redemption price
equal to 110% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the redemption date, with the Net Cash Proceeds (as defined herein)
of an Initial Public Equity Offering (as defined herein); PROVIDED that at least
66 2/3% of the aggregate principal amount of the Notes originally outstanding
remain outstanding immediately thereafter. Upon a Change of Control (as defined
herein), the Company will be required to make an irrevocable and unconditional
offer to repurchase all outstanding Notes at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all expenses incident to the Exchange Offer (which shall not
include the expenses of any Holder in connection with resales of the New Notes).
The Company will accept for exchange any and all validly tendered Old Notes on
or prior to 5:00 p.m. New York City time, on , 1996 (such date
and time, if and as extended, the "Expiration Date"). Tenders of Old Notes may
be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. Old Notes may be tendered only in integral multiples of $1,000. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Old Notes, the Company will promptly cause the return of all previously
tendered Old Notes.
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
[DESCRIPTION OF PHOTOGRAPH ON 2 PAGES SPREAD]
Photographs depicting the interior of a Guitar Center Management Company,
Inc. retail store with the following captions:
a. "Customers are encouraged to hold and play instruments."
b. "Knowledgeable salespeople demonstrate the latest multi-media
technology."
c. "Each department offers an extensive selection of brand name
merchandise."
d. "Each store features a display of 300 to 500 guitars on its 'guitar
wall'."
e. "One of the largest selections of vintage guitars."
Photograph of Little Richard at a Guitar Center Management Company, Inc.
retail store with the following caption:
"Little Richard's introduction into the Rock Walk."
<PAGE>
Based on interpretations contained in no action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission"), the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold, and
otherwise transferred by a holder thereof (other than (i) a broker-dealer who
purchases such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
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 that the holder is acquiring
the New Notes in its ordinary course of business and is not participating, and
has no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company that such conditions have been met.
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 has been prepared
for use in connection with the Exchange Offer and may be used by Chase
Securities Inc. ("CSI") and Donaldson, Lufkin & Jenrette ("DLJ") in connection
with offers and sales related to market-making transactions in the Notes. CSI
and DLJ may act as principals or agents in such transactions. Such sales will be
made at prices related to prevailing market prices at the time of sale. 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 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, for a
period of 180 days 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."
Prior to this Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the Notes will develop. To the extent
that a market for the Notes does develop, the market value of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, market conditions, general economic conditions, the Company's results of
operations and financial condition, the market for similar securities, and other
conditions. Such conditions might cause the Notes, to the extent that they are
actively traded, to trade at a significant discount from face value. See "Risk
Factors -- Absence of Public Market for the Notes."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE
INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE FOLLOWING EVENTS: (I) 100 TO
1 STOCK SPLIT EFFECTUATED ON JUNE 5, 1996; AND (II) THE REINCORPORATION OF THE
COMPANY FROM A CALIFORNIA TO A DELAWARE CORPORATION, EFFECTUATED ON ,
1996.
THE COMPANY
Guitar Center, Inc. (the "Company" or "Guitar Center") is the nation's
leading retailer of guitars, amplifiers, percussion instruments, keyboards and
pro audio and recording equipment with 28 stores operating in 14 major markets.
Over the past five fiscal years, the Company's net sales and operating income
have grown at compound annual growth rates of 21.9% and 34.0%, respectively.
Guitar Center offers a unique retail concept in the music products industry,
combining an interactive, hands-on shopping experience with superior customer
service and a broad selection of brand name, high-quality products at guaranteed
low prices. The Company creates an entertaining and exciting atmosphere in its
stores with bold and dramatic merchandise presentations, highlighted by bright,
multi-colored lighting, high ceilings, music and videos. Management believes
approximately 80% of the Company's sales are to professional and aspiring
musicians who generally view the purchase of music products as a career
necessity. These sophisticated customers rely upon the Company's knowledgeable
and highly trained salespeople to answer technical questions and to assist in
product demonstrations.
The Guitar Center prototype store generally ranges in size from 12,000 to
15,000 square feet (as compared to a typical music products retail store which
averages 3,230 square feet) and is designed to encourage customers to hold and
play instruments. Each store carries an average of 7,000 core stock keeping
units ("SKUs"), which management believes is significantly greater than a
typical music products retail store, and is organized into five departments,
each focused on one product category. These departments cater to a musician's
specific product needs and are staffed by specialized salespeople, many of whom
are practicing musicians. Management believes this retail concept differentiates
the Company from its competitors and encourages repeat business.
Guitar Center stores historically have generated strong and stable operating
results. All of the Company's stores have been profitable and have generated
positive comparable store sales growth in each of the past four fiscal years.
The following summarizes certain key operating statistics of a Guitar Center
store:
<TABLE>
<S> <C>
Average 1995 net sales per square foot......................... $ 646
Average 1995 net sales per store (1)........................... 8,513,000
Average 1995 store-level operating income (1).................. 1,239,000
Average 1995 store-level operating income margin............... 14.6%
</TABLE>
- ------------------------------
(1) Excludes results of the Company's Brea, California store opened in December
1995.
Guitar Center stores have typically generated positive operating income
within the first three months of opening. In addition, based on new store
openings since fiscal 1993, Guitar Center stores have demonstrated high
store-level operating income and store-level operating income margins averaging
approximately $0.6 million and 11.2%, respectively, and sales per square foot
averaging $465, during the first full twelve months of operations.
The United States retail market for music products in 1995 was estimated in
a study by MUSIC TRADE magazine to be approximately $5.5 billion in net sales,
representing a five-year compound annual growth rate of 7.9%. The industry is
highly fragmented with the nation's leading five music products retailers
accounting for approximately 7.9% of the industry's net sales in 1994. The
Company believes it
3
<PAGE>
benefits from several advantages relative to smaller competitors including
volume purchasing discounts, centralized operations and other financial
controls, advertising economies and the ability to offer an extremely broad and
deep selection of merchandise.
Management is highly committed to the success of Guitar Center. Management's
goal is to continue to expand Guitar Center's position as the leading music
products retailer throughout the United States. The Company's growth strategy is
to continue to increase its presence in its existing markets and to open new
stores in strategically selected markets. The Company will continue to pursue
its strategy of clustering stores in major markets to take advantage of
operating and advertising efficiencies and to build awareness of the Guitar
Center name in new markets. The Company has opened a total of seven stores in
fiscal 1996 and expects to open approximately eight stores in each of fiscal
1997 and fiscal 1998. The Company has committed substantial resources to
building a corporate infrastructure and management information systems that it
believes can support the Company's needs, including its expansion plans, for the
foreseeable future. Guitar Center believes it is well-positioned to continue to
implement its expansion strategy.
For fiscal years ended December 31, 1993, 1994, 1995 and for the six months
ended June 30, 1996 the Company had net income (loss) of $5.1 million, $8.8
million, $10.9 million and ($74.8) million, respectively. The results for the
six months ended June 30, 1996 reflect a recorded deferred compensation expense
of $69.9 million and $10.9 million for transaction costs and financing fees
incurred in connection with the Recapitalization (as defined below). These
expenses are non-recurring following the Recapitalization.
BUSINESS STRATEGY
The principal elements of the Company's business strategy are as follows:
EXTENSIVE SELECTION OF MERCHANDISE. Guitar Center offers an extensive
selection of brand name music products complemented by lesser known, hard to
find items and unique, vintage equipment. Guitar Center offers an average of
7,000 core SKUs per store, providing a breadth and depth of in-stock items which
management believes is not available from traditional music products retailers.
HIGHLY INTERACTIVE, MUSICIAN-FRIENDLY STORE CONCEPT. The purchase of
musical instruments is a highly personal decision for musicians. Management
therefore believes that a large part of the Company's success is attributable to
its creative instrument presentations and colorful, interactive displays which
encourage the customer to hold and play instruments as well as to participate in
product demonstrations. Each store also provides private sound-controlled rooms
to enhance the customers' listening experience while testing various
instruments.
EXCEPTIONAL CUSTOMER SERVICE. Exceptional customer service is fundamental
to the Company's operating strategy. Accordingly, the Company provides extensive
training programs for its salespeople, who specialize in one of the Company's
five product categories. Many of the Company's salespeople are also musicians.
With the advances in technology and continuous new product introductions in the
music products industry, customers increasingly rely on qualified salespeople to
offer expert advice and assist in product demonstrations. Management believes
that its emphasis on training and customer service distinguishes the Company
within the industry and is a critical part of Guitar Center's success.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the low price leader
in each of its markets. Guitar Center underscores its pricing commitment by
offering a 30-day low price guarantee. The Company is generally among its
vendors' largest customers and thereby benefits from volume purchasing discounts
and other terms not available to the typical music products retailer. Although
prices are usually determined on a regional basis, store managers are trained
and authorized to adjust prices in response to local market conditions.
INNOVATIVE PROMOTIONAL AND MARKETING PROGRAMS. Guitar Center sponsors
innovative promotional and marketing events which include in-store
demonstrations, famous artist appearances and weekend themed sales events
designed to create significant store traffic and exposure. Management believes
these events help the Company to build a loyal customer base and to encourage
repeat business. Since its inception, the Company has compiled a unique,
proprietary database containing information on more
4
<PAGE>
than one million customers. Guitar Center utilizes this database to advertise to
select target customers based on historical buying patterns. The Company
believes the typical music products retailer does not have the resources to
support large-scale promotional events or an extensive advertising program.
EXPANSION STRATEGY. Guitar Center's expansion strategy is to continue to
increase its market share in existing markets and to penetrate new markets. The
Company has opened a total of seven stores in fiscal 1996, and expects to open
approximately eight stores in each of fiscal 1997 and 1998. In preparation for
these additional stores, management has dedicated a substantial amount of its
resources over the past several years to building the infrastructure necessary
to support a large national chain. In addition, the Company believes it has
developed a unique and highly effective methodology for targeting prospective
store sites which includes analyzing demographic and psychographic
characteristics of a potential store location.
THE RECAPITALIZATION
On June 5, 1996, the Company consummated a series of transactions to effect
a recapitalization of the Company (the "Recapitalization") in order to transfer
ownership of the Company from its sole stockholder, the Scherr Living Trust (the
"Scherr Trust") to members of management and the Investors (as defined herein).
See "The Recapitalization and Related Transactions."
REINCORPORATION
On October , 1996 the Company reincorporated from California to Delaware
and changed its name from Guitar Center Management Company, Inc. to Guitar
Center, Inc. The Company's principal executive offices are located at 5155
Clareton Drive, Agoura Hills, California 91301.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary information for the fiscal years ended October 31, 1991 and
1992, the two months ended December 31, 1992 and the fiscal years ended December
31, 1993, 1994 and 1995 has been derived from the audited financial statements
of the Company. The financial data as of and for the six-month period ended June
30, 1995 and June 30, 1996 are derived from the unaudited consolidated financial
statements which, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) for a fair presentation of
such data. The results for the interim periods are not necessarily indicative of
the results for the full fiscal year. The summary unaudited PRO FORMA data for
the year ended December 31, 1995, and the six months ended June 30, 1995 and
1996 give effect to the Recapitalization (including the Company's conversion of
tax status from an "S" corporation to a "C" corporation and other tax
consequences related to the Recapitalization), as if it all had been consummated
as of January 1, 1995. The Recapitalization occurred on June 5, 1996 and is
reflected in the June 30, 1996 historical financial statement. See "Unaudited
Pro Forma Condensed Financial Data" and the notes thereto. The PRO FORMA
financial data set forth below is not necessarily indicative of the results that
would have been achieved or that may be achieved in the future. The summary
historical and PRO FORMA financial data should be read in conjunction with "The
Recapitalization and Related Transactions," "Unaudited Pro Forma Condensed
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical Financial Data" and the
financial statements of the Company and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
---------------- ------------ --------------------------- -----------------
1991 1992 1992 1993 1994 1995 1995 1996
------- ------- ------------ ------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $74,872 $85,592 $18,726 $97,305 $129,039 $170,671 $76,888 $ 91,048
Gross profit.................................... 22,064 25,472 5,393 28,778 36,764 47,256 21,146 25,799
Selling, general and administrative expenses.... 18,896 20,998 3,547 21,889 26,143 32,664 15,100 18,318
Deferred compensation expense (a)............... (230) -- 373 1,390 1,259 3,087 1,040 69,892
Operating income (loss)......................... 3,398 4,474 1,473 5,499 9,362 11,505 5,006 (62,411)
Non recurring transaction expense............... -- -- -- -- -- -- -- 6,176
Net income (loss)............................... 2,702 3,987 1,385 5,105 8,829 10,857 4,845 (74,764)
PRO FORMA FOR INCOME TAX PROVISION: (B)
Historical income (loss) before provision for
income taxes................................... $ 2,755 $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ 4,919 $(74,633)
Pro forma provision for income taxes............ 1,086 1,753 773 2,856 4,478 6,144 2,562 --
------- ------- ------------ ------- -------- -------- ------- --------
Pro forma net income (loss)..................... $ 1,669 $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ 2,357 $(74,633)
------- ------- ------------ ------- -------- -------- ------- --------
------- ------- ------------ ------- -------- -------- ------- --------
OPERATING DATA:
Net sales per gross square foot (c)............. $ 366 $ 407 -- $ 454 $ 518 $ 646 $ 292 $ 320
Stores open at end of period.................... 15 15 15 17 20 21 20 24
Net sales growth................................ 6.0% 14.3% 18.7% 13.7% 32.6% 32.3% 40.0% 18.4%
Increase in comparable store sales (d).......... 5.9% 11.5% 18.7% 11.4% 17.3% 23.4% 27.4% 11.8%
Inventory turns................................. 3.1x 3.3x 3.4x 3.4x 3.4x 3.7x 3.6x 3.7x
Ratio of earnings to fixed charges (e).......... 3.7x 5.8x 13.8x 9.1x 11.6x 11.7x 13.7x --
Capital expenditures............................ $ 1,192 $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 888 $ 3,523
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
------------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA DATA:
Net sales............................................... $ 170,671 $ 76,888 $ 91,048
Operating income........................................ 15,967 6,734 7,913
Net income.............................................. 2,551 554 1,196
Ratio of earnings to fixed charges...................... 1.4x 1.2x 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 6,494 $ 2,909
Net working capital............................................. 27,598 24,013
Total assets.................................................... 65,366 65,366
Total long term and revolving debt (including current
maturities).................................................... 105,421 105,421
Senior preferred stock.......................................... 13,702 --
Warrants........................................................ 6,500 6,500
Stockholders' equity (deficit).................................. (71,615) (71,615)
</TABLE>
- ------------------------
(a) For the six months ended June 30, 1996, the Company recorded deferred
compensation expense of $69.9 million related to the cancellation and
exchange of management stock options pursuant to the Recapitalization. After
the Recapitalization, these expenses will be non-recurring, as the deferred
compensation plan was terminated.
(b) Pro forma provision for income taxes reflects the estimated statutory
provision for income taxes assuming the Company was a "C" corporation.
(c) Net sales per gross square foot does not include new stores opened during
the reporting period. Information for the two months ended December 31, 1992
is not meaningful.
(d) Compares net sales for the comparable periods.
(e) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one third of lease expense, which management believes
is representative of the interest components of lease expense. Earnings were
insufficient to cover fixed charges by $74.6 million for the six months
ended June 30, 1996.
7
<PAGE>
THE EXCHANGE OFFER
The form and terms of the Old Notes will be the same as those of the New
Notes except that the New Notes will have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and hence will not be subject to
certain transfer restrictions, registration rights and related liquidated
damages provisions applicable to the Old Notes.
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THE EXCHANGE OFFER..................... The Company is offering to exchange an aggregate of
$100 million principal amount of New Notes for a
like principal amount of Old Notes. The Old Notes
may be exchanged only in multiples of $1,000
principal amount. The Company will issue the New
Notes on or promptly after the Expiration Date. See
"The Exchange Offer."
EXPIRATION DATE........................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1996, unless
extended in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended.
CONDITIONS TO THE EXCHANGE OFFER....... The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
whole or in part and from time to time in its sole
discretion. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer." The Exchange
Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange.
PROCEDURES FOR TENDERING OLD NOTES..... Each Holder desiring to accept the Exchange Offer
must complete and sign the Letter of Transmittal,
have the signature thereon guaranteed if required
by the Letter of Transmittal, and mail or deliver
the Letter of Transmittal, together with the Old
Notes or a Notice of Guaranteed Delivery and any
other required documents (such as evidence of
authority to act satisfactory to the Company in its
sole discretion, if the Letter of Transmittal is
signed by someone acting in a fiduciary or
representative capacity), to the Exchange Agent (as
defined) at the address set forth herein prior to
5:00 p.m., New York City time, on the Expiration
Date. Any beneficial owner of the Old Notes whose
Old Notes are registered in the name of a nominee,
such as a broker, dealer, commercial bank or trust
company and who wishes to tender Old Notes in the
Exchange Offer, should instruct such entity or
person to promptly tender on such beneficial
owner's behalf. See "The Exchange Offer --
Procedures for Tendering Old Notes."
GUARANTEED DELIVERY PROCEDURES......... Holders of Old Notes who wish to tender their Old
Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old
Notes or any other documents required by the Letter
of Transmittal to the Exchange Agent prior to the
Expiration Date (or complete the procedure for
book-entry transfer on a timely basis), may tender
their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer -- Guaranteed
Delivery Procedures."
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The Letter of Transmittal provides that each Holder
of Old Notes (other than participating
broker-dealers) will represent to the Company that,
among other things, the New Notes acquired pursuant
to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving
such New Notes, that neither such Holder of Old
Notes nor any such other person has an arrangement
or understanding with any person to participate in
the distribution of such New Notes and that neither
the Holder nor any such person is an "affiliate" of
the Company, as defined in Rule 405 under the
Securities Act. Any tendered Old Notes not accepted
for exchange for any reason will be returned
promptly after the expiration or termination of the
Exchange Offer. See "The Exchange Offer."
WITHDRAWAL RIGHTS...................... Tenders of Old Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
ACCEPTANCE OF OLD NOTES AND DELIVERY OF
NEW NOTES............................ The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 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."
RESALES OF NEW NOTES................... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any Holder thereof (other
than any such Holder which is an "affiliate" of the
Company 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
Holder's business and that such Holder has no
arrangement or understanding with any person to
participate in the distribution of such New Notes,
and provided, further, that each broker-dealer that
receives New Notes for its own account in exchange
for Old Notes must acknowledge that it will deliver
a Prospectus in connection with any resale of such
New Notes. See "Plan of Distribution." 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 exception
from, or in a transaction not subject to, the
Securities Act and
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applicable state securities laws. See "The Exchange
Offer -- Consequences of Failure to Exchange" and
"Description of Senior Notes."
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. In general, Old Notes may not be
offered or sold, except pursuant to a registration
statement under the Securities Act or any exemption
from registration thereunder and in compliance with
applicable state securities laws. In the event the
Company completes the Exchange Offer, holders of
Old Notes will have no further rights to
registration or liquidated damages pursuant to the
Registration Rights Agreement.
CERTAIN TAX CONSIDERATIONS............. There will be no Federal income tax consequences to
Holders exchanging Old Notes for New Notes pursuant
to the Exchange Offer and a Holder will have the
same adjusted basis and holding period in the New
Notes as in the Old Notes immediately before the
exchange.
REGISTRATION RIGHTS AGREEMENT.......... The Exchange Offer is intended to satisfy the
registration rights of Holders of Old Notes under
the Registration Rights Agreement, which rights
terminate upon consummation of the Exchange Offer.
EXCHANGE AGENT......................... U.S. Trust Company of California, N.A. is the
Exchange Agent. The address and telephone number of
the Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent."
THE NOTES
SECURITIES OFFERED..................... $100 million aggregate principal amount of 11%
Senior Notes due 2006.
MATURITY............................... July 1, 2006.
INTEREST PAYMENT DATES................. January 1 and July 1, commencing on January 1,
1997.
OPTIONAL REDEMPTION.................... The Notes will be redeemable at the option of the
Company, in whole or in part, on or after July 1,
2001, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the
date of redemption. Notwithstanding the foregoing,
prior to July 1, 1999, the Company may redeem up to
33 1/3% of the aggregate principal amount of the
Notes originally outstanding at a redemption price
equal to 110% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the
redemption date, with the Net Cash Proceeds of an
Initial Public Equity Offering; PROVIDED that at
least 66 2/3% of the aggregate principal amount of
the Notes originally outstanding remain outstanding
immediately thereafter. See "Description of Notes
-- Optional Redemption."
SINKING FUND........................... None.
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RANKING................................ The New Notes will be general, unsecured
obligations of the Company. The New Notes will rank
senior in right of payment to all subordinate
indebtedness of the Company, and PARI PASSU in
right of payment with all other senior indebtedness
of the Company, including the Company's outstanding
indebtedness under the New Credit Facility. The
Company has not issued (other than the $5.4 million
of indebtedness outstanding under the New Credit
Facility as of June 30, 1996), and does not have
any present intention to issue, any significant
indebtedness to which the Notes would be senior or
PARI PASSU in right of payment. The New Credit
Facility, upon the occurrence of certain events,
will be secured by substantially all of the assets
of the Company. See "The New Credit Facility."
After giving effect to the Exchange Offer and the
Recapitalization (as defined herein), on a PRO
FORMA basis, as of June 30, 1996, the Company would
have had approximately $105.4 million of
outstanding Indebtedness (as defined herein) and
remaining capacity under the New Credit Facility
(as defined herein) of approximately $13.7 million.
CHANGE OF CONTROL OFFER................ Upon a Change of Control, the Company will be
required to make an irrevocable and unconditional
offer to repurchase all outstanding Notes at 101%
of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
repurchase. A Change of Control will not result
from a sale of the Company or substantially all of
the Company's assets to a person or group of
persons who are Investors (as defined herein) and
the Holders would not receive the benefit of this
provision in the event of such a transaction. See
"Description of Notes -- Certain Covenants --
Repurchase of Notes at the Option of the Holder
Upon a Change of Control."
CERTAIN COVENANTS...................... The Indenture contains certain covenants with
respect to the Company that, among other things,
limit the ability of the Company and any
subsidiaries of the Company to (i) incur additional
Indebtedness and issue Disqualified Capital Stock
(as defined herein); (ii) pay dividends or make
other distributions and certain investments; (iii)
create certain liens; (iv) sell certain assets; (v)
enter into certain transactions with affiliates; or
(vi) enter into certain mergers or consolidations
involving the Company. See "Description of Notes --
Certain Covenants."
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RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by Holders prior to tendering their Old Notes in the Exchange Offer.
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RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PRIOR TO
TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS"
FOR A DESCRIPTION OF OTHER FACTORS AFFECTING THE BUSINESS OF THE COMPANY.
RESTRICTIONS UPON TRANSFER OF AND LIMITED TRADING MARKET FOR OLD NOTES
The New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of tenders of such Old Notes. Therefore, holders
of Old Notes desiring to tender such Old Notes in exchange for New Notes should
allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor
the Company is under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange. Old Notes that are not
tendered or are tendered but not accepted will, following consummation of the
Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer who 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 any 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 the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
BLUE SKY RESTRICTIONS; COMPLIANCE WITH STATE SECURITIES LAWS
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration of qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
POTENTIAL CONSEQUENCES OF SIGNIFICANT LEVERAGE
As of June 30, 1996, the Company had approximately $105.4 million of
outstanding Indebtedness, its ratio of total long-term debt to total
capitalization was approximately 221.9% and it had a stockholders' deficit of
approximately $71.6 million. See "Capitalization" and "Unaudited Pro Forma
Condensed Financial Data."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company may not generate sufficient cash to service its debt obligations
including its obligations under the Notes; (ii) the Company's ability to obtain
financing for future working capital needs or other purposes may be limited;
(iii) a substantial portion of the Company's cash flow from operations will be
dedicated to debt service, thereby reducing funds available for operations; and
(iv) the substantial indebtedness and the restrictive covenants to which the
Company is subject under the terms of its indebtedness, including the terms of
the New Credit Facility and the Indenture, may make the Company more vulnerable
to economic downturns, may hinder its ability to execute its growth strategy,
may reduce its flexibility to respond to changing business conditions and
opportunities and may limit its ability to withstand competitive pressures.
The Company's ability to generate sufficient cash to meet its debt service
obligations will depend on future operating performance, which will be subject,
in part, to factors beyond its control, including prevailing economic conditions
and financial, business and other factors. While the Company believes that cash
flow from operations will be adequate to meet its debt service obligations,
there can be no assurance that the Company will generate cash in sufficient
amounts. In the event the Company's operating cash flow is not sufficient to
fund the Company's expenditures or to service its debt including
12
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the Notes, the Company may be required to raise additional financing through
capital contributions, the refinancing of all or part of its indebtedness
(including the Notes) or sales of its assets. There can be no assurance that the
Company will be able to obtain any such additional financing or effect
satisfactory refinancings or asset sales on favorable terms, if at all.
FRAUDULENT TRANSFER CONSIDERATIONS
The obligations of the Company under the indebtedness represented by the
Notes may be subject to review under relevant federal and state fraudulent
transfer laws, as well as other similar laws regarding creditors rights
generally or distributions to stockholders, if a bankruptcy case or a lawsuit
(including circumstances not involving bankruptcy) is commenced by or on behalf
of any unpaid creditor or a representative of the Company's creditors, such as a
trustee in bankruptcy or the Company as debtor in possession. If a court, in
such a lawsuit, were to find that the Company incurred the indebtedness
represented by the Notes (i) with the intent to hinder, delay or defraud present
or future creditors or contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of others; or (ii) received
less than a reasonably equivalent value or fair consideration for any such
indebtedness and, at the time of such incurrence (a) was insolvent; (b) was
rendered insolvent by reason of such incurrence; (c) was engaged or about to
engage in a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business; or (d) intended to incur,
or believed or reasonably should have believed that it would incur, debts beyond
its ability to pay such debts as they matured, such court could void the
obligations under the Notes, direct the return of any amounts paid thereunder to
the Company or to a fund for the benefit of its creditors, subordinate such
obligations to all other indebtedness of the relevant obligor or take other
action detrimental to the Holders.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction that is being applied. Generally, however, a
company would be considered insolvent if either (i) the sum of its debts
(including contingent or unliquidated debts) is greater than all of its property
at a fair valuation; or (ii) if the then fair salable value of its assets is
less than the amount that is required to pay its probable liability on its
existing debts (including contingent or unliquidated debts) as they became
absolute and matured.
The Company however, believes that it was at the time of the
Recapitalization and is now solvent and that it had at the time of the
Recapitalization and now has sufficient capital to carry on its business and
that it believed at the time of the Recapitalization and now believes that it
was and will be able to pay its debts as they mature. There can be no assurance
however, that a court would reach the same conclusion.
AGGRESSIVE GROWTH STRATEGY
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. The Company, which currently
operates 28 stores, has opened seven stores in fiscal 1996 and expects to open
approximately eight stores in each of fiscal 1997 and fiscal 1998, which
represent significant increases in the number of stores previously opened and
operated by the Company. Although historically the Company has opened new stores
and expanded or relocated existing stores, prior to this year the Company had
not opened more than 4 new stores for any twelve-month period for the last three
fiscal years. The Company's expansion plan is dependent upon a number of
factors, including the identification of suitable sites, the negotiation of
acceptable leases for such sites, the hiring, training and retention of skilled
personnel, the availability of adequate financial resources, the adaptation of
its distribution and other operational and management information systems
("MIS") to such sites, the ability of the Company's vendors to supply its needs
on a timely basis and other factors, some of which are beyond the control of the
Company. There can be no assurance that the Company will be successful in
opening such new stores on schedule, if at all, or that such newly opened stores
will achieve sales and profitability levels comparable to existing stores, if
they are profitable at all, or that the Company will improve its overall market
position and profitability as a result therefrom.
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The Company's expansion strategy includes clustering new stores in existing
markets, which has in certain instances resulted in some transfer of sales from
existing stores to new locations. In addition, the Company's expansion into new
markets has in certain circumstances presented competitive and merchandising
challenges that are different from those currently encountered by the Company in
its current markets. These challenges include the effective management of stores
that are in distant locations and the incurrence of significant start-up costs,
including costs related to promotions and advertising. Although the Company is
continually evaluating the adequacy of its existing systems and procedures,
including store management, financial controls and MIS in connection with the
Company's planned expansion, there can be no assurance that the Company will
adequately anticipate all of the changing demands which its expanding operations
will impose on such systems. The failure by the Company to identify and respond
to such demands may have an adverse effect on the Company's business and
prospects. See "Business."
ADEQUATE SOURCES OF MERCHANDISE SUPPLY
The Company's business as well as its expansion plans are dependent to a
significant degree upon its suppliers. The Company does not have any long-term
supply contracts with its suppliers. The loss of certain key vendors or the
failure to establish and maintain relationships with brand name vendors could
have a material adverse effect on the Company's business. The Company believes
it currently has adequate supply sources; however, there can be no assurance,
especially given the Company's expansion plans, that the Company will be able to
acquire sufficient quantities and an appropriate mix of such merchandise at all
or at acceptable prices.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
Historically, the Company's sales growth has resulted from comparable store
sales growth. There can be no assurance that such growth will continue. A
variety of factors affect the Company's comparable store sales results
including, among others, economic conditions, consumer trends, retail sales,
music trends, changes in the Company's merchandise mix, distribution of
products, transfer of sales to new locations and the Company's ability to
execute its business strategy efficiently, including its strategy of clustering
stores in certain markets. The Company's quarterly comparable store sales
results have fluctuated significantly in the past. The Company's comparable
store sales results were 24.4%, 28.5%, 25.5% and 13.5% in the first, second,
third and fourth quarters of fiscal 1995, respectively, and 14.5% and 9.3% in
the first and second quarters of fiscal 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company does not expect comparable store sales to continue to increase at
historical rates.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the services of Larry Thomas, President and Chief Executive Officer,
and Marty Albertson, Executive Vice President and Chief Operating Officer, as
well as its ability to attract and retain additional key personnel with the
skills and expertise necessary to manage its existing business and effectuate
its planned growth. The loss or unavailability of the services of one or both of
these individuals or other key personnel could have a material adverse effect on
the Company. In June 1996, in connection with the Recapitalization, the Company
entered into a five-year employment agreement with each of Messrs. Thomas and
Albertson. The Company currently carries key man insurance on the lives of
Messrs. Thomas and Albertson in the amount of $5.0 million and $3.5 million,
respectively. See "Management."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
As of June 30, 1996, 13 of the Company's stores were located in California
and generated 55.9% and 55.7% of the Company's net sales for fiscal 1995 and the
six months ended June 30, 1996, respectively. Although the Company has opened
stores in other areas in the United States, a significant percentage of the
Company's net sales is likely to remain concentrated in California for the
foreseeable future. Consequently, the Company's results of operations and
financial condition are heavily dependent upon general consumer trends and other
general economic conditions in California.
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COMPETITION
The market for musical instruments is fragmented and highly competitive. The
Company competes with many different types of retailers who sell many or most of
the items sold by the Company, including other specialty retailers and catalogue
retailers. The Company's expansion into new markets in which its competitors are
already established, competitors' expansion into markets in which the Company is
currently operating, or the entry into the Company's markets by competitors with
substantial financial or other resources may have a material adverse effect on
the Company's operations.
IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS; CHANGING CONSUMER PREFERENCES
The Company's business is sensitive to customers' spending patterns, which
in turn are subject to prevailing economic conditions. There can be no assurance
that consumer spending will not be affected by economic conditions, thereby
impacting the Company's growth, net sales and profitability. A decline in
economic conditions in one or more of the markets in which the Company's stores
are concentrated could have an adverse effect on the Company's financial
condition and results of operations. Although the Company attempts to stay
abreast of consumer preferences for musical products and accessories
historically offered for sale by the Company, any sustained failure by the
Company to identify and respond to such trends would have a material adverse
effect on the Company's business, results of operations and financial condition.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Old Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The New Notes will constitute a
new issue of securities with no established trading market. The Company does not
intend to list the New Notes on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Company has been advised by DLJ and CSI that
they presently intend to make a market in the Notes. However, DLJ and CSI are
not obligated to do so and any market-making activities with respect to the
Notes may be discontinued at any time without notice. In addition, such market-
marking activity will be subject to the limits imposed by the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be
limited during the Exchange Offer. If a trading market does not develop or is
not maintained, holders of the Notes may experience difficulty in reselling the
Notes or may be unable to sell them at all. If a market for the Notes develops,
any such market may be discontinued at any time. If a public trading market
develops for the Notes, future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
results of operations and the market for similar securities. Depending on
prevailing interest rates, the market for similar securities and other factors,
including the financial condition of the Company, the Notes may trade at a
discount from their principal amount.
OWNERSHIP OF THE COMPANY
Management owns 35.7%, the Investors own 50% and the Scherr Trust owns 8.9%
of the Company's issued and outstanding Common Stock. Under a Stockholders
Agreement (as defined herein) entered into at the time of the Recapitalization,
the Management Stockholders (as defined herein) have the right to elect four
directors, the Investors have the right to elect four directors, the Scherr
Trust has the right to elect one director and the Investors have the right to
elect two additional directors who are not affiliated with the Company or any
stockholder subject to the approval of Larry Thomas, so long as he is the
Company's Chief Executive Officer. Under the Stockholders Agreement, a wide
range of actions to be taken by the Company will require approval of two-thirds
of the Board of Directors, including the sale of the Company and the
consummation of an initial public offering. Thus, if representatives of various
stockholder groups are unable to reach consensus on matters requiring two-thirds
approval, the operations and growth of the Company could be adversely affected.
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THE RECAPITALIZATION AND RELATED TRANSACTIONS
On June 5, 1996, Guitar Center consummated a series of transactions to
effect a Recapitalization of the Company in order to transfer ownership of the
Company from its sole stockholder, the Scherr Trust, to members of management
and the Investors (as defined herein). The Recapitalization included the
following transactions: (i) members of the Company's management purchased
500,000 shares of the Company's common stock, $.01 par value (the "Common
Stock") for $0.5 million cash; (ii) members of the Company's management received
495,000 shares of Junior Preferred Stock, with an aggregate liquidation
preference of $49.5 million in exchange for cancellation of outstanding options
exercisable for 49,500,000 shares of Common Stock; (iii) the Scherr Trust,
received 198,000 shares of Junior Preferred Stock with an aggregate liquidation
preference of $19.8 million in exchange for 19,800,000 shares of Common Stock;
(iv) Chase Venture Capital Associates, L.P. ("Chase VCA"), Wells Fargo Small
Business Investment Company, Inc. ("WFSB"), Weston Presidio Capital II, L.P.
("WPC") and CB Capital Investors, Inc. ("CB Capital" and together with Chase
VCA, WFSB and WPC, the "Investors") purchased 700,000 shares of Common Stock and
693,000 shares of 8% Junior Preferred Stock, $0.01 par value (the "Junior
Preferred Stock") for $70.0 million cash; (v) the DLJ Investors (as defined
herein) purchased 800,000 shares of 14% Senior Preferred Stock, $0.01 par value
(the "Senior Preferred Stock") with an aggregate liquidation value of $20.0
million and warrants (the "Warrants") to purchase 73,684 shares of Common Stock
and 72,947 shares of Junior Preferred Stock, for an aggregate purchase price of
$20.0 million cash; (vi) GCMC Funding, Inc. ("DLJ Bridge") purchased $51.0
million aggregate principal amount of senior unsecured increasing rate notes for
cash and Chemical Bank ("Chemical") loaned $49.0 million to the Company
(together, the "Bridge Facility"); (vii) the Company repurchased 120,000,000
shares of Common Stock from the Scherr Trust for approximately $113.1 million
cash; (viii) the Company cancelled 31,907,400 options to purchase Common Stock
held by certain members of management in exchange for approximately $27.9
million cash; and (ix) the Company cancelled its revolving credit facility (the
"Old Credit Facility") upon repaying in cash the approximately $35.9 million
outstanding pursuant thereto. Fees and expenses incurred by the Company to
effect the Recapitalization and the Bridge Facility aggregated approximately
$10.9 million. See "Certain Transactions."
In connection with the Recapitalization, the Company granted to each of two
executive officers ten year options to purchase 43,344 shares of Common Stock,
and adopted the 1996 Performance Stock Plan for the benefit of the Company's key
employees. See "Management." Upon consummation of the Recapitalization,
management, the Investors, and the Scherr Trust owned approximately 35.7%,
50.0%, and 14.3%, respectively, of the issued and outstanding Common Stock of
the Company. Upon the effectiveness of the Recapitalization, the Company entered
into a $25 million revolving credit facility (the "New Credit Facility") with
Wells Fargo Bank, N.A. ("WFB"). See "The New Credit Facility." Immediately
following the Recapitalization, the Company effected a 100 to 1 stock split.
On July 2, 1996 the Company issued an aggregate of $100 million of its 11%
Senior Notes due 2006 (the "Old Notes") to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Chase Securities, Inc. ("CSI"), as the
Initial Purchasers. The Old Notes were resold pursuant to Rule 144A under the
Securities Act. The net proceeds of the offering of the Old Notes were applied
to the retirement of the Bridge Facility.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on July 2, 1996 (the "Closing Date")
to DLJ and CSI as Initial Purchasers (the "Initial Purchasers"). The Initial
Purchasers subsequently placed the Old Notes with qualified institutional buyers
in transactions not requiring registration under the Securities Act or
applicable state securities laws, including sales pursuant to Rule 144A under
the Securities Act. As a condition to the sale of the Old Notes, the Company and
the Initial Purchasers entered into the Registration Rights Agreement on the
Closing Date. Pursuant to the Registration Rights Agreement, the Company agreed
that, unless the Exchange Offer is not permitted by applicable law or Commission
policy, it would (i) file with the Commission a Registration Statement under the
Securities Act with respect to the New Notes within 60 days after the Closing
Date, (ii) use its best efforts to cause such Registration Statement to become
effective under the Securities Act within 135 days after the Closing Date, and
(iii) upon effectiveness of the Registration Statement, commence the Exchange
Offer, maintain the effectiveness of the Registration Statement for at least 30
days (or longer if required by applicable law) and deliver to the Exchange Agent
New Notes in the same aggregate principal amount as the Old Notes that were
properly tendered by holders thereof pursuant to the Exchange Offer. A copy of
the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. This description of
the Registration Rights Agreement is qualified in its entirety by reference to
such exhibit. The Registration Statement, of which this Prospectus is a part, is
intended to satisfy certain of the Company's obligations under the Registration
Rights Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to the Expiration Date. As of the date
of this Prospectus, $100 million aggregate principal amount of the Old Notes is
outstanding. This Prospectus, together with the Letter of Transmittal, is first
being sent on or about , 1996, to all Holders of Old Notes known
to the Company. The Company's obligation to accept Old Notes for exchange
pursuant to the Exchange Offer is subject to certain conditions as set forth
under "-- Certain Conditions to the Exchange Offer" below. The Company will
issue $1,000 principal amount of New Notes in exchange for each $1,000 principal
amount of outstanding Old Notes accepted in the Exchange Offer. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer. See "Risk
Factors -- Failure to Exchange Old Notes." However, Old Notes may be tendered
only in integral multiples of $1,000.
The New Notes will evidence the same debt as the Old Notes for which they
are exchanged, and are entitled to the benefits of the Indenture. The form and
terms of the New Notes are the same as the form and terms of the Old Notes
except that the New Notes have been registered under the Securities Act and
hence will not bear legends restricting the transfer thereof.
Holders do not have any appraisal or dissenters' rights under the California
Corporations Code or the Indenture in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the applicable
requirements of Regulation 14E under the Exchange Act.
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
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, such unaccepted tenders of Old Notes will be returned, without
expense to the Holder thereof, as promptly as practicable after the Expiration
Date.
Holders whose Old Notes are not tendered or are tendered but not accepted in
the Exchange Offer will continue to hold such Old Notes and will be entitled to
all the rights and preferences and subject to the limitations applicable thereto
under the Indenture. Following consummation of the Exchange Offer, the Holders
will continue to be subject to the existing restrictions upon transfer thereof
and the Company
17
<PAGE>
will have no further obligation to such Holders to provide for the registration
under the Securities Act of the Old Notes held by them. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
See "Risk Factors -- Restrictions Upon Transfer of and Limited Trading Market
for Old Notes."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses; Solicitation of Tenders."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1996, unless the Company extends the Exchange Offer, in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a release to the
Dow Jones News Services prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right at its sole discretion (i) to delay accepting
any Old Notes, (ii) to extend the Exchange Offer, (iii) to terminate the
Exchange Offer and not accept Old Notes not previously accepted if any of the
conditions set forth below under "-- Certain Conditions to the Exchange Offer"
shall have occurred and shall not have been waived by the Company, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (iv) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the Holders. 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 by means of a
Prospectus supplement that will be distributed to all Holders, 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 disclosure to
Holders, if the Exchange Offer would otherwise expire during such five to ten
business day period. During any extension of the Expiration Date, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company.
The Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
Interest accrues on the Notes at the rate of 11% per annum and will be
payable in cash semiannually in arrears on each January 1 and July 1, commencing
on January 1, 1997. No interest will be payable on the Old Notes on the date of
the exchange for the New Notes and therefore no interest will be paid thereon to
the Holders at such time.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a beneficial owner thereof as set
forth below and the acceptance by the Company thereof will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and the Letter of
Transmittal. All of the Old Notes are held of record by a nominee of The
Depository Trust Company (the "Depositary").
Except as set forth below, a Holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, (i) certificates for such Old Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely
18
<PAGE>
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes into the Exchange Agent's account at the Depositary (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 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.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii)
for the account of an Eligible Institution (as defined below). In the event that
a signature on a Letter of Transmittal or a notice of withdrawal, as the case
may be, is required to be guaranteed, such guarantee must be 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 or
otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act (collectively, "Eligible Institutions"). If Old Notes are
registered in the name of a person other than the person signing the Letter of
Transmittal, the Old Notes surrendered for exchange must be endorsed by, or be
accompanied by, a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered Holder with the signature thereon guaranteed by an
Eligible Institution.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed by
the registered Holder with signature guaranteed by an Eligible Institution or
accompanied by appropriate powers of attorney with signature guaranteed by an
Eligible Institution, in either case signed exactly as the name or names of the
registered Holder or Holders that appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney 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, proper evidence satisfactory to the Company of its authority so to act
must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among other
things, (i) the 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, (ii) 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, (iii) if the Holder is not a
broker-dealer, or is a broker-dealer but will not receive New Notes for its own
account in exchange for Old Notes, neither the Holder nor any such other person
is engaged in or intends to participate in the distribution of such New Notes
and (iv) neither the Holder nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company. If the tendering
Holder is a broker-dealer that will receive New Notes for its own account in
exchange for Old Notes that were acquired as a result of market-making
activities or other trading activities, it will be required to 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 of the Securities Act.
DELIVERY OF DOCUMENTS TO THE DEPOSITARY OR THE COMPANY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
19
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right in its
sole discretion to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any Holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer as to any particular Old Notes either
before or after the Expiration Date (including the Letter of Transmittal and
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with the tenders of
Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
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. See "-- Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, and if the Company has given oral or
written notice thereof to the Exchange Agent.
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 pursuant to the book-entry transfer procedures
described below, 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
certificates representing Old Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering Holder thereof (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 below, such non-exchanged 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 make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this 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 the Book-Entry Transfer
Facility's Automated Tender Offer Program ("ATOP") procedures for transfer.
However, the exchange for the Old Notes so tendered will only be made after
timely confirmation of such book-entry transfer of Old Notes into the Exchange
Agent's account, and timely receipt by the Exchange Agent of an Agent's Message
(as such term is defined in the next sentence) and any other documents required
by the Letter of Transmittal on or prior to the Expiration Date or pursuant to
the guaranteed delivery procedures described below. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility and received by
the Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgement
from a
20
<PAGE>
participant tendering Old Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes and
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 procedure 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 telegram, telex,
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 New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates of all physically tendered Old Notes,
in proper form for 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 Institution with the Exchange Agent, and (iii) the certificates
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 NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." 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 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 procedure for book-entry transfer described
above, any note 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
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 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
"Procedures for Tendering Old Notes" above at any time on or prior to the
Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
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, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, there shall be threatened, instituted or pending any
action or
21
<PAGE>
proceeding before, or any injunction, order or decree shall have been issued by,
any court or governmental agency or other governmental regulatory or
administrative agency or commission (i) seeking to restrain or prohibit the
making or consummation of the Exchange Offer or any other transaction
contemplated by the Exchange Offer, or assessing or seeking any damages as a
result thereof, or (ii) resulting in a material delay in the ability of the
Company to accept for exchange or exchange some or all of the Old Notes pursuant
to the Exchange Offer; or any statute, rule, regulation, order or injunction
shall be sought, proposed, introduced, enacted, promulgated or deemed applicable
to the Exchange Offer or any of the transactions contemplated by the Exchange
Offer by any government or governmental authority, domestic or foreign, or any
action shall have been taken, proposed or threatened, by any government,
governmental authority, agency or court, domestic or foreign, that in the sole
judgment of the Company might directly or indirectly result in any of the
consequences referred to in clause (i) or (ii) above or, in the sole judgment of
the Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which exceed those described
herein, or would otherwise make it inadvisable to proceed with the Exchange
Offer.
If the Company determines in good faith that any of the conditions are not
met, the Company may (i) refuse to accept any Old Notes and return all tendered
Old Notes to exchanging Holders, (ii) extend the Exchange Offer and retain all
Old Notes tendered prior to the expiration of the Exchange Offer, subject,
however, to the rights of Holders to withdraw such Old Notes (see "-- Withdrawal
Rights") or (iii) waive certain of such unsatisfied conditions with respect to
the Exchange Offer and accept all properly tendered Old Notes which have not
been withdrawn or revoked. If such waiver constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
Prospectus supplement that will be distributed to all Holders.
Holders have certain rights and remedies against the Company under the
Registration Rights Agreement, including liquidated damages of up to $.30 per
week per $1,000 principal amount of Old Notes, should the Company fail to
consummate the Exchange Offer within a certain period of time, notwithstanding a
failure due to the occurrence of any of the conditions stated above. Such
conditions are not intended to modify those rights or remedies in any respect.
The foregoing conditions are for the benefit of the Company and may be
asserted by the Company in good faith regardless of the circumstances giving
rise to such condition or may be waived by the Company in whole or in part at
any time and from time to time in its discretion. The failure by the Company at
any time to exercise the foregoing rights shall not be deemed a wavier of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
EXCHANGE AGENT
U.S. Trust Company of California, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional 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:
U.S. Trust Company of California, N.A.
515 South Flower Street
Suite 2700
Los Angeles, CA 90071
Attention: Dwight Liu
BY FACSIMILE: (213) 488-1258
Attention: Dwight Liu
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
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<PAGE>
FEES AND EXPENSES; SOLICITATION OF TENDERS
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be $305,000 which
includes fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees.
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 a transfer tax is imposed for any reason other than the 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 to the Exchange Agent, the
amount of such transfer taxes will be billed directly to such tendering Holder.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) Holders in any jurisdiction in which the making
of the Exchange Offer or the acceptance thereof would not be in compliance with
the laws of such jurisdiction.
ACCOUNTING TREATMENT
The New Notes will be recorded by the Company at the same carrying value as
the Old Notes, which is face value, 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. The costs of the Exchange Offer will be expensed
over the term of the New Notes.
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. 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
intend to register the Old Notes under the Securities Act. The Company believes
that, based upon interpretations contained in no action letters issued to third
parties by the staff of the Commission, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company 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 have no arrangement with any
person to participate in the distribution of such New Notes, and provided,
further, that each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." If any
Holder (other than a broker-dealer
23
<PAGE>
described in the preceding sentence) has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such Holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. In addition, 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 jurisdiction or an
exemption from registration or qualification is available and is complied with.
See "Risk Factors -- Restrictions upon Transfer of and Limited Trading Market
for Old Notes"; and -- "Blue Sky Restrictions; Compliance with State Securities
Laws".
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<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996 and the capitalization of the Company at that date after giving
effect to the Exchange Offer. This table should be read in conjunction with
"Unaudited Pro Forma Condensed Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)
Long-term debt (a).................................................................. $ 100,000 $ 100,000
New credit facility................................................................. 5,421 5,421
------------ ------------
Total long-term debt.............................................................. 105,421 105,421
------------ ------------
Senior preferred stock................................................................ 13,702 13,702
Stockholders' equity (deficit)
Junior preferred stock.............................................................. 138,600 138,600
Warrants (b)........................................................................ 6,500 6,500
Common stock 10,000,000 shares, $.01 par value, authorized; 1,400,000 shares
outstanding........................................................................ 14 14
Additional paid in capital.......................................................... 1,386 1,386
Retained earnings (deficit)......................................................... (218,115) (218,115)
------------ ------------
Total stockholders' equity (deficit).............................................. (71,615) (71,615)
------------ ------------
Total capitalization............................................................ $ 47,508 $ 47,508
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) As of June 30, 1996, the Company had outstanding $100 million under the
Bridge Facility. As of July 2, 1996, the Bridge Facility was repaid in full
using the net proceeds from the sale of the Old Notes and cash on hand.
(b) Warrants to purchase 73,684 shares of Common Stock and 72,947 shares of
Junior Preferred Stock were issued in connection with the Recapitalization.
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited PRO FORMA condensed financial data (the "Pro Forma
Financial Data") have been prepared by the Company's management from the
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus. The unaudited PRO FORMA condensed statements of operations for
the fiscal year ended December 31, 1995, and the six months ended June 30, 1996
and 1995 reflect adjustments as if the Recapitalization and the sale of the Old
Notes had been consummated and were effective as of January 1, 1995. The
unaudited PRO FORMA condensed balance sheet as of June 30, 1996 gives effect to
the sale of the Old Notes as if it had occurred on such date.
The financial effects of the Recapitalization and sale of the Old Notes as
presented in the Pro Forma Financial Data are not necessarily indicative of
either the Company's financial position or the results of its operations which
would have been obtained had the Recapitalization and sale of the Old Notes
actually occurred on the dates described above, nor are they necessarily
indicative of the results of future operations. The Pro Forma Financial Data
should be read in conjunction with the notes thereto, which are an integral part
thereof, the financial statements of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
RECAPITALIZATION RECAPITALIZATION
AND SALE OF AND SALE OF
HISTORICAL OLD NOTES OLD NOTES
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................................................ $ 170,671 $ -- $ 170,671
Cost of sales, buying, and occupancy............................................. 123,415 -- 123,415
---------- -------- ----------------
Gross profit..................................................................... 47,256 -- 47,256
Operating expenses............................................................... 32,664 (1,375)(a) 31,289
Deferred compensation expense.................................................... 3,087 (3,087)(b) --
---------- -------- ----------------
Operating income................................................................. 11,505 4,462 15,967
Other (expenses) income:
Interest expense............................................................... (382) (11,176)(c) (11,558)
Interest income................................................................ 14 -- 14
Other.......................................................................... 65 -- 65
---------- -------- ----------------
(303) (11,176) (11,479)
---------- -------- ----------------
Income (loss) before provision for income taxes.................................. 11,202 (6,714) 4,488
Provision for income taxes....................................................... 345 1,592(e) 1,937
---------- -------- ----------------
Net income (loss)................................................................ 10,857 (8,306) 2,551
Preferred stock dividends........................................................ -- (14,034)(f) (14,034)
---------- -------- ----------------
Net income (loss) available for common stockholders.............................. $ 10,857 $ (22,340) $ (11,483)
---------- -------- ----------------
---------- -------- ----------------
PRO FORMA
Historical income before provision for income taxes.............................. $ 11,202
Pro forma provision for income taxes (g)......................................... (6,144)
----------
Pro forma net income............................................................. $ 5,058
----------
----------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
RECAPITALIZATION RECAPITALIZATION
AND SALE OF AND SALE OF
HISTORICAL OLD NOTES OLD NOTES
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................... $ 91,048 $-- $ 91,048
Cost of sales, buying, and occupancy........... 65,249 -- 65,249
---------- -------- --------
Gross profit................................... 25,799 -- 25,799
Operating expenses............................. 18,318 (432)(a) 17,886
Deferred compensation expense.................. 69,892 (69,892)(b) --
---------- -------- --------
Operating income............................... (62,411) 70,324 7,913
Other (expenses) income:
Interest expense............................. (6,046) 232(c) (5,814)
Transaction expenses......................... (6,176) 6,176(d) --
---------- -------- --------
(12,222) 6,408 (5,814)
---------- -------- --------
Income (loss) before provision for income
taxes......................................... (74,633) 76,732 2,099
Provision for income taxes..................... 131 772(e) 903
---------- -------- --------
Net income (loss).............................. (74,764) 75,960 1,196
Preferred stock dividends...................... (962) (6,071)(f) (7,033)
---------- -------- --------
Net income (loss) available for common
stockholders.................................. $(75,726) $ 69,889 $ (5,837)
---------- -------- --------
---------- -------- --------
PRO FORMA
Historical income (loss) before provision for
income taxes.................................. $(74,633)
Pro forma provision for income taxes (g)....... --
----------
Pro forma net income (loss).................... $(74,633)
----------
----------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
RECAPITALIZATION RECAPITALIZATION
AND SALE OF AND SALE OF
HISTORICAL OLD NOTES OLD NOTES
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................... $76,888 $-- $ 76,888
Cost of sales, buying, and occupancy........... 55,742 -- 55,742
---------- -------- --------
Gross profit................................... 21,146 -- 21,146
Operating expenses............................. 15,100 (688)(a) 14,412
Deferred compensation expense.................. 1,040 (1,040)(b) --
---------- -------- --------
Operating income............................... 5,006 1,728 6,734
Other (expenses) income:
Interest expense............................. (87) (5,675)(c) (5,762)
---------- -------- --------
(87) (5,675) (5,762)
---------- -------- --------
Income (loss) before provision for income
taxes......................................... 4,919 (3,947) 972
Provision for income taxes..................... 74 344(e) 418
---------- -------- --------
Net income (loss).............................. 4,845 (4,291) 554
Preferred stock dividends...................... -- (7,017)(f) (7,017)
---------- -------- --------
Net income (loss) available for common
stockholders.................................. $ 4,845 $(11,308) $ (6,463)
---------- -------- --------
---------- -------- --------
PRO FORMA
Historical income before provision for income
taxes......................................... $ 4,919
Pro forma provision for income taxes (g)....... (2,562)
----------
Pro forma net income........................... $ 2,357
----------
----------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Represents a reduction in (i) compensation expense historically paid to
Raymond Scherr, the former Chairman of the Board; and (ii) bonuses paid to
certain key executives based upon newly negotiated bonus plans as part of
the Recapitalization.
(b) Represents the elimination of deferred stock compensation expense associated
with the management stock options which have been partially redeemed and
partially exchanged for Junior Preferred Stock as part of the
Recapitalization.
(c) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED --------------------
DECEMBER 31 JUNE 30, JUNE 30,
1995 1995 1996
------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Historical interest expense............................. $ 382 $ 87 $ 6,046
Assumed interest expense on new credit facility for
working capital purposes............................... (183) (74) (126)
Cash interest expense on the Notes at an interest rate
of 11%................................................. (11,000) (5,500) (5,500)
------------- --------- ---------
Total cash interest expense adjustment.................. (10,801) (5,487) 420
Amortization of deferred financing fees
on the Notes........................................... (375) (188) (188)
------------- --------- ---------
Total interest expense adjustment....................... $ (11,176) $ (5,675) $ 232
------------- --------- ---------
------------- --------- ---------
</TABLE>
(d) Represents the elimination of non-recurring transaction expenses which are
directly attributable to the Recapitalization.
(e) Reflects the estimated statutory provision for income taxes assuming the
Company was a "C" corporation, and the increase in net expenses as a result
of the adjustments described in notes (a), (b), (c), and (d) above.
(f) Represents dividends to be paid on the Junior Preferred Stock and the Senior
Preferred Stock.
(g) The Company was an "S" Corporation prior to the consummation of the
Recapitalization on June 5, 1996. The pro forma statement of operations
information reflects adjustments to historical net income (loss) as if the
Company had elected "C" Corporation status for income tax purposes.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------------
ADJUSTMENTS
RELATED TO THE PRO FORMA
SALE OF FOR THE SALE OF
ACTUAL OLD NOTES OLD NOTES
--------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 6,494 $ (3,585)(a) $ 2,909
Accounts receivable........................................... 3,089 -- 3,089
Inventories................................................... 39,595 -- 39,595
Prepaid expenses and other current assets..................... 1,219 -- 1,219
--------- ---------------- ----------------
Total current assets........................................ 50,397 (3,585) 46,812
Property and equipment, net..................................... 14,038 -- 14,038
Other assets.................................................... 931 3,585(a) 4,516
--------- ---------------- ----------------
Total assets.............................................. $ 65,366 $ -- $ 65,366
--------- ---------------- ----------------
--------- ---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 9,130 $ -- $ 9,130
Accrued expenses and other current liabilities................ 8,248 -- 8,248
Revolving line of credit...................................... 5,421 -- 5,421
--------- ---------------- ----------------
Total current liabilities................................... 22,799 -- 22,799
Long term debt.................................................. 100,000 -- 100,000
Long term liabilities........................................... 480 -- 480
--------- ---------------- ----------------
Total liabilities........................................... 123,279 -- 123,279
--------- ---------------- ----------------
Senior preferred stock.......................................... 13,702 -- 13,702
Stockholders' equity (deficit):
Junior preferred stock........................................ 138,600 -- 138,600
Warrants...................................................... 6,500 -- 6,500
Common stock.................................................. 14 -- 14
Additional paid in capital.................................... 1,386 -- 1,386
Retained deficit.............................................. (218,115) -- (218,115)
--------- ---------------- ----------------
Total stockholders' equity (deficit)........................ (71,615) -- (71,615)
--------- ---------------- ----------------
Total liabilities and stockholders' equity (deficit)...... $ 65,366 $ -- $ 65,366
--------- ---------------- ----------------
--------- ---------------- ----------------
</TABLE>
- ------------------------
(a) Represents fees paid on July 2, 1996, for certain financing costs related to
the sale of the Notes and the resultant net increase in other assets.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data set forth below have been derived from the
financial statements of the Company and the related notes thereto. The income
statement data for the years ended December 31, 1993, 1994 and 1995, and the
balance sheet data at December 31, 1994 and 1995 are derived from the financial
statements of the Company, which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this Prospectus. The income
statement data for the six months ended June 30, 1995 and for the six months
ended June 30, 1996 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The income statement data for each of the years
in the two-year period ended October 31, 1992 and the balance sheet data at
October 31 of each of such years are derived from the financial statements of
the Company, which have been audited by Coopers & Lybrand, LLP and are not
included herein. The income statement data for the two-month period ended
December 31, 1992 and the balance sheet data at December 31, 1992 and 1993 are
derived from the financial statements of the Company which have been audited by
Ernst & Young LLP and which are also not included herein. The selected PRO FORMA
income statement data set forth below is for informational purposes only and may
not necessarily be indicative of the results of operations of the Company as
they may be in the future. The following selected financial data should be read
in conjunction with the Company's financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere in this Prospectus.
31
<PAGE>
<TABLE>
<CAPTION>
TWO
YEAR ENDED MONTHS YEAR ENDED SIX MONTHS
OCTOBER 31, ENDED DECEMBER 31, ENDED JUNE 30,
-------------------- DECEMBER 31, ------------------------------- --------------------
1991 1992 1992 1993 1994 1995 1995 1996
--------- --------- --------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $ 74,872 $ 85,592 $ 18,726 $ 97,305 $ 129,039 $ 170,671 $ 76,888 $ 91,048
Cost of sales (a).............. 52,808 60,120 13,333 68,527 92,275 123,415 55,742 65,249
--------- --------- --------------- --------- --------- --------- --------- ---------
Gross profit................. 22,064 25,472 5,393 28,778 36,764 47,256 21,146 25,799
Selling, general and
administration expenses....... 18,896 20,998 3,547 21,889 26,143 32,664 15,100 18,318
Deferred compensation expense
(b)........................... (230) -- 373 1,390 1,259 3,087 1,040 69,892
--------- --------- --------------- --------- --------- --------- --------- ---------
Operating income (loss)........ 3,398 4,474 1,473 5,499 9,362 11,505 5,006 (62,411)
--------- --------- --------------- --------- --------- --------- --------- ---------
Other (expense) income
Interest expense, net........ (702) (457) (49) (271) (252) (368) (87) (6,046)
Transaction expense and
other....................... 59 59 -- 23 45 65 -- (6,176)
--------- --------- --------------- --------- --------- --------- --------- ---------
(643) (398) (49) (248) (207) (303) (87) (12,222)
--------- --------- --------------- --------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes.............. 2,755 4,076 1,424 5,251 9,155 11,202 4,919 (74,633)
Provision for income taxes..... 53 89 39 146 326 345 74 131
--------- --------- --------------- --------- --------- --------- --------- ---------
Net income (loss).............. $ 2,702 $ 3,987 $ 1,385 $ 5,105 $ 8,829 $ 10,857 $ 4,845 $ (74,764)
--------- --------- --------------- --------- --------- --------- --------- ---------
--------- --------- --------------- --------- --------- --------- --------- ---------
PRO FORMA FOR INCOME TAX
PROVISION (C):
Historical income (loss) before
provision for income taxes.... $ 2,755 $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ 4,919 $ (74,633)
Pro forma provision for income
taxes......................... 1,086 1,753 773 2,856 4,478 6,144 2,562 --
--------- --------- --------------- --------- --------- --------- --------- ---------
Pro forma net income (loss).... $ 1,669 $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ 2,357 $ (74,633)
--------- --------- --------------- --------- --------- --------- --------- ---------
--------- --------- --------------- --------- --------- --------- --------- ---------
OPERATING DATA:
Net sales per gross square
foot (d).................... $ 366 $ 407 -- $ 454 $ 518 $ 646 $ 292 $ 320
Net sales growth............. 6.0% 14.3% 18.7% 13.7% 32.6% 32.3% 40.0% 18.4%
Increase in comparable store
sales (e)................... 5.9% 11.5% 18.7% 11.4% 17.3% 23.4% 27.4% 11.8%
Stores open at end of
period...................... 15 15 15 17 20 21 20 24
Inventory turns.............. 3.1x 3.3x 3.4x 3.4x 3.4x 3.7x 3.6x 3.7x
Ratio of earnings to fixed
charges (f)................. 3.7x 5.8x 13.8x 9.1x 11.6x 11.7x 13.7x --
Capital expenditures......... $ 1,192 $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 888 $ 3,523
BALANCE SHEET DATA:
Net working capital.......... $ 10,188 $ 11,923 $ 12,679 $ 10,243 $ 11,468 $ 6,002 $ 6,650 $ 27,598
Property, plant and
equipment, net.............. 8,558 7,888 8,677 10,066 11,642 13,276 11,659 14,038
Total assets................. 28,535 32,082 34,978 37,602 46,900 49,719 45,775 65,366
Total long term and revolving
debt (including current
debt)....................... 8,411 6,103 5,001 3,400 825 -- 8,528 105,421
Senior preferred stock....... -- -- -- -- -- -- -- 13,702
Stockholders' equity
(deficit)................... 12,625 16,612 17,997 18,464 23,424 19,764 18,687 (71,615)
</TABLE>
- ------------------------------
(a) Cost of sales includes buying and occupancy costs.
(b) For the six months ended June 30, 1996, the Company recorded deferred
compensation expense of $69.9 million related to the cancellation and
exchange of management stock options pursuant to the Recapitalization.
After the Recapitalization, these expenses will be non-recurring as the
deferred compensation plan was terminated.
(c) Pro forma provision for income taxes reflects the estimated statutory
provision for income taxes assuming the Company was a "C" corporation.
(d) Net sales per gross square foot does not include new stores opened during
the reporting period. Information for the two month period ended December
31, 1992 is not meaningful.
(e) Compares net sales for the comparable periods.
(f) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one third of lease expense, which management believes
is representative of the interest components of lease expense. Earnings
were insufficient to cover fixed charges by $74.6 million for the six
months ended June 30, 1996.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Guitar Center is the nation's leading retailer of guitars, amplifiers,
percussion instruments, keyboards and pro audio and recording equipment with 28
stores operating in 14 major markets. From 1993 to 1995, Guitar Center's net
sales have grown at a compound annual growth rate of 32.4%, principally due to
comparable store sales growth averaging 17.3% per year and the opening of six
new stores. Guitar Center achieved comparable store net sales growth of 11.4%,
17.3%, 23.4% and 11.8% for the fiscal years ended December 31, 1993, 1994, 1995
and the six months ended June 30, 1996, respectively. These increases were
primarily attributable to increases in unit sales rather than increases in
prices or changes in products mix. Management believes such volume increases are
the result of the continued success of the Company's implementation of its
business strategy, continued strong growth in the music products industry and
increasing consumer awareness of the Guitar Center name.
The Company opened 7 stores in fiscal 1996 and expects to open 8 stores in
each of fiscal 1997 and 1998. In preparation for these additional stores,
management has dedicated a substantial amount of resources over the past several
years to building the infrastructure necessary to support a large, national
chain. For example, the Company has spent $2.9 million during the past three
years on system upgrades to support the storewide integration of a
state-of-the-art management information system. The Company has also established
centralized operating and financial controls and has implemented an extensive
training program to ensure a high level of customer service in its stores.
Management believes that the infrastructure is in place to support its needs for
the foreseeable future, including its expansion plans as described herein.
Guitar Center's expansion strategy includes opening additional stores in
certain of its existing markets and entering new markets. As part of its store
expansion strategy, the Company opened five stores during a 14-month period from
October 1993 through November 1994. Additionally, the Company opened one store
in December 1995 and seven stores in fiscal 1996. The Company will continue to
pursue its strategy of clustering stores in major markets to take advantage of
operating and advertising efficiencies and to build awareness of the Guitar
Center name in new markets. In markets where the Company has pursued its
clustering strategy, mature stores have typically demonstrated net sales growth
rates consistent with the Company average. As the Company enters new markets,
management expects that it will initially incur higher administrative and
advertising costs per store than it currently experiences in established
markets.
The following table sets forth certain historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 29.6 28.5 27.7 27.5 28.3
Selling, general and adminstrative expenses.... 22.5 20.3 19.2 19.6 20.1
----------- ----------- ----------- ----------- -----------
Operating income before deferred compensation
expense....................................... 7.1 8.2 8.5 7.9 8.2
Deferred compensation expense.................. 1.4 0.9 1.8 1.4 76.8
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ 5.7 7.3 6.7 6.5 (68.6)
Interest expense, net.......................... 0.3 0.2 0.1 0.1 6.6
Transaction expenses -- -- -- -- 6.8
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.............. 5.4 7.1 6.6 6.4 (82.0)
Income taxes................................... 0.2 0.3 0.2 0.1 0.1
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. 5.2% 6.8% 6.4% 6.3% (82.1)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
33
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales for the six months ended June 30, 1996 increased 18.4% to $91.0
million from $76.9 million for the six months ended June 30, 1995. This growth
was attributable to an increase of 11.8% in comparable store net sales which
contributed $9.0 million, or 63.8% of the increase. In addition, $5.1 million
was contributed from new store net sales which accounted for 36.2% of the
increase. The increase in comparable store net sales was primarily attributable
to increases in unit sales rather than increases in prices or changes in the mix
of sales between product categories. Such volume increases were primarily the
result of the continued success of the Company's implementation of its business
strategy, continued strong growth in the music products industry and increasing
consumer awareness of Guitar Center stores.
Gross profit for the six months ended June 30, 1996 increased 22.0% to $25.8
million from $21.1 million for the six months ended June 30, 1995. Gross profit
as a percentage of net sales ("gross margin") for the six months ended June 30,
1996 increased to 28.3% from 27.5% in the six months ended June 30, 1995. This
increase in Gross Margin was primarily the result of the introduction and sales
of higher margin high-technology pro audio and recording equipment.
Selling, general and administrative expenses for the six months ended June
30, 1996 increased 21.3% to $18.3 million from $15.1 million for the six months
ended June 30, 1995. As a percentage of net sales, selling, general and
administrative expenses for the six months ended June 30, 1996 increased to
20.1% from 19.6% for the six months ended June 30, 1995. This change reflects an
increase in the number of store employees in anticipation of the continued
strong comparable store sales growth, as well as the incremental cost of
staffing newly opened stores prior to sales fully ramping up. In addition,
increases reflect increases in corporate personnel and management information
systems expenses associated with the Company's planned expansion. Additionally,
the six months ended June 30, 1996 reflect the commencement of operations of
three new stores which were open an average of two months and for which the
selling, general and administrative expenses were higher as a percentage of net
sales.
Deferred compensation expense for the six months ended June 30, 1996
increased to $69.9 million from $1.0 million for the six months ended June 30,
1995. The deferred compensation expense resulted from the purchase and exchange
of management stock options and the cancellation of the Company's prior stock
option program. After the Recapitalization, these expenses will be non-recurring
as the deferred compensation plan was terminated.
The operating loss for the six months ended June 30, 1996 was $62.4 million
compared to operating income of $5.0 million for the six months ended June 30,
1995. Operating income before deferred compensation increased 23.7% to $7.5
million from $6.0 million over the comparable period. As a percentage of net
sales, operating income before deferred compensation for the six months ended
June 30, 1996 increased to 8.2% from 7.9% in the six months ended June 30, 1995.
This increase was primarily attributable to the increase in Gross Margin,
partially offset by an increase in selling, general and administrative expenses.
Interest expense, net for the six months ended June 30, 1996 increased to
$6.0 million from $0.1 million for the six months ended June 30, 1995. This
increase was primarily attributable to the write-off of financing fees of $4.7
million and interest expense of $0.9 million on the Bridge Facility.
Non-recurring transaction costs of $6.2 million related to the
Recapitalization were expensed in the six months ended June 30, 1996.
Net income (loss) for the six months ended June 30, 1996 decreased to
($74.8) million from $4.8 million for the six months ended June 30, 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for fiscal 1995 increased 32.3% to $170.7 million from $129.0
million in fiscal 1994. This growth was attributable to an increase of 23.4% in
comparable store net sales which contributed $28.4 million, or 68.1% of the
increase. In addition, $13.3 million was contributed from new store sales
34
<PAGE>
which accounted for 31.9% of the increase. The increase in comparable store net
sales was primarily attributable to increases in unit sales rather than
increases in prices or changes in the mix of products sold. Such volume
increases were primarily the result of the continued implementation of the
Company's business strategy, continued strong growth in the music products
industry and increasing consumer awareness of Guitar Center stores.
Gross profit for fiscal 1995 increased 28.5% to $47.3 million from $36.8
million in fiscal 1994. Gross margin for fiscal 1995 decreased to 27.7% from
28.5% in fiscal 1994. This decrease in gross margin was primarily the result of
(i) an increase in the proportion of total net sales attributable to lower
margin pro-audio and recording equipment and (ii) the continuation of a sales
program which emphasized volume increases, customer service and market share
over gross margin.
Selling, general and administrative expenses for fiscal 1995 increased 24.9%
to $32.7 million from $26.1 million in fiscal 1994. As a percentage of net
sales, selling, general and administrative expenses for fiscal 1995 decreased to
19.2% from 20.3% in fiscal 1994 reflecting the leveraging of fixed expenses over
greater store net sales.
Deferred compensation expense for fiscal 1995 increased 145.2% to $3.1
million from $1.3 million in fiscal 1994. Deferred compensation relates to
non-cash expenses associated with the Company's prior stock option program.
Operating income after deferred compensation for fiscal 1995 increased 22.9%
to $11.5 million from $9.4 million for fiscal 1994. Operating income before
deferred compensation increased 37.4% to $14.6 million from $10.6 million over
the comparable period. As a percentage of net sales, operating income before
deferred compensation for fiscal 1995 increased to 8.5% from 8.2% for fiscal
1994. This increase was primarily attributable to the decrease in selling,
general and administrative expenses as a percentage of net sales, offset by the
decrease in gross margin.
Interest expense, net for fiscal 1995 increased 46.0% to $0.4 million from
$0.3 million for fiscal 1994. This increase was attributable to increased
borrowings to fund distributions to the Company's former sole stockholder.
Net income for fiscal 1995 increased 23.0% to $10.9 from $8.8 million for
fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales for fiscal 1994 increased 32.6% to $129.0 million from $97.3
million in fiscal 1993. This growth was attributable to an increase of 17.3% in
comparable store sales which contributed $15.9 million, or 50.0% of the
increase. In addition, $15.9 million was contributed from new store sales which
accounted for 50.0% of the increase. The increase in comparable store sales was
primarily attributable to increases in unit sales rather than increases in
prices or the mix of products sold. Such volume increases were primarily the
result of the implementation of the Company's business strategy, continued
strong growth in the music products industry and increasing consumer awareness
of Guitar Center stores.
Gross profit for fiscal 1994 increased 27.7% to $36.8 million from $28.8
million in fiscal 1993. Gross margin for fiscal 1994 decreased to 28.5% from
29.6% in fiscal 1993. This decrease in gross margin was primarily the result of
(i) an increase in the percentage of total net sales attributable to lower
margin pro-audio and recording equipment and (ii) the implementation of a sales
program which emphasized volume increases, customer service and market share
over gross margin.
Selling, general and administrative expenses for fiscal 1994 increased 19.4%
to $26.1 million from $21.9 million in fiscal 1993. As a percentage of net
sales, selling, general and administrative expenses for fiscal 1994 decreased to
20.3% from 22.5% in fiscal 1993, reflecting the leveraging of fixed expenses
over greater store net sales.
Deferred compensation expense for fiscal 1994 decreased 9.4% to $1.3 million
from $1.4 million in fiscal 1993. Deferred compensation relates to non-cash
expenses associated with the Company's prior stock option program.
35
<PAGE>
Operating income after deferred compensation for fiscal 1994 increased 70.2%
to $9.4 million from $5.5 million for fiscal 1993. Operating income before
deferred compensation increased 54.2% to $10.6 million from $6.9 million over
the comparable period. As a percentage of net sales, operating income before
deferred compensation for fiscal 1994 increased to 8.2% from 7.1% for fiscal
1993. This increase was primarily attributable to the decrease in selling,
general and administrative expenses as a percentage of net sales, offset by the
decrease in gross margin.
Interest expense, net for fiscal 1994 remained unchanged at $0.3 million
from fiscal 1993.
Net income for fiscal 1994 increased 72.9% to $8.8 million from $5.1 million
for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Guitar Center's need for liquidity will arise primarily from interest
payable on the indebtedness incurred in connection with the Recapitalization and
the funding of the Company's capital expenditure and working capital
requirements. The Company has no mandatory payments of principal on the Notes
scheduled prior to their final maturity and has no mandatory payments of
principal scheduled under the New Credit Facility for five years. The Company
has historically financed its operations through internally generated funds and
borrowings under its credit facilities.
As of October 4, 1996, under the New Credit Facility, which expires June 1,
2001, the Company had $9.9 million outstanding and approximately $9 million
available for additional borrowings. The interest rate as of such date was
9.75%. See "The New Credit Facility."
For the six months ended June 30, 1996, cash used in operating activities
was $46.5 million. During fiscal 1995, cash provided by operating activities
increased to $16.5 million from $13.6 million in fiscal 1994. The increase in
1995 from 1994 was primarily due to higher net income and more efficient use of
working capital. Cash provided by financing activities was $54.8 million for the
six months ended June 30, 1996, which includes the effects of the
Recapitalization. Cash used in financing activities during fiscal 1995 and 1994
was $15.3 million and $6.4 million, respectively, which consisted primarily of
distributions to the Company's sole stockholder of $14.5 million and $3.9
million for fiscal 1995 and 1994, respectively.
Capital expenditures for fiscal 1995 and 1994 were $3.4 million and $3.3
million, respectively, and included expenditures for store remodeling, computer
hardware and software upgrades as well as leasehold improvements and equipment
for the Company's store expansion. Capital expenditures related to the opening
of new stores and remodels in fiscal 1995 and 1994 were $1.5 million and $1.8
million, respectively. Capital expenditures for the first six months of 1996
were $3.5 million and are expected to aggregate approximately $6.9 million for
all of fiscal 1996 and will be primarily used to fund the opening of additional
stores and management information systems.
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. The Company, which currently
operates 28 stores, has opened seven stores in fiscal 1996 and expects to open
approximately eight stores in each of fiscal 1997 and 1998. Each new store
typically has required approximately $1.5 million for gross inventory, of which
approximately $1.2 million is financed with trade credit for approximately 90
days. Historically, the Company's cost of capital improvements for an average
new store has been approximately $450,000, consisting of leasehold improvements,
fixtures and equipment. Pre-opening costs for new stores have averaged
approximately $50,000 per new store, the majority of which are expensed and the
remaining portion of which are capitalized and amortized over a twelve month
period. Nominal pre-opening costs are incurred for the stores that are
relocated.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the foreseeable future,
including its plans for expansion as described elsewhere herein. The Company's
capital resources and liquidity are expected to be provided by the Company's
cash flow from operations and borrowings under the New Credit Facility.
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The Company operated as an "S" corporation for all reported periods prior to
the Recapitalization. Accordingly, federal taxes were paid at the stockholder
level and the Company paid minimal state income taxes. Upon consummation of the
Recapitalization, the Company eliminated its "S" corporation status and,
accordingly, became subject to federal, state and local income taxes. The
Company anticipates that the impact of the termination of the "S" corporation
and the election of the "C" corporation status on its future operations will be
that additional federal and state income taxes will have to be provided and
charged to the statement of operations. The Company believes, however, that the
cash impact to the Company will be reduced as the Company will no longer make
distributions to its former sole stockholder. See "Unaudited Pro Forma Condensed
Financial Data."
SEASONALITY
The Company's results are not highly seasonal, although, as with most
retailers, sales in the last quarter are typically higher than in other
quarters.
NEW ACCOUNTING POLICIES
Effective January 1, 1996 the Company elected to change certain accounting
policies. The changes include the capitalization of certain pre-opening costs,
MIS development costs, and lease negotiation costs. Such amounts will be
amortized over twelve months for the pre-opening costs, three years for the MIS
development costs and over the life of the lease for lease negotiation costs.
The Company believes these policy changes will more accurately match costs with
their related revenues.
The amounts capitalized during the six months ended June 30, 1996 were not
material to the financial statements. The effect on all prior periods presented
is not material.
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," issued in March 1995 and effective for fiscal years beginning after
December 15, 1995, establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable intangibles
and goodwill. The adoption of SFAS 121 did not have a material impact on the
Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain PRO
FORMA disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company will adopt the provisions for PRO FORMA
disclosure requirements of SFAS 123 in fiscal 1996. The implementation of
Financial Accounting Standards No. 123 did not have a material impact on the
Company's 1996 Financial Statements.
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BUSINESS
COMPANY HISTORY
Guitar Center was founded in 1964 in Hollywood, California. In 1972, the
Company opened its second store in San Francisco to capitalize on the emerging
San Francisco rock 'n roll scene. By this time, Guitar Center's inventory had
been expanded to include drums, keyboards, accessories and pro audio and
recording equipment. Throughout the 1980s, Guitar Center expanded by opening
nine stores in five major markets including Chicago, Dallas and Minneapolis.
Since 1990, the Company has continued its new store expansion and has focused on
building the infrastructure necessary to manage the Company's strategically
planned growth. Current senior management has been with the Company for an
average of 18 years and effectively assumed full operating control in 1987.
Since then, management has focused on developing and realizing its long-term
goal of expanding its position as the leading music product retailer throughout
the United States.
Guitar Center's flagship Hollywood store currently is one of the nation's
largest retail stores of its kind with 33,000 square feet of retail space. The
Hollywood store features one of the largest used and vintage guitar collections
in the United States, attracting buyers and collectors from around the world. In
front of the Hollywood store is the Rock Walk which memorializes over 70 famous
musicians. The Rock Walk attracts several tour buses daily and has helped to
create international recognition of the Guitar Center name.
BUSINESS
Guitar Center is the nation's leading retailer of guitars, amplifiers,
percussion instruments, keyboards and pro audio and recording equipment with 28
stores operating in 14 major markets. Over the past five fiscal years, the
Company's net sales and operating income have grown at compound annual growth
rates of 21.9% and 34.0%, respectively. This growth was principally the result
of strong and consistent comparable store sales growth, averaging 13.9% per year
over the past five fiscal years, and the opening of seven new stores. Same store
sales (stores opened for a full year) for fiscal years 1993, 1994, 1995 and the
six months ended June 30, 1996 were $95.4 million, $113.2 million, $157.5
million and $85.9 million, respectively.
Guitar Center offers a unique retail concept in the music products industry,
combining an interactive, hands-on shopping experience with superior customer
service and a broad selection of brand name, high-quality products at guaranteed
low prices. The Company creates an entertaining and exciting atmosphere in its
stores with bold and dramatic merchandise presentations, highlighted by bright,
multi-colored lighting, high ceilings, music and videos. Management believes
approximately 80% of the Company's sales are to professional and aspiring
musicians who generally view the purchase of music products as a career
necessity. These sophisticated customers rely upon the Company's knowledgeable
and highly trained salespeople to answer technical questions and to assist in
product demonstrations.
The Guitar Center prototype store generally ranges in size from 12,000 to
15,000 square feet (as compared to a typical music products retail store which
averages 3,230 square feet) and is designed to encourage customers to hold and
play instruments. Each store carries an average of 7,000 core SKUs, which
management believes is significantly greater than a typical music products
retail store, and is organized into five departments, each focused on one
product category. These departments cater to a musician's specific product needs
and are staffed by specialized salespeople, many of whom are practicing
musicians. Management believes this retail concept differentiates the Company
from its competitors and encourages repeat business.
Guitar Center stores historically have generated strong and stable operating
results. All of the Company's stores are profitable and have generated positive
comparable store sales growth in each of the past four fiscal years.
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The following summarizes certain key operating statistics of a Guitar Center
store:
<TABLE>
<S> <C>
Average 1995 net sales per square foot......................... $ 646
Average 1995 net sales per store (1)........................... 8,513,000
Average 1995 store-level operating income (1).................. 1,239,000
Average 1995 store-level operating income margin............... 14.6%
</TABLE>
- ------------------------------
(1) Excludes results of the Company's Brea, California store opened in December
1995.
Guitar Center stores have typically generated positive operating income
within the first three months of opening. In addition, based on new store
openings since fiscal 1993, Guitar Center stores have demonstrated high
store-level operating income and store-level operating income margins averaging
approximately $0.6 million and 11.2%, respectively, and sales per square foot
averaging $465, during the first full twelve months of operations.
Management is highly committed to the success of Guitar Center. The
Company's growth strategy is to continue to increase its presence in its
existing markets and to open new stores in strategically selected markets. The
Company will continue to pursue its strategy of clustering stores in major
markets to take advantage of operating and advertising efficiencies and to build
awareness of the Guitar Center name in new markets. The Company has opened a
total of seven stores in fiscal 1996, and expects to open approximately eight
stores in each of fiscal 1997 and fiscal 1998. The Company has committed
substantial resources to building a corporate infrastructure and management
information systems that it believes can support the Company's needs, including
its expansion plans, for the foreseeable future. Guitar Center believes it is
well-positioned to continue to implement its expansion strategy.
For fiscal years ended December 31, 1993, 1994, 1995 and for the six months
ended June 30, 1996, the Company had net income (loss) of $5.1 million, $8.8
million, $10.9 million and ($74.8) million, respectively. The results for the
six months ended June 30, 1996 reflect a recorded deferred compensation expense
of $69.9 million and $10.9 million for transaction costs and financing fees
incurred in connection with the Recapitalization. These expenses are
non-recurring following the Recapitalization.
INDUSTRY OVERVIEW
The United States retail market for music products in 1995 was estimated in
a study by MUSIC USA magazine to be approximately $5.5 billion in net sales,
representing a five year compound annual growth rate of 7.9%. The broadly
defined music products market, according to the National Association of Music
Merchants ("NAMM"), includes retail sales of string and fretted instruments,
sound reinforcement and recording equipment, drums, keyboards, print music,
pianos, organs and school band and orchestral instruments. The music products
market as currently defined by NAMM, however, does not include the significant
used and vintage product markets, or the computer software or apparel market in
which the Company actively participates. According to findings by a Gallup
Survey, as reported by NAMM, there were 62 million amateur musicians in the
United States in 1994, with 62% of households characterized as "player
households," in which someone plays or has played a musical instrument. The
industry is highly fragmented and, according to the MUSIC TRADE study, the
nation's leading five music products retailers (the Company, Sam Ash Music Corp,
Brook Mays/C&S/H&H, Musicians Friend, Inc. and Washington Music Center)
accounted for approximately 7.9% of the industry's net sales in 1994.
Over the past ten years, technological advances in the industry have
resulted in dramatic changes to the nature of music-related products. It is
estimated that nearly 40% of the electronic products sold today were developed
within the last twenty years. Manufacturers have combined computers and micro-
processor technologies with musical equipment to create a new generation of
products capable of high grade sound processing and reproduction. Products
featuring this technology are available in a variety of forms and have broad
applications across most of the Company's music product categories. Most
importantly, rapid technological advances have resulted in the continued
introduction of higher quality products offered at lower prices. For example,
today an individual consumer can much more affordably
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create a home recording studio which interacts with personal computers and is
capable of producing high-quality digital recordings. Until recently, this type
of powerful sound processing capability was prohibitively expensive and was
typically purchased only by professional sound recording studios.
Management believes that an opportunity exists to capitalize on a large
untapped market for musical instruments that is continuously expanding due in
part to various technological advances. Management believes it has demonstrated
an ability to tap into this market by offering a depth and breadth of
merchandise previously unavailable from more traditional retailers and by
increasing consumer awareness with aggressive radio and mail campaigns and
guaranteed low prices.
BUSINESS STRATEGY
The Company's goal is to continue to expand its position as the leading
music products retailer throughout the United States. The principal elements of
the Company's business strategy are as follows:
EXTENSIVE SELECTION OF MERCHANDISE. Guitar Center offers an extensive
selection of brand name music products complemented by lesser known, hard to
find items and unique, vintage equipment. Guitar Center offers an average of
7,000 core SKUs per store, providing a breadth and depth of in-stock items
which management believes is not available from traditional music products
retailers.
HIGHLY INTERACTIVE, MUSICIAN-FRIENDLY STORE CONCEPT. The purchase of
musical instruments is a highly personal decision for musicians. Management
therefore believes that a large part of the Company's success is
attributable to its creative instrument presentations and colorful,
interactive displays which encourage the customer to hold and play
instruments as well as to participate in product demonstrations. Each store
also provides private sound-controlled rooms to enhance the customers'
listening experience while testing various instruments.
EXCEPTIONAL CUSTOMER SERVICE. Exceptional customer service is
fundamental to the Company's operating strategy. Accordingly, the Company
provides extensive training programs for its salespeople, who specialize in
one of the Company's five product categories. Many of the Company's
salespeople are also musicians. With the advances in technology and
continuous new product introductions in the music products industry,
customers increasingly rely on qualified salespeople to offer expert advice
and assist in product demonstrations. Management believes that its emphasis
on training and customer service distinguishes the Company within the
industry and is a critical part of Guitar Center's success.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the low price
leader in each of its markets. Guitar Center underscores its pricing
commitment by offering a 30-day low price guarantee. The Company is
generally among its vendors' largest customers and thereby benefits from
volume purchasing discounts and other terms not available to the typical
music products retailer. Although prices are usually determined on a
regional basis, store managers are trained and authorized to adjust prices
in response to local market conditions.
INNOVATIVE PROMOTIONAL AND MARKETING PROGRAMS. Guitar Center sponsors
innovative promotional and marketing events which include in-store
demonstrations, famous artist appearances and weekend themed sales events
designed to create significant store traffic and exposure. Management
believes these events help the Company to build a loyal customer base and to
encourage repeat business. Since its inception, the Company has compiled a
unique, proprietary database containing information on more than one million
customers. Guitar Center utilizes this database to advertise to select
target customers based on historical buying patterns. The Company believes
the typical music products retailer does not have the resources to support
large-scale promotional events or an extensive advertising program.
EXPANSION STRATEGY. Guitar Center's expansion strategy is to continue
to increase its market share in existing markets and to penetrate new
markets. The Company has opened a total of seven stores in fiscal 1996, and
expects to open approximately eight stores in each of fiscal 1997 and fiscal
1998. In preparation for these additional stores, management has dedicated a
substantial amount
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of its resources over the past several years to building the infrastructure
necessary to support a large national chain. In addition, the Company
believes it has developed a unique and highly effective methodology for
targeting prospective store sites which includes analyzing demographic and
psychographic characteristics of a potential store location.
MERCHANDISING
Guitar Center's merchandising concept differentiates the Company from most
of its competitors. The Company creates an entertaining and exciting atmosphere
in its stores with bold and dramatic merchandise presentations, highlighted by
bright, multi-colored lighting, high ceilings, music and videos. The Company
offers its merchandise at guaranteed low prices and utilizes aggressive
marketing and advertising to attract new customers and maintain existing
customer loyalty. The principal elements of the Company's merchandising
philosophy are as follows:
EXTENSIVE SELECTION OF MERCHANDISE. The Company seeks to maintain a broad
customer appeal by offering high-quality merchandise at multiple price points to
serve musicians ranging from the casual hobbyist to the serious professional
performer. Guitar Center offers five primary product categories: guitars,
amplifiers, percussion instruments, keyboards and pro audio and recording
equipment.
GUITARS. The Company believes that Guitar Center's
electric, acoustic and bass guitar selections are among the deepest and
broadest in the industry. Each store features for sale 300 to 500 guitars on
the "guitar wall" as well as for display many autographed instruments from
world-renowned musicians. Major manufacturers, including Fender, Gibson,
Taylor, Martin, Ovation and Ibanez, are well represented in popular models
and colors. The Company believes it has one of the largest selections of
custom guitars, one-of-a-kind and used/vintage guitars of any retailer.
Prices range from $175 for entry-level guitars to over $50,000 for special
vintage guitars. In addition, the Company has recently expanded its line of
string instruments to include banjos, mandolins and dobros, among others.
The Company also offers an extensive selection of guitar sound processing
units and products which allow the guitar to interface with a personal
computer. The introduction of such equipment has enabled the Company to
serve crossover demand from the traditional guitarist into new
computer-related sound products.
AMPLIFIERS. The Company offers an extensive selection of
electric and bass guitar amplifiers and in addition carries a broad
selection of boutique and vintage amplifiers with prices ranging from $50 to
$3,000. Guitar Center represents most manufacturers, including Marshall,
Fender, Crate, Ampeg and Roland.
PERCUSSION INSTRUMENTS. The Company believes that Guitar
Center is one of the largest retailers of percussion products in the United
States. The Company's offerings range from basic drum kits to free standing
African congos and bongos and other rhythmic and electronic percussion
products with prices ranging from $10 to $10,000. The Company also has a
large selection of vintage and used percussion instruments. Name brands
include Drum Workshop, Remo, Sabian, Pearl, Yamaha, Premier, Tama and
Zildjian. The Company carries an extensive selection of digital drum kits
and hand held digital drum units. The digital units produce a variety of
high quality life-like drum sounds and have broad appeal to musicians.
KEYBOARDS. Guitar Center carries a wide selection of
keyboard products and computer peripheral and software packages with prices
ranging from $150 to $5,000. The Company offers an extensive selection of
software for the professional, hobbyist, studio engineer and the post
production market enthusiast. The product line covers a broad range of
manufacturers including Roland, Korg, Emu and Ensoniq. The Company also
maintains a broad selection of computer related accessories, including sound
cards, sound libraries and composition, sequence and recording software.
PRO AUDIO AND RECORDING EQUIPMENT. Guitar Center's pro
audio and recording equipment division offers products ranging in price from
$100 to $25,000 for musicians at every level, from the casual hobbyist to
the professional recording engineer. Guitar Center's products
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range from recording tape to state-of-the-art digital recorders. The Company
believes it also carries one of the largest pro audio assortment of
professional stage audio equipment for small traveling bands, private clubs
and large touring professional bands. The Company's major brand name
manufacturers include JBL, Panasonic, Sony, Mackie, Tascam and Alesis.
BROAD USED MERCHANDISE SELECTION. Guitar Center offers an extensive
selection of used merchandise, the majority of which derives from instruments
traded in or sold to Guitar Center by customers. The Company believes that its
trade-in policy assists in attracting sales by providing musicians an
alternative form of payment and the convenience of selling an old instrument and
purchasing a new one at a single location. Used products are bought and priced
to sell by store managers who are well trained and knowledgeable in the used
musical instrument market.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the price leader in
each of the markets it serves. The Company is one of the leading retailers in
each of its product categories. As a result, the Company is typically among its
vendors' largest customers, thereby benefitting from volume purchasing discounts
not available to the average music products retailer. To maintain this strategy
of guaranteed low prices, the Company routinely monitors prices in each of its
markets to assure that its prices remain competitive. Although prices are
typically determined on a regional basis, store managers are trained and
authorized to adjust prices in response to local market conditions. The Company
underscores its low price guarantee by providing a cash refund of the price
difference if an identical item is advertised by a competitor at a lower price
within thirty days of the customer's purchase.
DIRECT MARKETING, ADVERTISING AND PROMOTION. The Company's advertising and
promotion strategy is designed to enhance the Guitar Center name and increase
consumer awareness and loyalty. The advertising and promotional campaigns are
developed around "events" designed to attract significant store traffic and
exposure. Guitar Center regularly plans large promotional events including the
Green Tag Sale in March, the Anniversary Sale in August, the Blues Fest in
October and the Guitar-a-thon in December. The Company believes that its special
events have a broad reach as many of them have occurred annually during the past
twenty years. These events are often coordinated with product demonstrations,
interactive displays, clinics and in-store artist appearances.
As Guitar Center enters new markets, it initiates an advertising program,
including mail and radio promotions and other special grand opening activities
designed to accelerate sales volume for each new store. Radio advertising plays
a significant part in the Company's store-opening campaign to generate
excitement and create customer awareness.
Guitar Center maintains a unique and proprietary database containing
information on over one million customers. The Company believes that this
database assists in generating repeat business by targeting customers based on
their purchasing history and by permitting Guitar Center to establish and
maintain personal relationships with its customers. The number of customers in
Guitar Center's database is more than five times the estimated worldwide
circulation of GUITAR PLAYER, one of the industry's most popular magazines.
CUSTOMER SERVICE
Exceptional customer service is fundamental to the Company's operating
strategy. With the rapid changes in technology and continuous new product
introductions, customers depend on salespeople to offer expert advice and to
assist with product demonstrations. Guitar Center believes that its well trained
and highly knowledgeable salesforce differentiates it from its competitors and
is critical to maintaining customer confidence and loyalty. The Company's
employees are typically musicians who are selected and trained to understand the
needs of their customers. Salespeople specialize in one of the Company's five
product categories and begin training on their first day of employment. Sales
and management training programs are implemented on an ongoing basis to maintain
and continually improve the level of customer service and sales support in the
stores. Based on examination results, an employee is given a rating which
determines his or her salary and level of responsibility. Guitar Center believes
that its employee testing program impresses upon its salespeople a sense of
professionalism and reduces employee turnover by providing salespeople with the
opportunity to increase their salary by
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advancing through the certification program. The Company believes that due to
its emphasis on training, it is able to attract and retain well-qualified,
highly motivated salespeople committed to providing superior customer service.
In addition, each salesperson in the keyboards and pro audio and recording
departments is certified by a technical advisory board after satisfactory
completion of an extensive training program.
The Company's customer base consists of (i) the professional or aspiring
musician who makes or hopes to make a living through music and (ii) the amateur
musician or hobbyist who views music as recreation. Management estimates that
professional and aspiring musicians, who view the purchase of musical products
as a career necessity, represent approximately 65% of the Company's customer
base, and account for approximately 80% of the Company's sales. These customers
make frequent visits to a store and develop relationships with the salesforce.
Guitar Center generates repeat business and is successful in utilizing its
unique and proprietary database to market selectively to these customers based
on past buying patterns. In addition, Guitar Center services touring
professionals, providing customized products for musical artists such as
Aerosmith, Stevie Wonder and Van Halen.
STORE OPERATIONS
To facilitate its strategy of accelerated but controlled growth, Guitar
Center has centralized many key aspects of its operations, including the
development of policies and procedures, accounting systems, training programs,
store layouts, purchasing and replenishment, advertising and pricing. Such
centralization effectively utilizes the experience and resources of the
Company's headquarters staff to establish a high level of consistency throughout
all of the Guitar Center stores.
The Company's store operations are led by its Chief Operating Officer and
five regional store managers with each regional manager responsible for
approximately 4 to 8 stores. Store management is comprised of a store manager, a
sales manager, an operations manager, two assistant store managers and five
department managers. Each store also has a warehouse manager and a sales staff
that ranges from 20 to 40 employees.
The Company ensures that store managers are well-trained and experienced
individuals who will maintain the Guitar Center store concept and philosophy.
Each manager completes an extensive training program which instills the values
of operating as a business owner, and only experienced store employees are
promoted to the position of store manager. This strategy has resulted in
developing a group of store managers with an average tenure of approximately
eight years. The Company seeks to encourage responsiveness and entrepreneurship
at each store by providing store managers with a relatively high degree of
autonomy relating to operations, personnel and merchandising. Managers play an
integral role in the selection and presentation of merchandise, as well as the
promotion of the Guitar Center reputation.
The Company views its employees as long-term members of the Guitar Center
team. The Company encourages employee development by providing the salesforce
with extensive training and the opportunity to increase both compensation and
responsibility level through increased product knowledge and performance. The
Company's aggressive growth strategy provides employees with the opportunity to
move into operations, sales and store management positions, which management
believes is not available at most other music retailers. As the Company opens
new stores, key in-store management positions are primarily filled by the
qualified and experienced employees from existing stores. By adopting a
"promotion from within" strategy, Guitar Center maintains a well trained, loyal,
and enthusiastic salesforce that is motivated by the Company's strong
opportunities for advancement. Both Larry Thomas and Marty Albertson, the
Company's Chief Executive Officer and Chief Operating Officer, respectively,
began their careers as salespeople at Guitar Center.
PURCHASING, DISTRIBUTION AND INVENTORY CONTROL
PURCHASING. Guitar Center believes it has excellent relationships with its
vendors and, as the industry's largest volume purchaser, is able to receive
priority shipping and access to its vendors' premium products on favorable
terms. The Company maintains a centralized buying group comprised
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of merchandise managers, buyers and planners. Merchandise managers and buyers
are responsible for the selection and development of product assortments and the
negotiation of prices and terms. The Company uses a proprietary merchandise
replenishment system which automatically analyzes and forecasts sales trends for
each SKU using various statistical models, supporting the buyers by predicting
each store's merchandise requirements. This has resulted in limited "out of
stock" positions.
DISTRIBUTION. Guitar Center products are typically shipped direct from the
manufacturer to individual stores, minimizing handling costs and reducing
freight expense. Management continues to evaluate the cost effectiveness of
operating a distribution center in comparison to a direct ship program and
believes it can implement its growth strategy without a central distribution
center.
INVENTORY CONTROL. Management has invested significant time and resources
in its inventory control systems and believes it has one of the most
sophisticated systems in the music products retail industry. Management believes
the vast majority of music product retailers do not use a computerized inventory
management system. Guitar Center performs cycle inventory counts daily, both to
measure shrinkage and to update the perpetual inventory on a store-by-store
basis. The perpetual inventory is monitored and updated daily with sales,
receipts and transfer information. The Company's shrinkage level is extremely
low, averaging 0.3% of net sales annually over the past three years. Management
attributes this relatively low shrinkage level to its highly sophisticated
system controls and strong corporate culture.
The Company believes that its emphasis on purchasing, distribution and
inventory control has contributed significantly to an increase in inventory
turns from 3.4x in 1993 to 3.7x in 1995.
SITE SELECTION
The Company believes it has developed a unique and, what historically has
been, a highly effective selection criteria to identify prospective store sites.
In evaluating the suitability of a particular location, the Company concentrates
on the demographics of its target customer within a thirty-mile radius as well
as traffic patterns and specific site characteristics such as visibility,
accessibility, traffic volume, shopping patterns and availability of adequate
parking. In addition, the Company utilizes psychographic data which includes
cultural and socioeconomic aspects of the target area such as the number of
theaters, nightclubs, recording studios, universities and white collar and blue
collar workers. Stores are typically located in free-standing locations to
maximize their outside exposure and signage. Due to the fact that the Company's
vendors drop ship merchandise directly to the stores, the Company's expansion
plans are dependent more on the characteristics of the individual store site
than any logistical constraints that would be imposed by a central distribution
facility. The Company is targeting major metropolitan cities with populations in
excess of one million people for new markets.
MANAGEMENT INFORMATION SYSTEMS
Guitar Center has invested significant resources in management information
systems that provide real-time information both by store and by SKU. The systems
have been designed to integrate all major aspects of the Company's business
including sales, gross margins, inventory levels, purchase order management,
automated replenishment and merchandise planning. Guitar Center's highly
sophisticated management information systems provide the Company with the
ability to monitor all critical aspects of store activity on a real-time basis.
Guitar Center's system capabilities include inter-store transactions, vendor
analysis, serial number tracking, inventory analysis and commission sales
reporting. Guitar Center believes that the systems it has developed will enable
the Company to continue to improve customer service and operational efficiency
and support the Company's needs for the foreseeable future.
COMPETITION
The retail market for musical instruments is highly fragmented with the
nation's leading five music products retailers (the Company, Sam Ash Music Corp,
Brook Mays/C&S/H&H, Musicians Friend, Inc. and Washington Music Center)
accounting for approximately 7.9% of the industry's net sales. The Company's
largest competitor, Sam Ash, operates ten stores in the New York City area, and
two more
44
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stores in the South Florida area. The Company currently has no stores in the New
York City area. The Company competes with many different types of retail stores,
primarily specialty retailers and music product catalogue retailers.
Guitar Center believes that the ability to compete successfully in its
markets is determined by several factors, including breadth and quality of
product selection, pricing, effective merchandise presentation, customer
service, store location and proprietary database marketing programs. Guitar
Center believes it is well positioned to compete on the basis of these factors.
EMPLOYEES
As of June 30, 1996, Guitar Center employed 922 people, of whom 424 were
hourly employees and 498 were salaried. To date, the Company has not experienced
any difficulty in recruiting qualified personnel to manage or staff its stores.
None of the Company's employees is covered by a collective bargaining agreement.
Management believes that the Company enjoys good employee relations.
PROPERTIES
Guitar Center leases all but five of its stores and intends to lease all new
locations. The terms of the store leases are generally for 10 years and
typically allow the Company to renew for two additional five year terms. Most of
the leases require the Company to pay property tax, utilities, common area
maintenance and insurance expenses. The Guitar Center corporate offices consist
of approximately 20,000 square feet. The lease for this space expires in 2001
and provides for a five-year renewal option. The Company believes its corporate
office space, which is located at 5155 Clareton Drive, Agoura Hills, California
91301, is adequate to meet its needs for the foreseeable future.
45
<PAGE>
STORE LOCATIONS
The table below sets forth certain information concerning Guitar Center
stores:
<TABLE>
<CAPTION>
YEAR GROSS SQUARE
STORE OPENED FEET LEASE/OWN
- ------------------------------------------------------------------ --------- ------------ -----------
<S> <C> <C> <C>
SOUTHERN CALIFORNIA
Hollywood....................................................... 1964 33,000 Own
San Diego....................................................... 1973 13,800 Own
Fountain Valley................................................. 1980 13,761 Lease
Sherman Oaks.................................................... 1982 10,860 Own
Covina.......................................................... 1985 14,700 Lease
Lawndale........................................................ 1985 15,376 Lease
San Bernardino.................................................. 1993 10,000 Lease
Brea............................................................ 1995 15,000 Lease
San Marcos...................................................... 1996 15,000 Lease
NORTHERN CALIFORNIA
San Francisco................................................... 1972 13,600 Lease
San Jose........................................................ 1978 10,600 Own
El Cerrito...................................................... 1983 22,000(1) Lease
Pleasant Hill................................................... 1996 11,065 Lease
ILLINOIS
South Chicago................................................... 1979 12,300 Lease
North Chicago................................................... 1981 10,975 Lease
Central Chicago................................................. 1988 9,600 Own
Villa Park...................................................... 1996 12,100 Lease
OHIO
Cleveland....................................................... (2) 15,835 Lease
TEXAS
Dallas.......................................................... 1989 13,399 Lease
Arlington....................................................... 1991 11,126 Lease
South Houston................................................... 1993 15,000 Lease
North Houston................................................... 1994 10,488 Lease
MASSACHUSETTS
Boston.......................................................... 1994 12,000 Lease
Danvers......................................................... 1996 13,953 Lease
MICHIGAN
Detroit......................................................... 1994 10,620 Lease
Southfield...................................................... 1996 12,900 Lease
MINNESOTA
Twin Cities..................................................... 1988 10,202 Lease
FLORIDA
North Miami area................................................ 1996 20,904 Lease
South Miami area................................................ 1996 15,169 Lease
</TABLE>
- ------------------------------
(1) Of the 22,000 square feet, 10,000 square feet consist of a basement and
warehouse space.
(2) To open in the first quarter of 1997.
SERVICE MARKS
The Company has registered the GUITAR CENTER and ROCK WALK service marks
with the United States Patent and Trademark office. The Company believes that
these service marks have become important components in its merchandising and
marketing strategy. The loss of the GUITAR CENTER service mark could have a
material adverse effect on the Company's business.
LEGAL PROCEEDINGS
Guitar Center is not a party to any legal proceedings other than various
claims and lawsuits arising in the normal course of its business which, in the
opinion of the Company's management, are not individually or collectively
material to its business.
46
<PAGE>
MANAGEMENT
The executive officers, directors and key personnel of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Larry Thomas........................... 46 President, Chief Executive Officer and Director
Marty Albertson........................ 43 Executive Vice President, Chief Operating
Officer and Director
Bruce Ross............................. 47 Vice President, Chief Financial Officer and
Secretary
Barry Soosman.......................... 36 Vice President of Corporate Development and
General Counsel
Raymond Scherr......................... 48 Director
David Ferguson......................... 41 Director
Jeffrey Walker......................... 40 Director
Michael Lazarus........................ 41 Director
Steven Burge........................... 40 Director
KEY PERSONNEL
Dave Di Martino........................ 42 Vice President -- Store Development
Richard Pidanick....................... 44 Vice President -- Southern California Regional
Manager
Rodney Barger.......................... 46 Vice President -- Merchandising
David Angress.......................... 46 Vice President -- Merchandising
Andrew Heyneman........................ 34 Vice President -- Marketing
William McGarry........................ 42 Vice President -- Store Administration
</TABLE>
The Company's Bylaws (the "Bylaws") provide for a Board of Directors (the
"Board") consisting of 11 persons. Presently, the Board consists of 7 persons
with 4 vacancies. The Board intends to fill two of the remaining positions by
the end of the fiscal year. The members of the Board were elected pursuant to a
Stockholders Agreement among all of the stockholders of the Company. See
"Certain Transactions -- Terms of the Stockholders Agreement."
LARRY THOMAS has been with Guitar Center since 1977. He has served as a
director since 1984 and has been the Company's President and Chief Executive
Officer since 1992. After working for a year as a salesperson in the San
Francisco, California store, Mr. Thomas became the store's manager. In 1980, Mr.
Thomas became the San Francisco area regional manager. After serving as a
regional manager in California and Illinois for four years, Mr. Thomas assumed
the role of Corporate General Manager and Chief Operating Officer. Mr. Thomas
has been a director of the Company since 1983. Mr. Thomas is currently a member
of the Los Angeles Chapter of the Young Presidents' Organization and is a former
board member of NAMM.
MARTY ALBERTSON has served as Executive Vice President and Chief Operating
Officer since 1990. Mr. Albertson was elected as a director upon consummation of
the Recapitalization. Mr. Albertson joined the Company as a salesperson in 1979.
Mr. Albertson has held various positions of increasing responsibility with the
Company since first joining the Company in 1979. In 1980 he served as the
Company's Advertising Director. In 1984, he became the Company's National Sales
Manager. Thereafter, in 1985, Mr. Albertson became Vice President of Corporate
Development, and then became the Vice President of Sales and Marketing in 1987.
47
<PAGE>
BRUCE ROSS joined the Company in July 1994 as Chief Financial Officer. Prior
to joining the Company, Mr. Ross was Chief Financial Officer of Fred Hayman
Beverly Hills, Inc., a retailer of high end fashion clothing on Rodeo Drive in
California and a wholesaler of men's and women's fragrances. From 1982 to 1990,
Mr. Ross was employed by Hanimex Vivitar Corporation, a worldwide manufacturer
and distributor of photographic products. Mr. Ross served in various capacities
with Hanimex Vivitar in Australia, the United States and Europe. While working
for Hanimex Vivitar in the United States, Mr. Ross was promoted to the position
of Chief Financial Officer in 1986 and Chief Executive Officer for North America
in 1988. Mr. Ross graduated from the University of New South Wales (Australia)
with a degree in Commerce and is an associate of the Institute of Chartered
Accountants.
BARRY SOOSMAN joined the Company in July 1996 as Vice President of Corporate
Development and General Counsel. Mr. Soosman has been a practicing attorney for
twelve years specializing in real estate, commercial and corporate law. Since
1992 and prior to joining the Company, Mr. Soosman had been the outside general
counsel to the Company. Mr. Soosman earned a Bachelor of Science degree in
Business Administration (corporate finance and real estate valuation) with
honors and a Juris Doctorate degree at the University of Southern California. In
June 1996 Mr. Soosman became of counsel to the law firm of Buchalter, Nemer,
Fields & Younger, a Professional Corporation. Mr. Soosman is a former Adjunct
Professor at Southwestern School of Law.
RAYMOND SCHERR became a director in 1978 and served as the Chairman of the
Board from 1990 until consummation of the Recapitalization. Mr. Scherr joined
the Company in 1975 as a salesperson in the Company's San Francisco, California
store. From 1981 through 1990 Mr. Scherr was also the Company's President and
Chief Executive Officer.
DAVID FERGUSON is a general partner of Chase Capital Partners, an affiliate
of Chase Venture Capital Associates, L.P. and Chase Securities Inc. He became a
director of the Company upon consummation of the Recapitalization. Prior to
joining Chase Capital, Mr. Ferguson was a member of the mergers and acquisitions
groups of Bankers Trust New York Corporation and Prudential Securities, Inc. Mr.
Ferguson currently serves as a director of Physical Electronics, Thompson PBE,
Buster Brown Apparel, Logistics Express, Inc., HOB Entertainment, Terrace
Corporation, Airbase Services, Wild Oats Markets, The Bagel Group, Details Inc.
and House of Blues. Mr. Ferguson is a former director of Whitmire Distribution
Corporation, New Mexico Beverage Company and TA Instruments. Mr. Ferguson
received a Bachelor of Arts degree from Loyola College in Baltimore, Maryland
and an M.B.A. degree from The Wharton School of the University of Pennsylvania.
Mr. Ferguson is a certified public accountant.
JEFFREY WALKER is the managing general partner of Chase Capital Partners, an
affiliate of Chase Venture Capital Associates, L.P. and Chase Securities Inc.,
and a senior managing director and member of the Policy Council of Chase
Manhattan Bank. He became a director of the Company upon consummation of the
Recapitalization. Prior to co-founding Chase Capital Partners in 1984, Mr.
Walker worked in the Investment Banking and Finance Divisions of Chemical Bank
and the Audit and Consulting Divisions of Arthur Young & Co. Mr. Walker is a
Certified Public Accountant and a Certified Management Accountant. Mr. Walker
received a Bachelor of Science degree from the University of Virginia and an
M.B.A. degree from the Harvard Business School. Mr. Walker currently serves as a
director of Domain, Six Flags Holdings, 1-800-Flowers, Timothy's Coffee, The
Monet Group, Beylik Drilling, Metroplex, PTN Holdings, Seymour Housewares, Doane
Products and the WPA Theatre and was Vice Chairman of the Board of Education of
Wilton, Connecticut and Vice Chairman of the National Association of Small
Business Investment Corporations.
MICHAEL LAZARUS is a general partner of Weston Presidio Capital II, L.P., a
venture capital firm. From 1986 to 1991, he served as Managing Director and
Director of the Private Placement Department of Montgomery Securities. He became
a director of the Company upon consummation of the Recapitalization. Mr. Lazarus
is currently on the Board of Directors of Just For Feet, Inc., and various
privately held companies.
STEVEN BURGE is a Managing Director with Wells Fargo Small Business
Investment Company, Inc. He became a director of the Company upon consummation
of the Recapitalization. From 1987 through
48
<PAGE>
1995, Mr. Burge was a Managing General Partner of Wedbush Capital Partners, a
private investment fund, and Managing Director, Corporate Finance for Wedbush
Morgan Securities, a regional investment banking firm. Prior to joining Wedbush
Morgan Securities, Mr. Burge held various positions with Wells Fargo Bank.
DAVE DI MARTINO joined the Company in 1972. In 1983, Mr. Di Martino became
the manager of Guitar Center's flagship Hollywood, California store. In 1988,
Mr. Di Martino became Vice President -- Store Development. In 1992, he became
West Coast Regional Manager responsible for all of the Company's West Coast
stores. In 1995, he reassumed the position of Vice President -- Store
Development.
RICHARD PIDANICK joined the Company in 1983 as a salesperson. Mr. Pidanick
was promoted to store manager in 1984, after working in a variety of capacities
and locations for Guitar Center. Mr. Pidanick was promoted in 1990 to District
Manager of the Mid-West and was appointed as the Vice President -- Southern
California Regional Manager in 1996.
RODNEY BARGER joined the Company in 1980 as a salesperson. Mr. Barger was
promoted to a store manager in 1981. In 1989, Mr. Barger was promoted to Western
Regional Sales Manager and then to the corporate office in the position of
Purchasing Director. In 1996, Mr. Barger was promoted to Vice President --
Merchandising. He is responsible for the supervision of purchasing and
merchandising of guitars, drums and accessories.
DAVID ANGRESS joined the Company in January 1996 as Vice President of
Merchandising. Prior to joining the Company, Mr. Angress was Vice President of
Harman Pro., North America where he was responsible for North American marketing
and sales for such brands as JBL, SoundCraft, AKG and worldwide marketing
manager of DBX and Orban. Prior thereto, Mr. Angress was the Vice President and
General Manager of Sound Genesis, a retailer of professional audio equipment.
Mr. Angress has over 20 years of music retailing experience.
ANDREW HEYNEMAN joined the Company in 1983. He has served in a variety of
positions with Guitar Center ranging from a salesperson to a department manager.
In July 1985, Mr. Heyneman was appointed store manager and later promoted to the
corporate office as an advertising director in 1989. In 1996, Mr. Heyneman was
promoted to Vice President -- Marketing.
WILLIAM MCGARRY joined the Company in 1980 as a salesperson. In 1981 he was
promoted to a store manager. In 1985 Mr. McGarry was promoted to Midwest
District Manager. Mr. McGarry became the Company's first Director of Store
Administration in 1986 and was promoted to Vice President -- Store
Administration in 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
As part of the Recapitalization, the Board established two standing
committees, the Audit Committee and the Compensation Committee. The Audit
Committee has responsibility for reviewing and making recommendations regarding
the Company's employment of independent accountants, the annual audit of the
Company's financial statements, and the Company's internal controls, accounting
practices and policies. The members of the Audit Committee are Jeffrey Walker
and Steven Burge. The Compensation Committee has responsibility for determining
the nature and amount of compensation of the management of the Company and
administering the Company's employee benefits (other than the 1996 Performance
Stock Option Plan). The members of the Compensation Committee are Larry Thomas,
Marty Albertson, David Ferguson and Michael Lazarus.
DIRECTOR COMPENSATION
The present members of the Board do not receive compensation for their
services as members of the Board.
49
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid by
the Company for services rendered by the Chief Executive Officer and the
Company's other executive officers during fiscal 1995 (collectively, the "Named
Officers"):
<TABLE>
<CAPTION>
ALL OTHER
COMPENSATION (1)
-----------------
ANNUAL COMPENSATION
-------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- --------------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Larry Thomas............................................. 1995 $ 500,000 $ 285,715 $ 25,645
President and Chief Executive Officer
Marty Albertson.......................................... 1995 $ 375,000 $ 214,285 $ 25,645
Executive Vice President and Chief Operating Officer
Bruce Ross............................................... 1995 $ 180,000 $ 48,060 --
Vice President and Chief Financial Officer
Raymond Scherr (2)....................................... 1995 $ 1,000,000 -- $ 25,645
Chairman of the Board
</TABLE>
- ------------------------
(1) All other compensation consists of contributions made by the Company to its
profit sharing plan on behalf of the Named Officers.
(2) Resigned as the Chairman of the Board effective with the completion of the
Recapitalization.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth, on an aggregated basis, information
regarding securities underlying unexercised options during fiscal 1995 by the
Named Officers. The Company did not grant any stock options to the Named
Officers during fiscal 1995.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
SHARES ACQUIRED ----------------------------- -------------------------------
NAME ON EXERCISE (#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE (1) EXERCISABLE/UNEXERCISABLE (1)(2)
- --------------------------- ----------------- ----------------- ----------------------------- -------------------------------
<S> <C> <C> <C> <C>
Larry Thomas............... -- -- 7,777,800(2) $ 7,390,660
23,333,300(3) $ 19,616,305
Marty Albertson............ -- -- 3,888,800(2) $ 3,695,234
16,851,900(3) $ 14,167,392
Bruce Ross................. -- -- -- --
Raymond Scherr (4)......... -- -- -- --
</TABLE>
- ------------------------
(1) All options listed in the table were exercisable in fiscal 1995. All of the
options listed in the table were exchanged or cancelled in connection with
the Recapitalization. See "The Recapitalization and Related Transactions."
(2) These options were granted in September 1989 at an exercise price of $.0005
per share.
(3) These options were granted in October 1992 at an exercise price of $0.11 per
share.
(4) Resigned as Chairman of the Board effective with the Recapitalization.
EMPLOYMENT AGREEMENTS
Upon consummation of the Recapitalization, the Company entered into a
five-year employment agreement with Larry Thomas and Marty Albertson, and a
three-year employment agreement with Bruce Ross and Barry Soosman (collectively,
the "Employment Agreements"). The Employment Agreements provide Messrs. Thomas,
Albertson, Ross and Soosman (each a "Senior Officer" and collectively, the
"Senior Officers") with base salaries of $500,000, $375,000, $195,000 and
$225,000, respectively. Each
50
<PAGE>
Senior Officer is entitled to participate in all insurance and benefit plans
generally available to executives of the Company. In addition to their base
salary, Messrs. Thomas and Albertson will be paid an annual bonus equal to 57.1%
and 42.9%, respectively, of a bonus pool determined at the end of each year, not
to exceed $900,000. The amount of the bonus pool with respect to any fiscal year
will be a percentage ranging from 10% to 30% of the excess of the Company's
actual earnings before interest expense, tax expense, depreciation expense and
amortization expense ("EBITDA") over the Company's target EBITDA (as determined
by the Board). Messrs. Ross and Soosman will receive annual bonuses at the
discretion of the Board. Messrs. Ross and Soosman were granted options under the
Company's Amended and Restated 1996 Performance Stock Option Plan to purchase
8,669 Units, with each Unit consisting of one share of Common Stock and 99/100th
of a share of share of Junior Preferred Stock at an exercise price of $100 per
Unit. To the extent Units are available for award under such plan, each of
Messrs. Ross and Soosman is entitled to receive an aggregate of 1.0% of the
Units issued at an exercise price of $100 per Unit.
Under the terms of the Employment Agreements, if the Senior Officer is
terminated without cause or resigns with reasonable justification, the Senior
Officer will be entitled to receive his base salary, annual cash bonus (equal to
the last annual bonus he received prior to termination) and continuation of his
benefits through the term of the agreement. If the Senior Officer is terminated
without cause, all stock options held by the Senior Officer will immediately
vest unless such termination was approved by super majority vote of the Board.
If the Senior Officer's employment is terminated for any other reason, the
executive will be entitled only to his accrued base salary.
Upon consummation of the Recapitalization, the Company entered into a
three-year employment agreement with Mr. Scherr pursuant to which Mr. Scherr
will serve as the chairman and operator of Rock Walk, a division of the Company.
Mr. Scherr's duties will be of a part-time nature, and he will devote only such
time to his duties as he determines in good faith are required. Mr. Scherr will
receive $100,000 per year, which will be allocated among his salary and expense
allowance, as Mr. Scherr determines. Mr. Scherr will be entitled to participate
in all employee medical benefit programs available generally to employees of the
Company. If Mr. Scherr's employment is terminated by the Company without cause,
he will be entitled to receive as severance the cash equivalent of his
compensation package for the remainder of the term of the agreement, not to
exceed $300,000, and continuation of his medical benefits until age 63 1/2.
After his employment agreement expires, Mr. Scherr will continue to be entitled
to medical benefits until age 63 1/2. If Mr. Scherr's employment is terminated
by the Company for cause or upon Mr. Scherr's death, he or his estate will be
entitled to receive his compensation to the extent such amount has accrued
through the date of termination.
MANAGEMENT STOCK OPTION AGREEMENTS
In connection with the Recapitalization, the Company initially granted
options to each of Messrs. Thomas and Albertson to purchase 43,344 shares of
Common Stock at an exercise price of $1.00 per share pursuant to stock option
agreements (the "Management Stock Option Agreements"). The Company amended the
Management Stock Option Agreements to correct a mutual mistake of the parties.
At the time of the Recapitalization, the Company and management agreed that
options should be provided to allow the parties to obtain the right to purchase
an aggregate of 5% of the Company's Common Stock on a fully diluted basis. At
the time of grant, the Management Stock Option Agreements did not contemplate
the conversion of the Company's Junior Preferred Stock into Common Stock in the
event of an initial public offering. As amended, each Management Stock Option
Agreement grants Messrs. Thomas and Albertson options to purchase 43,344 Units,
with each Unit exercisable for one share of Common Stock and 99/100ths of a
share of a share of Junior Preferred Stock (or a total of 43,344 shares of
Common Stock and 42,911 shares of Junior Preferred Stock). The exercise price
for each Unit is $100. The number and class of securities constituting a Unit
are subject to equitable adjustments for stock splits, stock dividends, share
recombinations and other recapitalizations affecting the Common Stock and/or the
Junior Preferred Stock. The effect of such amendments is to require the optionee
to acquire the same combination of Common Stock and Junior Preferred Stock as
was acquired by the Investors in connection with the Recapitalization and adjust
the exercise price for each
51
<PAGE>
Unit to the same price paid by the Investors for such combination of securities.
Each Management Stock Option Agreement represents 2.5% of the Common Stock and
Junior Preferred Stock of the Company on a fully-diluted basis following
completion of the Recapitalization. The term of the options may not exceed the
earlier of ten years or the sale of the Company. Unless accelerated as provided
under the terms of the Management Stock Option Agreements, such options vest in
three equal installments on the seventh, eighth and ninth anniversary of the
date of grant. Options may be exercised only to the extent that they have
vested. The vesting of the options may be accelerated on the occurrence of
certain events including (i) following a public offering in which a prescribed
public float and market capitalization is achieved, (ii) sale of the Company, or
(iii) termination of employment without cause and with good reason (although the
Board of Directors may waive this provision with respect to a termination
without cause upon a super majority vote of the Board). The purchase price of an
option may be paid in cash or a cash equivalent.
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
The Company's Amended and Restated 1996 Performance Stock Option Plan (the
"Plan") was initially adopted by the Board of Directors and approved by its sole
stockholder on June 3, 1996 and became effective on that date. The Plan
initially provided for options to purchase 173,375 shares of Common Stock. The
Company amended the Plan to correct a mutual mistake of the parties. At the time
of the Recapitalization, the Company and Management agreed that options should
be provided under the Plan to allow the purchase of up to 10% of the Company's
Common Stock on a fully diluted basis. At the time the Plan was adopted, the
Plan did not contemplate the conversion of the Company's Junior Preferred Stock
into Common Stock in the event of an initial public offering. The amendment will
make the options awarded under the Plan exercisable for up to 173,374 Units,
with each Unit exercisable for one share of Common Stock and 99/100ths of a
share of a share of Junior Preferred Stock (or a total of 173,374 shares of
Common Stock and 171,640 shares of Junior Preferred Stock). The number and class
of securities constituting a Unit will be subject to equitable adjustments for
stock splits, stock dividends, share recombinations and other recapitalizations
affecting the Common Stock and/or the Junior Preferred Stock. The effect of such
amendments is to require the optionee to acquire the same combination of Common
Stock and Junior Preferred Stock as was acquired by the Investors in connection
with the Recapitalization. After the amendments, the securities available under
the Plan will represent 10% of the Common Stock and Junior Preferred Stock of
the Company on a fully-diluted basis following completion of the
Recapitalization.
GENERAL NATURE OF THE PLAN. Options issued under the Plan may be either
incentive stock options ("Incentive Options") intended to qualify as such under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options ("Non-qualified options"). Options will become
available for issuance pursuant to a performance vesting formula under the Plan.
The Plan shall be administered by a stock option committee (the "Committee"),
which has the power and authority to grant options under the Plan, subject to
the Board's prior approval.
ELIGIBILITY. Options may be granted under the Plan to employees of and
consultants to the Company, or any of its subsidiaries (other than Messrs.
Thomas, Albertson, or any other person serving on the Committee). No options may
be granted to any one person in any one taxable year in excess of 25% of the
options issued or issuable under the Plan. Incentive Options may not be granted
to an employee who owns (as described in Sections 422(b)(6) and 425(d) of the
Code) stock possessing more than 10% of the aggregate voting power of the
Company unless the option price is fixed at less than 110% of the fair market
value (as determined according to the Plan) of the stock on the grant date and
the options are not exercisable later than five years following the grant date.
GRANT OF OPTIONS. Options may be granted under the Plan at any time, from
time to time, prior to the termination of the Plan.
VESTING. Options are deemed granted on the date the Committee approves the
grants. However, in the case of Incentive Options, the grant date may not be
earlier than the date the optionee becomes an employee of the Company or one of
its subsidiaries. The Committee shall determine whether and to
52
<PAGE>
what extent any options are also subject to time vesting based on the optionee's
continued service. The Plan provides for acceleration of time vesting, a sale of
the Company or termination of the optionee's relationship with the Company
without cause (as defined in the Plan), or by the optionee with reasonable
justification (as defined in the Plan) or death.
OPTION PRICE AND EXERCISE. An option is exercisable at such times as are
determined on the grant date by the Committee. The purchase price for shares to
be issued to an optionee upon exercise of an option shall be the fair market
value of a share of Common Stock and Junior Preferred Stock on the grant date
(or such other value approved by the Board), provided that the fair market value
of the Junior Preferred Stock may not be less than the liquidation value.
EXPIRATION, TERMINATION, REVOCATION, TRANSFER OF OPTIONS AND
AMENDMENTS. Options granted under the Plan automatically terminate and become
null and void upon the occurrence of certain events. Options granted under the
Plan are not assignable except by will or by the laws of descent and
distribution. The Company shall require any person receiving options to become a
party to the Stockholders Agreement described under the caption "Certain
Transactions -- Terms of the Stockholders Agreement" prior to issuing any
options to such person. The Committee, with the Board's approval, and the prior
written consent of the stockholders as provided in the Stockholders Agreement,
may amend or modify the Plan in any respect, provided however, that approval of
the holders of a majority of Common Stock must be obtained if required by law or
for compliance with federal securities laws or the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Recapitalization, the Company did not have a compensation
committee. In fiscal 1995, compensation decisions for executive officers and
senior management were made by Messrs. Scherr and Thomas. In April 1996, the
Company made a personal loan to Larry Thomas, the Company's President, of $1
million at an annual interest rate of 8.0% to assist Mr. Thomas's purchase of a
personal residence. The loan, excluding accrued interest of $10,000 (which was
forgiven), was repaid concurrently with the Recapitalization.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The information in the following table sets forth the ownership of the
Common Stock of the Company by (i) each person who beneficially owns more than
5% of the outstanding shares of the Company's Common Stock; (ii) each executive
officer of the Company; (iii) each director of the Company; and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
stated, each person has sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS(1) NUMBER OF SHARES PERCENT
- --------------------------------------------------------------------------------- --------------------- -----------
<S> <C> <C>
Chase Venture Capital Associates, L.P.(2)........................................ 525,000 37.5%
840 Apollo Street, Suite 223
El Segundo, CA 90245
Wells Fargo Small Business Investment Company.................................... 100,000 7.1%
333 South Grand Avenue
Los Angeles, CA 90071
Weston Presidio Capital II, L.P.................................................. 75,000 5.4%
400 Sansome Street
San Francisco, CA 94111
Raymond Scherr(3)................................................................ 125,250 8.9%
Scherr Living Trust(3)........................................................... 125,250 8.9%
1096 Lakeview Canyon
Westlake Village, CA 91362
Dave Di Martino(4)............................................................... -- --
Di Martino Family Trust.......................................................... 95,542 6.8%
430 LaLoma Road
Pasadena, CA 91105
David Ferguson(5)................................................................ -- --
Jeffrey Walker(6)................................................................ -- --
Michael Lazarus(7)...............................................................
Steven Burge(8).................................................................. -- --
Larry Thomas(9).................................................................. 191,083 13.6%
Marty Albertson(9)............................................................... 123,888 8.85%
Bruce Ross(10)................................................................... * *
Barry Soosman(11)................................................................ 13,669 *
All Executive Officers and Directors as a group (9 persons)...................... 1,053,890 74.81 %
</TABLE>
- --------------------------
* Represents less than 1% of the issued and outstanding shares.
(1)Unless otherwise indicated, the address is the Company's address at 5155
Clareton Drive, Agoura Hills, CA 91362.
(2)Chase VCA owns and has voting and investment power with respect to 499,800
shares, and has voting power pursuant to a proxy over an additional 25,200
shares.
(3)Mr. Scherr is the co-trustee of the Scherr Trust and shares voting and
investment control over the shares of Common Stock with his spouse who is a
co-trustee of the trust.
(4)Dave Di Martino is the trustee of the Di Martino Family Trust and exercises
voting and investment control over the shares of Common Stock held by the
DiMartino Family Trust.
(5)Mr. Ferguson is a general partner of Chase Capital Partners, the general
partner of Chase VCA. Mr. Ferguson does not directly own any Common Stock.
However, as a general partner of Chase Capital Partners, he may be deemed to
share voting and investment control over the shares of Common Stock held by
Chase VCA.
(6)Mr. Walker is the managing general partner of Chase Capital Partners, the
general partner of Chase VCA. Mr. Walker does not directly own any Common
Stock. However, as the managing general partner of Chase Capital Partners,
he may be deemed to share voting and investment control over the shares of
Common Stock held by Chase VCA.
(7)Mr. Lazarus is a general partner of WPC. Mr. Lazarus does not directly own
any Common Stock. However, as a general partner of WPC he can be deemed to
share voting and investment control over the shares of Common Stock held by
Chase VCA.
(8)Mr. Burge is a managing director of WFSB. Mr. Burge does not have or share
voting or investment control over the shares of Common Stock held by WFSB.
(9)Does not include 43,344 shares of Common Stock subject to options to acquire
Units consisting of the right to purchase Common Stock and Junior Preferred
Stock. These Options have not vested as of the date hereof.
(10)Does not include 8,669 shares of Common Stock subject to options to acquire
Units consisting of the right to purchase Common Stock and Junior Preferred
Stock. These options have not vested as of the date hereof.
(11)The Soosman Family Trust of which Mr. Soosman and his spouse are co-trustees
and share voting and investment control owns 5,000 shares of Common Stock.
An additional 8,669 shares are subject to options to purchase units
consisting of the right to purchase Common Stock and Junior Preferred Stock
which options have vested.
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CERTAIN TRANSACTIONS
MANAGEMENT TRANSACTIONS
In April 1996, the Company made a personal loan to Larry Thomas, currently
the Company's President and Chief Executive Officer, of $1 million at an annual
interest rate of 8.0% to assist Mr. Thomas's purchase of a personal residence.
The loan, excluding accrued interest of $10,000 (which was forgiven), was repaid
concurrently with the Recapitalization.
On February 15, 1996 the Company entered into sale-leaseback transactions
with Raymond Scherr relating to the Company's Arlington, Texas store and North
Chicago, Illinois store. The Arlington, Texas store was sold by the Company to
Mr. Scherr for $935,000. The North Chicago, Illinois store was sold by the
Company to Mr. Scherr for $820,000. The Company leases the Arlington, Texas
store and North Chicago, Illinois store from Mr. Scherr for $7,687 and $8,570
per month, respectively. In October 27, 1995, Mr. Scherr purchased the South
Chicago, Illinois store from the Company's profit sharing plan for $900,000. The
Company leases this store from Mr. Scherr for $8,250 per month. The Company
leases its Covina, California store from Mr. Scherr for $9,900 per month. All of
the leases are on a triple net basis pursuant to which the Company pays rent, as
well as expenses relating to taxes, insurance and maintenance. Management
believes that the terms of these leases are on the same or similar terms that
would be available from an unaffiliated third party in an arm's length
negotiation.
The Company paid the law firm of Soosman & Associates, of which Barry
Soosman was a partner, $40,000, $70,000, and $120,000 for legal fees in calendar
years 1993, 1994 and 1995, respectively.
RECAPITALIZATION AND MANAGEMENT
In connection with the Recapitalization, Larry Thomas (i) purchased 191,083
shares of Common Stock for $191,083 cash, (ii) exchanged for cancellation
options to acquire 18,917,192 shares of Common Stock for 189,171.92 shares of
Junior Preferred Stock with a liquidiation value of $18.9 million, and (iii)
exchanged for cancellation 12,193,908 options for $10.6 million cash. Of the
options exchanged, 7,778,800 had an exercise price of $.0005 and 23,333,330 had
an exercise price of $.11 per share. Marty Albertson (i) purchased 127,388
shares of Common Stock for $127,388 cash, (ii) exchanged for cancellation
options to acquire 12,611,441 shares of Common Stock for 126,114.41 shares of
Junior Preferred Stock with a liquidation value of $12.2 million, and (iii)
exchanged for cancellation 8,129,259 options for $7.1 million cash. Of the
options exchanged 3,888,800 had an exercise price of $.0005 and 16,851,900 had
an exercise price of $.11 per share. The Company repurchased 120,000,000 shares
of Common Stock from the Scherr Trust for approximately $113.1 million cash. The
Scherr Trust also exchanged 19,800,000 shares of Common Stock for 198,000 shares
of Junior Preferred Stock with a liquidation value of $19.8 million, and
retained 200,000 shares of Common Stock. The purpose of the Recapitalization was
to transfer control of the Company from its sole stockholder, the Scherr Trust,
to members of management (including Messrs. Thomas and Albertson) and the
Investors. The terms of the Recapitalization including the basis of the purchase
price for shares of Common Stock and the number of shares of Junior Preferred
Stock issued to Messrs. Thomas and Albertson and the Scherr Trust was determined
as a result of arms-length negotiations with the Investors.
EQUITY PURCHASE
In connection with the Recapitalization, pursuant to an Agreement dated as
of May 1, 1996 (the "Investor Agreement"), among the Company, the stockholders
named therein and Chase VCA, WFSB and WPC, the Investors purchased 700,000
shares of the Company's Common Stock and 693,000 shares of the Company's Junior
Preferred Stock for $70.0 million. Chase VCA, one of the Investors, and CSI, an
Initial Purchaser in the sale of the Old Notes, are each wholly owned
subsidiaries of Chase Corporation. Jeffrey Walker, a director of the Company, is
the managing general partner of Chase Capital Partners, the general partner of
Chase VCA. David Ferguson, a director of the Company, is a general partner of
Chase Capital Partners. Messrs. Walker and Ferguson have equity interests in
Chase Capital Partners. Mr. Burge, a director of the Company, is a managing
director of WFSB. Mr. Burge does not have an equity ownership in WFSB. WFSB is
an indirect wholly owned subsidiary of Wells Fargo & Co.
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<PAGE>
("WFC"), the parent company of WFB, the lender under the New Credit Facility.
Michael Lazarus, a director of the Company, is a general partner of WPC and has
an equity interest therein. Pursuant to the Investor Agreement, the Scherr Trust
and stockholders holding management positions (the "Management Stockholders")
have agreed to indemnify the Investors for losses incurred in connection with
any of the Company's or its affiliates' misrepresentations or breaches of
warranty. The Investors have agreed to indemnify the Company in substantially
the same manner, with the indemnified amount limited to each Investor's ratable
share of such losses.
TRANSACTIONS WITH AFFILIATES OF DLJ AND CSI
In connection with the Recapitalization, the Company and DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners,
C.V. and DLJ Merchant Banking Funding, Inc. (collectively, the "DLJ Investors"),
all of which may be deemed to be affiliates of DLJ, an Initial Purchaser in the
sale of the Old Notes, entered into (i) a Securities Purchase Agreement (the
"Securities Purchase Agreement"), pursuant to which the Company issued 800,000
shares of its Senior Preferred Stock and Warrants to purchase 73,684 shares of
Common Stock and 72,947 shares of Junior Preferred Stock for an aggregate of $20
million cash; and (ii) a Registration Agreement (the "Registration Agreement"),
pursuant to which each of the DLJ Investors and any future holders of the Senior
Preferred Stock and the Warrants have the right to (a) request inclusion of such
holder's securities in certain registered offerings of securites by the Company
and (b) at any time after the earlier of June 5, 2001 or 180 days after a public
offering of the Company's equity securities to cause the Company to register the
resales of the securities held by such stockholder.
In connection with the Recapitalization, the Company entered into a Bridge
Financing Agreement (the "Bridge Financing Agreement") with DLJ Bridge, an
affiliate of DLJ, and Chemical, pursuant to which DLJ Bridge purchased $51.0
million aggregate principal amount of senior unsecured increasing rate notes for
$51.0 million cash with interest payable at 12.75% per annum. Chemical, loaned
$49.0 million to the Company with interest payable at 12.75% per annum. Chemical
and CSI are both wholly owned subsidiaries of Chase Corporation. The Company
applied the net proceeds of the offering of the Old Notes for which DLJ and CSI
acted as Initial Purchasers to the retirement of the Bridge Facility. In
connection with such issuance, DLJ Bridge and Chemical received customary
commitment and takedown fees and, in connection with the sale of the Old Notes,
DLJ and CSI received customary fees.
NEW CREDIT FACILITY
WFB is acting as lender under the New Credit Facility, and is being paid
customary fees therefor. In addition, the Company has agreed to pay to WFB
promptly upon demand, a fee of $25,000 in consideration for WFB agreeing to
allow the Company to use the proceeds of Revolving Loans (as defined herein) to
make loans to senior management in respect of certain personal income tax
liabilities. See "The New Credit Facility." Effective with the Recapitalization,
WFSB, an indirect wholly owned subsidiary of WFB, owns approximately 7.14% of
the Common Stock of the Company. See "Principal Stockholders."
TERMS OF THE STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Stockholders Agreement (the "Stockholders Agreement") with all of its holders of
Common Stock and Junior Preferred Stock and any other securities exercisable or
exchangeable for or convertible into Common Stock or Junior Preferred Stock,
including Messrs. Thomas and Albertson, the Scherr Trust, and the Investors
(collectively, the "Stockholders"). Until the occurrence of certain events
specified in the Stockholders Agreement, the Stockholders will have certain
rights, including the following: (i) to designate the members of an eleven
person Board of Directors as follows: (A) management (including Messrs. Thomas
and Albertson) will have the right to designate four directors; (B) the Scherr
Trust will have the right to designate one director; (C) the Investors will have
the right to designate four directors; and (D) two members will be independent
directors designated by the Investors subject to the approval of Larry Thomas,
so long as he is the Company's Chief Executive Officer and thereafter of
management; and (ii) to subscribe for a proportional share of certain future
equity issuances by the Company. The Stockholders Agreement will also (i)
prohibit the Company from taking certain actions without the consent of
two-thirds of the
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<PAGE>
members of the Board of Directors, including but not limited to the adoption of
the Company's annual budget, capital expenditures in excess of $500,000, the
issuance of any securities except as pursuant to agreements in existence on the
date of the Stockholders Agreement, the sale of the Company, and the
consummation of an initial public offering; (ii) obligate the Company to provide
certain Stockholders with financial and other information regarding the Company
and with inspection rights; and (iii) subject to certain exceptions, require
Stockholders who propose to transfer equity securities to comply with certain
rights of first refusal and co-sale provisions. In addition, in connection with
certain events of termination of the employment of a Management Stockholder, the
Company and the other Stockholders shall have the right to purchase the Common
Stock of such Management Stockholder at its fair market value.
STOCKHOLDER REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Registration Rights Agreement (the "Stockholder Registration Rights Agreement")
with all of its holders of Common Stock and any other securities exercisable or
exchangeable for or convertible into Common Stock, including Messrs. Thomas,
Albertson, the Scherr Trust and the Investors (the "Equity Holders"). Under this
agreement, the Equity Holders have the right to require the Company to register
such holders shares at any time in accordance with the requirements of the
Securities Act upon the request of holders of 60.0% of the Common Stock, subject
to the Company's right to delay its obligations upon the occurrence of specified
events. In addition, at such times as the Company chooses to register shares
under the Securities Act, the holders of Common Stock will have the right to
elect to have their shares of Common Stock included therein, subject to certain
limitations. Under the Stockholder Registration Rights Agreement, the Company
has agreed to pay all of the costs associated with registration, except for
discounts and commissions.
RESTRICTED STOCK AGREEMENTS
On June 5, 1996, the Company entered into restricted stock agreements with
each of the Management Stockholders (the "Restricted Stock Agreements"). Under
the terms of the Restricted Stock Agreements, Management Stockholders (including
Messrs. Thomas and Albertson) may not transfer their shares of Junior Preferred
Stock before the earlier of (i) the completion of a Qualified Public Offering,
as defined in the Restricted Stock Agreements, (ii) the sale of the Company; or
(iii) five years from the date of the agreement ("Restricted Period") subject to
certain exemptions. If during the Restricted Period, a Management Stockholder
becomes employed (or has a financial or other interests in) by any business
engaged in the selling of retail musical instruments, pro-audio equipment or
related accessories within the prescribed territory, then the shares of Junior
Preferred Stock held by such Management Stockholder will be automatically
forfeited without consideration, and returned to the Company.
The Restricted Stock Agreement also provides that if, at the end of the
Restricted Period (or at such other time as a Management Stockholder is deemed
for federal income tax purposes to realize compensation income from the receipt
of shares of Junior Preferred Stock) the net proceeds from a sale or redemption
of the Common Stock or Junior Preferred Stock does not equal or exceed an amount
sufficient to discharge such Management Stockholders' tax obligations relating
to such sale or redemption, then the Company will loan to such Management
Stockholder an amount equal to (i) the amount necessary for the Management
Stockholder to pay such tax obligations, as and when such tax obligations shall
become payable by the Management Stockholder, less (ii) the aggregate amount of
net proceeds from the sale or redemption of Common Stock or Junior Preferred
Stock received by the Management Stockholder during the Restricted Period.
Alternatively, the Company may, at its option, repurchase from the Management
Stockholder for cash a number of shares of Junior Preferred Stock sufficient in
amount to allow the Management Stockholder to pay the tax obligations. In the
event the Company provides a loan under the circumstances described above, such
loan will bear interest at an interest rate then being paid by the Company on
its New Credit Facility, and provide for amortization of principal over five
equal annual installments. To secure payment of such loan, the Company may, as a
condition to the loan, require the Management Stockholder to grant a first
priority security interest to the
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<PAGE>
Company in all of the Common Stock and Junior Preferred Stock then owned by the
Management Stockholder. The Management Stockholder in such case would retain the
right to vote such shares, notwithstanding the grant of the security interest.
TAX INDEMNIFICATION AGREEMENT
In connection with the Recapitalization, the Company entered into a tax
indemnification agreement ("Tax Indemnification Agreement") with Raymond Scherr
pursuant to which the Company has agreed to indemnify Raymond Scherr for any
loss, damage or liability and all expenses incurred, suffered, sustained, or
required to be paid by the Scherr Trust resulting from a determination that the
exchange of the Common Stock held by the Scherr Trust for Junior Preferred Stock
is not treated as a tax-free transaction under Section 368(a)(1)(E) of the Code.
The Management Stockholders have agreed to individually reimburse the Company on
a pro rata basis for any amounts paid to Mr. Scherr by the Company as required
by the Tax Indemnification Agreement, provided, however, that the aggregate
amount reimbursed by the Management Stockholders shall not exceed $5 million.
SUBCHAPTER S DISTRIBUTIONS
The Company elected to be taxed as a "S" corporation from 1988 through the
consummation of the Recapitalization. The Scherr Trust, as the sole stockholder,
received for 1993, 1994, 1995 and the six months ended June 30, 1996 aggregate
"S" corporation distributions of $4.6 million, $3.9 million, $14.5 million and
$29.8 million, respectively.
SCHERR BOARD REPRESENTATION LETTER
On June 5, 1996, the Company entered into an agreement with Raymond Scherr
in which the Company agreed that subsequent to the termination of the
Stockholders Agreement by reason of a Qualified Public Offering so long as Mr.
Scherr owns 5% or more of the Common Stock on a fully diluted basis, the Company
will nominate or cause the nomination of Mr. Scherr to the Board of Directors
(and include Scherr in any proxy statement and related materials used in
connection with an election of directors) and otherwise use its best efforts to
cause his election at each annual meeting or special meeting relating to the
election of directors of the Company. The Company's obligations under this
agreement will terminate if Mr. Scherr suffers a disability or commits certain
acts (as described in the agreement).
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<PAGE>
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The New
Notes will be issued pursuant to an indenture (the "Indenture"), dated as of
July 2, 1996, by and between Guitar Center Management Company, Inc. (the
"Company") and U.S. Trust Company of California, N.A., as trustee (the
"Trustee"). The Old Notes were also issued pursuant to the Indenture. The
following summaries of certain provisions of the Notes and the Indenture are
summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the Notes and the Indenture.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to them in the Indenture. Wherever particular provisions of the
Indenture are referred to in this summary, such provisions are incorporated by
reference as a part of the statements made and such statements are qualified in
their entirety by such reference. The Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
The Notes are senior, unsecured, general obligations of the Company, limited
in aggregate principal amount to $100 million. The Notes are issuable only in
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes will mature on July 1, 2006. The Notes will bear interest at the
rate per annum stated on the cover page hereof from the date of issuance or from
the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on January 1 and July 1 of each year,
commencing January 1, 1997, to the Persons in whose names such Notes are
registered at the close of business on the December 15 or June 15 immediately
preceding such Interest Payment Date. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York. At
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at the addresses set forth upon the registry books of
the Company. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Until otherwise designated by the Company, the Company's office or agency will
be the corporate trust office of the Trustee presently located at the office of
the Trustee in the Borough of Manhattan, The City of New York.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Notes prior to July 1,
2001 (other than out of the Net Cash Proceeds of an Initial Public Equity
Offering, as described in the following paragraph). The Notes will be redeemable
for cash at the option of the Company, in whole or in part, at any time on or
after July 1, 2001, upon not less than 30 days nor more than 60 days notice to
each Holder of Notes, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing July 1 of the years indicated below, in each case (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------- ------------
<S> <C>
2001.................................................................. 105.500%
2002.................................................................. 103.667%
2003.................................................................. 101.833%
2004 and thereafter................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to July 1, 1999, upon an Initial Public
Equity Offering for cash, up to 33 1/3% of the original aggregate principal
amount of the Notes may be redeemed at the option of the Company within 60 days
of such Initial Public Equity Offering, on not less than 30 days, but not more
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<PAGE>
than 60 days, notice to each Holder of the Notes to be redeemed, with cash from
the Net Cash Proceeds of such Initial Public Equity Offering, at 110% of
principal amount (subject to the right of Holders of record on a Record Date to
receive interest due on an Interest Payment Date that is on or prior to such
Redemption Date), together with accrued and unpaid interest to the date of
redemption; PROVIDED, HOWEVER, that immediately following such redemption not
less than 66 2/3% of the original aggregate principal amount of the Notes
remains outstanding.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part of such
Holder's Notes (PROVIDED that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control Purchase
Date") that is no later than 35 Business Days after the occurrence of such
Change of Control, at a cash price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof, together with (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such repurchase date) accrued and
unpaid interest to the Change of Control Purchase Date. The Change of Control
Offer shall be made within 10 Business Days following a Change of Control and
shall remain open for 20 Business Days following its commencement (the "Change
of Control Offer Period"). Upon expiration of the Change of Control Offer
Period, the Company promptly shall purchase all Notes properly tendered in
response to the Change of Control Offer.
As used herein, a "Change of Control" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act
of 1934, as amended), other than any person or group comprised solely of the
Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Investors; or (b) a
sale or transfer of all or substantially all of the assets of the Company to any
person or group (other than any group consisting solely of the Investors or
their Affiliates) has been consummated; or (c) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election was approved by a vote of a majority of the directors then still in
office, who either were directors at the beginning of such period or whose
election or nomination for the election was previously so approved) cease for
any reason to constitute a majority of the directors of the Company, as the case
may be, then in office, other than as a result of election and removal of
directors pursuant to the terms of the Senior Preferred Stock as in effect on
the Issue Date or the Stockholders Agreement as in effect on the Issue Date
governing the election and removal of directors.
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As used herein, "Investors" means (i) Chase Venture Capital Associates,
L.P., CB Capital Investors, Inc., Weston Presidio Capital II, L.P., Wells Fargo
Small Business Investors Company, Inc. and any Person controlled by or under
common control with any of the foregoing but not Persons controlling any of the
foregoing, other than those Persons controlling the Investors as of the date the
shares of Senior Preferred Stock are first issued and (ii) the other
securityholders of the Company party to the Stockholders Agreement as in effect
on June 5, 1996, members of their immediate families and trusts for their sole
benefit.
A transaction in which the Company is sold or its assets are transferred to
any person or group of persons who is or are Investors will not constitute a
Change of Control, thus Holders would not receive the benefit of the Change of
Control provisions in the event of such transaction. The Investors as a group
own 700,000 shares of Common Stock and 693,000 shares of Junior Preferred Stock
of the Company with a liquidation value of $69.3 million. On or before the
Change of Control Purchase Date, the Company will (i) accept for payment Notes
or portions thereof properly tendered pursuant to the Change of Control Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the Change of Control
Purchase Price (together with accrued and unpaid interest) of all Notes so
tendered and (iii) deliver to the Trustee Notes so accepted together with an
Officers' Certificate listing the Notes or portions thereof being purchased by
the Company. The Paying Agent promptly will pay the Holders of Notes so accepted
an amount equal to the Change of Control Purchase Price (together with accrued
and unpaid interest), and the Trustee promptly will authenticate and deliver to
such Holders a new Note equal in principal amount to any unpurchased portion of
the Note surrendered; PROVIDED, that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. Any Notes not so accepted will
be delivered promptly by the Company to the Holder thereof. The Company publicly
will announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date. Any Note (or a portion
thereof) accepted for payment pursuant to the Change of Control Offer (and duly
paid on the Change of Control Purchase Date) will cease to accrue interest after
the Change of Control Purchase Date. There can be no assurance that the Company
would have available sufficient funds to repurchase the Notes in the event of a
Change of Control.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules and regulations promulgated thereunder and all other
applicable federal and state securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth below in this covenant, the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, issue, assume, guaranty, incur, become directly or indirectly liable
with respect to (including as a result of an Acquisition), or otherwise become
responsible for, contingently or otherwise (individually and collectively, to
"incur" or, as appropriate, an "incurrence"), any Indebtedness or any
Disqualified Capital Stock (including Acquired Indebtedness), other than
Permitted Indebtedness.
Notwithstanding the foregoing, if (i) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect on a PRO FORMA basis to, such incurrence of Indebtedness or Disqualified
Capital Stock and (ii) on the date of such incurrence (the "Incurrence Date"),
the Consolidated Coverage Ratio of the Company for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a PRO FORMA
basis to such incurrence of such Indebtedness or Disqualified Capital Stock and,
to the extent set forth in the definition of Consolidated Coverage Ratio,
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the use of proceeds thereof, would be at least (x) 2.0 to 1, if such incurrence
occurs on or before June 30, 1997, or (y) 2.25 to 1, if such incurrence occurs
at any time thereafter (the "Debt Incurrence Ratio"), then the Company may incur
such Indebtedness or Disqualified Capital Stock.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other Person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such Person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company and its Subsidiaries will not, and
will not permit any of their Subsidiaries to, directly or indirectly, make any
Restricted Payment if, after giving effect to such Restricted Payment on a PRO
FORMA basis, (1) a Default or an Event of Default would have occurred and be
continuing, (2) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (3) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed the sum of (a)
50% of the aggregate Consolidated Net Income of the Company for the period
(taken as one accounting period), commencing on the first day of the first full
fiscal quarter commencing after the Issue Date, to and including the last day of
the fiscal quarter ended immediately prior to the date of each such calculation
(or, in the event Consolidated Net Income for such period is a deficit, then
minus 100% of such deficit), plus (b) 100% of the aggregate Net Cash Proceeds
received by the Company from the sale of its Qualified Capital Stock (other than
(i) to a subsidiary of the Company and (ii) to the extent applied in connection
with a Qualified Exchange), after the Issue Date.
Failure to satisfy the foregoing clauses (2) and (3) of the immediately
preceding paragraph, however, will not prohibit (v) Restricted Investments,
PROVIDED that, after giving PRO FORMA effect to any such Investment, the
aggregate amount of all such Investments made on or after the Issue Date that
are outstanding (after giving effect to the amount (as such amount is determined
by the Board of Directors reasonably and in good faith) of any such Investments
(whether made originally in the form of property or cash) returned to the
Company or the Subsidiary that made such prior Investment, without restriction,
in cash, except to the extent that the effect of such return increased
Consolidated Net Income of the Company, on or prior to the date of any such
calculation) at any time does not exceed $5 million, and failure to satisfy the
foregoing clauses (1), (2) and (3) of the immediately preceding paragraph will
not prohibit (w) a Qualified Exchange, (x) the payment of any dividend on
Capital Stock within 60 days after the date of its declaration if such dividend
could have been made on the date of such declaration in compliance with the
foregoing provisions, (y) the repurchase, redemption, or other acquisition or
retirement for value of any Equity Interests of the Company held by any member
of the Company's management pursuant to any management equity subscription
agreement, restricted stock agreement, stockholders agreement, stock option
agreement or other similar agreement, PROVIDED that, in the case of this clause
(y), the aggregate net consideration paid for all such Equity Interests so
reacquired shall not exceed $1.0 million, or (z) the issuance of dividends on
the Senior Preferred Stock in shares of Senior Preferred Stock or accretion to
the liquidation value thereof pursuant to the terms of the instrument governing
the Senior Preferred Stock as such instrument was in effect on the Issue Date.
The full amount of any Restricted Payment made pursuant to the foregoing clauses
(v), (x) (except to the extent also covered by clause (z)) and (y), but not
pursuant to clause (w) or (z), of the immediately preceding sentence, however,
will be deducted in the calculation of the aggregate amount of Restricted
Payments available to be made referred to in clause (3) of the immediately
preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture provides that the Company and its Subsidiaries will not, and
will not permit any of their Subsidiaries to, directly or indirectly, create,
assume or suffer to exist any consensual restriction on
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the ability of any Subsidiary of the Company to pay dividends or make other
distributions to or on behalf of, or to pay any obligation to or on behalf of,
or otherwise to transfer assets or property to or on behalf of, or make or pay
loans or advances to or on behalf of, the Company or any Subsidiary of the
Company, except (a) restrictions imposed by the Notes or the Indenture, (b)
restrictions imposed by applicable law and regulation, (c) existing restrictions
under Existing Indebtedness (assuming retirement of the Bridge Facility), (d)
restrictions under any Acquired Indebtedness not incurred in violation of the
Indenture or any agreement relating to any property, asset, or business acquired
by the Company or any of its Subsidiaries, which restrictions in each case
existed at the time of acquisition, were not put in place in connection with or
in anticipation of such acquisition and are not applicable to any Person, other
than the Person acquired, or to any property, asset or business, other than the
property, assets and business so acquired, (e) any such restriction or
requirement imposed by Indebtedness incurred under paragraph (e) of the
definition of "Permitted Indebtedness," PROVIDED such restriction or requirement
is no more restrictive than that imposed by the Credit Agreement as of the Issue
Date, (f) restrictions with respect solely to a Subsidiary of the Company
imposed pursuant to a binding agreement which has been entered into for the sale
or disposition of all or substantially all of the Equity Interests or assets of
such Subsidiary, PROVIDED such restrictions apply solely to the Equity Interests
or assets of such Subsidiary which are being sold or disposed of, (g)
restrictions on transfer contained in Purchase Money Indebtedness incurred
pursuant to paragraph (c) of the definition of "Permitted Indebtedness,"
PROVIDED such restrictions relate only to the transfer of the property acquired
with the proceeds of such Purchase Money Indebtedness, and (h) in connection
with and pursuant to permitted Refinancings, replacements of restrictions
imposed pursuant to clause (a), (c), (d) or (g) of this paragraph that are not
more restrictive than those being replaced and do not apply to any other Person
or assets than those that would have been covered by the restrictions in the
Indebtedness so refinanced.
Notwithstanding the foregoing, customary provisions restricting subletting
or assignment of any lease entered into in the ordinary course of business,
consistent with industry practice shall in and of themselves not be considered
restrictions on the ability of the applicable Subsidiary to transfer such
agreement or assets, as the case may be.
LIMITATION ON LIENS SECURING INDEBTEDNESS
The Company will not, and will not permit any Subsidiary to, create, incur,
assume or suffer to exist any Lien of any kind, other than Permitted Liens, upon
any of their respective assets now owned or acquired on or after the Issue Date
or upon any income or profits therefrom.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, in one transaction or a series of related transactions
(that has or have, when taken together with all other such transactions over the
preceding 12-months, an aggregate fair market value in excess of $250,000 or for
aggregate net proceeds in excess of $250,000), convey, sell, transfer, assign,
or otherwise dispose of, directly or indirectly, any of their respective
property, businesses, or assets, including by merger or consolidation (in the
case of a Subsidiary of the Company), and including any sale or other transfer
or issuance of any Equity Interests of any Subsidiary of the Company, whether by
the Company or a Subsidiary of either or through the issuance, sale or transfer
of Equity Interests by a Subsidiary of the Company (an "Asset Sale"), unless
(1)(a) within 365 days after the date of such Asset Sale, the Net Cash Proceeds
therefrom (the "Asset Sale Offer Amount") are applied (i) to the optional
redemption of the Notes in accordance with the terms of the Indenture, (ii) to
the repurchase of the Notes pursuant to an irrevocable and unconditional cash
offer (the "Asset Sale Offer") to repurchase the Notes at a purchase price (the
"Asset Sale Offer Price") of 101% of principal amount, plus accrued and unpaid
interest to the date of payment, (iii) to the repayment of amounts outstanding
pursuant to the terms of the Credit Agreement (PROVIDED that upon such
application, the availability of amounts that the Company or its Subsidiaries
may be liable for pursuant thereto shall be permanently reduced by a
corresponding amount), or (iv) to the repayment of Purchase Money Indebtedness
secured by the assets which are the subject of such Asset Sale, or (b) within
365 days following such Asset Sale, the Asset Sale Offer Amount is invested in
assets and property (other than notes, bonds, obligations and securities of
Persons other
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than subsidiaries, which are received as a result of transactions effected in
compliance with the "Limitations on Restricted Payments" covenant) which in the
good faith reasonable judgment of the Board will immediately constitute or be a
part of a Related Business of the Company or such Subsidiary (if it continues to
be a Subsidiary) immediately following such transaction, (2) at least 75% of the
consideration for such Asset Sale or series of related Asset Sales consists of
cash or Cash Equivalents, (3) no Default or Event of Default shall have occurred
and be continuing at the time of, or would occur after giving effect, on a PRO
FORMA basis, to, such Asset Sale, and (4) the Board of Directors of the Company
determines in good faith that the Company or such Subsidiary, as applicable,
receives fair market value for such Asset Sale.
The Indenture provides that an acquisition of the Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in clauses (1)(a) or (1)(b) above (the
"Excess Proceeds") exceeds $5 million and that each Asset Sale Offer shall
remain open for 20 Business Days following its commencement (the "Asset Sale
Offer Period"). Upon expiration of the Asset Sale Offer Period, the Company
shall apply the Asset Sale Offer Amount, plus an amount equal to accrued and
unpaid interest, to the purchase of all Notes properly tendered (on a PRO RATA
basis if the Asset Sale Offer Amount is insufficient to purchase all Notes so
tendered) at the Asset Sale Offer Price (together with accrued and unpaid
interest). To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Asset Sale Offer Amount, the Company may
use any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture and following the consummation of each Asset Sale
Offer in compliance therewith the Excess Proceeds amount shall be reset to zero.
For purposes of (2) above, total consideration received means the total
consideration received for such Asset Sales, minus the amount of (a) non-
subordinated debt secured by the assets that were the subject of the Asset Sale
and assumed by a transferee, which assumption permanently reduces the amount of
Indebtedness outstanding on the Issue Date or permitted pursuant to paragraph
(c), (e) or (g) of the definition of "Permitted Indebtedness" (including that in
the case of a revolver or similar arrangement that makes credit available, such
commitment is permanently reduced by such amount), (b) Purchase Money
Indebtedness secured solely by the assets sold and assumed by a transferee and
(c) property that within 30 days of such Asset Sale is converted into cash or
Cash Equivalents and then applied in accordance with the terms of this covenant.
Notwithstanding the foregoing provisions:
(i)
the Company and its Subsidiaries may, in the ordinary course of
business, convey, sell, transfer, assign or otherwise dispose of
inventory acquired and held for resale in the ordinary course of business
and consistent with past practice;
(ii)
the Company and its Subsidiaries may convey, sell, transfer, assign
or otherwise dispose of assets pursuant to and in accordance with the
limitation on mergers, sales or consolidations provisions in the Indenture;
(iii)
the Company and its Subsidiaries may sell or dispose of damaged, worn
out or other obsolete (to the Company or such Subsidiaries) real or
personal property in the ordinary course of business and consistent with
past practice so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Subsidiary, as applicable;
(iv)
the Company or any Subsidiary may, for fair market value (as
determined reasonably and in good faith by the Board of Directors),
convey, sell, transfer, assign or otherwise dispose of assets to the Company
or any of its Subsidiaries; and
(v)
cash and Cash Equivalents may be exchanged or sold for or in
consideration of cash or Cash Equivalents.
All Net Cash Proceeds from an Event of Loss shall be invested or applied
otherwise as set forth in clause 1(a) or 1(b) of the first paragraph of this
covenant, all within the period and as otherwise provided above in clause 1(a)
or 1(b) of the first paragraph of this covenant.
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Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations promulgated thereunder and all other
applicable federal and state securities laws.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of its Subsidiaries
will be permitted on or after the Issue Date to, directly or indirectly, enter
into or suffer to exist any contract, agreement, arrangement or transaction with
any Affiliate (an "Affiliate Transaction"), or any series of related Affiliate
Transactions (other than Exempted Affiliate Transactions), unless it is
determined that the terms of such Affiliate Transaction (or Affiliate
Transactions) are fair and reasonable to the Company, and no less favorable to
the Company than could have been obtained in an arm's length transaction with a
non-Affiliate.
Without limiting the foregoing, in connection with any Affiliate Transaction
or any series of related Affiliate Transactions (other than Exempted Affiliate
Transactions) (i) involving value to either party in excess of $1.0 million, the
Company must address and deliver an Officers' Certificate to the Trustee
certifying that (x) the terms of such Affiliate Transaction (or Affiliate
Transactions) are fair and reasonable to the Company, and no less favorable to
the Company than could have been obtained in an arm's length transaction with a
non-Affiliate and (y) such Affiliate Transaction (or Affiliate Transactions) has
been approved by a majority of the members of the Board of Directors that are
disinterested in such transaction and (ii) involving value to either party in
excess of $5.0 million, the Company must, prior to the consummation thereof, in
addition to the Officers' Certificate delivered to the Trustee pursuant to
clause (i) of this paragraph, obtain a written favorable opinion as to the
fairness of such transaction to the Company from a financial point of view from
an independent investment banking firm or valuation firm of national reputation
for being knowledgeable with respect to such matters, PROVIDED that this clause
(ii) shall not apply to transactions between the Company or any of its
Subsidiaries and any Affiliate thereof that is an investment or commercial bank
of national reputation with capital and surplus of at least $500.0 million, in
connection with the rendering by such Affiliate to the Company or such
Subsidiary of investment or commercial banking (including lending) services.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not, directly or indirectly,
consolidate with or merge with or into another Person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, or adopt a plan of liquidation,
unless (i) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a plan of liquidation, the
entity which receives the greatest value from such plan of liquidation is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the Indenture;
(ii) no Default or Event of Default shall exist or would occur immediately after
giving effect on a PRO FORMA basis to such transaction; (iii) immediately after
giving effect to such transaction on a PRO FORMA basis, the Consolidated Net
Worth of the consolidated surviving or transferee entity or, in the case of a
plan of liquidation, the entity which receives the greatest value from such plan
of liquidation is at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a PRO FORMA basis, the consolidated resulting, surviving or
transferee entity or, in the case of a plan of liquidation, the entity which
receives the greatest value from such plan of liquidation would immediately
thereafter be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"; and (v)
the Company has delivered to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that such consolidation, merger or transfer and, if a
supplemental indenture is required, such supplemental indenture, complies with
the Indenture and that all conditions precedent therein relating to such
transaction have been satisfied. The provisions of clause (iv) will not prevent
the merger of the Company with or into another Person solely for the purpose of
changing the jurisdiction of incorporation of the Company.
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Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and, except in the case of a transfer of all or
substantially all of the assets of the Company and its Subsidiaries as a result
primarily of the lease to any party thereof, the Company shall be released from
the obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
or Unrestricted Subsidiaries will directly or indirectly engage to any
substantial extent in any line or lines of business activity other than that
which, in the reasonable good faith judgment of the Board of Directors of the
Company, is a Related Business.
RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK
The Indenture provides that the Company will not sell, and will not permit
any of its Subsidiaries to issue or sell, any Equity Interests of any Subsidiary
of the Company to any Person other than the Company or a Wholly Owned Subsidiary
of the Company, except for Equity Interests with no preferences or special
rights or privileges and with no redemption or prepayment provisions.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder within 15 days after it is or
would have been (if it were subject to such reporting obligations) required to
file such with the Commission, annual and quarterly financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission, if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including, with respect
to annual information only, a report thereon by the Company's certified
independent public accountants as such would be required in such reports to the
Commission, and, in each case, together with a management's discussion and
analysis of financial condition and results of operations which would be so
required and, to the extent permitted by the Exchange Act or the Commission (if
it were subject to such reporting obligations), file with the Commission the
annual, quarterly and other reports which it is or would have been required to
file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes due
and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of the principal, or premium, if
any,
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on the Notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation, payment
of the Change of Control Purchase Price or the Asset Sale Offer Price, or
otherwise, (iii) the failure by the Company or any Subsidiary to observe or
perform any other covenant or agreement contained in the Notes or the Indenture
and, subject to certain exceptions, the continuance of such failure for a period
of 60 days after written notice is given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate principal
amount of the Notes outstanding, (iv) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any of its Subsidiaries, (v) a
default in any issue of Indebtedness of the Company or any of its Subsidiaries
with an aggregate principal amount in excess of $5 million, which default (a) is
caused by failure to pay principal of, or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided therein on the
date of such default, or (b) results in the acceleration of payment of such
Indebtedness prior to its express maturity and (vi) final unsatisfied judgments
not covered by insurance aggregating in excess of $5 million, at any one time
rendered against the Company or any of its Subsidiaries and not stayed, bonded
or discharged within 60 days. The Indenture provides that if a Default occurs
and is continuing, the Trustee must, within 90 days after the occurrence of such
default, give to the Holders notice of such default; PROVIDED, that 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.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any
Subsidiary), then in every such case, unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the Holders of
25% in aggregate principal amount of the Notes then outstanding, by notice in
writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, premium, if any, and accrued
and unpaid interest thereon to be due and payable immediately. If an Event of
Default specified in clause (iv), above, relating to the Company or any
Subsidiary occurs, all principal and accrued interest thereon will be
immediately due and payable on all outstanding Notes without any declaration or
other act on the part of the Trustee or the Holders. The Holders of a majority
in aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-payment of
the principal of, premium, if any, and interest on the Notes which have become
due solely as a result of such acceleration have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
in the payment of principal of or interest on any Note not yet cured or a
default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Notes, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by, and the
Indenture shall cease to be of further effect as to, all outstanding Notes,
except as to (i) rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due from the trust funds; (ii) the Company's obligations with respect to such
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,
trust,
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duties, and immunities of the Trustee, and the Company's obligations in
connection therewith; and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have its
obligations 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
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, U.S. legal tender, noncallable U.S. 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, if any, and interest on such Notes on the
stated date for payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such Notes, and the
Holders of Notes must have a valid, perfected, exclusive security interest in
such trust; (ii) in the case of the Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by the Internal Revenue Service, a ruling or (B) since
the 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 such 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 Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to such Trustee confirming
that the Holders of such 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 or, insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under the Indenture or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee
an Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of such Notes over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; and (vii) the Company
shall have delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that the conditions precedent provided for in, in the case
of the Officers' Certificate, (i) through (vi) and, in the case of the opinion
of counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company under
the Indenture will be revived and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any supplemental indenture or modify the rights of the Holders; PROVIDED, that
no such modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of any Note, or reduce the
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principal amount thereof or the rate (or extend the time for payment) of
interest thereon or any premium payable upon the redemption thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the provisions (including the defined terms used therein) regarding the
right of the Company to redeem the Notes or the provisions (including the
defined terms used therein) of the "Repurchase of Notes at the Option of the
Holder Upon a Change of Control" covenant in a manner adverse to the Holders, or
(ii) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or (iii) modify any of the
waiver provisions, except to increase any required percentage or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the Holder of each outstanding Note affected thereby, or (iv)
cause the Notes to become subordinate in right of payment to any other
Indebtedness.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company or any
successor entity shall have any personal liability in respect of the obligations
of the Company under the Indenture or the Notes by reason of his or its status
as such stockholder, employee, officer or director.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any Person existing at the time such Person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with or otherwise
acquired by the Company or one of its Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"AFFILIATE" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, PROVIDED that, with respect to ownership of the Company and its
Subsidiaries, a beneficial owner of 10% or more of the total voting power
normally entitled to vote in the election of directors, managers or trustees, as
applicable, shall for such purposes be deemed to constitute control.
"ANCILLARY DOCUMENTS" means the amendment to the Company's Articles of
Incorporation creating the Junior Preferred Stock, the Restricted Stock
Agreements, the Shareholders Agreement, the Shareholder Registration Rights
Agreement, the Employment Agreements, the Management Stock Option Agreements and
the Plan.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of (a) the
product of the number of years from the date of determination to the date or
dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" has the meaning attributed to it in
Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue Date),
whether or not applicable, except that a "Person" shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time.
"BORROWING BASE" means at any time the sum of (i) 75% of Eligible
Receivables, plus (ii) 65% of Eligible Inventory.
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"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"CAPITALIZED LEASE OBLIGATION" means rental or other payment obligations
under a lease of real or personal property that are required to be capitalized
for financial reporting purposes in accordance with GAAP, and the amount of
Indebtedness represented by such obligations shall be the capitalized amount of
such obligations, as determined in accordance with GAAP.
"CASH EQUIVALENT" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation of
any domestic commercial bank of recognized standing having capital and surplus
in excess of $500 million and commercial paper issued by others rated at least
A-2 or the equivalent thereof by Standard & Poor's Corporation or at least P-2
or the equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition and (iii) investments in
money market accounts substantially all of whose assets comprise securities of
the types described in clauses (i) and (ii) above.
"CONSOLIDATED COVERAGE RATIO" of any Person as of the date of the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
(the "Transaction Date") means the ratio, on a PRO FORMA basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; PROVIDED that for purposes of
this definition, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall be
assumed to have occurred on the first day of such Reference Period, and (iv) the
Consolidated Fixed Charges of such Person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a PRO FORMA basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
Person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that either (i) has the effect of fixing the
interest rate on the date of computation, in which case such fixed rate (whether
higher or lower) shall be used or (ii) has the effect of capping the interest
rate on the date of computation, in which case such capped rate (if lower) shall
be used.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
Consolidated Net Income of such Person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of (i) Consolidated Income Tax Expense,
(ii) Consolidated Depreciation and Amortization Expense, PROVIDED that
Consolidated Depreciation and Amortization Expense of a Subsidiary that is not a
Wholly Owned Subsidiary shall only proportionately be added to the extent of the
proportionate equity interest of the Company in
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such Subsidiary, (iii) Consolidated Fixed Charges, (iv) all other non-cash
charges, less the amount of all cash payments made by such Person or any of its
Subsidiaries during such period to the extent such payments relate to non-cash
charges that were added back in determining Consolidated EBITDA for such period
or any prior period, and (v) for periods including and prior to June 5, 1996,
salary paid to Raymond Scherr as Chairman of the Company (to the extent such
salary reduced Consolidated Net Income).
"CONSOLIDATED FIXED CHARGES" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to bankers'
acceptances and letters of credit financings and currency and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period, and
(b) the amount of cash dividends paid or scheduled to be paid by such Person or
any of its Consolidated Subsidiaries in respect of Preferred Stock (other than
by Subsidiaries of such Person to such Person or such Person's Wholly Owned
Subsidiaries). For purposes of this definition, (x) interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or a
Subsidiary of such Person of an obligation of another Person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP), plus, without
duplication and only to the extent not already included in net income, cash
dividends received by the Company from Unrestricted Subsidiaries (not in excess
of the Company's or such Subsidiary's proportionate share of the equity interest
therein) for such period, adjusted to exclude (only to the extent included in
computing such net income (or loss) and without duplication): (a) all gains and
losses which are either extraordinary (as determined in accordance with GAAP) or
are either unusual or nonrecurring (including any gain or loss from the sale or
other disposition of assets outside the ordinary course of business or from the
issuance or sale of any Capital Stock), (b) the net income, if positive, of any
Person, other than a Wholly Owned Subsidiary, in which such Person or any of its
Consolidated Subsidiaries has an interest, except to the extent of the amount of
any dividends or distributions actually paid in cash to such Person or a Wholly
Owned Subsidiary of such Person during such period, but in any case not in
excess of such Person's PRO RATA share of such Person's net income for such
period, (c) the net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, (d)
the net income, if positive, of any of such Person's Consolidated Subsidiaries
to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Consolidated
Subsidiary, and (e) the effect of non-cash charges resulting solely from the
issuance and/or lapse of substantial risk of forfeiture of Junior Preferred
Stock issued to members of the Company's management in connection with and at
the time of the Recapitalization.
"CONSOLIDATED NET WORTH" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to preferred stock of such Person) and its Consolidated
Subsidiaries, as would be shown on the consolidated balance sheet of such Person
prepared in accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity), (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of such Person and
its Consolidated Subsidiaries, and (b) amounts included in such stockholders'
equity resulting from upward revaluations and other write-ups in the book value
of assets of such Person or a Consolidated Subsidiary of such Person subsequent
to the Issue Date.
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"CONSOLIDATED SUBSIDIARY" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of June 5, 1996,
between the Company and Wells Fargo Bank, N.A., and all refundings,
refinancings, amendments, modifications, replacements (solely with institutional
lenders of national reputation) and supplements thereto.
"DISQUALIFIED CAPITAL STOCK" means (a), except as set forth in (b), with
respect to any Person, any Equity Interest of such Person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time would
be, required to be redeemed or repurchased (including at the option of the
Holder thereof) by such Person or any of its Subsidiaries, in whole or in part,
on or prior to the Stated Maturity of the Notes and (b) with respect to any
Subsidiary of such Person (including with respect to any Subsidiary of the
Company), any Equity Interest other than any common equity with no preference,
privileges, or redemption or repayment provisions.
"ELIGIBLE INVENTORY" means the book value of all inventory owned by the
Company and its Subsidiaries as would be reportable on a consolidated balance
sheet prepared in accordance with GAAP .
"ELIGIBLE RECEIVABLES" means the face amount of all accounts receivable
owned by the Company and its Subsidiaries as would be reportable on a
consolidated balance sheet in compliance with GAAP.
"EQUITY INTEREST" of any Person means any shares, interests, warrants,
options, participations or other equivalents (however designated) in such
Person's equity, and shall in any event include any Capital Stock issued by, or
partnership interests in, such Person.
"EVENT OF LOSS" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"EXEMPTED AFFILIATE TRANSACTION" means (i) compensation paid to officers and
directors of the Company pursuant to the Ancillary Documents as in effect on the
date the shares of Senior Preferred Stock were first issued, (ii) any loans or
advances by the Company to employees of the Company or a subsidiary of the
Company in the ordinary course of business and in furtherance of the Company's
business, in an aggregate amount not to exceed $1 million at any one time
outstanding, (iii) transactions expressly contemplated by the Transaction
Documents (including, without limitation, the repurchase of shares of Junior
Preferred Stock and Common Stock held by employees), (iv) transactions with
employees of the Company (including but not limited to compensation arrangements
or loans and advances not referred to in clause (i) or (ii) that have been
approved by the Board of Directors, including a majority of the disinterested
directors, as being in the best interests of the Company) and (v) transactions
between or among the Company and one or more of its Wholly Owned Subsidiares and
between or among the Company's Wholly Owned Subsidiaries.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company outstanding on the
Issue Date after giving effect to the redemption of the Bridge Facility.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"INDEBTEDNESS" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such any Person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of
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the purchase price of any property or services, except (other than accounts
payable or other obligations to trade creditors (not the result of borrowed
money) which have remained unpaid for greater than 90 days past their original
due date) those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable (including trade payables due within 12
months representing special terms offered by vendors in connection with new
store openings, "special buy" situations or promotional situations) to trade
creditors (which in no event provide for payment more than 12 months after
delivery of goods or provision of services), (iv) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks, (v) relating to
any Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such Person with respect to any letter of credit;
(b) all net obligations of such Person under Interest Swap and Hedging
Obligations; (c) all liabilities and obligations of others of the kind described
in the preceding clause (a) or (b) that such Person has guaranteed or that is
otherwise its legal liability, or which are secured by any assets or property
(limited, in such case, to the lesser of the amount of such Indebtedness or the
fair market value of such assets or property) of such Person, and all
obligations to purchase, redeem or acquire any Equity Interests; (d) any and all
deferrals, renewals, extensions, refinancing and refundings (whether direct or
indirect) of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (a), (b) or (c), or this
clause (d), whether or not between or among the same parties; and (e) all
Disqualified Capital Stock of such Person (measured at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends). For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value to be determined in good faith by the
board of directors of the issuer (or managing general partner of the issuer) of
such Disqualified Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act as a consequence of which the Common Stock of the
Company is listed on a national securities exchange or quoted on the national
market system of NASDAQ.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any Person in any other Person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (b) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); (c) other than guarantees of Indebtedness of the
Company to the extent permitted by the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," the entering into by
such Person of any guarantee of, or other credit support or contingent
obligation with respect to, Indebtedness or other liability of such other
Person; (d) the making of any capital contribution by such Person to such
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other Person; and (e) the designation by the Board of Directors of the Company
of any person to be an Unrestricted Subsidiary. The Company shall be deemed to
make an Investment in an amount equal to the fair market value (as reasonably
determined in good faith by the Board of Directors) of the net assets of any
Subsidiary (or, if neither the Company nor any of its Subsidiaries has
theretofore made an Investment in such Subsidiary, in an amount equal to the
Investments being made), at the time that such subsidiary is designated an
Unrestricted Subsidiary, and any property transferred to an Unrestricted
Subsidiary from the Company or a Subsidiary shall be deemed an Investment valued
at its fair market value (as reasonably determined in good faith by the Board of
Directors) at the time of such transfer.
"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"LIEN" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired (excluding any option, warrant, right to purchase or
other similar right with respect to Qualified Capital Stock).
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary) expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less (i) the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its Subsidiaries in connection with such Asset Sale and (ii)
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against (a) any liabilities associated with the property or assets
disposed of in such Asset Sale, and (b) the after-tax cost of any
indemnification payments (fixed and contingent) attributable to the seller's
indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such Asset Sale (but excluding any payments,
which by the terms of the indemnities will not be made prior to the Stated
Maturity of the Notes).
"PERMITTED INDEBTEDNESS" means any of the following:
(a) Indebtedness incurred by the Company to any Wholly Owned Subsidiary,
and any Wholly Owned Subsidiary may incur Indebtedness to any other
Wholly Owned Subsidiary or to the Company; PROVIDED that, in the case of
Indebtedness of the Company, such obligations shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the
Notes and the date of any event that causes such Subsidiary no longer to be
a Wholly Owned Subsidiary shall be an Incurrence Date;
(b) Indebtedness incurred by the Company evidenced by the Notes and
represented by the Indenture up to the amounts specified therein as
of the date thereof;
(c) Purchase Money Indebtedness (including any Indebtedness issued to
refinance, replace or refund such Indebtedness so long as such
Indebtedness is secured only by the assets that secured the Indebtedness so
refinanced, replaced or refunded on a non-recourse basis) incurred by the
Company and its Subsidiaries on or after the Issue Date, PROVIDED that (i)
the aggregate amount of such Indebtedness incurred on or after the Issue
Date and outstanding at any time pursuant to this paragraph (c) (including
Indebtedness issued so to refinance, replace or refund) shall not exceed $5
million, and (ii) in each case, such Indebtedness when incurred shall not
constitute less than 50% nor more than 100% of the cost (determined in
accordance with GAAP) to the Company of the property so purchased or leased;
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(d) Refinancing Indebtedness incurred by the Company with respect to any
Indebtedness or Disqualified Capital Stock, as applicable, incurred
as permitted by the Debt Incurrence Ratio contained in the "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"
covenant or as described in clause (b) of this definition or described in
this clause (d) or Existing Indebtedness (after giving effect to the
repayment of the Bridge Facility);
(e) Indebtedness incurred pursuant to the Credit Agreement (including any
Indebtedness issued to refinance, refund or replace such
Indebtedness); provided that, after giving effect to any such incurrence,
the aggregate principal amount of such Indebtedness then outstanding does
not exceed the greater of (i) $25 million and (ii) the Borrowing Base, which
such amount (in the case of (i) or (ii)) shall be reduced by the amount of
any Indebtedness outstanding pursuant to the Credit Agreement retired with
Net Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset
Sale;
(f) Disqualified Capital Stock issued as in-kind dividends on the Senior
Preferred Stock or accretion to the liquidation value thereof
pursuant to the instrument governing the terms of such capital stock as such
instrument was in effect on the Issue Date; and
(g) unsecured Indebtedness incurred by the Company (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate amount outstanding at any time (including any Indebtedness issued
to refinance, replace, or refund such Indebtedness) of up to $10 million.
"PERMITTED INVESTMENT" means Investments in (a) any of the Notes; (b) Cash
Equivalents; and (c) intercompany indebtedness to the extent permitted under
clause (a) of the definition of "Permitted Indebtedness."
"PERMITTED LIEN" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business,
PROVIDED that (i) the underlying obligations are not overdue for a period of
more than 30 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds,
deposits in connection with the purchase of real property, and other obligations
of a like nature incurred in the ordinary course of business; (e) easements,
rights-of-way, zoning, similar restrictions and other similar encumbrances or
title defects which, singly or in the aggregate, do not in any case materially
detract from the value of the property subject thereto (as such property is used
by the Company or any of its Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (f) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with respect
thereto; (g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security legislation; (h) Liens securing the Notes; (i) Liens securing
Indebtedness of a Person existing at the time such Person becomes a Subsidiary
or is merged with or into the Company or a Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, PROVIDED that such
Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any property or assets other than property or assets acquired in such
transaction; (j) Liens arising from Purchase Money Indebtedness permitted to be
incurred under clause (c) of the definition of "Permitted Indebtedness,"
PROVIDED such Liens relate only to the property which is subject to such
Purchase Money Indebtedness and PROVIDED, FURTHER, that cross-collateralization,
creation of "collateral pools" or similar arrangements involving solely Purchase
Money Indebtedness and the assets serving as collateral therefor shall be
Permitted Liens; (k) leases or subleases granted to other Persons in the
ordinary course of business not materially interfering with the conduct of the
business of the Company or any of its Subsidiaries or
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materially detracting from the value of the relative assets of the Company or
any Subsidiary; (l) Liens arising from precautionary Uniform Commercial Code
financing statement filings regarding operating leases entered into by the
Company or any of its Subsidiaries in the ordinary course of business; (m) Liens
securing Refinancing Indebtedness incurred to refinance any Indebtedness that
was previously so secured in a manner no more adverse to the Holders of the
Notes than the terms of the Liens securing such refinanced Indebtedness
(provided that any Refinancing Indebtedness with respect to the Credit Agreement
need not have any limitation on when such Liens are granted or perfected),
PROVIDED that the Indebtedness secured is not increased, except to finance
accrued interest and the expenses of such refinancing, and the lien is not
extended to any additional assets or property; (n) Liens in favor of the Company
only; and (o) Liens imposed pursuant to the terms of the Credit Agreement.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of such Person to any
seller or other Person (i) incurred solely to finance the acquisition (including
in the case of a Capitalized Lease Obligation only, the lease) of any real or
personal tangible property which, in the reasonable good faith judgment of the
Board of Directors of the Company, is directly related to a Related Business of
the Company, (ii) which is incurred within 90 days of such acquisition, and
(iii) is secured only by assets so financed.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Equity Interests or Indebtedness of the
Company with the Net Cash Proceeds received by the Company from the
substantially concurrent sale of Qualified Capital Stock or any exchange of
Qualified Capital Stock for any Capital Stock or Indebtedness.
"REFERENCE PERIOD" with regard to any period means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference including accrued dividends
thereon, of the Indebtedness or Disqualified Capital Stock so Refinanced and
(ii) if such Indebtedness being Refinanced was issued with an original issue
discount, the accreted value thereof (as determined in accordance with GAAP) at
the time of such Refinancing; PROVIDED that (A) Refinancing Indebtedness
incurred by any Subsidiary of the Company shall only be used to Refinance
outstanding Indebtedness or Disqualified Capital Stock of such Subsidiary, (B)
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness or Disqualified Capital Stock to be so refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior, if
applicable, to the rights of Holders of the Notes than was the Indebtedness or
Disqualified Capital Stock to be refinanced and (C) Refinancing Indebtedness
shall have a final stated maturity or redemption date, as applicable, no earlier
than the final stated maturity or redemption date, as applicable, of the
Indebtedness or Disqualified Capital Stock to be so refinanced.
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than investments in Permitted Investments.
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"RESTRICTED PAYMENT" means, with respect to any Person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such Person or any parent or Subsidiary of such Person, (b) any payment on
account of the purchase, redemption or other acquisition or retirement for value
of Equity Interests of such Person or any Subsidiary or parent of such Person,
(c) other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness, any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness, directly or
indirectly, by such Person or a parent or Subsidiary of such Person prior to the
scheduled maturity, any scheduled repayment of principal, or scheduled sinking
fund payment, as the case may be, of such Indebtedness and (d) any Restricted
Investment by such Person; PROVIDED, HOWEVER, that the term "Restricted Payment"
does not include (i) any dividend, distribution or other payment on or with
respect to Capital Stock of an issuer to the extent payable solely in shares of
Qualified Capital Stock of such issuer; or (ii) any dividend, distribution or
other payment to the Company by any of its Subsidiaries.
"STATED MATURITY," when used with respect to any Note, means July 1, 2006.
"STOCKHOLDERS AGREEMENT" means the agreement dated as of June 5, 1996, among
the Company and the stockholders listed on the various schedules thereto, as in
effect on the Issue Date.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company that is
subordinated in right of payment to the Notes in any respect.
"SUBSIDIARY," with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such Person, by such
Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, (ii) any other Person (other than a corporation) in
which such Person, one or more Subsidiaries of such Person, or such Person and
one or more Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest, or (iii) a
partnership in which such Person or a Subsidiary of such Person is, at the time,
a general partner. Notwithstanding the foregoing, an Unrestricted Subsidiary
shall not be a Subsidiary of the Company or of any Subsidiary of the Company.
Unless the context requires otherwise, Subsidiary means each direct and indirect
Subsidiary of the Company.
"TRANSACTION DOCUMENTS" means the Investor Agreement, the Bridge Financing
Agreement, the Securities Purchase Agreement, the Registration Agreement, the
Tax Indemnification Agreement, and the Ancillary Documents, in each case as such
documents are in effect on the date shares of Senior Preferred Stock are first
issued.
"UNRESTRICTED SUBSIDIARY" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); PROVIDED that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving PRO FORMA effect to such designation would there exist a Default or Event
of Default and (iii) any Investment therein shall not be prohibited by the
"Limitation on Restricted Payments" covenant. The Board of Directors of the
Company may designate any Unrestricted Subsidiary to be a Subsidiary, PROVIDED
that (i) no Default or Event of Default is existing or will occur as a
consequence thereof and (ii) immediately after giving effect to such
designation, on a PRO FORMA basis, the Company could incur at least $1.00 of
Indebtedness pursuant to the Debt Incurrence Ratio in the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock." Each
such designation shall be evidenced by filing with the Trustee a certified copy
of the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"WHOLLY OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more Wholly Owned Subsidiaries of the
Company.
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes initially will be issued in the
form of one or more registered Notes in global form (the "Global Notes"). Each
Global Note will be deposited on the date of the consummation of the Exchange
Offer with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary.
The Depositary is (i) a limited-purpose trust company organized under the
New York Banking Law; (ii) a member of the Federal Reserve System; (iii) a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code; and (iv) a "clearing agency" registered pursuant to Section 17A of the
Exchange Act. The Depositary holds securities that its participating
organizations (collectively, the "Participants") deposit with the Depositary.
The Depositary also facilitates the settlement of transactions in such
securities between Participants, such as transfers and pledges in deposited
securities through electronic computerized book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. The rules applicable to the
Depositary and its Participants are on file with the SEC. QIBs may elect to hold
Notes purchased by them through the Depositary. QIBs who are not Participants
may beneficially own securities held by or on behalf of the Depositary only
through Participants or Indirect Participants. Persons who are not QIBs may not
hold Notes through the Depositary.
The Company expects that pursuant to procedures established by the
Depositary, upon deposit of the Global Note, the Depositary will credit the
accounts of Participants with an interest in the Global Note, and ownership of
the Notes evidenced by the Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of Participants), the Participants and
the Indirect Participants. The laws of some states require that certain persons
take physical delivery in definitive form of securities that they own and that
security interests in negotiable instruments can only be perfected by delivery
of certificates representing the instruments. Consequently, the ability to
transfer Notes or to pledge the Notes as collateral will be limited to such
extent. For certain other restrictions on the transferability of the Notes, see
"Notice to Investors."
So long as the Depositary or its nominee is the registered owner of a Global
Note, the Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Securities, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a person having a beneficial
interest in Notes represented by a Global Note to pledge such interest to
persons or entities that do not participate in the Depositary's system, or to
otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Accordingly, each Holder owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such Holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such Holder owns its interest, to exercise any rights of a holder
under the Indenture or such Global Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
Holders of Notes or a Holder that is an owner of a beneficial interest in a
Global Note desires to take any action that the Depositary, as the holder of
such Global Note, is entitled to take, the Depositary would authorize the
Participants to take such action and the Participants would authorize Holders
owning through such Participants to take such action or would otherwise act
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upon the instructions of such Holders. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the Depositary
or its nominee on the applicable record date will be payable by the Trustee to
or at the direction of the Depositary or its nominee in its capacity as the
registered holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
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 Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of the Depositary. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days; or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depositary of
its Global Note, Certificated Securities will be issued to each person that the
Depositary identifies as the beneficial owner of the Notes represented by the
Global Note. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee, exchange
such beneficial interest for Certificated Securities. Upon any such issuance,
the Trustee is required to register such Certificated Securities in the name of
such person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and the Company and the Trustee may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company will have no responsibility for the
performance by the Depositary or its Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
The Indenture requires 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 funds to the
accounts specified by the Depositary. With respect to Notes represented by
Certificated Securities, the Company 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. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are expected to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds. No assurance can be given as to the effect, if any,
of settlement in immediately available funds on trading activity in the Notes.
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THE NEW CREDIT FACILITY
GENERAL. The Company has entered into a credit agreement (the "New Credit
Facility") with WFB. The New Credit Facility provides for a $25 million
revolving credit facility, including a sub-limit for letters of credit of $10
million. The facility expires on June 1, 2001. Capitalized terms used in this
description that are not defined herein have the meaning given to such terms in
the New Credit Facility.
AVAILABILITY. Borrowings under the New Credit Facility are subject to a
borrowing base limit equal to 80% of Eligible Receivables plus 70% of Eligible
Inventory minus, at all times prior to the occurrence of the Collateral
Perfection Date, Trade Payables.
SECURITY. Indebtedness of the Company under the New Credit Facility is
currently unsecured. Upon the occurrence of certain events including (i) an
Event of Default or (ii) the failure by the Company to maintain certain ratios,
at the option of WFB, the New Credit Facility will be secured by a security
interest in certain assets and properties of the Company, including accounts
receivable, inventory, trademarks, copyrights, patents and general intangibles,
and all products and proceeds of any of the foregoing.
INTEREST. Indebtedness under the New Credit Facility bears interest at a
rate based (at the Company's option) upon (i) in the case of Prime Rate Loans,
the Prime Rate plus a maximum margin of 1.50% (subject to reduction depending on
the ratio of Funded Debt to EBITDA); and (ii) in the case of Eurodollar Rate
Loans, the Eurodollar Rate for one, two, three, six, nine or twelve months, plus
a maximum margin of 3.00% (subject to reduction depending on the ratio of Funded
Debt to EBITDA).
MATURITY. The New Credit Facility will mature on June 1, 2001. Loans made
pursuant to the New Credit Facility may be borrowed, repaid and reborrowed from
time to time until such maturity date, subject to the satisfaction of certain
conditions on the date of any such borrowing.
REVOLVING CREDIT FACILITY FEES. The Company is required to pay WFB a
facility fee of $250,000, of which $50,000 was paid and $50,000 is payable at
the end of each fiscal year of the Company (beginning at the end of fiscal year
1996); PROVIDED that upon termination or cancellation of the New Credit
Facility, the Company must pay in full the outstanding balance of the $250,000
facility fee. In addition, the Company has agreed to pay to WFB promptly upon
demand, a fee of $25,000 in consideration for WFB agreeing to allow the Borrower
to use the proceeds of Revolving Loans to make loans to senior management in
respect of certain personal income tax liabilities. The Company is also required
to pay to WFB a commitment fee based on the average daily unused portion of the
committed undrawn amount of the New Credit Facility during the preceding quarter
equal to a maximum of 0.375% per annum (subject to reduction depending on the
ratio of Funded Debt to EBITDA), payable in arrears on a quarterly basis. In
addition to a nominal issuance fee for each letter of credit issued, the Company
is required to pay to WFB a letter of credit fee based on the aggregate unpaid
face amount of outstanding letters of credit equal to a maximum of 3.00%
(subject to reduction depending on the ratio of Funded Debt to EBITDA), payable
in arrears on a quarterly basis.
CONDITIONS TO EXTENSIONS OF CREDIT. The obligation of WFB to make loans or
extend letters of credit after the Closing Date will be subject to the
satisfaction of certain customary conditions including, but not limited to, the
absence of a default or event of default under the New Credit Facility, all
representations and warranties under the New Credit Facility being true and
correct in all material respects, and that there has been no material adverse
change in the Company's properties or business.
COVENANTS. The New Credit Facility requires the Company to meet certain
financial tests, including a maximum Funded Debt to EBITDA ratio, a minimum Debt
Service Coverage Ratio, a minimum level of profit, a minimum quarterly increase
in Tangible Net Worth and a minimum EBITDA. The New Credit Facility also
contains covenants which, among other things, will limit the incurrence of
additional indebtedness, the nature of the business of the Company, leases of
assets, ownership of subsidiaries, dividends, limitations on capital
expenditures, transactions with affiliates, asset sales, acquisitions, mergers
and consolidations, loans and investments, liens and encumbrances and other
matters customarily restricted in such agreements. The New Credit Facility
contains additional covenants which will
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require the Company to maintain its existence and rights and franchises, to
maintain its properties, to maintain insurance on such properties, to provide
certain information to WFB, including financial statements, notices and reports
and to permit inspections of the books and records of the Company and its
subsidiaries, to comply with applicable laws, including environmental laws and
ERISA, to pay taxes and contractual obligations and to use the proceeds of the
Revolving Loans to finance in part the Recapitalization, and for working capital
and other general corporate purpose.
EVENTS OF DEFAULT. Events of Default under the New Credit Facility contains
events of default customary for working capital facilities, including payment
defaults, breach of representations, warranties and covenants (subject to
certain cure periods), cross-default to other indebtedness in excess of $2
million, certain events of bankruptcy and insolvency, breach of ERISA covenants,
judgment defaults in excess of $2 million and the occurrence of a Change of
Control.
INDEMNIFICATION. Under the New Credit Facility, the Company has agreed to
indemnify WFB and related persons from and against any and all Losses
(including, without limitation, the reasonable fees and disbursements of
counsel) that may be incurred by or asserted against any such indemnified party
(a) in any way relating to the Loan Documents, the Recapitalization, or the use
or intended use of the proceeds of the New Credit Facility; (b) in connection
with any investigation, litigation or other proceeding relating to the
foregoing; or (c) in any way relating to or arising out of any Environmental
Claims; PROVIDED, HOWEVER, that the Company is not liable for any such Losses
resulting from such indemnified party's own gross negligence or willful
misconduct.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, $0.01 par value per share ("Common Stock") and 10,000,000 shares
of Preferred Stock, $0.01 par value per share ("Preferred Stock"). The following
summary description relating to the capital stock does not purport to be
complete. Reference is made to the Certificate of Incorporation of the Company
(the "Certificate") and the Bylaws of the Company ("Bylaws"), which are filed as
exhibits to the Registration Statement of which this Prospectus forms a part,
for a detailed description of the provisions thereof summarized below.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may from
time to time be declared by the Board of Directors of the Company out of funds
legally available therefor. Holders of Common Stock are entitled to one vote per
share on all matters on which the holders of Common Stock are entitled to vote
and do not have any cumulative voting rights. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding Preferred Stock. The outstanding
shares of Common Stock are fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to any series of Preferred
Stock which the Company may issue in the future.
WARRANTS
In connection with the Recapitalization, the Company granted a warrant for
the purchase of shares of the Common Stock and the Junior Preferred Stock of the
Company (collectively, the "Warrants") to each of the DLJ Investors. The
Warrants are exercisable for Common Stock and Junior Preferred Stock, at an
exercise price of $0.01 per share and expire on June 5, 2006.
So long as any of the Warrants are outstanding, the amount of Common Stock
and the amount of Junior Preferred Stock obtainable pursuant to the Warrants
shall be subject to change or adjustment according to the anti-dilution
provisions of the Warrants.
If pursuant to the terms of the Junior Preferred Stock, all or a portion of
the shares of Junior Preferred Stock are converted to Common Stock, the amount
of Common Stock issuable pursuant to the Warrants shall be increased by the
number of shares of Common Stock that the holders of the Warrants would have
received immediately prior to the conversion, and the number of shares of Junior
Preferred Stock issuable pursuant to the Warrants shall be decreased by the
number of shares of Junior Preferred Stock which would have been converted into
Common Stock had the Warrants been exercised immediately prior to the
conversion.
PREFERRED STOCK
The Certificate authorizes the issuance of up to 10,000,000 shares of
Preferred Stock. The Board of Directors is authorized to provide for the
issuance of Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference, and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up, or both. In addition, any such shares of the Preferred Stock may have class
or series voting rights.
THE SENIOR PREFERRED STOCK
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock with an initial aggregate liquidation value of $20.0
million. All outstanding shares of Senior Preferred Stock are fully paid and
nonassessable.
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RANKING. The Senior Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, ranks senior to the Junior
Preferred Stock and the Common Stock.
DIVIDENDS. The holders of the shares of Senior Preferred Stock are entitled
to receive, when, as and if declared by the Board, out of funds legally
available for the payment of dividends, dividends accruing at the rate of 14%
per annum. Such dividends are payable quarterly on each of March 15, June 15,
September 15 and December 15 of each year, beginning June 15, 1996 (each such
date, a "Dividend Payment Date"). On or prior to June 15, 2002 (the "Cash Pay
Date"), dividends shall not be payable in cash to holders of Senior Preferred
Stock but shall, whether or not declared, accrete to the Liquidation Value (as
defined in the Certificate) of the Senior Preferred Stock compounded on each
Dividend Payment Date; provided, however, that the majority of the holders of
outstanding Senior Preferred Stock may request that all dividends required to be
paid on shares of Senior Preferred Stock be paid in kind through the issuance of
additional shares of Senior Preferred Stock ("Additional Shares"). The
Additional Shares shall be identical to all other shares of Senior Preferred
Stock, except with respect to Liquidation Value.
OPTIONAL REDEMPTION. The Company may, at its option, to the extent that
funds are legally available for such payment, redeem, prior to June 15, 1999, in
whole or in part, shares of Senior Preferred Stock at a redemption price equal
to 103% of the Liquidation Value if such redemption shall occur before June 15,
1997, or 106% of the Liquidation Value if the redemption occurs on or after June
15, 1997 to and including June 15, 1999, without interest; PROVIDED, HOWEVER,
that an initial public offering shall have occurred and the aggregate redemption
price of the Senior Preferred Stock does not exceed the net proceeds received by
the Company in the initial public offering.
The Company may, at its option, on and after June 15, 1999, to the extent
the Company shall have funds legally available for such payment, redeem shares
of Senior Preferred Stock, at any time in whole, or from time to time in part,
at redemption prices per share in cash set forth in the table below, together
with accrued and unpaid cash dividends thereon to the date fixed for redemption,
without interest:
<TABLE>
<CAPTION>
YEAR
BEGINNING PERCENTAGE OF
JUNE 15, LIQUIDATION VALUE
----------- ---------------------
<S> <C>
1999................................................... 110%
2000................................................... 108
2001................................................... 106
2002................................................... 104
2003................................................... 102
2004 and thereafter.................................... 100
</TABLE>
MANDATORY REDEMPTION. To the extent the Company shall have funds legally
available therefor, on June 15, 2008, the Company shall redeem all outstanding
shares of Senior Preferred Stock at a redemption price equal to the aggregate
Liquidation Value, without interest.
In addition, to the extent the Company shall have funds legally available
therefor, the Company shall offer, within five days following a Change of
Control to redeem all shares of Senior Preferred Stock no later than 45 days
following a Change of Control of the Company at a redemption price per share
equal to 101% of the Liquidation Value, without interest.
As used herein, "Change in Control" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act
of 1934, as amended), other than any person or group comprised solely of the
Initial Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Initial Investors;
(b) a sale or transfer of all or substantially all of the assets of the Company
to any person or group (other than any group consisting solely of the Initial
Investors) has been consummated; or (c) during any period of two consecutive
years, individuals who at the beginning of such period
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constituted the Board of Directors of the Company (together with any new
directors whose election was approved by a vote of a majority of the directors
then still in office, who either were directors at the beginning of such period
or whose election or nomination for the election was previously so approved)
cease for any reason to constitute a majority of the directors of the Company,
as the case may be, then in office, other than as a result of election and
removal of directors pursuant to the provisions of the Senior Preferred Stock
contained in the Certificate, the Bridge Financing Agreement or the Stockholders
Agreement governing the election and removal of directors.
"Initial Investors" means the Investors and the other securityholders of the
Company party to the Stockholders Agreement on the date the shares of Senior
Preferred Stock were first issued, (y) as to any Stockholder (as defined in the
Stockholders Agreement) that is an individual, any Permitted Transferee thereof
described in clause (i) or (iii) of the definition of Permitted Transferee
contained in the Stockholders Agreement and (z) any Person (as defined in the
Stockholders Agreement) controlled by or under common control with any of the
Investors but not Persons controlling any of the Investors, other than those
Persons controlling the Investors as of the date the shares of Senior Preferred
Stock were first issued. For purposes of the foregoing, "controlling, controlled
by or under common control with" as applied to any Person, means the ability,
through the ownership of voting securities to control the management and
policies of such Person.
VOTING RIGHTS. Holders of the Senior Preferred Stock have no voting rights
with respect to any matters except as provided by law or as set forth in the
Certificate. Such Certificate provides that in the event that (i) dividends on
the Senior Preferred Stock are in arrears and unpaid for six consecutive
quarterly periods after the Cash Pay Date; (ii) for any reason (including the
reason that funds are not legally available for redemption), the Company shall
have failed to discharge any mandatory redemption obligation; or (iii) the
Company shall have failed to provide a notice within the time period required by
a redemption pursuant to a Change of Control (each of the foregoing, a "Voting
Trigger"), the Board will be increased by two directors and the holders of the
Senior Preferred Stock, together with the holders of shares of every other
series of preferred stock of the Company with like rights to vote for the
election of two additional directors, voting as a class, will be entitled to
elect two directors to the expanded Board of Directors. Such voting rights will
continue until the Company shall have fulfilled its obligations that gave rise
to a Voting Trigger.
The Certificate provides that, without the consent of the holders of at
least sixty percent (60%) of the outstanding shares of Senior Preferred Stock,
the Company will not (i) liquidate, dissolve, wind-up or otherwise discontinue
its business unless immediately prior thereto, the Company redeems all
outstanding shares of Senior Preferred Stock; (ii) amend, alter or repeal any
provision of its Certificate, so as to adversely affect the preferences, rights
or powers of the Senior Preferred Stock, PROVIDED, certain charges will require
the approval of each holder of Senior Preferred Stock; (iii) create, authorize
or issue any class of stock or security convertible into such stock ranking
prior to, or on a parity with, the Senior Preferred Stock, or increase the
authorized number of shares of any such class or series, or reclassify any
authorized stock of the Company into any such prior or parity shares; or (iv)
merge or consolidate with or into or transfer all or substantially all of its
assets (in one transaction or a series of related transactions) to any person
unless (x) immediately prior thereto, the Company redeems all outstanding shares
of Senior Preferred Stock or (y) (A) the company surviving such merger or
consolidation or to which the properties and assets of the Company are
transferred shall be a corporation organized and existing under the laws of any
state of the United States or the District of Columbia; (B) the Senior Preferred
Stock shall be converted into, or exchanged for, and shall become shares of such
successor or resulting company, having in respect of such successor or resulting
company substantially the same powers, preferences and relative participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, that the Senior Preferred Stock had immediately prior to
such transaction; and (C) immediately after giving effect to such transaction on
a PRO FORMA basis, the Consolidated Net Worth (as defined in the Certificate) of
the surviving entity is at least equal to the Consolidated Net Worth of the
Company immediately prior to such transaction.
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<PAGE>
JUNIOR PREFERRED STOCK
In connection with the Recapitalization, the Company issued 1,386,000 shares
of Junior Preferred Stock. All outstanding shares of Junior Preferred Stock are
fully paid and nonassessable. Each outstanding share of Junior Preferred Stock
has a liquidation preference of $100.00.
RANKING. The Junior Preferred Stock ranks junior to the Senior Preferred
Stock and senior to the Common Stock, with respect to dividend rights and rights
on liquidation, winding up and dissolution.
DIVIDENDS. The holders of the Junior Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor and to the extent permitted by the terms of the
Senior Preferred Stock, dividends on each share of Junior Preferred Stock
accruing on a daily basis at the rate of 8% per annum on the sum of the
liquidation preference thereof plus accumulated but unpaid dividends thereon. To
the extent not paid on March 31, June 30, September 30 and December 31 of each
year, beginning June 30, 1996 (each such date, a "Dividend Payment Date"), all
dividends which have accrued on a share of Junior Preferred Stock during the
three-month period ending upon each such Dividend Payment Date shall be, and
remain accumulated until paid.
OPTIONAL REDEMPTION. Subject to the rights and restrictions contained in
senior securities, the Company may, at its option, redeem, to the extent that
funds are legally available therefor, in whole or in part, shares of Junior
Preferred Stock at a redemption price per share equal to the Liquidation Value
(as defined in the Certificate), plus accrued and unpaid dividends thereon to
the date fixed for redemption, without interest.
MANDATORY REDEMPTION. Subject to the rights and restrictions contained in
senior securities, at the option of the holders of Junior Preferred Stock, the
following amounts of Junior Preferred Stock are subject to mandatory redemption
(subject to contractual and other restrictions with respect thereto and to the
legal availability of funds therefor) within 45 days of an initial public
offering of the Company's Common Stock (an "IPO") resulting in a Market
Capitalization (as defined in the Certificate) of more than $500 million, at a
redemption price per share equal to 100% of the Liquidation Value, plus all
accrued and unpaid cash dividends thereon to the date of redemption, without
interest:
(i)
If the IPO results in a Market Capitalization of the Company of less
than $750 million but more than or equal to $500 million, the Company
shall redeem up to 25% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption;
(ii)
If the IPO results in a Market Capitalization of the Company of less
than $1 billion but more than or equal to $750 million, the Company
shall redeem up to 50% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption; and
(iii)
If the IPO results in a Market Capitalization of the Company of more
than or equal to $1 billion, the Company shall redeem up to 100% of
the outstanding shares of Junior Preferred Stock held by each holder of such
shares who requests redemption.
In addition, to the extent the Company shall have funds legally available
therefor, the Company shall offer to redeem all shares of Junior Preferred Stock
no later than 45 days following a Change of Control of the Company at a
redemption price equal to 100% of the Liquidation Value, plus accrued and unpaid
cash dividends to the date fixed for redemption, without interest.
"Change of Control" means such time as: (a) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act of 1934, as
amended), other than any person or group comprised principally of the Initial
Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Initial Investors;
(b) a sale or transfer of all or substantially all of the assets of the Company
to any person or group (other than any group consisting principally of the
Initial Investors) has been consummated; or (c) during any period of two
consecutive years occurring after an initial Public Offering, individuals who
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<PAGE>
at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election was approved by a vote
of a majority of the directors then still in office, who either were directors
at the beginning of such period or whose election or nomination for the election
was previously so approved) cease for any reason to constitute a majority of the
directors of the Company, as the case may be, then in office, other than as a
result of election and removal of directors pursuant to the provisions of the
Senior Preferred Stock contained in the Certificate, the Bridge Financing
Agreement or the Stockholders Agreement governing the election and removal of
directors.
"Initial Investors" means the Investors and the other securityholders of the
Company party to the Stockholders Agreement on the date the shares of Junior
Preferred Stock were first issued, (y) as to any Stockholder (as defined in the
Stockholders Agreement) that is an individual, any Permitted Transferee thereof
described in clause (i) or (iii) of the definition of Permitted Transferee
contained in the Stockholders Agreement and (z) any Person (as defined in the
Stockholders Agreement) controlled by or under common control with any of the
Investors but not Persons controlling any of the Investors other than those
persons controlling the Investors as of the date the shares of Junior Preferred
Stock were first issued. For purposes of the foregoing, "controlling, controlled
by or under common control with" as applied to any Person, means the ability,
through the ownership of voting securities, to control the management and
policies of such Person.
CONVERSION. In the event the Company intends to consummate an IPO, the
holders of sixty percent (60%) of the outstanding Junior Preferred Stock may
require the Company to convert on a PRO RATA basis all or any portion of the
outstanding Junior Preferred Stock into shares of Common Stock, such conversion
to occur automatically upon the closing of an IPO. Each share of Junior
Preferred Stock shall be converted into a number of shares of Common Stock equal
to (x) the Liquidation Value per share, without interest, divided by (y) the
offering price per share of Common Stock in such IPO, with any fractional shares
being redeemed by the Company for cash. Any dividends accrued up to the time of
conversion will be deemed waived.
VOTING RIGHTS. Holders of the Junior Preferred Stock have no voting rights
with respect to any matters except as provided by law or as set forth in the
Certificate. The Certificate provides that, without the consent of the holders
of sixty percent (60%) of the outstanding shares of Junior Preferred Stock, the
Company will not (i) liquidate, dissolve, wind-up or otherwise discontinue its
business unless contemporaneous therewith the Company redeems all outstanding
shares of Junior Preferred Stock; (ii) amend, alter or repeal any provision of
its Certificate, so as to adversely affect the preferences, rights or powers of
the Junior Preferred Stock; (iii) create, authorize or issue any additional
class of stock or security convertible into such stock ranking prior to, or on a
parity with, the Junior Preferred Stock, or increase the authorized number of
shares of any existing class or series, or reclassify any authorized stock of
the Company into any such prior or parity shares; or (iv) merge or consolidate
with or into or transfer all or substantially all of its assets (in one
transaction or a series of related transactions), to any person unless (x)
contemporaneous therewith the Company redeems all outstanding shares of Junior
Preferred Stock or (y) (A) the company surviving such merger or consolidation or
to which the properties and assets of the Company are transferred shall be a
corporation organized and existing under the laws of any state of the United
States or the District of Columbia; (B) the Junior Preferred Stock shall be
converted into or exchanged for and shall become shares of such successor or
resulting company, having in respect of such successor or resulting company
substantially the same powers, preferences and relative participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereof, that the Junior Preferred Stock had immediately prior to such
transaction; and (C) immediately after giving effect to such transaction on a
PRO FORMA basis, the Consolidated Net Worth (as defined in the Certificate) of
the surviving entity is at least equal to the Consolidated Net Worth of the
Company immediately prior to such transaction.
LIMITATION ON DIRECTOR AND OFFICER LIABILITY
The Certificate provides that, to the fullest extent permitted by the
Delaware Law, directors and officers of the Company shall not be liable to the
Company or its stockholders for monetary damages for acts or omissions as a
director or officer. Under the Delaware Law, a director's or officer's liability
to the
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<PAGE>
Company or its stockholders may not be limited or eliminated (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) with respect to certain unlawful dividend
payments, stock redemptions or repurchases or (iv) for any transaction from
which the director or officer derived an improper personal benefit. This
provision, in effect, eliminates the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages from a director or officer for breach of his or her fiduciary
duty of care as a director or officer, except in the situations set forth in
clauses (i) through (iv) above. In addition, the Certificate does not alter the
liability of directors and officers under federal securities laws, and does not
limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach in a director's or officer's duty of care. The Certificate requires the
Company to indemnify and advance indemnification expenses on behalf of all
directors and officers of the Company to the fullest extent permitted by law.
The Bylaws also require the Company to indemnify and advance indemnification
expenses to the Company's officers and directors.
The Company has entered into indemnification agreements with its directors
and executive officers. Such agreements require the Company, among other things,
(i) to indemnify its officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers provided
such persons acted in good faith and in a manner reasonably believed to be in
the best interests of the Company and, with respect to any criminal action, had
no cause to believe their conduct was unlawful; (ii) to advance the expenses
actually and reasonably incurred by its officers and directors as a result of
any proceeding against them as to which they could be indemnified; and (iii) to
obtain directors' and officers' insurance if available on reasonable terms.
There is no action or proceeding pending or, to the knowledge of the Company,
threatened which may result in a claim for indemnification by any director,
officer, employee or agent of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above 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 Securities 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 Notes offered
hereby, 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 Securities Act and will be governed by the
final adjudication of such issue.
OTHER ATTRIBUTES OF THE STOCK OF THE COMPANY
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the right of its stockholders. Certain provisions of the
California Corporations Code become applicable to a corporation incorporated
outside of California, however, if (i) the corporation transacts intrastate
business in California and the average of its California property, payroll and
sales factors (as defined in the California Revenue and Taxation Code) with
respect to it is more than 50% during its latest fiscal year, (ii) more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California and (iii) the corporation is not otherwise
exempt. An exemption is provided if the corporation has outstanding securities
(i) listed on the New York Stock Exchange or the American Stock Exchange, or
(ii) qualified for trading as a national market security on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") if such
corporation has at least 800 holders of its equity securities as of the record
date of its most recent annual meeting of stockholders (a "Listed Corporation").
Since approximately 50% the Company's activities occur in California,
certain provisions of California corporate law may apply to the Company, as
described above.
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<PAGE>
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets these tests and is not exempt
include, without limitation, those provisions relating to the stockholders'
right to cumulative votes in elections of directors (cumulative voting is
mandatory under California law), and the Company's ability to indemnify its
officers, directors and employees (which is more limited in California than in
Delaware). Notwithstanding the foregoing, a corporation may provide for a
classified board of directors, or eliminate cumulative voting, or both if it is
a Listed Corporation.
FEDERAL INCOME TAX CONSIDERATIONS
There will be no Federal income tax consequences to Holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer and a Holder will have the
same adjusted basis and holding period in the New Notes as the Old Notes
immediately before the exchange. There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a Broker-Dealer (a "Participating 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. Each such Participating Broker-Dealer that participates in the
Exchange Offer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Notes. The Company has agreed that for a period of
180 days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer for use in connection
with any such resale. In addition, until , 1996, 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
Participating Broker-Dealers. New Notes received by Participating 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
Participating Broker-Dealer and/or the purchasers of any such New Notes. Any
Participating 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 on 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 Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
This Prospectus has been prepared for use in connection with the Exchange
Offer and may be used by CSI and DLJ in connection with the offers and sales
related to market-making transactions in the Notes. CSI and DLJ may act as
principals or agents in such transactions. Such sales will be made at prices
related to prevailing market prices at the time of sale. The Company will not
receive any of the
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<PAGE>
proceeds of such sales. CSI and DLJ have no obligation to make a market in the
Notes and may discontinue its market-making activities at any time without
notice, at its sole discretion. The Company has agreed to indemnify CSI and DLJ
against certain liabilities, including liabilities under the Securities Act of
1933, and to contribute to payments which CSI and DLJ might be required to make
in respect thereof.
Chase VCA, an affiliate of CSI, owns 525,000 shares of the Company's Common
Stock and 519,750 of the Company's Junior Preferred Stock, representing 37.5% of
each such class of securities issued and outstanding. Messrs. David Ferguson and
Jeffrey Walker, who serve as directors of the Company, are general partners of
Chase Capital Partners, the general partner of Chase VCA, an affiliate of CSI.
CSI acted as an initial purchaser in connection with the offering of the Old
Notes. In addition, Chemical, an affiliate of CSI was a lender of a portion of a
Bridge Facility extended to the Company in June 1996 which was repaid, in part
with the proceeds of the offering of the Old Notes.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon by
Buchalter, Nemer, Fields & Younger, a Professional Corporation.
EXPERTS
The financial statements of Guitar Center Management Company, Inc. at
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
In connection with the Recapitalization, Ernst & Young LLP was replaced on
July 24, 1996 by KPMG Peat Marwick LLP as the Company's independent certified
public accountants. The decision to change accountants was approved by the
Company's Board of Directors. The reports of Ernst & Young LLP on the Company's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
of the Company's financial statements for each of the two fiscal years ended
December 31, 1995, and the subsequent interim period ended June 30, 1996, there
were no disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make reference to the matter in their
report.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1. File No.
333-10491, (the "Registration Statement") under the Securities Act with respect
to the New Notes offered hereby. As used herein, the term "Registration
Statement" means the initial Registration Statement and any and all amendments
thereto. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company, the Notes and the Exchange Offer,
reference is hereby made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and in each
instance, reference is made to the copy of such contract or documents filed as
an exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington D.C. 20549 and at certain regional offices of the
Commission located at 75 Park Place, 14th Floor, New York, New York 1007 and
Northwest Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be
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obtained form the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Room 1025, Washington D.C. 20549, at prescribed rates. The
Commission maintains a World Wide Web site at http:// www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that filed electronically with the Commission.
Upon completion of the Exchange Offer, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports with the Commission. The Company intends to furnish to Holders
annual reports containing audited financial statements of the Company audited by
its independent accountants and quarterly reports containing unaudited condensed
financial statements for each of the first three quarters of the fiscal year.
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GUITAR CENTER MANAGEMENT COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets as of June 30, 1995 and 1996 (unaudited)................... F-2
Condensed Statements of Operations for the six months ended June 30, 1995
and 1996 (unaudited)..................................................... F-3
Condensed Statements of Stockholders' Equity (Deficit) as of June 30, 1996
(unaudited).............................................................. F-4
Condensed Statements of Cash Flows for the six months ended June 30, 1995
and 1996 (unaudited)..................................................... F-5
Notes to Condensed Financial Statements (unaudited)....................... F-6
Report of Independent Auditors............................................ F-10
Balance Sheets as of December 31, 1994 and 1995........................... F-11
Statements of Income for the years ended December 31, 1993, 1994 and
1995..................................................................... F-12
Statements of Stockholder's Equity for the years ended December 31, 1993,
1994 and 1995............................................................ F-13
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995..................................................................... F-14
Notes to Financial Statements............................................. F-15
</TABLE>
F-1
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 40 $ 6,494
Accounts receivable, less allowance for doubtful accounts of $200 (1995) and $100
(1996)............................................................................. 1,596 3,089
Inventories......................................................................... 31,193 39,595
Prepaid expenses and other current assets........................................... 599 1,219
--------- ------------
Total current assets.................................................................. 33,428 50,397
Property and equipment, net........................................................... 11,659 14,038
Goodwill, net of accumulated amortization of $145 (1995) and $160 (1996).............. 455 440
Other assets.......................................................................... 233 491
--------- ------------
Total assets.......................................................................... $ 45,775 $ 65,366
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................................... $ 7,135 $ 9,130
Accrued expenses and other current liabilities...................................... 11,115 8,248
Current portion of long-term debt................................................... 8,528 5,421
--------- ------------
Total current liabilities............................................................. 26,778 22,799
Other long-term liabilities........................................................... 310 480
Long-term debt........................................................................ -- 100,000
Senior preferred stock, aggregate liquidating preference of $20,190; authorized
4,250,000 shares, issued and outstanding 800,000 shares.............................. -- 13,702
Stockholder's equity:
Junior preferred stock.............................................................. -- 138,600
Warrants............................................................................ -- 6,500
Common stock, no par value; authorized 2,500,000 shares issued and outstanding
1,400,000 at June 30, 1995 authorized 10,000,000 shares, issued and outstanding
1,400,000 at June 30, 1996......................................................... 4,987 1,400
Retained earnings (deficit)......................................................... 13,700 (218,115)
--------- ------------
Total stockholder's equity (deficit).................................................. 18,687 (71,615)
--------- ------------
Total liabilities and stockholder's equity............................................ $ 45,775 $ 65,366
--------- ------------
--------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1995 1996
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net sales.............................................................................. $ 76,888 $ 91,048
Cost of goods sold, buying and occupancy............................................... 55,742 65,249
--------- -----------
Gross profit........................................................................... 21,146 25,799
Selling, general and administrative expenses........................................... 15,100 18,318
Deferred compensation expense.......................................................... 1,040 69,892
--------- -----------
Operating income (loss)................................................................ 5,006 (62,411)
Interest expense, net.................................................................. 87 6,046
Transaction expenses................................................................... -- 6,176
--------- -----------
Income (loss) before income taxes...................................................... 4,919 (74,633)
Income taxes........................................................................... 74 131
--------- -----------
Net income (loss)...................................................................... $ 4,845 $ (74,764)
--------- -----------
--------- -----------
Pro forma data:
Income (loss) before taxes........................................................... $ 4,919 $ (74,633)
Pro forma tax provision.............................................................. 2,562 --
--------- -----------
Pro forma net income (loss).......................................................... $ 2,357 $ (74,633)
---------
---------
Senior and junior preferred stock dividends............................................ (962)
Pro forma net loss applicable to common stockholder.................................... $ (75,595)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNIOR RETAINED
COMMON PREFERRED EARNINGS
STOCK WARRANTS STOCK (DEFICIT) TOTAL
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1995...................... $ 4,987 $ -- $ -- $ 14,776 $ 19,763
S Corporation cash distributions.................. -- -- -- (28,057) (28,057)
S Corporation non-cash distributions.............. -- -- -- (1,753) (1,753)
Redemption of prior sole stockholder interest..... (4,787) -- 19,800 (128,115) (113,102)
Issuance of equity to management.................. 500 -- 49,500 -- 50,000
Issuance of equity to new investors............... 700 -- 69,300 -- 70,000
Issuance of warrants.............................. -- 6,500 -- -- 6,500
Net losses........................................ -- -- -- (74,764) (74,764)
Undeclared dividend on senior preferred stock..... -- -- -- (190) (190)
Accretion of senior preferred stock............... -- -- -- (12) (12)
----------- ----------- ----------- ------------ ------------
Balance at June 30, 1996.......................... $ 1,400 $ 6,500 $ 138,600 $ (218,115) $ (71,615)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1995 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................................... $ 4,845 $ (74,764)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 878 1,014
Deferred compensation -- repurchase of options....................................... -- 49,500
Changes in operating assets and liabilities:
Accounts receivable................................................................ (70) (1,127)
Inventories........................................................................ (2,541) (8,317)
Prepaid expenses................................................................... (187) (560)
Other assets....................................................................... (86) (190)
Accounts payable................................................................... (3,271) (3,483)
Accrued expenses and other current liabilities..................................... (834) (8,831)
Other long-term liabilities........................................................ 14 217
--------- ------------
Net cash used in operating activities.................................................. (1,252) (46,541)
INVESTING ACTIVITIES
Purchases of property and equipment.................................................... (888) (3,523)
--------- ------------
Net cash used in investing activities.................................................. (888) (3,523)
FINANCING ACTIVITIES
Principal repayment of note payable.................................................... (825) --
Net proceeds from revolving line of credit............................................. 8,528 5,421
Proceeds from issuance of long-term debt............................................... -- 100,000
Distribution of prior stockholder interests............................................ -- (113,102)
Issuance of common stock............................................................... -- 1,200
Issuance of junior preferred stock..................................................... -- 69,300
Issuance of senior preferred stock..................................................... -- 13,500
Issuance of warrants................................................................... -- 6,500
Distributions to stockholder........................................................... (9,582) (28,057)
--------- ------------
Net cash provided by (used in) financing activities.................................... (1,879) 54,762
--------- ------------
Net (decrease) increase in cash and cash equivalents................................... (4,019) 4,698
Cash and cash equivalents at beginning of period....................................... 4,059 1,796
--------- ------------
Cash and cash equivalents at end of period............................................. $ 40 $ 6,494
--------- ------------
--------- ------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
In 1996, the Company entered two sale leaseback transactions with its former
sole stockholder aggregate $1,753,000
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of management, the accompanying condensed financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Guitar Center
Management Company, Inc., a California corporation ("Guitar Center" or the
"Company") as of June 30, 1996, the results of operations and cash flows for the
six months ended June 30, 1996 and 1995. On October , 1996, the Company
reincorporated from California to Delaware and changed its name to Guitar
Center, Inc.
The results of operations for the first six months of 1996 are not
necessarily indicative of the results to be expected for the full year.
2. NEW ACCOUNTING POLICIES
Effective January 1, 1996 the Company elected to change certain accounting
policies. The changes include the capitalization of certain pre-opening costs,
management information systems development costs, and lease negotiation costs.
Such amounts will be amortized over twelve months for the pre-opening costs,
three years for the management information systems development costs and over
the life of the lease for lease negotiation costs. The Company believes these
policy changes will more accurately match costs with their related revenues.
The amounts capitalized during the six months ended June 30, 1996 were not
material to the financial statements. The effect on all prior periods presented
is not material.
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," issued in March 1995 and effective for fiscal years beginning after
December 15, 1995, establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable intangibles
and goodwill. The adoption of SFAS 121 did not have a material impact on the
Company's financial position or results of operations. The Company assesses the
recoverability of its intangible assets by determining whether the amortization
of those balances can be recovered through projected undiscounted future cash
flows. The amount of the impairment, if any, is measured based on projected
discounted future cash flows using a discount rate reflecting the Company's
average cost of capital.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain PRO
FORMA disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company will adopt the provisions for PRO FORMA
disclosure requirements of SFAS 123 in fiscal 1996. The implementation of
Financial Accounting Standards No. 123 did not have a material impact on the
Company's 1996 Financial Statements.
3. PRO FORMA DATA
Pro forma information has been provided to reflect the estimated statutory
provision for income taxes assuming the Company had been taxed as a C
corporation.
4. RECAPITALIZATION
On June 5, 1996, Guitar Center consummated a series of transactions to
effect the recapitalization of the Company (the "Recapitalization"). Members of
management purchased 500,000 shares of the Company's Common Stock for $.5
million cash and received 495,000 shares of 8% Junior Preferred Stock in
exchange for the cancellation of outstanding options exercisable for Common
Stock. The Company's former sole stockholder received 198,000 shares of Junior
Preferred Stock in exchange for Common Stock. New investors purchased 700,000
shares of Common Stock and 693,000 shares of
F-6
<PAGE>
4. RECAPITALIZATION (CONTINUED)
Junior Preferred Stock for $70.0 million cash, and 800,000 shares of 14% Senior
Preferred Stock and Warrants for an aggregate $20 million cash. The Warrants are
exchangeable for 73,684 shares of Common Stock and 72,947 shares of Junior
Preferred Stock. The Company repurchased shares of Common Stock from the former
sole stockholder for $113.1 million cash, and canceled certain options for
Common Stock held by management in exchange for $27.9 million cash. For
financial statement purposes, the Company recorded a charge to operations in the
amount of $69.9 million (net of $7.9 million which the Company had previously
accrued) related to the cancellation and exchange of the management stock
options.
In part to fund the Recapitalization transaction and to repay the $35.9
million outstanding under its Old Credit Facility, the Company borrowed $100
million under an increasing rate Bridge Facility. The Bridge Facility was repaid
on July 2, 1996 with the proceeds of the 11% Senior Notes due 2006 and cash on
hand.
In connection with the Recapitalization, the Company incurred transaction
costs of approximately $10.9 million, which consists of $6.2 million of sellers
transaction costs and $4.7 million in fees paid to finance the Bridge Facility.
These amounts have been charged to transaction expenses and interest expense,
net, respectively, in the six months ended June 30, 1996 condensed statement of
operations. In addition, on July 2, 1996, in connection with the sale of the
Notes, approximately $3.6 million in fees was paid and will be recorded as an
other asset and amortized over the term of the related debt.
5. STOCK OPTION PLANS
In connection with the Recapitalization the Company granted to certain
employees options to purchase 146,762 units consisting of 146,762 shares of
Common Stock and 145,294 shares of Junior Preferred stock at an exercise price
of $100 per option. The Company has an additional 113,301 units remaining
available for grant. The option agreements of Larry Thomas and Marty Albertson
contain provisions whereby in the event of certain initial public offering
transactions, the options will immediately vest.
6. DEBT
In connection with the Recapitalization, the Company borrowed $100 million
under increasing rate notes (the Bridge Facility). Financing fees of $4.7
million were paid and charged to the statement of operations during June 1996.
On July 2, 1996, the Bridge Facility was repaid with the proceeds from the sale
of 11% Senior Notes due 2006 and cash on hand. The Senior Notes are unsecured
and pay interest on a semi-annual basis.
In addition, the Company entered into a $25 million unsecured revolving line
of credit. The line expires in June 2001. The revolving line of credit bears
interest at various rates based on the prime lending rate (8.25% at June 30,
1996) plus 1.5% or the Eurodollar rate (5.5% at June 30, 1996) plus 3.0%. A fee
of .375% is assessed on the unused portion of the facility with interest due
monthly. At June 30, 1996, the Company had $5.4 million outstanding under the
revolving line of credit.
7. INCOME TAXES
In connection with the Recapitalization, the Company terminated its S
Corporation election and converted to a C Corporation for income tax purposes.
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset and
liability method of SFAS 109, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-7
<PAGE>
7. INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Management
determined that a substantial valuation allowance was necessary due to the
increased leverage of the Company and its effect on future taxable income.
8. PREFERRED STOCK
REDEEMABLE SENIOR PREFERRED STOCK AND WARRANTS
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock with an initial aggregate liquidation value of $20.0
million.
Dividends on the Senior Preferred Stock accrue at a rate of 14%. Such
dividends are payable quarterly on each of March 15, June 15, September 15 and
December 15, beginning June 15, 1996. On or prior to June 15, 2002, dividends
shall not be payable in cash to holders, but shall, whether or not declared,
accrete to the liquidation value of the Senior Preferred Stock compounded on
each dividend payment date. Under certain circumstances the holders can elect to
receive additional shares of the Senior Preferred stock in lieu of accreting to
the liquidation value.
The Company may, at its option, to the extent that funds are legally
available for such payment, redeem, prior to June 15, 1999, in whole or in part,
shares of Senior Preferred Stock at a redemption price equal to 103% of the
Liquidation Value if such redemption shall occur before June 15, 1997, or 106%
of the Liquidation Value if the redemption occurs on or after June 15, 1997 to
and including June 15, 1999, without interest; PROVIDED, HOWEVER, that an
initial public offering shall have occurred and the aggregate redemption price
of the Senior Preferred Stock does not exceed the net proceeds received by the
Company in the initial public offering.
The Company may, at its option, on and after June 15, 1999, to the extent
the Company shall have funds legally available for such payment, redeem shares
of Senior Preferred Stock, at any time in whole, or from time to time in part,
at redemption prices per share in cash set forth in the table below, together
with accrued and unpaid cash dividends thereon to the date fixed for redemption,
without interest:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR BEGINNING JUNE 15, LIQUIDATION VALUE
----------- -------------------
<S> <C>
1999.............................. 110%
2000.............................. 108
2001.............................. 106
2002.............................. 104
2003.............................. 102
2004 and thereafter............... 100
</TABLE>
The Senior Preferred stock is mandatorially redeemable on June 15, 2008 at a
redemption price equal to the aggregate liquidation value plus all accrued and
unpaid cash dividends.
Holders of the Senior Preferred Stock have no voting rights with respect to
any matters except as provided by law or as set forth in the Company's
Certificate of Incorporation. Such Certificate of Determination provides that in
the event that (i) dividends on the Senior Preferred Stock are in arrears and
unpaid for six consecutive quarterly periods after June 15, 2002; (ii) for any
reason (including the reason that funds are not legally available for
redemption), the Company shall have failed to discharge any mandatory redemption
obligation; or (iii) the Company shall have failed to provide a notice within
the time period required by a redemption pursuant to a Change of Control (each
of the foregoing, a "Voting Trigger"), the Board will be increased by two
directors and the holders of the Senior Preferred Stock, together with the
holders of shares of every other series of preferred stock of the Company with
like
F-8
<PAGE>
8. PREFERRED STOCK (CONTINUED)
rights to vote for the election of two additional directors, voting as a class,
will be entitled to elect two directors to the expanded Board of Directors. Such
voting rights will continue until the Company shall have fulfilled its
obligations that gave rise to a Voting Trigger.
The Senior Preferred Stock with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks senior to Junior Preferred Stock
and the Common Stock.
In connection with the issuance of the Senior Preferred Stock the holders
received detachable warrants (in addition to the Senior Preferred Stock) for the
aggregate $20.0 million paid. The warrants are exchangeable for 73,684 shares of
Common Stock and 72,947 shares of Junior Preferred Stock.
The market value of the warrants at issuance was deemed to be $6.5 million
with the Senior Preferred Stock valued at $13.5 million. The Senior Preferred
stock will accrete to its redemption value ($20.0 million) using the effective
interest method through its mandatory redemption date of June 15, 2008. The
carrying amount of the Senior Preferred Stock will be adjusted periodically for
both the above noted accretion as well as by amounts representing dividends not
currently declared or paid, but which will be payable under the mandatory
redemption features.
JUNIOR PREFERRED STOCK
The Company has authorized the issuance of up to 1,500,000 shares of Junior
Preferred Stock.
In connection with the Recapitalization 1,386,000 shares of Junior Preferred
Stock were issued. Each outstanding share of Junior Preferred Stock has a
liquidating preference of $100.00. Dividends accrue at a rate of 8% per annum on
the sum of the liquidation preference plus accumulated but unpaid dividends
thereon.
The Junior Preferred Stock ranks junior to the Senior Preferred Stock and
senior to the Common Stock, with respect to dividend rights and rights on
liquidation.
The Company may be required to mandatorily redeem all or a portion of the
Junior Preferred Stock under certain conditions. Specifically, the Company would
be required to redeem within 45 days of an initial public offering (IPO)
resulting in a market capitalization of more than $500 million, at a redemption
price per share equal to 100% of the liquidating value plus all accrued and
unpaid cash dividends as follows:
(i)
If the IPO results in a market capitalization of the Company of less
than $750 million but more than or equal to $500 million, the Company
shall redeem up to 25% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption;
(ii)
If the IPO results in a market capitalization of the Company of less
than $1 billion but more than or equal to $750 million, the Company
shall redeem up to 50% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who request redemption; and
(iii)
If the IPO results in a market capitalization of the Company of more
than or equal to $1 billion, the Company shall redeem up to 100% of
the outstanding shares of Junior Preferred Stock held by each holder of such
shares who requests redemption.
In the event the Company intends to consummate an IPO, the holders of sixty
percent (60%) of the outstanding Junior Preferred Stock may require the Company
to convert on a PRO RATA basis all or any portion of the outstanding Junior
Preferred Stock into shares of Common Stock, such conversion to occur
automatically upon the closing of an IPO. Each share of Junior Preferred Stock
shall be converted into a number of shares of Common Stock equal to (x) the
Liquidation Value per share plus accrued and unpaid dividends thereon to the
date of conversion, without interest, divided by (y) the offering price per
share of Common Stock in such IPO, with any fractional shares being redeemed by
the Company for cash.
Accumulated but unpaid dividends on the Junior and Senior Preferred Stock
aggregated $950,000 as of June 30, 1996.
F-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Guitar Center Management Company, Inc.
We have audited the accompanying balance sheets of Guitar Center Management
Company, Inc. as of December 31, 1995 and 1994, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. 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 Guitar Center Management
Company, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
March 6, 1996, except for Note 10, as to which
the date is June 6, 1996.
F-10
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 4,058,928 $ 1,796,126
Accounts receivable, less allowance for doubtful accounts of $200,000 (1994)
and (1995).................................................................. 1,525,571 1,962,085
Employee notes............................................................... 39,755 81,996
Inventories (NOTE 2)......................................................... 28,651,731 31,277,531
Prepaid expenses............................................................. 372,323 576,613
-------------- ---------------
Total current assets........................................................... 34,648,308 35,694,351
Property and equipment, net (NOTE 3)........................................... 11,642,270 13,276,106
Goodwill, net of accumulated amortization of $137,448 (1994) and $152,443
(1995)........................................................................ 462,326 447,331
Other assets................................................................... 147,176 300,826
-------------- ---------------
Total assets................................................................... $ 46,900,080 $ 49,718,614
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................. $ 10,405,733 $ 12,613,356
Accrued liabilities (NOTE 9)................................................. 5,608,370 7,160,745
Deferred compensation (NOTE 7)............................................... 4,821,000 7,908,000
Merchandise advances......................................................... 1,519,775 2,009,867
Current portion of long-term debt (NOTE 4)................................... 825,000 --
-------------- ---------------
Total current liabilities...................................................... 23,179,878 29,691,968
Other long-term liabilities.................................................... 296,239 262,940
Commitments (NOTE 5)
Stockholder's equity (NOTE 7):
Common stock, no par value; authorized 2,500,000 shares, issued and
outstanding 1,400,000....................................................... 4,987,299 4,987,299
Retained earnings............................................................ 18,436,664 14,776,407
-------------- ---------------
Total stockholder's equity..................................................... 23,423,963 19,763,706
-------------- ---------------
Total liabilities and stockholder's equity..................................... $ 46,900,080 $ 49,718,614
-------------- ---------------
-------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales................................................... $ 97,305,125 $ 129,038,608 $ 170,671,199
Cost of goods sold.......................................... 68,527,340 92,274,181 123,415,007
---------------- ---------------- ----------------
Gross profit................................................ 28,777,785 36,764,427 47,256,192
Selling, general and administrative expenses................ 21,888,971 26,143,498 32,663,845
Deferred compensation expense............................... 1,389,933 1,259,000 3,087,000
---------------- ---------------- ----------------
Operating income............................................ 5,498,881 9,361,929 11,505,347
Interest income............................................. 33,886 14,344 13,978
Interest expense............................................ (304,461) (266,343) (382,357)
Other income................................................ 22,531 44,534 65,034
---------------- ---------------- ----------------
Income before income taxes.................................. 5,250,837 9,154,464 11,202,002
Income taxes................................................ 146,142 325,676 344,750
---------------- ---------------- ----------------
Net income.................................................. $ 5,104,695 $ 8,828,788 $ 10,857,252
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Pro forma data (unaudited) (NOTE 11):
Income before taxes....................................... $ 5,250,837 $ 9,154,464 $ 11,202,002
Pro forma income taxes.................................... 2,856,000 4,478,000 6,144,000
---------------- ---------------- ----------------
Pro forma net income...................................... $ 2,394,837 $ 4,676,464 $ 5,058,002
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1992................................... $ 4,987,299 $ 13,010,010 $ 17,997,309
Net income................................................... -- 5,104,695 5,104,695
Distributions to stockholder................................. -- (4,637,751) (4,637,751)
------------- ---------------- ----------------
Balance at December 31, 1993................................... 4,987,299 13,476,954 18,464,253
Net income................................................... -- 8,828,788 8,828,788
Distributions to stockholder................................. -- (3,869,078) (3,869,078)
------------- ---------------- ----------------
Balance at December 31, 1994................................... 4,987,299 18,436,664 23,423,963
Net income................................................... -- 10,857,252 10,857,252
Distributions to stockholder................................. -- (14,517,509) (14,517,509)
------------- ---------------- ----------------
Balance at December 31, 1995................................... $ 4,987,299 $ 14,776,407 $ 19,763,706
------------- ---------------- ----------------
------------- ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-13
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1993 1994 1995
-------------- -------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 5,104,695 $ 8,828,788 $ 10,857,252
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 1,243,618 1,488,043 1,801,652
(Gain) loss on sale of fixed assets...................... -- 85,380 (3,641)
Changes in operating assets and liabilities:
Accounts receivable.................................... 145,472 937,326 (436,515)
Inventories............................................ (6,392,025) (4,700,890) (2,625,800)
Prepaid expenses....................................... 247,131 11,817 (204,289)
Other assets........................................... 52,695 29,840 (153,650)
Accounts payable....................................... 2,714,798 2,138,914 2,207,623
Accrued liabilities.................................... 297,478 2,870,497 1,552,375
Deferred compensation.................................. 1,389,933 1,259,000 3,087,000
Merchandise advances................................... 201,362 349,150 490,092
Other long-term liabilities............................ -- 296,239 (33,299)
-------------- -------------- ----------------
Net cash provided by operating activities.................. 5,005,157 13,594,104 16,538,800
INVESTING ACTIVITIES
Proceeds from sale of assets............................... -- 142,510 15,000
Purchases of property and equipment........................ (2,618,031) (3,276,757) (3,431,852)
Employee notes............................................. (872) (38,883) (42,241)
-------------- -------------- ----------------
Net cash used in investing activities...................... (2,618,903) (3,173,130) (3,459,093)
FINANCING ACTIVITIES
Principal repayments of long-term debt..................... (1,600,728) (2,575,000) (825,000)
Proceeds from revolving bank facilities.................... -- 8,220,438 39,905,718
Repayments of revolving bank facilities.................... -- (8,220,438) (39,905,718)
Repayment of stockholder loans............................. (845,790) -- --
Distributions to stockholder............................... (4,637,751) (3,869,078) (14,517,509)
-------------- -------------- ----------------
Net cash used in financing activities...................... (7,084,269) (6,444,078) (15,342,509)
-------------- -------------- ----------------
Net (decrease) increase in cash and cash equivalents....... (4,698,015) 3,976,896 (2,262,802)
Cash and cash equivalents at beginning of year............. 4,780,047 82,032 4,058,928
-------------- -------------- ----------------
Cash and cash equivalents at end of year................... 82,032 $ 4,058,928 $ 1,796,126
-------------- -------------- ----------------
-------------- -------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 303,214 $ 291,975 $ 357,120
-------------- -------------- ----------------
-------------- -------------- ----------------
Income taxes........................................... $ 152,853 $ 111,319 $ 346,438
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-14
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Guitar Center Management Company, Inc. (the Company) operates a chain of
retail stores dba "Guitar Center" which sell high quality musical instruments
primarily guitars, keyboard, percussion and pro-audio equipment. At December 31,
1995, the Company operated 21 stores in major cities throughout the United
States with approximately 50% of the stores located in California.
INVENTORIES
Inventories, including used merchandise and vintage guitars, are valued at
the lower of cost or market using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets;
generally five years for furniture and fixtures, computer equipment and
vehicles, 15 years for buildings and 15 years or the life of the lease,
whichever is less, for leasehold improvements. Maintenance and repair costs are
expensed as they are incurred, while renewals and betterments are capitalized.
STORE PREOPENING COSTS
The Company charges preopening costs to operations in the month a new store
opens.
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expense included in the statements of income for the years ended December 31,
1993, 1994 and 1995, is $3,264,931, $4,236,010 and $4,128,157, respectively.
MERCHANDISE ADVANCES
Merchandise advances represent primarily layaway deposits which are recorded
as a liability pending consummation of the sale when the full purchase price is
received from the customer and outstanding gift certificates which are recorded
as a liability until redemption by the customer.
REVENUE RECOGNITION
Revenue is recognized at the time of sale, net of a provision for estimated
returns.
INCOME TAXES
Effective November 1, 1988, the Company elected to be taxed as a Subchapter
S corporation. This election generally requires the individual stockholder
rather than the Company to pay federal income taxes on the Company's earnings.
California, and certain other states in which the Company does business,
impose a minimum tax on Subchapter S corporate income, which is reflected as
income taxes on the statements of income.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired resulting from a business combination and is being
amortized on a straight-line basis over 40 years.
RENT EXPENSE
The Company leases certain store locations under operating leases that
provide for annual payments that increase over the life of the leases. The
aggregate of the minimum annual payments are expensed on a straight-line basis
over the term of the related lease without consideration of renewal
F-15
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
option periods. The amount by which straight-line rent expense exceeds actual
lease payment requirements in the early years of the leases is accrued as
deferred minimum rent and reduced in later years when the actual cash payment
requirements exceed the straight-line expense.
CONCENTRATION OF CREDIT RISK
The Company's deposits are with various high quality financial institutions.
Customer purchases are transacted using generally cash or credit cards. In
certain instances, the Company grants credit for larger purchases, generally to
professional musicians, under normal trade terms. Trade accounts receivable were
approximately $194,000 and $212,000 at December 31, 1994 and 1995, respectively.
Credit losses have historically been within management's expectations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, the Company considers all highly liquid investments that are both readily
convertible into cash and mature within 90 days of their date of purchase to be
cash equivalents.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain PRO
FORMA disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to adopt the provisions for PRO
FORMA disclosure requirements of SFAS 123 in fiscal 1996.
2. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
Major goods............................................................ $ 18,286,968 $ 19,593,966
Associated accessories................................................. 5,550,883 5,951,514
Vintage guitars........................................................ 1,604,166 2,072,005
Used merchandise....................................................... 1,673,266 1,940,326
General accessories.................................................... 1,536,448 1,719,720
-------------- ---------------
$ 28,651,731 $ 31,277,531
-------------- ---------------
-------------- ---------------
</TABLE>
Major goods includes the major product lines including stringed merchandise,
percussion, keyboards and pro-audio equipment. Associated accessories are
comprised of accessories to major goods. General accessories includes other
merchandise such as apparel, cables and books.
F-16
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
Land................................................................... $ 2,630,770 $ 2,880,770
Buildings.............................................................. 7,456,930 9,075,458
Transportation equipment............................................... 288,703 494,557
Furniture and fixtures................................................. 4,647,740 5,837,736
Leasehold improvements................................................. 2,287,309 2,416,092
Construction in progress............................................... 1,228,508 1,200,595
-------------- ---------------
18,539,960 21,905,208
Less accumulated depreciation.......................................... 6,897,690 8,629,102
-------------- ---------------
$ 11,642,270 $ 13,276,106
-------------- ---------------
-------------- ---------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Noncollateralized term note payable, interest at 7.54% due in monthly
installments of $75,000 plus interest, with unpaid principal and interest due
through May 29, 1995......................................................... $ 825,000 $ --
----------- -----------
825,000 --
Less current portion.......................................................... 825,000 --
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
The Company also has available a noncollateralized revolving line of credit
in the amount of $10,000,000 which is available through September 1, 1996. The
revolving line of credit bears interest at three-quarter percent below the prime
rate, or at LIBOR plus 1% at the Company's option, with interest due monthly. At
December 31, 1995, the Company did not have any outstanding borrowings under the
revolving line of credit.
In addition, the Company has available a noncollateralized term loan
facility of $10,000,000 which is available through September 1, 1996. The term
loan facility bears interest at one-quarter percent below the prime rate with
interest due monthly. At December 31, 1995, the Company did not have any
outstanding borrowings under the term loan agreement.
Under the terms of the term loan and revolving line of credit agreements,
the Company is subject to various financial and other covenants. The Company was
in compliance with such covenants at December 31, 1995.
5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its office and several retail store facilities under
various operating leases which expire at varying dates through June 2006.
Generally, the agreements contain provisions which require the Company to pay
for normal repairs and maintenance, property taxes and insurance.
Through October 17, 1995, the Company leased from its Profit Sharing Plan
two properties at a total monthly rental of $19,988. On October 17, 1995, the
leases with the Company were cancelled for fees totaling $227,408. One of the
properties was then purchased by the Company for $500,000, a price determined by
an independent fiduciary. The other property was re-leased by the Company
through
F-17
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
2005 from a related party-in-interest at a monthly rental of $8,250. The Company
leases one additional property through 2001 from a related party-in-interest at
a monthly rental of $9,900. The total rent expense recorded for related party
leases totaled $229,714, $237,900 and $291,824 in 1993, 1994 and 1995,
respectively.
The total minimum rental commitment at December 31, 1995, under operating
leases, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
- -------------------------------------------------------------------- --------------
<S> <C>
1996................................................................ $ 2,438,123
1997................................................................ 2,811,872
1998................................................................ 2,880,432
1999................................................................ 2,777,958
2000................................................................ 2,718,558
Thereafter.......................................................... 12,338,070
--------------
$ 25,965,013
--------------
--------------
</TABLE>
The total rental expense included in the statements of income for the years
ended December 31, 1993, 1994 and 1995 is $1,035,129, $1,803,698 and $1,985,401,
respectively.
6. PROFIT SHARING PLAN
The Company has a Profit Sharing Plan (the Plan) which covers substantially
all employees who meet a minimum employment requirement. The Company's board of
directors can elect to contribute up to 15% of the participants' compensation
for any plan year, subject to a maximum of $30,000 per participant. During the
Plan years ended October 31, 1995 and 1994, the Company declared total
contributions of $1,272,025 and $1,003,128, respectively, which is included in
accrued liabilities. In addition, $177,787 of assets, included in the Plan,
which had been forfeited by terminated employees was reallocated to
participants.
7. STOCK OPTION PLAN
The Company has granted stock options to certain key employees. At December
31, 1995, stock options to purchase 814,074 shares of common stock at prices
ranging from $.05 to $11.23 per share were outstanding and exercisable. In
certain situations, such as the termination, death or disability of the
employee, the Company is required to repurchase the stock options based on a
defined formula as set forth in the stock purchase agreement.
The deferred compensation liability of $7,908,000 at December 31, 1995
represents the difference between the defined formula price and the option price
on all stock options accrued annually as deferred compensation expense for any
increase in the spread between the two prices.
8. SALE-LEASEBACK TRANSACTIONS
On February 15, 1996, the Company entered into two sale-leaseback
transactions with a related party-in-interest. The combined sale amount for the
two properties was $1,753,000 resulting in a $3,587 net gain for the Company.
The two properties are leased back from the related party-in-interest through
2006 for a combined monthly rental of $16,258. The Company also entered into two
additional leases subsequent to year end with unrelated parties for a combined
monthly rental of $31,310. These four leases are reflected in the total minimum
rental commitment in Note 5.
F-18
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. OTHER FINANCIAL INFORMATION
Accrued Expenses
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Wages, salaries and benefits....................................................... $ 1,582,081 $ 2,217,546
Sales tax payable.................................................................. 1,460,167 1,666,157
Profit sharing accrual............................................................. 1,003,128 1,271,738
Other.............................................................................. 1,562,994 2,005,304
------------- -------------
$ 5,608,370 $ 7,160,745
------------- -------------
------------- -------------
</TABLE>
10. SUBSEQUENT EVENTS
On June 5, 1996, Guitar Center consummated a series of transactions to
effect a recapitalization of the Company which resulted in (i) the issuance of
common stock, junior preferred stock, and senior preferred stock, (ii) the
incurrence of senior unsecured increasing rate indebtedness ("Bridge Facility"),
(iii) the repurchase of a substantial portion of common stock held by the sole
stockholder, and (iv) cancellation of options to purchase common stock held by
certain members of management. The Company repaid in full its existing credit
facility, and entered into a new $25 million credit facility with Wells Fargo
Bank, N.A. The Company expects to offer $100,000,000 of senior notes in a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended. The proceeds of the offering will be used to repay the
Bridge Facility.
11. PRO FORMA DATA (UNAUDITED)
Pro forma information has been provided to reflect the estimated statutory
provision for income taxes assuming the Company had been taxed as a C
corporation.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPEOPLE OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary................................................................. 3
Risk Factors............................................................ 12
The Recapitalization and Related Transactions........................... 16
The Exchange Offer...................................................... 17
Capitalization.......................................................... 25
Unaudited Pro Forma Condensed Financial Data............................ 26
Selected Historical Financial Data...................................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 33
Business................................................................ 38
Management.............................................................. 47
Principal Stockholders.................................................. 54
Certain Transactions.................................................... 55
Description of Notes.................................................... 59
The New Credit Facility................................................. 80
Description of Capital Stock............................................ 82
Federal Income Tax Considerations....................................... 88
Plan of Distribution.................................................... 88
Legal Matters........................................................... 89
Experts................................................................. 89
Available Information................................................... 90
Index to Financial Statements........................................... F-1
</TABLE>
--------------
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
GUITAR CENTER, INC.
$100,000,000
11% SENIOR NOTES DUE 2006
-----------------
PROSPECTUS
-----------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Exchange Offer are as follows:
<TABLE>
<CAPTION>
EXPENSE AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
The Commission's Registration Fee................................................. $ 34,483
Printing Expenses................................................................. 63,000
Legal Fees and Expenses........................................................... 100,000
Accounting Fees and Expenses...................................................... 85,000
Exchange Agent Fees............................................................... 2,000
Miscellaneous Expenses............................................................ 20,000
----------
Total......................................................................... $ 304,483
----------
----------
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Certificate of Incorporation of the Company eliminates the liability of
the Company's directors for monetary damages arising from a breach of their
fiduciary duties to the Company and its stockholders, to the extent permitted by
the Delaware General Corporation Law. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by applicable law. The Company has
entered into indemnification agreements with its directors and executive
officers containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. Such agreements require the Company, among other things, (i) to
indemnify its officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers provided such
persons acted in good faith and in a manner reasonably believed to be in the
best interests of the Company and, with respect to any criminal action, had no
cause to believe their conduct was unlawful; (ii) to advance the expenses
actually and reasonable incurred by its officers and directors as a result of
any proceeding against them as to which they could be indemnified; and (iii) to
obtain directors' and officers' insurance if available on reasonable terms.
There is no action or proceeding pending or, to the knowledge of the Company,
threatened which may result in a claim for indemnification by any director,
officer, employee or agent of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Recapitalization the following transactions were
effectuated: (i) members of the Company's management purchased 500,000 shares of
Common Stock for $500,000 in cash, (ii) holders of outstanding options to
purchase 49,500,000 shares of Common Stock exchanged such options for 495,000
shares of Junior Preferred Stock, (iii) the holder of 19,800,000 shares of
Common Stock exchanged such shares for 198,000 shares of Junior Preferred Stock,
(iv) the DLJ Investors purchased 800,000 shares of Senior Preferred Stock and
Warrants to purchase 73,864 shares of Common Stock and 72,947 shares of Junior
Preferred Stock for $20.0 million in cash, (v) the Investors purchased 700,000
shares of Common Stock and 693,000 shares of Junior Preferred Stock for $70.0
million cash, and (vi) DLJ Bridge purchased $51.0 million aggregate principal
amount of senior unsecured increasing rate notes for $51.0 million in cash. The
Company believes that the securities issued in each of these transactions were
issued in a private offering in accordance with Section 4(2) of the Securities
Act.
On July 2, 1996, the Company sold an aggregate of $100 million principal
amount of Old Notes to DLJ and CSI. (severally, the "Initial Purchasers"). The
Company believes this offering was exempt from registration under Section 4(2)
of the Securities Act. The Initial Purchasers resold an aggregate of $100
million principal amount of Old Notes to Qualified Institutional Investors
(within the meaning of Rule 144A under the Securities Act ("Rule 144A")) in
transactions meeting the requirements of Rule 144A.
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 The Company's Certificate of Incorporation
3.2 The Company's Bylaws
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.1* Indenture, dated as of July 2, 1996 by and between the Company and U.S. Trust Company of California as
trustee
4.2* Form of Restricted Stock Agreements dated as of May 1, 1996 between the Company and certain members of
management
4.3* Warrants (1-4) dated June 5, 1996, for the purchase of shares of Common Stock and Junior Preferred
Stock issued to certain investors
5.1 Opinion of Buchalter, Nemer, Fields & Younger, a Professional Corporation, as to the enforceability of
the notes offered hereby
10.1* Recapitalization Agreement, dated May 1, 1996 by and among the Company, CVCA, WPC, WFSBIC, and the
stockholders named therein
10.2* Registration Rights Agreement, dated June 5, 1996, among the Company and its stockholders
10.3* Tax Indemnification Agreement, dated as of May 1, 1996, by and among the Company, Ray Scherr, and the
individuals identified on the signature pages thereto
10.4* The Company's 1996 Stock Option Plan dated June 3, 1996 and Amendment No. 1
10.5* Employment Agreement dated June 5, 1996, between the Company
and Lawrence Thomas
10.6* Employment Agreement dated June 5, 1996, between the Company
and Marty Albertson
10.7* Employment Agreement dated June 5, 1996, between the Company and Bruce Ross
10.8* Employment Agreement dated June 5, 1996, between the Company and Raymond Scherr
10.9* Form of Indemnification Agreement dated June 5, 1996, between the Company
and certain members of management
10.10* Securities Purchase Agreement dated June 5, 1996, by and among the Company
and the parties named therein
10.11* Registration Agreement dated June 5, 1996, among the Company
and the parties named therein
10.12* Credit Agreement dated June 5, 1996, between the Company
and Wells Fargo Bank, N.A.
10.13* Revolving Promissory Note dated June 5, 1996, issued by the Company in favor of Wells Fargo Bank, N.A.
in the principal amount of $25,000,000
10.14* Security Agreement dated June 5, 1996, between the Company and Wells Fargo, N.A.
10.15* Registration Rights Agreement, dated July 2, 1996, by and among the Company, CSI and DLJ
10.16* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Lawrence Thomas
10.17* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Marty Albertson
10.18 Employment Agreement dated June 5, 1996, between the Company and Barry Soosman
10.19* Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
10.20 Amended and Restated 1996 Performance Stock Option Plan
10.21 Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the Company and
Larry Thomas
10.22 Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the Company and
Marty Albertson
10.23 Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Bruce Ross
10.24 Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Barry Soosman
11.1 Computation of Earnings to Fixed Charges
16.1 Letter re: change in certifying accountant
23.2 Consent of Ernst & Young LLP, independent auditors
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
23.4 Consent of Buchalter, Nemer, Fields & Younger, a Professional Corporation
(included in Exhibit 5)
24.1* Power of Attorney (included on page II-4)
25.1* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
99.1 Letter of Transmittal
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules
No schedules for which provision is made in the applicable accounting
regulations of the Commission are required under the applicable instructions or
are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out the Securities Act
may be permitted to directors, officers or controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by registrant of expenses incurred or paid
by a directors, officer or controlling person of the registrant in the
successful defense in any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant 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 whether such indemnification by it is against public
policy as expressed in the Securities Act and will by governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California on this 16th day of October 1996.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By: /s/ LARRY THOMAS
------------------------------------------
Name: Larry Thomas
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
/s/ LARRY THOMAS President, Chief Executive Officer
------------------------------------------- and Director [Principal Executive October 16, 1996
Larry Thomas Officer]
/s/ BRUCE ROSS Vice President, Chief Financial
------------------------------------------- Officer and Secretary [Principal October 16, 1996
Bruce Ross Financial and Accounting Officer]
/s/ MARTY ALBERTSON
------------------------------------------- Executive Vice President, Chief October 16, 1996
Marty Albertson Operating Officer and Director
------------------------------------------- Director October , 1996
Raymond Scherr
/s/ DAVID FERGUSON*
------------------------------------------- Director October 16, 1996
David Ferguson
------------------------------------------- Director October , 1996
Jeffrey Walker
/s/ MICHAEL LAZARUS*
------------------------------------------- Director October 16, 1996
Michael Lazarus
------------------------------------------- Director October , 1996
Steven Burge
By /s/ BRUCE ROSS
---------------------------------------
Bruce Ross
Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
3.1 The Company's Certificate of Incorporation
3.2 The Company's Bylaws
4.1* Indenture, dated as of July 2, 1996 by and between the Company and U.S. Trust Company of
California as trustee
4.2* Form of Restricted Stock Agreements dated as of May 1, 1996 between the Company and certain
members of management
4.3* Warrants (1-4) dated June 5, 1996, for the purchase of shares of Common Stock and Junior
Preferred Stock issued to certain investors
5.1 Opinion of Buchalter, Nemer, Fields & Younger, a Professional Corporation, as to the
enforceability of the Notes offered hereby
10.1* Recapitalization Agreement, dated May 1, 1996 by and among the Company, CVCA, WPC, WFSBIC, and
the stockholders named therein
10.2* Registration Rights Agreement, dated June 5, 1996, among the Company and its stockholders
10.3* Tax Indemnification Agreement, dated as of May 1, 1996, by and among the Company, Ray Scherr,
and the individuals identified on the signature pages thereto
10.4* The Company's 1996 Stock Option Plan dated June 3, 1996 and Amendment No. 1
10.5* Employment Agreement dated June 5, 1996, between the Company
and Lawrence Thomas
10.6* Employment Agreement dated June 5, 1996, between the Company
and Marty Albertson
10.7* Employment Agreement dated June 5, 1996, between the Company and Bruce Ross
10.8* Employment Agreement dated June 5, 1996, between the Company and Raymond Scherr
10.9* Form of Indemnification Agreement dated June 5, 1996, between the Company
and certain members of management
10.10* Securities Purchase Agreement dated June 5, 1996, by and among the Company
and the parties named therein
10.11* Registration Agreement dated June 5, 1996, among the Company
and the parties named therein
10.12* Credit Agreement dated June 5, 1996, between the Company
and Wells Fargo Bank, N.A.
10.13* Revolving Promissory Note dated June 5, 1996, issued by the Company in favor of Wells Fargo
Bank, N.A. in the principal amount of $25,000,000
10.14* Security Agreement dated June 5, 1996, between the Company and Wells Fargo, N.A.
10.15* Registration Rights Agreement, dated July 2, 1996, by and among the Company, CSI and DLJ
10.16* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Lawrence
Thomas
10.17* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Marty
Albertson
10.18 Employment Agreement dated June 5, 1996 between the Company and Barry Soosman
10.19* Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
10.20 Amended and Restated 1996 Performance Stock Option Plan
10.21 Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the
Company and Larry Thomas
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.22 Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the
Company and Marty Albertson
10.23 Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Bruce
Ross
10.24 Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Barry
Soosman
11.1 Computation of Earnings to Fixed Charges
16.1 Letter re: change in certifying accountant
23.2 Consent of Ernst & Young LLP, independent auditors
23.4 Consent of Buchalter, Nemer, Fields & Younger, a Professional Corporation
(included in Exhibit 5)
24.1* Power of Attorney (included on page II-4)
25.1* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
99.1 Letter of Transmittal
</TABLE>
- ------------------------
* Previously filed
<PAGE>
CERTIFICATE OF INCORPORATION
OF
GUITAR CENTER, INC.
The undersigned incorporator, in order to form a corporation under
the General Corporation Law of the State of Delaware, certifies as follows:
ARTICLE I
The name of this corporation is GUITAR CENTER, INC. (the
"Corporation").
ARTICLE II
The registered office of the Corporation in the State of Delaware is
1013 Centre Road in the City of Wilmington, County of New Castle 19805. The
name of the registered agent of the Corporation at that address is
Corporation Service Company.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
This corporation is authorized to issue two classes of stock
designated, respectively, Common Stock and Preferred Stock. The aggregate
number of shares of all classes of capital stock which the corporation shall
have authority to issue is twenty million (20,000,000 shares), of which ten
million (10,000,000) shall be Common Stock, $.01 par value (the "Common
Stock"), and of which ten million (10,000,000) shall be Preferred Stock, par
value $.01 per share (the "Preferred Stock"). The shares of Preferred Stock
authorized by this Certificate of Incorporation may be issued from time to
time in one or more series. The Board of Directors is authorized to
determine or alter any or all of the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock shares and to fix, alter or reduce (but not below the number
then outstanding) the number of shares comprising any such series and the
designation thereof, or any of them, and to provide for the rights and terms
of redemption or conversion of the shares of any such series. In addition to
the foregoing right of the Board of Directors, the Corporation hereby
designates the following classes of Preferred Stock:
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A. 14% Senior Preferred Stock
1. NUMBER AND DESIGNATION. 4,250,000 shares of the Preferred
Stock of the Corporation shall be designated as 14% Senior Preferred Stock,
par value $.01 (the "SENIOR PREFERRED STOCK").
2. RANK. The Senior Preferred Stock shall, with respect to
dividend rights and rights on liquidation, dissolution and winding up, rank
prior to all classes or series of common stock of the Corporation, including
the Corporation's Common Stock and each other class of capital stock of the
Corporation, the terms of which provide that such class shall rank junior to
the Senior Preferred Stock (including, without limitation, the Corporation's
8% Junior Preferred Stock, par value $.01 (the "JUNIOR PREFERRED STOCK")) or
the terms of which do not specify any rank relative to the Senior Preferred
Stock. All equity securities of the Corporation to which the Senior
Preferred Stock ranks prior (whether with respect to dividends or upon
liquidation, dissolution, winding up or otherwise), including the Common
Stock and Junior Preferred Stock, are collectively referred to herein as the
"JUNIOR SECURITIES." All equity securities of the Corporation with which the
Senior Preferred Stock ranks on a parity (whether with respect to dividends
or upon liquidation, dissolution, winding up or otherwise) are collectively
referred to herein as the "SENIOR PREFERRED PARITY SECURITIES." The
respective definitions of Junior Securities and Senior Preferred Parity
Securities shall also include any rights or options exercisable for, or
securities convertible into or exchangeable for, any of the Junior Securities
and Senior Preferred Parity Securities, as the case may be. The Senior
Preferred Stock shall be subject to the creation of Junior Securities and as
provided in Section 3(b) hereof, any Additional Shares of Senior Preferred
Stock.
3. DIVIDENDS. (a) (i) The holders of shares of Senior
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors, out of funds legally available for the payment of
dividends, dividends (subject to Sections 3(a)(ii) and (iii) hereof) at the
rate of 14% per annum (computed on the basis of a 360 day year of twelve
30-day months) (the "SENIOR PREFERRED DIVIDEND RATE") on the Senior Preferred
Liquidation Value of each share of Senior Preferred Stock on and as of the
most recent Senior Preferred Dividend Payment Date (as defined below). Such
dividends shall be payable in the manner set forth below in Sections 3(a)(ii)
to this Subpart A and (iii) quarterly on March 15, June 15, September 15, and
December 15 of each year (unless such day is not a Business Day, in which
event on the next succeeding business day) (each of such dates being a
"SENIOR PREFERRED DIVIDEND PAYMENT DATE" and each such quarterly period being
a "SENIOR PREFERRED DIVIDEND PERIOD"). Such dividends shall be cumulative
from the date of issue, whether or not in any Senior Preferred Dividend
Period or Periods there shall be profits, surplus or other funds of the
Corporation legally available for the payment of such dividends. "BUSINESS
DAY" means any day except a Saturday, Sunday or other day on which the New
York Stock Exchange is closed.
(ii) On or prior to June 15, 2002 or, if not a Business Day,
the next succeeding Business Day (the "SENIOR PREFERRED CASH PAY DATE"),
dividends shall not
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be payable in cash to holders of shares of Senior Preferred Stock but shall,
subject to Section 3(b) of Subpart A hereof, whether or not declared,
accrete to the Senior Preferred Liquidation Value in accordance with Section
4(a) of Subpart A hereof. For the avoidance of doubt, whenever this
Certificate refers to "accrued and unpaid dividends", it shall be deemed not
to include dividends that have been previously accreted to the Senior
Preferred Liquidation Value of a share of Senior Preferred Stock pursuant to
this Section 3(a)(ii) of Subpart A.
(iii) Following the Senior Preferred Cash Pay Date, each such
dividend shall be payable in cash on the Senior Preferred Liquidation Value
per share of the Senior Preferred Stock, in equal quarterly amounts, to the
holders of record of shares of the Senior Preferred Stock, as they appear on
the stock records of the Corporation at the close of business on such record
dates, not more than 60 days or less than 10 days preceding the payment dates
thereof, as shall be fixed by the Board of Directors. Accrued and unpaid
dividends for any past Senior Preferred Dividend Periods may be declared and
paid at any time, without reference to any Senior Preferred Dividend Payment
Date, to holders of record on such date, not more than 45 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
(b) At the written request of the holders of a majority of the
issued and outstanding shares of Senior Preferred Stock, the Corporation
shall, commencing on the first Senior Preferred Dividend Payment Date after
such request and ending on the Senior Preferred Cash Pay Date, be required to
pay all dividends on shares of Senior Preferred Stock by the issuance of
additional shares of Senior Preferred Stock ("ADDITIONAL SHARES"). The
Additional Shares shall be identical to all other shares of Senior Preferred
Stock, except as set forth in Section 4 of Subpart A hereof. For the
purposes of determining the number of Additional Shares to be issued as
dividends pursuant to this Paragraph (b), such Additional Shares shall be
valued at their Applicable Senior Preferred Liquidation Value as provided in
Section 4(c) of Subpart A hereof.
(c) Holders of shares of Senior Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in
excess of the cumulative dividends, as herein provided, on the Senior
Preferred Stock. Except as provided in this Section 3, no interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on the Senior Preferred Stock that may be in arrears.
(d) So long as any shares of the Senior Preferred Stock are
outstanding, no dividends, except as described in the next succeeding
sentence, shall be declared or paid or set apart for payment or other
distribution declared or made upon Senior Preferred Parity Securities for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof
set apart for such payment, on the Senior Preferred Stock for all dividend
periods terminating on or prior to the date of payment of the dividend on
such class or series of Senior Preferred Parity Securities. When dividends
are not paid in full, or a sum sufficient
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for such payment is not set apart, as aforesaid, all dividends declared upon
shares of the Senior Preferred Stock and all dividends declared upon any
other class or series of Senior Preferred Parity Securities shall be
declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Senior Preferred Stock and accumulated and
unpaid on such Senior Preferred Parity Securities. In no event will cash
dividends be paid on Senior Preferred Parity Securities when dividends are
not payable in cash on the Senior Preferred Stock. In addition, so long as
any shares of the Senior Preferred Stock are outstanding, no Senior
Preferred Parity Securities shall be redeemed, purchased or otherwise
acquired for any consideration (and no moneys shall be paid to or made
available for a sinking fund for the purchase or redemption of any shares of
any such stock) by the Corporation, directly or indirectly, except as
described in the next succeeding sentence, unless the Senior Preferred
Stock has been redeemed, purchased, or otherwise acquired (or money paid to
or made available for a sinking fund for such redemption, purchase or
acquisition) contemporaneously or a sum sufficient for the redemption,
purchase or acquisition thereof set apart for such redemption, purchase or
acquisition of the Senior Preferred Stock. When the shares of Senior
Preferred Stock are not redeemed, purchased, or otherwise acquired in full
or a sum sufficient for such redemption, purchase or acquisition is not set
apart, as aforesaid, all redemptions, purchases or acquisitions of shares of
the Senior Preferred Stock and all redemptions, purchases or acquisitions of
any other class or series of Senior Preferred Parity Securities shall be
effected, ratably in accordance with the respective amounts that would be
payable on such shares of Senior Preferred Stock and any such Senior
Preferred Parity Securities if all amounts payable thereon were paid in full.
(e) So long as any shares of the Senior Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, Junior Securities) shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any
Junior Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Junior Preferred Stock
held by Management Stockholders or their respective Permitted Transferees (as
such terms are defined in the Stockholders Agreement) in an amount sufficient
to pay taxes owed by such persons (as set forth in a certificate of the
Corporation's chief financial officer providing such calculation in
reasonable detail) as a result of the grant and issuance of such Junior
Preferred Stock to Management Stockholders or the lapsing of the substantial
risk of forfeiture imposed upon such shares by the Restricted Stock
Agreements (as defined in the Stockholders Agreement); PROVIDED that the
aggregate amount of all such redemptions, purchases or other acquisitions
shall not exceed the net proceeds received by the Corporation from the sale
of its Common Stock in an Initial Public Offering) (all such dividends,
distributions, redemptions or purchases being hereinafter referred to as a
"JUNIOR SECURITIES DISTRIBUTION") for any consideration (or any moneys be
paid to or made available for a sinking fund for the purchase or redemption
of any Junior Securities) by the Corporation, directly or indirectly (except
by conversion into, or exchange for, Junior Securities).
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4. LIQUIDATION PREFERENCE. (a) In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any payment or distribution of the assets of the Corporation
(whether capital or surplus) shall be made to or set apart for the holders
of Junior Securities, the holders of the shares of Senior Preferred Stock
shall be entitled to receive an amount equal to the Senior Preferred
Liquidation Value of such share plus any accrued and unpaid cash dividends
to the date of distribution. "SENIOR PREFERRED LIQUIDATION VALUE" on any date
means, with respect to (x) any share of Senior Preferred Stock, other than
any Additional Shares, the sum of (1) $25.00 and (2) the aggregate of all
dividends accreted on such share pursuant to Section 3(a)(ii) of Subpart A
hereof (whether or not declared) until the most recent Senior Preferred
Dividend Payment Date upon which an accretion to Senior Preferred Liquidation
Value has occurred (or if such date is a Senior Preferred Dividend Payment
Date upon which an accretion to Senior Preferred Liquidation Value has
occurred, such date, but in no event beyond the Senior Preferred Cash Pay
Date), PROVIDED that in the event of an actual liquidation, dissolution or
winding up of the Corporation the amount referred to in (2) shall be
calculated by including dividends accreting to the actual date of such
liquidation, dissolution or winding up, rather than the Senior Preferred
Dividend Payment Date referred to above and PROVIDED FURTHER that in no event
will dividends accrete beyond the earlier of (i) the Senior Preferred Cash
Pay Date and (ii) the most recent Senior Preferred Dividend Payment Date
prior to the Senior Preferred Dividend Payment Date on which dividends on the
Senior Preferred Stock are payable in Additional Shares and (y) any
Additional Share, the Senior Preferred Applicable Liquidation Value (as
hereinafter defined). All accretions to Senior Preferred Liquidation Value
will be calculated using compounding on a quarterly basis as of each Senior
Preferred Dividend Payment Date (whether or not declared). Except as provided
in the preceding sentences, holders of shares of Senior Preferred Stock shall
not be entitled to any distribution in the event of liquidation, dissolution
or winding up of the affairs of the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation,
or proceeds thereof, distributable among the holders of the shares of Senior
Preferred Stock shall be insufficient to pay in full the preferential amount
aforesaid and liquidating payments on any Senior Preferred Parity Securities,
then such assets, or the proceeds thereof, shall be distributed among the
holders of shares of Senior Preferred Stock and any such other Senior
Preferred Parity Securities ratably in accordance with the respective amounts
that would be payable on such shares of Senior Preferred Stock and any such
Senior Preferred Parity Securities if all amounts payable thereon were paid
in full. For the purposes of this Section 4, (i) a consolidation or merger
of the Corporation with one or more corporations, or (ii) a sale or transfer
of all or substantially all of the Corporation's assets, shall not be deemed
to be a liquidation, dissolution or winding up, voluntary or involuntary, of
the Corporation.
(b) Subject to the rights of the holders of any Senior
Preferred Parity Securities, after payment shall have been made in full to
the holders of the Senior Preferred Stock, as provided in this Section 4, any
other series or class or classes of Junior Securities shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the
holders of the Senior Preferred Stock shall not be entitled to share therein.
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(c) The "SENIOR PREFERRED APPLICABLE LIQUIDATION VALUE" of any
Additional Share shall be the Senior Preferred Liquidation Value of a share
of Senior Preferred Stock outstanding immediately prior to the first Senior
Preferred Dividend Payment Date occurring after a request for payment in
Additional Shares has been made in accordance with Section 3(b) of Subpart A
hereof (it being understood that it is the intent that all outstanding shares
of Senior Preferred Stock, including Additional Shares, shall have the same
Senior Preferred Liquidation value).
5. REDEMPTION. (a) REDEMPTION UPON CONSUMMATION OF INITIAL
PUBLIC OFFERING. The Corporation may, at its option, to the extent it shall
have funds legally available for such payment, redeem, at any time and from
time to time prior to June 15, 1999, in whole or in part, shares of Senior
Preferred Stock, at a redemption price per share equal to 103% of the Senior
Preferred Liquidation Value if such redemption shall occur before June 15,
1997, or 106% of the Senior Preferred Liquidation Value if such redemption
shall occur on or after June 15, 1997, to and including June 15, 1999, in
cash, plus accrued and unpaid cash dividends on such share to the date fixed
for redemption, without interest, PROVIDED that the Corporation shall not
redeem any shares of Senior Preferred Stock pursuant to this Section 5(a)
unless (i) prior to such redemption an Initial Public Offering shall have
been consummated and (ii) the aggregate redemption price of the shares of
Senior Preferred Stock redeemed pursuant to this Section 5(a) does not
exceed the net proceeds received by the issuer in such Initial Public
Offering.
"INITIAL PUBLIC OFFERING" shall have the meaning ascribed to
such term in the Registration Agreement and shall, in addition, for the
purposes of Section 5(a) of Subpart A hereof, include any sale after the
issuance of the Senior Preferred Stock of any equity securities by any
affiliate of the Corporation, the net proceeds of which are contributed or
loaned to the Corporation in such a manner that such proceeds may lawfully be
used for the redemption of the Senior Preferred Stock.
"REGISTRATION AGREEMENT" means the Registration Agreement among
DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ
Offshore Partners, C.V., and DLJ Merchant Banking Funding, Inc. (collectively,
the "DLJ ENTITIES"), and Guitar Center Management Company, Inc. as in
effect on the date the shares of Senior Preferred Stock are first issued.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement among
the Guitar Center Management Company, Inc., the DLJ Entities, and the other
securityholders of the Guitar Center Management Company, Inc. party thereto
as in effect on the date the shares of Senior Preferred Stock are first issued.
(b) REDEMPTION AT THE OPTION OF THE CORPORATION. On and after
June 15, 1999, to the extent the Corporation shall have funds legally
available for such payment, the Corporation may, at its option, redeem shares
of Senior Preferred Stock, at any time in whole, or from time to time in part,
at redemption prices per share in cash set
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forth in the table below, together with accrued and unpaid cash dividends
thereon to the date fixed for redemption, without interest:
Year Beginning Percentage of [Senior
June 15, Preferred] Liquidation Value
------- ----------------------------
1999 110%
2000 108
2001 106
2002 104
2003 102
2004 and thereafter 100
(c) REDEMPTION IN THE EVENT OF A CHANGE OF CONTROL. In the
event of a Change of Control, the Corporation shall within 5 days following a
Change of Control, to the extent it shall have funds legally available for
such payment, offer to redeem all of the shares of Senior Preferred Stock
then outstanding, and shall redeem the shares of Senior Preferred Stock of
any holder of such shares that shall consent to such redemption upon a date
no earlier than 35 days and no later than 45 days following the Change of
Control, at a redemption price per share equal to 101% of the Senior
Preferred Liquidation Value, in cash, plus accrued and unpaid cash dividends
thereon to the date fixed for redemption, without interest.
"CHANGE OF CONTROL" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act of 1934, as amended), other than any person or group comprised solely of
the Senior Preferred Initial Investors, has become the beneficial owner, by
way of purchase, merger, consolidation or otherwise, of 35% or more of the
voting power of all classes of voting securities of the Corporation and such
person or group has become the beneficial owner of a greater percentage of
the voting power of all classes of voting securities of the Corporation than
that then held by the Senior Preferred Initial Investors; or (b) a sale or
transfer of all or substantially all of the assets of the Corporation to any
person or group (other than any group consisting solely of the Senior
Preferred Initial Investors) has been consummated; or (c) during any period
of two consecutive years occurring after an Initial Public Offering,
individuals who at the beginning of such period constituted the Board of
Directors of the Corporation (together with any new directors whose election
was approved by a vote of a majority of the directors then still in office,
who either were directors at the beginning of such period or whose election
or nomination for the election was previously so approved) cease for any
reason to constitute a majority of the directors of the Corporation, as the
case may be, then in office, other than as a result of election and removal
of directors pursuant to the provisions of this Certificate of Incorporation,
the Bridge Loan Agreement or the Stockholders Agreement governing the
election and removal of directors.
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"SENIOR PREFERRED INITIAL INVESTORS" means (x) Chase Venture
Capital Associates, L.P., CB Capital Investors, Inc., Weston Presidio Capital
II, L.P., Wells Fargo Small Business Investment Company, Inc. (collectively,
the "SENIOR PREFERRED INVESTORS") and the other securityholders of the
Corporation party to the Stockholders Agreement on the date the shares of
Senior Preferred Stock are first issued, (y) as to any Stockholder (as
defined in the Stockholders Agreement) that is an individual, any Permitted
Transferee thereof described in clause (i) or (iii) of the definition of
Permitted Transferee contained in the Stockholders Agreement and (z) any
Person (as defined in the Stockholders Agreement) controlled by or under
common control with any of the Senior Preferred Investors but not Persons
controlling any of the Senior Preferred Investors, other than those Persons
controlling the Senior Preferred Investors as of the date the shares of
Senior Preferred Stock are first issued. For purposes of the foregoing,
"controlling, controlled by or under common control with" as applied any
Person, means the ability, through the ownership of voting securities, to
control the management and policies of such Person.
"BRIDGE LOAN AGREEMENT" means the Bridge Financing Agreement
among Guitar Center Management, Inc., GCMC Funding, Inc. and Chemical Bank as
well as any notes issued thereunder and all other documents executed and
delivered in connection therewith, in each case, as in effect on the date the
shares of Senior Preferred Stock are first issued.
(d) SENIOR PREFERRED MANDATORY REDEMPTION. To the extent the
Corporation shall have funds legally available for such payment, on June 15,
2008, if any shares of the Senior Preferred Stock shall be outstanding, the
Corporation shall redeem all outstanding shares of the Senior Preferred Stock,
at a redemption price equal to the aggregate Senior Preferred Liquidation
Value, in cash, together with any accrued and unpaid cash dividends thereon
to the date fixed for redemption, without interest.
(e) STATUS OF REDEEMED SHARES. Shares of Senior Preferred
Stock which have been issued and reacquired in any manner, including shares
purchased or redeemed, shall (upon compliance with any applicable provisions
of the laws of the State of Delaware) have the status of authorized and
unissued shares of the class of Preferred Stock undesignated as to series and
may be redesignated and reissued as part of any series of the Preferred
Stock; PROVIDED that no such issued and reacquired shares of Senior Preferred
Stock shall be reissued or sold as Senior Preferred Stock, except as provided
in Section 3(b) of Subpart A hereof.
(f) FAILURE TO REDEEM. If the Corporation is unable or shall
fail to discharge its obligation to redeem all offered shares of Senior
Preferred Stock pursuant to paragraph (5)(c) of Subpart A hereof or all
shares of Senior Preferred Stock pursuant to paragraph 5(d) of Subpart A
hereof (each, a "SENIOR PREFERRED MANDATORY REDEMPTION OBLIGATION"), such
Senior Preferred Mandatory Redemption Obligation shall be discharged as soon
as the Corporation is able to discharge such Senior Preferred Mandatory
Redemption Obligation. If and so long as any Senior Preferred Mandatory
Redemption Obligation with respect to the Senior Preferred Stock shall not be
fully discharged, the
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Corporation shall not directly or indirectly, redeem, purchase, or otherwise
acquire any Senior Preferred Parity Security or discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of
any Senior Preferred Parity Securities (except in connection with a
redemption, sinking fund or other similar obligation to be satisfied pro
rata with the Senior Preferred Stock).
(g) FAILURE TO PAY DIVIDENDS. Notwithstanding the foregoing
provisions of this Section 5, unless full cumulative accrued cash dividends
payable pursuant to Section 3(a)(iii) of Subpart A hereof (whether or not
declared) on all outstanding shares of Senior Preferred Stock shall have been
paid or contemporaneously are declared and paid or set apart for payment for
all Senior Preferred Dividend Periods ending on or prior to the applicable
redemption date, none of the shares of Senior Preferred Stock shall be
redeemed, purchased or otherwise acquired and no sum shall be set aside for
such redemption, purchase or other acquisition.
(h) OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall
not directly or indirectly redeem or otherwise acquire any Senior Preferred
Stock, except as expressly authorized herein or, subject to the provisions of
Section 5(g) of Subpart A hereof, pursuant to a purchase offer made pro-rata
to all holders of Senior Preferred Stock on the basis of the number of whole
shares of such Senior Preferred Stock owned by each such holder.
6. PROCEDURE FOR REDEMPTION. (a) In the event that fewer than
all the outstanding shares of Senior Preferred Stock are to be redeemed
pursuant to Sections 5(a) or (b) of Subpart A hereof, the number of shares to
be redeemed shall be determined by the Board of Directors and the shares to
be redeemed shall be selected PRO RATA (with any fractional shares being
rounded to the nearest whole share) according to the number of whole shares
held by each holder of the Senior Preferred Stock.
(b) In the event the Corporation shall redeem shares of Senior
Preferred Stock pursuant to Sections 5(a), (b) or (d) of Subpart A hereof,
notice of such redemption shall be given by first class mail, postage prepaid,
mailed not less than 30 days nor more than 60 days prior to the redemption
date, to each holder of record of the shares to be redeemed at such holder's
address as the same appears on the stock register of the Corporation;
PROVIDED that neither the failure to give such notice nor any defect therein
shall affect the validity of the giving of notice for the redemption of any
share of Senior Preferred Stock to be redeemed, except as to the holder to
whom the Corporation has failed to give said notice or whose notice was
defective. Each such notice shall state: (i) the redemption date; (ii) the
number of shares of Senior Preferred Stock to be redeemed and, if fewer than
all the shares held by such holder are to be redeemed, the number of shares
to be redeemed from such holder; (iii) the redemption price; (iv) the place
or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on the shares to be
redeemed will cease to accrue or accrete, as the case may be, on such
redemption date.
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(c) In the case of any redemption pursuant to Sections 5(a),
(b) or (d) of Subpart A hereof, notice having been mailed as provided in
Section 6(b) of Subpart A hereof, from and after the redemption date (unless
default shall be made by the Corporation in providing money for the payment
of the redemption price of the shares called for redemption), dividends on
the shares of Senior Preferred Stock so called for redemption shall cease to
accrete or accrue, as the case may be, and all rights of the holders thereof
as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price) shall cease. Upon surrender, in accordance
with said notice, of the certificates for any shares so redeemed (properly
endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the redemption price aforesaid. In
case fewer than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed
shares without cost to the holder thereof.
(d) In the case of a redemption pursuant to Section 5(c) of
Subpart A hereof, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not more than 5 days following the occurrence of
the Change of Control, to each holder of record of the shares to be redeemed
at such holder's address as the same appears on the stock register of the
Corporation; PROVIDED that neither the failure to give such notice nor any
defect therein shall affect the validity of the giving of notice for the
redemption of any share of Senior Preferred Stock to be redeemed, except as
to the holder to whom the Corporation has failed to give said notice or whose
notice was defective. Each such notice shall state: (i) that a Change of
Control has occurred; (ii) the redemption date; (iii) the redemption price;
(iv) that such holder may elect to cause the Corporation to redeem all or any
of the shares of Senior Preferred Stock held by such holder; (v) the place or
places where certificates for such shares are to be surrendered for payment
of the redemption price; and (vi) that dividends on the shares the holder
elects to cause the Corporation to redeem will cease to accrue on such
redemption date.
Upon receipt of such notice, the holder shall, within 20 days
of receipt thereof, return such notice to the Corporation indicating the
number of shares of Senior Preferred Stock such holder shall elect to cause
the Corporation to redeem, if any.
(e) In the case of a redemption pursuant to Section 5(c) of
Subpart A hereof, notice having been mailed as provided in Section 6(d) of
Subpart A hereof, from and after the redemption date (unless default shall be
made by the Corporation in providing money for the payment of the redemption
price of the shares called for redemption), dividends on such shares of
Senior Preferred Stock as the holder elects to cause the Corporation to
redeem shall cease to accrete or accrue, as the case may be, and all rights
of the holders thereof as stockholders of the Corporation (except the right
to receive from the Corporation the redemption price) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors of the Corporation shall so require and the notice shall so state),
such share shall be redeemed by the Corporation at the redemption price
aforesaid. In case fewer than all the shares represented by any such
certificate are redeemed, a new
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certificate shall be issued representing the unredeemed shares without cost
to the holder thereof.
7. VOTING RIGHTS. (A) The holders of record of shares of
Senior Preferred Stock shall not be entitled to any voting rights except as
hereinafter provided in this Section 7 or as otherwise provided by law.
(b) If and whenever (i) six quarterly cash dividends payable
on the Senior Preferred Stock after the Senior Preferred Cash Pay Date have
not been paid in full, (ii) for any reason (including the reason that funds
are not legally available for a redemption), the Corporation shall have
failed to discharge any Senior Preferred Mandatory Redemption Obligation
(including a Redemption in the Event of a Change of Control pursuant to
Section 5(c) of Subpart A hereof), or (iii) the Corporation shall have failed
to provide the notice required by Section 6(d) of Subpart A hereof within the
time period specified in such Section (each of the foregoing, a "VOTING
TRIGGER"), the holders of shares of Senior Preferred Stock, together with the
holders of shares of every other series of preferred stock of the Corporation
upon which like rights to vote for the election of two additional directors
have been conferred and are exercisable (resulting from either the failure to
pay dividends or the failure to redeem)(any such other series is referred to
collectively as the "PREFERRED SHARES"), voting as a single class regardless
of series, shall be entitled to elect two additional directors to serve on
the Board of Directors at any annual meeting of stockholders or special
meeting held in place thereof, or at a special meeting of the holders of the
Senior Preferred Stock and the Preferred Shares called as hereinafter provided.
Whenever (i) all arrears in cash dividends on the Senior Preferred Stock
and the Preferred Shares then outstanding shall have been paid and cash
dividends thereon for the current quarterly dividend period shall have been
paid or declared and set apart for payment, (ii) the Corporation shall have
fulfilled its Senior Preferred Mandatory Redemption Obligation, or (iii)
fulfilled its obligation to provide notice as specified in clause (b)(iii) of
the preceding sentence, as the case may be, then the right of the holders of
the Senior Preferred Stock and the Preferred Shares to elect such additional
two directors shall cease (but subject always to the same provisions for the
vesting of such voting rights in the case of the occurrence of any similar
future Voting Trigger) and the terms of office of all persons elected as
directors by the holders of the Senior Preferred Stock and the Preferred
Shares shall automatically terminate and the number of the Board of Directors
shall automatically be reduced accordingly, in each case without any further
action by the Corporation or any other Person. At any time after such voting
power shall have been so vested in the holders of shares of Senior Preferred
Stock and the Preferred Shares, the secretary of the Corporation may, and
upon the written request of any holder of Senior Preferred Stock (addressed
to the secretary at the principal office of the Corporation) shall, call a
special meeting of the holders of the Senior Preferred Stock and of the
Preferred Shares for the election of the two directors to be elected by them
as herein provided, such call to be made by notice similar to that provided
in the Bylaws of the Corporation for a special meeting of the stockholders or
as required by law. If any such special meeting required to be called as
above provided shall not be called by the secretary within 20 days after
receipt of any such request, then any holder of shares of Senior Preferred
Stock may
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call such meeting, upon the notice above provided, and for that purpose shall
have access to the stock books of the Corporation. The directors elected at
any such special meeting shall hold office until the next annual meeting of
the stockholders or special meeting held in lieu thereof if such office
shall not have previously terminated as above provided. If any vacancy
shall occur among the directors elected by the holders of the Senior
Preferred Stock and the Preferred Shares, a successor shall be elected by
the Board of Directors, upon the nomination of the then-remaining director,
if any, elected by the holders of the Senior Preferred Stock and the
Preferred Shares or the successor of such remaining director, to serve until
the next annual meeting of the stockholders or special meeting held in place
thereof if such office shall not have previously terminated as provided above.
In the event that such voting power shall have been so vested in the
holders of the shares of the Senior Preferred Stock, the Board of Directors
of the Corporation shall be increased by two directors to be so elected by
the holders of the shares of Senior Preferred Stock and Preferred Shares,
unless the authorized number of directors of the Corporation would then be
increased beyond the then maximum authorized number thereof, in which event,
the number of directors to be elected by the holders of Common Stock shall
immediately be decreased by two, two directors shall then resign from the
Board of Directors and the holders of the shares of Senior Preferred Stock
and Preferred Shares shall be entitled to elect two directors in their place
pursuant to the provisions set forth above.
(c) Without the written consent of holders of at least 60% of
the outstanding shares of Senior Preferred Stock or the vote of holders of at
least 60% of the outstanding shares of Senior Preferred Stock at a meeting of
the holders of Senior Preferred Stock called for such purpose, in each case
voting as a separate class, the Corporation will not (i) liquidate, dissolve,
wind-up or otherwise discontinue the business of the Corporation unless, if
redemption is then permitted under Section 5(b) of Subpart A hereof,
immediately prior thereto the Corporation redeems all outstanding shares of
Senior Preferred Stock pursuant to Section 5(b) of Subpart A hereof; (ii)
amend, alter or repeal any provision of the Certificate of Incorporation (by
merger or otherwise) so as to adversely affect the preferences, rights or
powers of the Senior Preferred Stock (PROVIDED that any such amendment that
changes the dividend payable on, or the Senior Preferred Liquidation Value
(or method of calculation thereof) of, the Senior Preferred Stock or the
provisions of Section 5 or 6 of Subpart A hereof shall require the
affirmative vote of holders of all outstanding shares of Senior Preferred
Stock at a meeting of holders of Senior Preferred Stock called for such
purpose or written consent of the holders of all outstanding shares of Senior
Preferred Stock); (iii) create, authorize or issue any class of stock ranking
prior to, or on a parity with, the Senior Preferred Stock with respect to
dividends or upon liquidation, dissolution, winding up or otherwise (other
than Additional Shares issued in accordance with Section 3(b)) of Subpart A
hereof or increase the authorized number of shares of any such class or series,
or reclassify any authorized stock of the Corporation into any such prior
or parity shares or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such prior or parity
shares or alter, amend or repeal any of the terms of any of the foregoing,
except that the Corporation may, without such approval, create authorize and
issue such prior or parity securities for the purpose of utilizing the
proceeds from the issuance of such securities for the redemption or
repurchase
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of all shares of Senior Preferred Stock in accordance with the
terms hereof; or (iv) merge, consolidate, sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the assets,
property or business of the Corporation in one or more related transactions
unless (x) if redemption is then permitted under Section 5(b) of Subpart A
hereof, immediately prior thereto the Corporation redeems all outstanding
shares of Senior Preferred Stock pursuant to Section 5(b) of Subpart A hereof
or (y) (A) the company surviving such merger or consolidation or to which
such assets, property or business are sold, assigned, transferred, leased,
conveyed or otherwise disposed of (the "SUCCESSOR COMPANY") is a corporation
organized under the laws of a state of the United States or the District of
Columbia; (B) the Senior Preferred Stock shall be converted into, or
exchanged for, and shall become shares of the Successor Company having
substantially the same powers, preferences, and relative privileges, rights
and qualifications that the Senior Preferred Stock had immediately prior to
such transaction; and (C) the Successor Company has a pro forma Consolidated
Net Worth (immediately following any such transaction but prior to any
purchase price accounting adjustments resulting from the transaction) at
least equal to that of the Corporation immediately prior to such transaction.
"CONSOLIDATED NET WORTH" means at any date and with respect to
any Person, the consolidated stockholders' equity of such Person and its
consolidated subsidiaries in accordance with generally accepted accounting
principles.
(d) In exercising the voting rights set forth in this Section 7
, each share of Senior Preferred Stock shall have one vote per share, except
that when any other series of preferred stock shall have the right to vote
with the Senior Preferred Stock as a single class on any matter, then the
Senior Preferred Stock and such other series shall have with respect to such
matters one vote per $25.00 of Senior Preferred Liquidation Value or other
liquidation preference. Except as otherwise required by applicable law or as
set forth herein, the shares of Senior Preferred Stock shall not have any
relative, participating, optional or other special voting rights and powers
and the consent of the holders thereof shall not be required for the taking
of any corporate action.
8. TRANSACTIONS WITH AFFILIATES. The Corporation will not,
and will not permit any of its subsidiaries to, directly or indirectly, enter
into, renew or extend any transaction or any series of related transactions
or agreement relating thereto (including, without limitation, the purchase,
sale, lease or exchange of any property or assets, the rendering of any
service or the making of any investments, loans or advances) with or for the
benefit of any holder (or any Affiliate of such holder) of 5% or more of any
class of capital stock of the Corporation (any such Person, a "5% Holder") or
with or for the benefit of an Affiliate of the Corporation (each, an
"AFFILIATE TRANSACTION"), except for transactions which are conducted in good
faith upon fair and reasonable terms no less favorable to the Corporation or
such subsidiary than could be obtained at the time of such transaction in a
comparable arms-length transaction with a Person that is not such a holder or
an Affiliate. Any Affiliate Transaction or series of related transactions
where the amount (whether in cash or other property) paid to, or received by,
the Affiliate or 5% Holder is in excess of $1 million must be approved by the
Board of Directors, including a majority of the
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disinterested Directors, as a condition to entering into such transaction.
In addition, in connection with any Affiliate Transaction or series of
related transactions where the amount paid to, or received by, the Affiliate
or 5% Holder is in excess of $5 million, the Corporation must obtain, as a
condition to entering into such transaction, a written opinion from a
nationally recognized investment banking firm, stating that such transaction
is fair to the Corporation or such subsidiary from a financial point of view.
The foregoing limitation does not limit, and shall not apply to
(i) compensation paid to officers and directors of the Corporation pursuant
to the Ancillary Documents (as such term is defined in the Transaction
Agreement) as in effect on the date the shares of Senior Preferred Stock are
first issued, (ii) any loans or advances by the Corporation to employees of
the Corporation or a subsidiary in the ordinary course of business and in
furtherance of the Corporation's business, in an aggregate amount not to
exceed $1 million at any one time outstanding, (iii) transactions expressly
contemplated by the Transaction Documents (including, without limitation, the
repurchase of shares of Junior Preferred Stock and Common Stock held by
employees), (iv) transactions with employees of the Corporation (including
but not limited to compensation arrangements or loans and advances not
referred to in clause (i) or (ii)) that have been approved by the Board of
Directors, including a majority of the Disinterested Directors, as being in
the best interests of the Corporation, (v) transactions between or among the
Corporation and one or more of its subsidiaries and transactions between or
among one or more of such subsidiaries, in each case, which do not involve
any other Affiliate or 5% Holder, (vi) leases of real property between the
Corporation and Affiliates of Mr. Raymond Scherr in the form in which they
are in effect on the date the shares of Senior Preferred Stock are first
issued, (vii) customary indemnification agreements (including the
Indemnification Agreements entered into in connection with the closing under
the Transaction Documents) for promoters, officers, directors, controlling
Persons and other fiduciaries (including indemnification for securities law
issues) or (viii) the payment of reasonable directors fees to Persons who are
not Affiliates of the Senior Preferred Investors.
For purposes of this Section 8, "AFFILIATE" means, as applied to
any Person, any other Person directly or indirectly controlling, controlled by,
or under direct or indirect common control with, such Person. For purposes
of this definition, "control" (including, with correlative meanings, the
terms "controlling," "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise. The officers and directors of the Corporation and Mr. Raymond
Scherr will be deemed to be Affiliates of the Corporation.
"TRANSACTION AGREEMENT" means the Agreement dated May 1, 1996 by
and among Guitar Center Management Company, Inc., Chase Venture Capital
Associates, L.P. (who subsequently assigned its rights to CB Capital Investors,
Inc.), Weston Presidio Capital II, L.P., Wells Fargo Small Business
Investment Company, Inc.
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and each of the stockholders and/or holders of options set forth on the
signature pages thereof in the form executed on May 1, 1996.
"TRANSACTION DOCUMENTS" means the Transaction Agreement, the
Bridge Loan Agreement, the Stockholders Agreement, the Securities Purchase
Agreement among the DLJ Entities and Guitar Center Management Company, Inc.,
the Registration Agreement, the Registration Rights Agreement (as defined in
the Stockholders Agreement), the Tax Indemnification Agreement dated as of
May 1, 1996, by and among the Investors, Raymond Scherr and other
securityholders of the Corporation party thereto, the Restricted Stock
Agreements and the Ancillary Documents (as defined in the Transaction
Agreement), in each case as such documents are in effect on the date the
shares of Senior Preferred Stock are first issued.
9. REPORTS. So long as any of the Senior Preferred Stock is
outstanding, the Corporation will furnish the holders thereof with the
quarterly and annual financial reports that the Corporation is required to
file with the Securities and Exchange Commission pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 or, in the event the
Corporation is not required to file such reports, reports containing the same
information as would be required in such reports.
10. GENERAL PROVISIONS. (a) The term "PERSON" as used herein
means any corporation, limited liability company, partnership, trust,
organization, association, other entity or individual.
(b) The term "OUTSTANDING", when used with reference to shares
of stock, shall mean issued shares, excluding shares held by the Corporation
or a subsidiary.
(c) The headings of the paragraphs, subparagraphs, clauses and
subclauses of this Subpart A of Article IV, Certificate of Incorporation are
for convenience of reference only and shall not define, limit or affect any
of the provisions hereof.
(d) Each holder of Senior Preferred Stock, by acceptance
thereof, acknowledges and agrees that payments of dividends, interest,
premium and principal on, and exchange, redemption and repurchase of, such
securities by the Corporation are subject to restrictions on the Corporation
contained in certain credit and financing agreements, including but not
limited to the Bridge Loan Agreement and Credit Agreement, in each case as
amended, modified or restated from time to time.
"CREDIT AGREEMENT" means the Credit Agreement between Guitar
Center Management Company, Inc. and Wells Fargo Bank, N.A. dated June 6, 1996.
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B. 8% Junior Preferred Stock
1. NUMBER AND DESIGNATION. 1,500,000 shares of the Preferred
Stock of the Corporation shall be designated as 8% Junior Preferred Stock,
par value $.01 (the "Junior Preferred Stock").
2. RANK. The Junior Preferred Stock shall, with respect to
dividend rights and rights on liquidation, dissolution and winding up, rank
prior to all classes or series of common stock of the Corporation, including
the Corporation's Common Stock and each other class of capital stock of the
Corporation, the terms of which provide that such class shall rank junior to
the Junior Preferred Stock or the terms of which do not specify any rank
relative to the Junior Preferred Stock. All equity securities of the
Corporation to which the Junior Preferred Stock ranks prior (whether with
respect to dividends or upon liquidation, dissolution, winding up or
otherwise), including the Common Stock, are collectively referred to herein
as the "JUNIOR SECURITIES." All equity securities of the Corporation with
which the Junior Preferred Stock ranks on a parity (whether with respect to
dividends or upon liquidation, dissolution, winding up or otherwise) are
collectively referred to herein as the "JUNIOR PREFERRED PARITY SECURITIES."
All equity securities of the Corporation to which the Junior Preferred Stock
are expressly ranked junior (whether with respect to dividends or upon
liquidation, dissolution, winding up or otherwise), including the
Corporation's 14% Senior Preferred Stock, par value $.01 (the "SENIOR
PREFERRED STOCK") are collectively referred to herein as the "SENIOR
SECURITIES". The respective definitions of Junior Securities and Junior
Preferred Parity Securities shall also include any rights or options
exercisable for, or securities convertible into or exchangeable for, any of
the Junior Securities and Junior Preferred Parity Securities, as the case may
be.
3. DIVIDENDS.
(a) (i) GENERAL OBLIGATION. Shares of Junior Preferred Stock
shall rank junior to shares of Senior Preferred Stock as to dividends. When,
as and if declared by the Board of Directors and to the extent permitted
under the General Corporation Law of the State of Delaware and the terms of
the Senior Preferred Stock, the Corporation shall pay preferential dividends
to the holders of the Junior Preferred Stock as provided in this Section 3.
Except as otherwise provided herein, dividends on each share of the Junior
Preferred Stock (a "Share") shall accrue on a daily basis at the rate of 8%
per annum (computed on the basis of a 360 day year of twelve 30-day months)
of the sum of the Junior Preferred Liquidation Value thereof plus all
Accumulated and Unpaid Junior Preferred Dividends thereon (as defined
herein), from and including the date of issuance of such Share to and
including the date on which the Junior Preferred Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon) is paid. As used herein,
the "JUNIOR PREFERRED LIQUIDATION VALUE" of each Share shall be $100.00.
Such dividends shall accrue whether or not they have been declared and
whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. The date on which the
Corporation initially issues any Share shall be deemed to be its "date of
issuance"
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regardless of the number of times transfer of such Share is made on the stock
records maintained by or for the Corporation and regardless of the number of
certificates which may be issued to evidence such Share.
(ii) JUNIOR PREFERRED DIVIDEND PAYMENT DATES. To the extent not
paid on March 31, June 30, September 30 and December 31 of each year,
beginning June 30, 1996 (each of such dates being a "JUNIOR PREFERRED
DIVIDEND PAYMENT DATE" and each period between the date of issuance and the
next Junior Preferred Dividend Payment Date or between successive Junior
Preferred Dividend Payment Dates being a "JUNIOR PREFERRED DIVIDEND PERIOD"),
all dividends which have accrued on each Share outstanding during the
three-month period (or other period in the case of the initial Junior
Preferred Dividend Payment Date) ending upon each such Junior Preferred
Dividend Payment Date shall be accumulated and shall remain accumulated
dividends with respect to such Share until paid. Such accumulated dividends,
until paid, are referred to herein as "ACCUMULATED AND UNPAID JUNIOR
PREFERRED DIVIDENDS."
(b) DISTRIBUTION OF JUNIOR PREFERRED PARTIAL DIVIDEND PAYMENTS.
Except as otherwise provided herein, if at any time the Corporation pays less
than the total amount of dividends then accrued with respect to the Junior
Preferred Stock, such payment shall be distributed ratably among the holders
of such class based upon the aggregate accrued but unpaid dividends on the
Shares of such class held by each such holder.
(c) Holders of shares of Junior Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in
excess of the cumulative dividends, as herein provided, on the Junior
Preferred Stock. Except as provided in this Section 3, no interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on the Junior Preferred Stock that may be in arrears.
(d) So long as any shares of the Junior Preferred Stock are
outstanding, no dividends, except as described in the next succeeding
sentence, shall be declared or paid or set apart for payment, or other
distribution declared or made, upon Junior Preferred Parity Securities,
unless full cumulative dividends have been or contemporaneously are declared
and paid, or declared and a sum sufficient for the payment thereof set apart
for such payment, on the Junior Preferred Stock for all Junior Preferred
Dividend Periods terminating on or prior to the date of payment of the
dividend on such class or series of Junior Preferred Parity Securities. When
dividends are not paid in full, or a sum sufficient for such payment is not
set apart, as aforesaid, all dividends declared upon shares of the Junior
Preferred Stock and all dividends declared upon any other class or series of
Junior Preferred Parity Securities shall be declared ratably in proportion to
the respective amounts of dividends accumulated and unpaid on the Junior
Preferred Stock and accumulated and unpaid on such Junior Preferred Parity
Securities. In no event will cash dividends be paid on Junior Preferred
Parity Securities when dividends are not payable in cash on the Junior
Preferred Stock. In addition, so long as any shares of the Junior Preferred
Stock are outstanding, no Junior Preferred Parity Securities shall be redeemed,
purchased or otherwise acquired for any consideration (and no moneys shall
be paid to or
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made available for a sinking fund for the purchase or redemption of any
shares of any such stock) by the Corporation, directly or indirectly, except
as described in the next succeeding sentence, unless the Junior Preferred
Stock has been redeemed, purchased, or otherwise acquired (or money paid to
or made available for a sinking fund for such redemption, purchase or
acquisition) contemporaneously or a sufficient amount for the redemption,
purchase or acquisition thereof set apart for such redemption, purchase or
acquisition of the Junior Preferred Stock. When the shares of Junior
Preferred Stock are not redeemed, purchased, or otherwise acquired in full or
a sum sufficient for such redemption, purchase or acquisition is not set apart,
as aforesaid, all redemptions, purchases or acquisitions of shares of the
Junior Preferred Stock and all redemptions, purchases or acquisitions of any
other class or series of Junior Preferred Parity Securities shall be
effected, ratably in accordance with the respective amounts that would be
payable on such shares of Junior Preferred Stock and any such Junior
Preferred Parity Securities if all amounts payable thereon were paid in full.
(e) So long as any shares of the Junior Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, Junior Securities) shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any
Junior Securities be redeemed, purchased or otherwise acquired (all such
dividends, distributions, redemptions or purchases being hereinafter referred
to as a "JUNIOR SECURITIES DISTRIBUTION") for any consideration (or any
moneys be paid to or made available for a sinking fund for the purchase or
redemption of any shares of any Junior Securities) by the Corporation,
directly or indirectly (except by conversion into, or exchange for, Junior
Securities).
(f) Notwithstanding the provisions of Sections 3(d) and 3(e)
above of this Subpart B, the Corporation may purchase shares of Junior
Preferred Stock and may purchase any Junior Preferred Parity Securities or
Junior Securities in the manners and instances contemplated by the
Stockholders Agreement (as defined herein) or the Restricted Stock Agreements
(including any redemption of Junior Preferred Stock to provide Management
Stockholders (as defined in the Stockholders Agreement) with sufficient funds
to pay taxes as contemplated by the Restricted Stock Agreements), in each case,
to the extent permitted under the General Corporation Law of the State of
Delaware and the terms of the Senior Preferred Stock.
"RESTRICTED STOCK AGREEMENTS" shall mean the several Restricted
Stock Agreements, each between the Guitar Center Management Company, Inc. on
the one hand and one of the Management Stockholders acquiring Junior
Preferred Stock pursuant to the Transaction Agreement on the other hand.
"Stockholders Agreement" means the Stockholders Agreement among
the Guitar Center Management Company, Inc. and the other stockholders of the
Guitar Center Management Company, Inc. party thereto as in effect on the date
the shares of Junior Preferred Stock are first issued.
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"Transaction Agreement" means the Agreement dated May 1, 1996 by
and among the Guitar Center Management Company, Inc., Chase Venture Capital
Associates, L.P. (who subsequently assigned its rights to CB Capital Investors,
Inc.), Weston Presidio Capital II, L.P., Wells Fargo Small Business
Investment Company, Inc. and each of the stockholders and/or holders of
options set forth on the signature pages thereof in the form executed on
May 1, 1996.
4. JUNIOR PREFERRED LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus)
shall be made to or set apart for the holders of Junior Securities, but after
payment in full to holders of Senior Securities of all amounts due thereunder,
the holders of the shares of Junior Preferred Stock shall be entitled to
receive an amount equal to the Junior Preferred Liquidation Value of such
share plus any accrued and unpaid cash dividends from the most recent Junior
Preferred Dividend Payment Date to the date of distribution. Except as
provided in the preceding sentence, holders of shares of Junior Preferred
Stock shall not be entitled to any distribution in the event of liquidation,
dissolution or winding up of the affairs of the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof distributable among the holders of the
shares of Junior Preferred Stock shall be insufficient to pay in full the
preferential amount aforesaid and liquidating payments on any Junior
Preferred Parity Securities, then such assets, or the proceeds thereof, shall
be distributed among the holders of shares of Junior Preferred Stock and any
such other Junior Preferred Parity Securities ratably in accordance with the
respective amounts per share that would be payable on such shares of Junior
Preferred Stock and any such Junior Preferred Parity Securities if all
amounts payable thereon were paid in full. For the purposes of this Section
(4), (i) a consolidation or merger of the Corporation with one or more
Corporations, or (ii) a sale or Transfer of all or substantially all of the
Corporation's assets, shall not be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, of the Corporation.
(b) Subject to the rights of the holders of any Junior
Preferred Parity Securities, after payment shall have been made in full to
the holders of the Junior Preferred Stock, as provided in this Section 4, any
other series or class or classes of Junior Securities shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the
holders of the Junior Preferred Stock shall not be entitled to share therein.
5. REDEMPTION.
(a) REDEMPTION AT THE OPTION OF THE CORPORATION. Subject to
the rights and restrictions contained in Senior Securities, the Corporation
may at any time, or from time to time, at its option, to the extent it shall
have funds legally available for such payment, redeem, in whole or in part,
shares of Junior Preferred Stock, at a redemption
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price per share equal to 100% of the Junior Preferred Liquidation Value, plus
accrued and unpaid cash dividends on such share to the date fixed for
redemption, without interest.
(b) REDEMPTION UPON CONSUMMATION OF INITIAL PUBLIC OFFERING.
Subject to the rights and restrictions contained in Senior Securities, upon
the consummation of an Initial Public Offering resulting in a Market
Capitalization of the Corporation of more than $500,000,000, each holder of
Junior Preferred Stock shall, to the extent the Corporation shall have funds
legally available for such payments, have the right to cause the Corporation
to redeem such holder's shares of Junior Preferred Stock, at a redemption
price per share equal to 100% of the Junior Preferred Liquidation Value, plus
accrued and unpaid cash dividends on such share to the date fixed for
redemption, without interest; provided, however: (i) if the Initial Public
Offering results in a Market Capitalization of the Corporation of less than
$750,000,000, the Corporation shall not redeem more than 25% of each holder's
shares of Junior Preferred Stock; and (ii) if the Initial Public Offering
results in a Market Capitalization of the Corporation of less than $1,000,000,
000 but more than or equal to $750,000,000, the Corporation shall not redeem
more than 50% of each holder's shares of Junior Preferred Stock. Any
redemption pursuant to this Section 5(b) of Subpart B hereof shall occur on a
date specified by the Corporation, which date shall be no earlier than 35
days and no later than 45 days following the Initial Public Offering.
"INITIAL PUBLIC OFFERING" shall have the meaning ascribed to
such term in the Stockholders Agreement.
"MARKET CAPITALIZATION" shall equal the product of (x) the
number of Fully-diluted Common Shares (as defined in the Stockholders
Agreement) other than shares not designated as Shares Available for Award (as
defined in the Guitar Center Management, Inc.'s 1996 Performance Stock Option
Plan) as of the date of the Initial Public Offering multiplied by (y) the
gross proceeds per share of Common Stock sold in the Initial Public Offering
(the "Price Per Share").
(c) REDEMPTION IN THE EVENT OF A CHANGE OF CONTROL. Subject
to the rights and restrictions contained in Senior Securities, in the event
of a Change of Control, the Corporation shall, to the extent it shall have
funds legally available for such payment, offer to redeem all of the shares
of Junior Preferred Stock then outstanding, and shall redeem the shares of
Junior Preferred Stock of any holder of such shares that shall consent to
such redemption upon a date no earlier than 35 days and no later than 45 days
following the Change of Control, at a redemption price per share equal to
100% of the Junior Preferred Liquidation Value, in cash, plus accrued and
unpaid cash dividends thereon to the date fixed for redemption, without
interest.
"Change of Control" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act of 1934, as amended), other than any person or group comprised
principally of the Junior Preferred Initial Investors, has become the
beneficial owner, by way of purchase, merger, consolidation or otherwise, of
35% or more of the voting power of all classes of voting
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securities of the Corporation and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes
of voting securities of the Corporation than that then held by the Junior
Preferred Initial Investors; or (b) a sale or transfer of all or
substantially all of the assets of the Corporation to any person or group
(other than any group consisting principally of the Junior Preferred Initial
Investors) has been consummated; or (c) during any period of two consecutive
years occurring after an Initial Public Offering, individuals who at the
beginning of such period constituted the Board of Directors of the
Corporation (together with any new directors whose election was approved by a
vote of a majority of the directors then still in office, who either were
directors at the beginning of such period or whose election or nomination for
the election was previously so approved) cease for any reason to constitute a
majority of the directors of the Corporation, as the case may be, then in
office, other than as a result of election and removal of directors pursuant
to the provisions of the Senior Preferred Stock, the Bridge Loan Agreement or
the Stockholders Agreement governing the election and removal of directors.
"JUNIOR PREFERRED INITIAL INVESTORS" means (x) Chase Venture
Capital Associates, L.P., CB Capital Investors, Inc., Weston Presidio Capital
II, L.P., Wells Fargo Small Business Investment Company, Inc. (collectively,
the "Junior Preferred Investors") and the other securityholders of the
Corporation party to the Stockholder Agreement on June 5, 1996, (y) as to any
Stockholder (as defined in the Stockholders Agreement) that is an individual,
any Permitted Transferee thereof described in clause (i) or (iii) of the
definition of Permitted Transferee contained in the Stockholders Agreement
and (z) any Person (as defined in the Stockholders Agreement) controlled by
or under common control with any of the Junior Preferred Investors but not
Persons controlling any of the Junior Preferred Investors (other than those
Persons controlling the Junior Preferred Initial Investors as of June 5,
1996. For purposes of the foregoing, "controlling, controlled by or under
common control with" as applied to any Person, means the ability, through the
ownership of voting securities, to control the management and policies of
such Person.
"Bridge Loan Agreement" means the Securities Purchase Agreement
between Guitar Center Management Company, Inc. and GCMC Funding, Inc., as
well as any notes issued thereunder and all other documents executed and
delivered in connection therewith, in each case as in effect on June 5, 1996.
(d) STATUS OF REDEEMED SHARES. Shares of Junior Preferred
Stock which have been issued and reacquired in any manner, including shares
purchased or redeemed, shall (upon compliance with any applicable provisions
of the laws of the State of Delaware) have the status of authorized and
unissued shares of the class of Preferred Stock undesignated as to series and
may be redesignated and reissued as part of any series of the Preferred
Stock; provided that no such issued and reacquired shares of Junior Preferred
Stock shall be reissued or sold as Junior Preferred Stock, except upon
exercise of the Warrants.
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"WARRANTS" means the Warrants to purchase shares of Junior
Preferred Stock and Common Stock issued on June 5, 1996 and any additional
Warrants issued, or increase in the number of shares of Junior Preferred
Stock and Common Stock issuable upon exercise of the Warrants, in each case,
pursuant to the anti-dilution provisions of the Warrants.
(e) FAILURE TO REDEEM. If the Corporation is unable or shall
fail to discharge its obligation to redeem all outstanding shares of Junior
Preferred Stock pursuant to paragraph (5)(b) or (5)(c) of Subpart B hereof
(each, a "JUNIOR PREFERRED MANDATORY REDEMPTION OBLIGATION"), such Junior
Preferred Mandatory Redemption Obligation shall be discharged as soon as the
Corporation is able to discharge such Junior Preferred Mandatory Redemption
Obligation. If and so long as any Junior Preferred Mandatory Redemption
Obligation with respect to the Junior Preferred Stock shall not be fully
discharged, the Corporation shall not directly or indirectly, redeem, purchase,
or otherwise acquire any Junior Preferred Parity Security or discharge any
mandatory or optional redemption, sinking fund or other similar obligation in
respect of any Junior Preferred Parity Securities (except in connection with
a redemption, sinking fund or other similar obligation to be satisfied pro
rata with the Junior Preferred Stock).
(f) OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall
not redeem or otherwise acquire any Junior Preferred Stock, except as
expressly authorized herein or pursuant to a purchase offer made pro-rata to
all holders of Junior Preferred Stock on the basis of the number of whole
shares of such Junior Preferred Stock owned by each such holder. The previous
sentences notwithstanding, any such redemption is subject to the rights and
restrictions contained in the Senior Securities.
6. PROCEDURE FOR REDEMPTION.
(a) In the event that fewer than all the outstanding shares of
Junior Preferred Stock are to be redeemed pursuant to Section 5(a) of Subpart
B hereof, then shares shall be redeemed pro rata from each holder of Junior
Preferred Stock (with any fractional shares being rounded to the nearest
whole share) in proportion to the amounts that would be payable to such
holders if all shares of Junior Preferred Stock were redeemed in full.
(b) In the event the Corporation shall redeem shares of Junior
Preferred Stock pursuant to Section 5(a) of Subpart B hereof, notice of such
redemption shall be given by first class mail, postage prepaid, mailed not
less than 25 days nor more than 45 days prior to the redemption date, to each
holder of record of the shares to be redeemed at such holder's address as the
same appears on the stock register of the Corporation; provided that neither
the failure to give such notice nor any defect therein shall affect the
validity of the giving of notice for the redemption of any share of Junior
Preferred Stock to be redeemed, except as to the holder to whom the
Corporation has failed to give said notice or whose notice was defective.
Each such notice shall state: (i) the redemption date; (ii) the number of
shares of Junior Preferred Stock to be redeemed and, if fewer than
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all the shares held by such holder are to be redeemed, the number of shares
to be redeemed from such holder; (iii) the redemption price; (iv) the place
or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on the shares to be
redeemed will cease to accrue on such redemption date.
(c) In the case of any redemption pursuant to Section 5(a) of
Subpart B hereof, notice having been mailed as provided in Section 6(b) of
Subpart B hereof, from and after the redemption date (unless default shall be
made by the Corporation in providing money for the payment of the redemption
price of the shares called for redemption), dividends on the shares of Junior
Preferred Stock so called for redemption shall cease to accrue, and all
rights of the holders thereof as stockholders of the Corporation (except the
right to receive from the Corporation the redemption price) shall cease. Upon
surrender, in accordance with said notice, of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors of the Corporation shall so require and the notice shall so state),
such shares shall be redeemed by the Corporation at the redemption price
aforesaid. In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(d) In the case of a redemption pursuant to Sections 5(b) or
5(c) of Subpart B hereof, notice of such redemption shall be given by first
class mail, postage prepaid, mailed not more than 5 days following the
occurrence of the Initial Public Offering or Change of Control, to each
holder of record of the shares to be redeemed at such holder's address as the
same appears on the stock register of the Corporation; provided that neither
the failure to give such notice nor any defect therein shall affect the
validity of the giving of notice for the redemption of any share of Junior
Preferred Stock to be redeemed, except as to the holder to whom the
Corporation has failed to give said notice or whose notice was defective.
Each such notice shall state: (i) that an Initial Public Offering or Change
of Control has occurred; (ii) the redemption date; (iii) the redemption price;
(iv) that such holder may, in the case of a Change of Control, elect to
cause the Corporation to redeem all or any of the shares of Junior Preferred
Stock held by such holder, or in the case of an Initial Public Offering,
elect to cause the Corporation to redeem that portion of such holder's shares
of Junior Preferred Stock as is determined by Section 5(b) of Subpart B hereof;
(v) the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; and (vi) that dividends on
the shares the holder elects to cause the Corporation to redeem will cease to
accrue on such redemption date.
Upon receipt of such notice, the holder shall, within 20 days
of receipt thereof, return such notice to the Corporation indicating the
number of shares of Junior Preferred Stock such holder shall elect to cause
the Corporation to redeem, if any.
(e) In the case of a redemption pursuant to Sections 5(b) or
5(c) of Subpart B hereof, notice having been mailed as provided in Section
6(d) of Subpart B hereof, from and after the redemption date (unless default
shall be made by the Corporation in providing money for the payment of the
redemption price of the shares called for
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redemption), dividends on such shares of Junior Preferred Stock as the holder
elects to cause the Corporation to redeem shall cease to accrue, and all
rights of the holders thereof as stockholders of the Corporation (except the
right to receive from the Corporation the redemption price) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors of the Corporation shall so require and the notice shall so state),
such share shall be redeemed by the Corporation at the redemption price
aforesaid. In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
7. CONVERSION UPON AN INITIAL PUBLIC OFFERING.
(a) In the event the Corporation intends to consummate an
Initial Public Offering, the holders of at least sixty percent (60%) of all
shares of Junior Preferred Stock may demand (which demand shall be binding
upon all holders of Junior Preferred Stock) that the Corporation convert all
or any portion of the shares of Junior Preferred Stock then outstanding into
Common Stock, such conversion to occur automatically upon the closing of an
Initial Public Offering. The Corporation shall notify the holders of Junior
Preferred Stock, not less than 20 nor more than 60 days prior to the filing
of a "red herring" preliminary prospectus intended to be distributed publicly
to commence marketing of its common stock, of its intention to consummate an
Initial Public Offering. The requisite holders of Junior Preferred Stock
must demand conversion within 10 days after delivery of the Corporation's
notice (or within such longer period permitted by the Corporation and set
forth in the Corporation's notice). In the event that less than all
outstanding shares of Junior Preferred Stock are being converted, the shares
to be converted shall be selected pro rata (with any fractional shares being
rounded to the nearest whole share) according to the number of whole shares
held by each holder of the Junior Preferred Stock. Each share of Junior
Preferred Stock being converted shall convert into such number of shares of
Common Stock as is equal to the Junior Preferred Liquidation Value per share,
divided by the offering price of a share of Common Stock in the Initial
Public Offering, with any fractional shares being redeemed by the Corporation
for cash.
(b) In the case of a conversion pursuant to Section 7(a) of
Subpart B hereof, from and after the conversion date, dividends on such
shares of Junior Preferred Stock as the holder elects to cause the
Corporation to convert shall cease to accrue, the payment of any Accumulated
and Unpaid Junior Preferred Dividends shall be deemed to be waived, and all
rights of the holders thereof as holders of Junior Preferred Stock shall
cease. Upon surrender in accordance with said notice of the certificates for
any shares so converted (properly endorsed or assigned for transfer, if the
Board of Directors of the Corporation shall so require and the notice shall
so state), such share shall be converted by the Corporation in accordance
with the provisions of this Section 7. In case fewer than all the shares
represented by any such certificate are converted, a new certificate shall be
issued representing the unconverted shares without cost to the holder thereof.
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8. VOTING RIGHTS.
(a) The holders of record of shares of Junior Preferred Stock
shall not be entitled to any voting rights except as hereinafter provided in
this Section 8 or as otherwise provided by law.
(b) Without the written consent of sixty percent (60%) of the
outstanding shares of Junior Preferred Stock or the vote of holders of sixty
percent (60%) of the outstanding shares of Junior Preferred Stock at a
meeting of the holders of Junior Preferred Stock called for such purpose, in
each case voting as a separate class, the Corporation will not (i) liquidate,
dissolve, wind-up or otherwise discontinue the business of the Corporation
unless contemporaneous therewith the Corporation redeems all outstanding
shares of Junior Preferred Stock pursuant to Section 5(a) of Subpart B hereof;
(ii) amend, alter or repeal any provision of the Certificate of
Incorporation (by merger or otherwise) so as to adversely affect the
preferences, rights or powers of the Junior Preferred Stock ; (iii) create,
authorize or issue any class of stock ranking prior to, or on a parity with,
the Junior Preferred Stock with respect to dividends or upon liquidation,
dissolution, winding up or otherwise (other than the Senior Preferred Stock,
additional shares of Senior Preferred Stock or accretion to the liquidation
value of the shares of Senior Preferred Stock in accordance with the terms of
the Senior Preferred Stock and additional shares of Junior Preferred Stock
issued upon exercise of the Warrants), or increase the authorized number of
shares of any such class or series (other than accretion to the liquidation
value of the shares of Senior Preferred Stock in accordance with the terms of
the Senior Preferred Stock, additional shares of Senior Preferred Stock
necessary to pay in kind accrued dividends on outstanding shares of Senior
Preferred Stock and additional shares of Junior Preferred Stock issued upon
the exercise of the Warrants), or reclassify any authorized stock of the
Corporation into any such prior or parity shares or create, authorize or
issue any obligation or security convertible into or evidencing the right to
purchase any such prior or parity shares or alter, amend or repeal any of the
terms of any of the foregoing, except that the Corporation may, without such
approval, create authorize and issue such prior or parity securities for the
purpose of utilizing the proceeds from the issuance of such securities for
the redemption or repurchase of all shares of Junior Preferred Stock in
accordance with the terms hereof; or (iv) merge, consolidate, sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets, property or business of the Corporation in one or more related
transactions unless either (x) contemporaneous therewith the Corporation
redeems all outstanding shares of Junior Preferred Stock pursuant to Section
5(a) of Subpart B hereof or (y) (A) the company surviving such merger or
consolidation or to which such assets, property or business are sold, assigned,
transferred, leased, conveyed or otherwise disposed of (the "Successor
Company") is a corporation organized under the laws of a state of the United
States or the District of Columbia; (B) the Junior Preferred Stock shall be
converted into, or exchanged for, and shall become shares of the Successor
Company having substantially the same powers, preferences, and relative
privileges, rights and qualifications that the Junior Preferred Stock had
immediately prior to such transaction; and (C) the Successor Company has a
pro forma Consolidated Net Worth (immediately following any such transaction
but prior to any purchase price accounting adjustments
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resulting from the transaction) at least equal to that of the Corporation
immediately prior to such transaction.
"CONSOLIDATED NET WORTH" means at any date and with respect to
any Person, the consolidated stockholders' equity of such Person and its
consolidated subsidiaries in accordance with generally accepted accounting
principles.
(c) In exercising the voting rights set forth in this Section 8,
each share of Junior Preferred Stock shall have one vote per share. Except
as otherwise required by applicable law or as set forth herein, the shares of
Junior Preferred Stock shall not have any relative, participating, optional
or other special voting rights and powers and the consent of the holders
thereof shall not be required for the taking of any corporate action.
9. GENERAL PROVISIONS.
(a) The term "Person" as used herein means any corporation,
limited liability company, partnership, trust, organization, association,
other entity or individual.
(b) The term "outstanding", when used with reference to shares
of stock, shall mean issued shares, excluding shares held by the Corporation
or a subsidiary.
(c) Each holder of Junior Preferred Stock, by acceptance
thereof, acknowledges and agrees that payments of dividends, interest,
premium and principal on, and exchange, redemption and repurchase of, such
securities by the Corporation are subject to restrictions on the Corporation
contained in the terms of the Senior Preferred Stock and certain credit and
financing agreements, including but not limited to the Bridge Loan Agreement
and Credit Agreement, in each case as amended, modified or restated from time
to time.
"Credit Agreement" means the Credit Agreement between the Guitar
Center Management Company, Inc. and Wells Fargo Bank, N.A. dated June 6, 1996.
ARTICLE V
The Board of Directors shall have the power to make, adopt, alter,
amend and repeal from time to time bylaws of the Corporation.
ARTICLE VI
To the fullest extend permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, the
Corporation shall indemnify and advance indemnification expenses on behalf of
all directors and officers of the Corporation. The Corporation shall
indemnify such other persons as may be required by statute or by the bylaws
of the Corporation.
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ARTICLE VII
The liability of directors of the corporation (for actions or
inactions taken by them as directors) for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law. Neither any
amendment nor repeal of this Article VII, nor the adoption of any provision
of the Certificate of Incorporation inconsistent with this Article VII, shall
eliminate or reduce the effect of this Article VII in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
VII would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE VIII
The Corporation is to have perpetual existence.
ARTICLE IX
The name and address of the incorporator of the Corporation is:
Bruce Ross
Guitar Center, Inc.
5155 Clareton Drive
Agoura Hills, CA 91301
----------------------------------
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed on this _________ day
of ____________, 1996.
--------------------------------------------
Bruce Ross
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BYLAWS
OF
GUITAR CENTER, INC.
ARTICLE I.
OFFICES
Section 1.1 PRINCIPAL OFFICES.
The registered office of Guitar Center, Inc. shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 1.2 OTHER OFFICES.
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2.1 PLACE OF MEETINGS.
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
Section 2.2 ANNUAL MEETINGS OF STOCKHOLDERS.
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At each annual meeting, directors
shall be elected and any other proper business may be transacted.
Section 2.3 SPECIAL MEETINGS.
A special meeting of stockholders may be called at any time by the board of
directors, or by the chairman of the board, or by the president.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the
<PAGE>
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving such request forthwith
shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that
a meeting will be held at the time requested by the person or persons calling
the meeting, not less than thirty-five (35) nor more than sixty (60) days after
the receipt of the request. If the notice is not given within twenty (20) days
after receipt of the request, the person or persons requesting the meeting may
give the notice. Nothing contained in this paragraph of this Section 2.3 shall
be construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.
Section 2.4 NOTICE OF STOCKHOLDERS' MEETINGS.
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.5 of this Article II not less than ten (10) nor more
than sixty (60) days before the date of the meeting being noticed. The notice
shall specify the place, date and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted, or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the
stockholders. The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees which, at the time of the
notice, the board of directors intends to present for election.
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Notice of any meeting of stockholders shall be given either personally or
by first-class mail, telegraphic, facsimile, or other written communication,
charges prepaid, addressed to the stockholder at the address of such stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent by first-class mail or telegram to the corporation's principal executive
office, or if published at least once in a newspaper of general circulation in
the county where this office is located. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram, facsimile, or other means of written communication.
If any notice addressed to a stockholder at the address of such stockholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at such address, all
future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the stockholder upon written
demand of the stockholder at the principal executive office of the corporation
for a period of one year from the date of the giving of such notice.
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An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the corporation giving such notice, and shall be filed and
maintained in the minute book of the corporation.
Section 2.6 QUORUM.
The presence in person or by proxy of the holders of a majority of the
shares of all classes of stock entitled to vote at a meeting of stockholders
shall constitute a quorum for the transaction of business. The stockholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 2.7 ADJOURNED MEETING AND NOTICE THEREOF.
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at such meeting, either in person or by proxy, but in the
absence of a quorum, no other business may be transacted at such meeting, except
as provided in Section 2.6 of this Article II.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at a meeting at which the adjournment is
taken, unless a new record date for the adjourned meeting is fixed, or unless
the adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the board of directors shall set a new record
date. Notice of any such adjourned meeting shall be given to each stockholder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of this Article II. At any adjourned meeting
the corporation may transact any business which might have been transacted at
the original meeting.
Section 2.8 VOTING.
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of this Article II.
Any stockholder entitled to vote on any matter (other than elections of
directors) may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or vote them against the proposal, but, if the
stockholder fails to specify the number of shares such stockholder is voting
affirmatively, it will be conclusively presumed that the stockholder's approving
vote is with respect to all shares such stockholder is entitled to vote. Except
as provided in Section 2.6 of this Article II, the affirmative vote of a
majority of the shares represented and voting at a duly held meeting at which a
quorum is present (which shares voting
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affirmatively also constitute at least a majority of the required quorum) shall
be the act of the stockholders, unless the vote of a greater number or voting by
classes is required by the Corporations Code of Delaware or the certificate of
incorporation.
Section 2.9 WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDER.
The transactions at any meeting of stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though had
at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
person entitled to vote, not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes thereof. The waiver of notice, consent to the holding of the meeting or
approval of the minutes thereof need not specify either the business to be
transacted or the purpose of any annual or special meeting of stockholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 2.4 of this Article
II, the waiver of notice, consent to holding of the meeting or approval of the
minutes thereof shall state the general nature of such proposal. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of and presence at such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
the Corporations Code of Delaware to be included in the notice but which were
not included in the notice, if such objection is expressly made at the meeting.
Section 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken at any annual or special meeting of
stockholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. All such consents shall
be filed with the secretary of the corporation and shall be maintained int he
corporate records. Any stockholder giving a written consent, or the
stockholder's proxy holders, or a transferee of the shares or a personal
representative of the stockholder or their respective proxy holders, may revoke
the consent by a writing received by the secretary of the corporation prior to
the time that written consents of the numbers of shares required to authorize
the proposed action have been filed with the secretary.
If the consents of all stockholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
stockholders shall not have been received,
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the secretary shall give prompt notice of the corporate action approved by the
stockholders without a meeting. Such notice shall be given in the manner
specified in Section 2.5 of this Article II.
Section 2.11 RECORD DATE FOR STOCKHOLDER NOTICE, VOTING, AND GIVING
CONSENTS.
For purposes of determining the stockholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days prior to the date
of any such meeting nor more than sixty (60) days prior to such action without a
meeting, and in such case only stockholders at the close of business on the
record date so fixed are entitled to notice and to vote or to give consents, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date fixed as aforesaid, except as otherwise
provided in the Corporations Code of Delaware.
If the board of directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the board has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the board has been taken, shall be at the
close of business on the day on which the board adopts the resolution relating
thereto, or the sixtieth (60th) day prior to the date of such other action,
whichever is later.
Section 2.12 PROXIES.
Every person entitled to vote for directors or on any other matter shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the stockholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the stockholder or the stockholder's attorney in fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) revoked by the person executing it,
prior to the vote pursuant thereto, by a writing delivered to the corporation
stating that the proxy is revoked or by a subsequent proxy executed by the
person executing the prior proxy and presented to the meeting, or as to any
meeting by attendance at such meeting and voting in person by the person
executing the proxy; or (ii) written notice of the death or incapacity of the
maker of such proxy is received by the corporation before the vote pursuant
thereto is counted;
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provided, however, that no such proxy shall be valid after the expiration of
eleven (11) months from the date of such proxy, unless otherwise provided in the
proxy.
Section 2.13 INSPECTORS OF ELECTION.
Before any meeting of stockholders, the board of directors may appoint any
persons other than nominees for office to act as inspectors of election at the
meeting or its adjournment. If no inspectors of election are so appointed, the
chairman of the meeting may, and on the request of any stockholder or a
stockholder's proxy shall, appoint inspectors of election at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more stockholders or proxies,
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all stockholders.
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ARTICLE III.
DIRECTORS
Section 3.1 POWERS.
Subject to the provisions of the Corporations Code of Delaware and any
limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
(a) Select and remove all officers, agents, and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or these bylaws, fix
their compensation, and require from them security for faithful service.
(b) Change the principal executive office or the principal business office
in the State of Delaware from one location to another; cause the corporation to
be qualified to do business in any other state, territory, dependency, or
foreign country and conduct business within or outside the State of Delaware;
designate any place within or without the State of Delaware for the holding of
any stockholders' meeting, or meetings, including annual meetings; adopt, make
and use a corporate seal, and prescribe the forms of certificates of stock, and
alter the form of such seal and of such certificates from time to time as in
their judgment they may deem best, provided that such forms shall at all times
comply with the provisions of law.
(c) Authorize the issuance of shares of stock of the corporation from time
to time, upon such terms as may be lawful, in consideration of money paid, labor
done or services actually rendered, debts or securities cancelled or tangible or
intangible property actually received.
(d) Borrow money and incur indebtedness for the purposes of the
corporation, and cause to be executed and delivered therefor, in the corporate
name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges,
hypothecations, or other evidences of debt and securities therefor.
Section 3.2 NUMBER AND QUALIFICATION OF DIRECTORS.
The authorized number of directors shall be eleven (11), plus that number
of directors that may from time to time be elected by the holders of preferred
stock, until changed by a duly adopted amendment to the certificate of
incorporation or by an
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amendment to this bylaw adopted by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote.
Section 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.
Directors shall be elected at each annual meeting of the stockholders to
hold office until the next annual meeting. Subject to Section 3.15 hereof, each
director, including a director elected to fill a vacancy, shall hold office
until the expiration of the term for which elected and until a successor has
been elected and qualified or the earlier of his or her resignation or removal.
Section 3.4 VACANCIES.
Subject to Section 3.15, vacancies on the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the stockholders or by court order
may be filled only by the vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) or by
the written consent of holders of a majority of the outstanding shares entitled
to vote. Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and qualified
or until the earlier of his or her resignation or removal.
A vacancy or vacancies in the board of directors shall be deemed to exist
in the case of the death, resignation or removal of any director, or if the
board of directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of directors be increased, or if the stockholders
fail at any meeting of stockholders at which any director or directors are
elected, to elect the full authorized number of directors to be voted for at
that meeting.
Subject to Section 3.15 hereof, the stockholders may elect a director or
directors at any time to fill any vacancy or vacancies not filled by the
directors.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation of a director is effective at a future time,
the board of directors may, subject to Section 3.17, elect a successor to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.
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Section 3.5 PLACE OF MEETINGS AND TELEPHONIC MEETINGS.
Regular meetings of the board of directors may be held at any place within
or without the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board shall be held at any place within or without the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or there is no notice, at the principal executive office of the
corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in such meeting can hear one another, and all such directors shall
be deemed to be present in person at such meeting.
Section 3.6 ANNUAL MEETING.
Immediately following each annual meeting of stockholders, the board of
directors shall hold a regular meeting for the purpose of organization, any
desired election of officers and the transaction of other business. Notice of
this meeting shall not be required.
Section 3.7 OTHER REGULAR MEETINGS.
Other regular meetings of the board of directors shall be held without call
at such time as shall from time to time be fixed by the board of directors.
Such regular meetings may be held without notice.
Section 3.8 SPECIAL MEETINGS.
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board or the president or any vice
president or the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges pre-paid, addressed to each director at his or her address as
it is shown upon the records of the corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours prior to
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated to either the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
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Section 3.9 QUORUM.
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as hereinafter provided.
Every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act of
the board of directors. A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors, if
any action taken is approved by at least a majority of the required quorum for
such meeting.
Section 3.10 WAIVER OF NOTICE.
Notice of a meeting need not be given to any director who signs a waiver of
notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents and approvals shall be filed with the corporate records
or made a part of the minutes of the meeting.
Section 3.11 ADJOURNMENT.
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
Section 3.12 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be
given, unless the meeting is adjourned for more than twenty-four hours, in which
case notice of such time and place shall be given prior to the time of the
adjourned meeting, in the manner specified in Section 3.8 of this Article III,
to the directors who were not present at the time of the adjournment.
Section 3.13 ACTION WITHOUT MEETING.
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, if all members of the board shall individually or
collectively consent in writing to such action. Such action by written consent
shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent or consents shall be filed with the minutes of
the proceedings of the board.
Section 3.14 FEES AND COMPENSATION OF DIRECTORS.
Directors and members of committees may receive such compensation, if any,
for their services, and such reimbursement of expenses, as may be fixed or
determined by resolution of the board of directors. Nothing contained herein
shall be construed to preclude
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any director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for such services.
Section 3.15 PREFERRED DIRECTORS.
Notwithstanding anything contained herein to the contrary, whenever the
holders of one or more classes or series of preferred stock shall have the
right, voting separately as a class or series, to elect directors, the election,
term of office, filling of vacancies, removal and other features of such
directorships shall be governed by the terms of the certificate of incorporation
and such directors so elected shall not be subject to the provisions of
Sections 3.2, 3.3, and 3.4 of this Article III unless otherwise specifically
provided therein. For the purposes of this Section 3.15 "preferred stock" shall
include the 14% Senior Preferred Stock $.01 par value and 8% Junior Preferred
Stock as provided for in Article IV of the certificate of incorporation.
ARTICLE IV.
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS.
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent member at any meeting of the committee. The
appointment of members or alternate members of a committee requires the vote of
a majority of the authorized number of directors. Any such committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Corporations Code of
Delaware or in the certificates of incorporation, also requires stockholders'
approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the board
or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
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(f) a distribution to the stockholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors or
the members thereof.
Section 4.2 MEETINGS AND ACTION OF COMMITTEES.
Meetings and action of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Sections 3.5
(place of meetings), 3.7 (regular meetings), 3.8 (special meetings and notice),
3.9 (quorum), 3.10 (waiver of notice), 3.11 (adjournment), 3.12 (notice of
adjournment) and 3.13 (action without meeting), with such changes in the context
of those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members, except that the time of regular meetings
of committees may be determined by resolution of the board of directors as well
as by resolution of the committee; special meetings of committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
ARTICLE V.
OFFICERS
Section 5.1 OFFICERS.
The officers of the corporation shall be a president, a secretary and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice-presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of this Article V. Any number of offices may be held by the same
person.
Section 5.2 ELECTION OF OFFICERS.
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of this Article
V, shall be chosen by the board of directors, and each shall serve at the
pleasure of the board, subject to the rights, if any, of an officer under any
contract of employment.
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Section 5.3 SUBORDINATE OFFICERS, ETC.
The board of directors may appoint, and may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority and perform
such duties as are provided in the bylaws or as the board of directors may from
time to time determine.
Section 5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors, at any regular or special meeting thereof, or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
Section 5.5 VACANCIES IN OFFICES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to such office.
Section 5.6 CHAIRMAN OF THE BOARD.
The chairman of the board, if such an officer be elected, shall, if
present, preside at all meetings of the board of directors and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the board of directors or prescribed by the bylaws. If there is no
president, the chairman of the board shall in addition be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of this Article V.
Section 5.7 PRESIDENT.
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. The
president shall preside at all meetings of the stockholders and, in the absence
of the chairman of the board, or if there be none, at all meetings of the board
of directors. The president shall have the general powers and duties of
management usually
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vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or the bylaws.
Section 5.8 VICE PRESIDENTS.
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president, and when so acting shall have all the powers of, and be
subject to all restrictions upon, the president. The vice presidents shall have
such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors or the bylaws, the
president or the chairman of the board.
Section 5.9 SECRETARY.
The secretary shall keep or cause to be kept, at the principal executive
office or such other place as the board of directors may order, a book of
minutes of all meetings and actions of directors, committees of directors and
stockholders, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at directors' and committee meetings, the number of shares present or
represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names of all stockholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required by the bylaws or by law
to be given, and the secretary shall keep the seal of the corporation, if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by the bylaws.
Section 5.10 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board
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of directors. The chief financial officer shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or the bylaws.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
Section 6.1 INDEMNIFICATION - THIRD PARTY PROCEEDINGS.
The corporation shall indemnify any person (the "Indemnitee") who is or was
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in its favor)
by reason of the fact that Indemnitee is or was a director or officer of the
corporation, or any subsidiary of the corporation, and the corporation may
indemnify a person who is or was a party or is threatened to be made a party to
any proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that such person is or
was an employee or other agent of the corporation (the "Indemnitee Agent") by
reason of any action or inaction on the part of Indemnitee or Indemnitee Agent
while an officer, director or agent or by reason of the fact that Indemnitee or
Indemnitee Agent is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including subject to
Section 6.19, attorneys' fees and any expenses of establishing a right to
indemnification pursuant to this Article VI or under Delaware law), judgments,
fines, settlements (if such settlement is approved in advance by the
corporation, which approval shall not be unreasonably withheld) and other
amounts actually and reasonably incurred by Indemnitee or Indemnitee Agent in
connection with such proceeding if Indemnitee or Indemnitee Agent acted in good
faith and in a manner Indemnitee or Indemnitee Agent reasonably believed to be
in or not opposed to the best interests of the corporation and, in the case of a
criminal proceeding, if Indemnitee or Indemnitee Agent had no reasonable cause
to believe Indemnitee's or Indemnitee Agent's conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that Indemnitee or Indemnitee Agent did not act in good faith and in
a manner which Indemnitee or Indemnitee Agent reasonably believed to be in or
not opposed to the best interests of the corporation, or with respect to any
criminal proceedings, would not create a presumption that Indemnitee or
Indemnitee Agent had reasonable cause to believe that Indemnitee's or Indemnitee
Agent's conduct was unlawful.
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Section 6.2 INDEMNIFICATION - PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION.
The corporation shall indemnify Indemnitee and may indemnify Indemnitee
Agent if Indemnitee, or Indemnitee Agent, as the case may be, was or is a party
or is threatened to be made a party to any proceeding in the right of the
corporation or any subsidiary of the corporation to procure a judgment in its
favor by reason of the fact that Indemnitee or Indemnitee Agent is or was a
director, officer, employee or other agent of the corporation, or any subsidiary
of the corporation, by reason of any action or inaction on the part of
Indemnitee or Indemnitee Agent while an officer, director or agent or by reason
of the fact that Indemnitee or Indemnitee Agent is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including subject to Section 6.19, attorneys' fees and any expenses of
establishing a right to indemnification pursuant to this Article VI or under
Delaware law) and, to the fullest extent permitted by law, amounts paid in
settlement, in each case to the extent actually and reasonably incurred by
Indemnitee or Indemnitee Agent in connection with the defense or settlement of
the proceeding if Indemnitee or Indemnitee Agent acted in good faith and in a
manner Indemnitee or Indemnitee Agent believed to be in or not opposed to the
best interests of the corporation and its stockholders, except that no
indemnification shall be made with respect to any claim, issue or matter to
which Indemnitee or Indemnitee Agent shall have been adjudged to have been
liable to the corporation in the performance of Indemnitee's or Indemnitee
Agent's duty to the corporation and its stockholders, unless and only to the
extent that the court in which such proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, Indemnitee
or Indemnitee Agent is fairly and reasonably entitled to indemnity for expenses
and then only to the extent that the court shall determine.
Section 6.3 SUCCESSFUL DEFENSE ON MERITS.
To the extent that Indemnitee or Indemnitee Agent without limitation has
been successful on the merits in defense of any proceeding referred to in
Sections 6.1 or 6.2 above, or in defense of any claim, issue or matter therein,
the corporation shall indemnify Indemnitee and may indemnify Indemnitee Agent
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee or Indemnitee Agent in connection therewith. An Indemnitee shall be
deemed to have been successful on the merits, if the Plaintiff in the action
does not prevail in obtaining the relief sought in the suit or action or
demanded in the claim.
Section 6.4 CERTAIN TERMS DEFINED.
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans, references to "fines" shall include any excise
taxes assessed on Indemnitee or Indemnitee Agent with respect to an employee
benefit plan, and references to "proceeding" shall include any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative. References to "corporation" include
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all constituent corporations absorbed in a consolidation or merger as well as
the resulting or surviving corporation, so that any person who is or was a
director, officer, employee, or other agent of such a constituent corporation or
who, being or having been such a director, officer, employee or other agent of
another corporation, partnership, joint venture, trust or other enterprise shall
stand in the same position under the provisions of this Article VI with respect
to the resulting or surviving corporation as such person would if he or she had
served the resulting or surviving corporation in the same capacity.
Section 6.5 ADVANCEMENT OF EXPENSES.
The corporation shall advance all expenses incurred by Indemnitee and may
advance all or any expenses incurred by Indemnitee Agent in connection with the
investigation, defense, settlement (excluding amounts actually paid in
settlement of any action, suit or proceeding) or appeal of any civil or criminal
action, suit or proceeding referenced in Sections 6.1 or 6.2 hereof. Indemnitee
or Indemnitee Agent hereby undertakes to repay such amounts advanced only if,
and to the extent that, it shall be determined ultimately that Indemnitee or
Indemnitee Agent is not entitled to be indemnified by the corporation as
authorized hereby. The advances to be made hereunder shall be paid by the
corporation (i) to Indemnitee within twenty (20) days following delivery of a
written request therefor by Indemnitee to the corporation; and (ii) to
Indemnitee Agent within twenty (20) days following the later of a written
request therefor by Indemnitee Agent to the corporation and determination by the
corporation to advance expenses to Indemnitee Agent pursuant to the
corporation's discretionary authority hereunder.
Section 6.6 NOTICE OF CLAIM.
Indemnitee shall, as a condition precedent to his or her right to be
indemnified under this Article VI, and Indemnitee Agent shall, as a condition
precedent to his or her ability to be indemnified under this Article VI, give
the corporation notice in writing as soon as practicable of any claim made
against Indemnitee or Indemnitee Agent, as the case may be, for which
indemnification will or could be sought under this Article VI; PROVIDED,
HOWEVER, that the failure to give such notice shall not affect the Indemnitee's
rights hereunder except and only to the extent such failure prejudiced the
corporation's ability to successfully defend the matter subject to such notice.
Notice to the corporation shall be directed to the president and secretary of
the corporation at the principal business office of the corporation with copies
to Buchalter, Nemer, Fields & Younger, 601 South Figueroa Street, Suite 2400,
Los Angeles, California 90017, Attention: Mark A. Bonenfant, Esq. (or such
other address as the corporation shall designate in writing to Indemnitee). In
addition, Indemnitee or Indemnitee Agent shall give the corporation such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's or Indemnitee Agent's power.
Section 6.7 ENFORCEMENT RIGHTS.
Any indemnification provided for in Sections 6.1 or 6.2 or 6.3 shall be
made no later than sixty (60) days after receipt of the written request of
Indemnitee. If a claim or request
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under this Article VI, under any statute, or under any provision of the
corporation's certificate of incorporation providing for indemnification is not
paid by the corporation, or on its behalf, within sixty (60) days after written
request for payment thereof has been received by the corporation, Indemnitee
may, but need not, at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim or request, and subject to Section 6.19,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
connection with any action, suit or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the corporation to indemnify Indemnitee for
the amount claimed, but the burden of proving such defense shall be on the
corporation, and Indemnitee shall be entitled to receive interim payments of
expenses pursuant to Section 6.5 unless and until such defense may be finally
adjudicated by court order or judgment for which no further right of appeal
exists. The parties hereto intend that if the corporation contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be a decision for the court, and no presumption regarding whether the
applicable standard has been met will arise based on any determination or lack
of determination of such by the corporation (including its Board or any subgroup
thereof, independent legal counsel or its stockholders). The board of directors
may, in its discretion, provide by resolution for similar or identical
enforcement rights for any Indemnitee Agent.
Section 6.8 ASSUMPTION OF DEFENSE.
In the event the corporation shall be obligated to pay the expenses of any
proceeding against the Indemnitee or Indemnitee Agent, as the case may be, the
corporation, if appropriate, shall be entitled to assume the defense of such
proceeding with counsel approved by Indemnitee or Indemnitee Agent, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee or
Indemnitee Agent of written notice of its election so to do. After delivery of
such notice, approval of such counsel by Indemnitee or Indemnitee Agent and the
retention of such counsel by the corporation, the corporation will not be liable
to Indemnitee or Indemnitee Agent under this Article VI for any fees of counsel
subsequently incurred by Indemnitee or Indemnitee Agent with respect to the same
proceeding, unless (i) the employment of counsel by Indemnitee or Indemnitee
Agent is authorized by the corporation, (ii) Indemnitee or Indemnitee Agent
shall have reasonably concluded, based upon written advice of counsel, that
there may be a conflict of interest of such counsel retained by the corporation
between the corporation and Indemnitee or Indemnitee Agent in the conduct of
such defense, or (iii) the corporation ceases or terminates the employment of
such counsel with respect to the defense of such proceeding, in any of which
events then the fees and expenses of Indemnitee's or Indemnitee Agent's counsel
shall be at the expense of the corporation. At all times, Indemnitee or
Indemnitee Agent shall have the right to employ other counsel in any such
proceeding at Indemnitee's or Indemnitee Agent's expense, and to participate in
the defense of the proceeding or claim through such counsel.
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Section 6.9 APPROVAL OF EXPENSES.
No expenses for which indemnity shall be sought under this Article VI,
other than those in respect of judgments and verdicts actually rendered, shall
be incurred without the prior consent of the corporation, which consent shall
not be unreasonably withheld.
Section 6.10 SUBROGATION.
In the event of payment under this Article VI, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee or Indemnitee Agent, who shall do all things that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the corporation effectively to bring suit to enforce such rights.
Section 6.11 EXCEPTIONS.
Notwithstanding any other provision herein to the contrary, the corporation
shall not be obligated pursuant to this Article VI:
(a) EXCLUDED ACTS. To indemnify Indemnitee (i) as to circumstances in
which indemnity is expressly prohibited pursuant to Delaware law, (ii) for any
acts or omissions or transactions from which a director may not be relieved of
liability pursuant to Delaware law; or (iii) any act or acts of bad faith or
willful misconduct; or
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Article VI or any other statute or law or as otherwise required under the
Corporations Code of Delaware, but such indemnification or advancement of
expenses may be provided by the corporation in specific cases if the board of
directors has approved the initiation or bringing of such suit; or
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred
by the Indemnitee with respect to any proceeding instituted by Indemnitee to
enforce or interpret this Article VI, if a court of competent jurisdiction
determines that such proceeding was not made in good faith or was frivolous; or
(d) INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities
of any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) which have been paid
directly to Indemnitee by an insurance carrier under a policy of officers' and
directors' liability insurance maintained by the corporation; or
(e) BREACHES OF AGREEMENTS. To indemnify Indemnitee for expenses or
liabilities (including indemnification obligations of Indemnitee) of any type
whatsoever arising from
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his breach of the Purchase Agreement among the Guitar Center Management Company,
Inc., Chase Venture Capital Associates, L.P., Wells Fargo Small Business
Investment Company, Inc., Weston Presidio Capital II, L.P. and the Stockholders
(as defined therein) dated as of May 1, 1996 (the "Purchase Agreement"), an
employment agreement with the corporation (if any) or any other agreement with
the corporation or any of its subsidiaries; or
(f) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Exchange Act, as amended, or any
similar successor statute.
Section 6.12 PARTIAL INDEMNIFICATION.
If Indemnitee is entitled under any provision of this Article VI to
indemnification by the corporation for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by the Indemnitee
in the investigation, defense, appeal or settlement of any civil or criminal
action, suit or proceeding, but not, however, for the total amount thereof, the
corporation shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
Section 6.13 COVERAGE.
All rights to indemnification under this Article VI shall be deemed to be
provided by a contract between the corporation and the Indemnitee in which the
corporation hereby agrees except as expressly provided in these bylaws to
indemnify Indemnitee to the fullest extent permitted by law, notwithstanding
that such indemnification is not specifically authorized by the corporation's
certificate of incorporation, these bylaws or by statute. Any repeal or
modification of these bylaws, the Corporations Code of Delaware or any other
applicable law shall not affect any rights or obligations then existing under
this Article VI. The provisions of this Article VI shall continue as to
Indemnitee and Indemnitee Agent for any action taken or not taken while serving
in an indemnified capacity even though the Indemnitee or Indemnitee Agent may
have ceased to serve in such capacity at the time of any action, suit or other
covered proceeding. This Article VI shall be binding upon the corporation and
its successors and assigns and shall inure to the benefit of Indemnitee and
Indemnitee Agent and Indemnitee's and Indemnitee Agent's estate, heirs, legal
representatives and assigns.
Section 6.14 NON-EXCLUSIVITY.
Nothing herein shall be deemed to diminish or otherwise restrict any rights
to which Indemnitee or Indemnitee Agent may be entitled under the corporation's
certificate of incorporation, any agreement, any vote of stockholders or
disinterested directors, or, except as expressly provided herein, under the laws
of the State of Delaware.
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Section 6.15 SEVERABILITY.
Nothing in this Article VI is intended to require or shall be construed as
requiring the corporation to do or fail to do any act in violation of applicable
law. If this Article VI or any portion hereof shall be invalidated on any
ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify Indemnitee or Indemnitee Agent to the fullest extent
permitted by any applicable portion of this Article VI that shall not have been
invalidated.
Section 6.16 MUTUAL ACKNOWLEDGMENT.
Both the corporation and Indemnitee acknowledge that in certain instances,
Federal law or applicable public policy may prohibit the corporation from
indemnifying its directors and officers under this Article VI or otherwise.
Indemnitee understands and acknowledges that the corporation has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the corporation's right under public policy
to indemnify Indemnitee.
Section 6.17 OFFICER AND DIRECTOR LIABILITY INSURANCE.
The corporation shall, from time to time, make the good faith determination
whether or not it is practicable for the corporation to obtain and maintain a
policy or policies of insurance with reputable insurance companies providing the
officers and directors of the corporation with coverage for losses from wrongful
acts, or to ensure the corporation's performance of its indemnification
obligations under this Article VI. Among other considerations, the corporation
will weigh the costs of obtaining such insurance coverage against the protection
afforded by such coverage. Notwithstanding the foregoing, the corporation shall
have no obligation to obtain or maintain such insurance if the corporation
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the corporation.
Section 6.18 NOTICE TO INSURERS.
If, at the time of the receipt of a notice of a claim pursuant to
Section 6.6 hereof, the corporation has director and officer liability insurance
in effect, the corporation shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The corporation shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
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Section 6.19 ATTORNEYS' FEES.
In the event that any action is instituted by Indemnitee under this Article
VI to enforce or interpret any of the terms hereof, Indemnitee shall be entitled
to be paid all court costs and expenses, including reasonable attorneys' fees,
incurred by Indemnitee with respect to such action, unless as a part of such
action, the court of competent jurisdiction determines that the action was not
instituted in good faith or was frivolous. In the event of an action instituted
by or in the name of the corporation under this Article VI, or to enforce or
interpret any of the terms of this Article VI, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that Indemnitee's defenses to such action were not
made in good faith or were frivolous. The board of directors may, in its
discretion, provide by resolution for payment of such attorneys' fees to any
Indemnitee Agent.
Section 6.20 NOTICE.
All notices, requests, demands and other communications under this Article
VI shall be in writing and shall be deemed duly given (i) if delivered by hand
and receipted for by the addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked.
ARTICLE VII.
RECORDS AND REPORTS
Section 7.1 MAINTENANCE OF SHARE REGISTER.
The corporation shall keep at its principal executive office, or at the
office of its transfer agent or registrar, if either be appointed and as
determined by resolution of the board of directors, a record of its
stockholders, giving the names and addresses of all stockholders and the number
and class of shares held by each stockholder.
Section 7.2 MAINTENANCE AND INSPECTION OF BYLAWS.
The corporation shall keep at its principal executive office, or if its
principal executive office is not in the State of Delaware at its principal
business office in this State, the original or a copy of the bylaws as amended
to date, which shall be open to inspection by the stockholders at all reasonable
times during office hours. If the principal executive office of the corporation
is outside this State and the corporation has no principal business office in
this State, the secretary shall, upon the written request of any stockholder,
furnish to such stockholder a copy of the bylaws as amended to date.
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Section 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
The accounting books and records and minutes of proceedings of the
stockholders and the board of directors and any committee or committees of the
board of directors shall be kept at such place or places designated by the board
of directors, or, in the absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form. Such minutes and
accounting books and records shall be open to inspection upon the written demand
of any stockholder or holder of a voting trust certificate, at any reasonable
time during usual business hours, for a purpose reasonably related to such
holder's interests as a stockholder or as the holder of a voting trust
certificate. Such inspection may be made in person or by an agent or attorney,
and shall include the right to copy and make extracts. The foregoing rights of
inspection shall extend to the records of each subsidiary of the corporation.
Section 7.4 INSPECTION BY DIRECTORS.
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind and the physical
properties of the corporation and each of its subsidiary corporations. This
inspection by a director may be made in person or by an agent or attorney and
the right of inspection includes the right to copy and make extracts of
documents.
ARTICLE VIII.
GENERAL CORPORATE MATTERS
Section 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
stockholders by written consent without a meeting), the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
prior to any such action, and in such case only stockholders of record on the
date so fixed are entitled to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date
fixed as aforesaid, except as otherwise provided in the Corporations Code of
Delaware.
If the board of directors does not so fix a record date, the record date
for determining stockholders for any such purpose shall be at the close of
business on the day
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on which the board adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such action, whichever is later.
Section 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness, issued in the name of or payable to the corporation,
shall be signed or endorsed by such person or persons and in such manner as,
from time to time, shall be determined by resolution of the board of directors.
Section 8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED.
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, agent or agents, to enter into any contract
or execute any instrument in the name of and on behalf of the corporation, and
such authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
Section 8.4 CERTIFICATES FOR SHARES.
A certificate or certificates for shares of the capital stock of the
corporation shall be issued to each stockholder when any such shares are fully
paid, and the board of directors may authorize the issuance of certificates for
shares as partly paid provided that such certificates shall state the amount of
the consideration to be paid therefor and the amount paid thereon. All
certificates shall be signed in the name of the corporation by the chairman of
the board or vice chairman of the board or the president or a vice president and
by the chief financial officer or an assistant treasurer or the secretary or any
assistant secretary, certifying the number of shares and the class or series of
shares owned by the stockholder. Any or all of the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue.
Section 8.5 LOST CERTIFICATES.
Except as hereinafter in this Section 8.5 provided, no new certificates for
shares shall be issued in lieu of an old certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors shall in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, upon such terms and conditions as the board may
reasonably require including provision for indemnification of the corporation
secured by a bond or
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other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of such certificate or the issuance of
such new certificate.
Section 8.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The chairman of the board, the president, or any vice president, or any
other person authorized by resolution of the board of directors by any of the
foregoing designated officers, is authorized to vote on behalf of the
corporation any and all shares of any other corporation or corporations, foreign
or domestic, standing in the name of the corporation. The authority herein
granted to said officers to vote or represent on behalf of the corporation any
and all shares held by the corporation in any other corporation or corporations
may be exercised by any such officer in person or by any person authorized to do
so by proxy duly executed by said officer.
Section 8.7 CONSTRUCTION AND DEFINITIONS.
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Corporations Code of Delaware shall govern
the construction of these bylaws. Without limiting the generality of the
foregoing, the singular number includes the plural, the plural number includes
the singular, and the term "person" shall be construed broadly and shall include
a natural person, corporation or other entity.
ARTICLE IX.
AMENDMENT
Section 9.1 AMENDMENT BY STOCKHOLDERS.
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote.
Section 9.2 AMENDMENT BY DIRECTORS.
Subject to the rights of the stockholders as provided in Section 9.1 of
this Article IX, bylaws may be adopted, amended or repealed by the board of
directors.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of GUITAR CENTER,
INC., a Delaware corporation; and
(2) That the foregoing bylaws, comprising of twenty-eight (28) pages,
constitute the bylaws of such corporation, as duly adopted by the board of
directors of this corporation dated _________________, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal
of such corporation this ________ day of _______________, 1996.
----------------------------------------
Bruce Ross, Secretary
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Exhibit 5.1
October 17, 1996
Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Office of Applications and Reports Services
Re: Guitar Center Management Company, Inc.
REGISTRATION STATEMENT ON FORM S-1
(FILE NO. 333-10491)
Gentlemen:
We have acted as counsel to Guitar Center Management Company, Inc., a
California corporation (the "Company"), in connection with the Company's
proposed offer to exchange $100,000,000 of 11% Senior Unsecured Notes due 2006
(the "New Notes") for any and all previously issued and outstanding 11% Senior
Notes due 2006 (the "Old Notes") (the "Exchange Offer").
This opinion is being delivered in accordance with the requirements of
the Securities and Exchange Commission in connection with the filing of the
Registration Statement on Form S-1 (File No. 333-10491) (the "Registration
Statement").
In our capacity as counsel to the Company, we have reviewed such
documents and made such inquiries as we have reasonably deemed necessary to
enable us to render the opinion expressed below. In all such review, we have
made certain customary assumptions such as the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the lack of any
undisclosed modifications, waivers, or amendments to any documents reviewed by
us and the conformity to authentic original documents of all documents submitted
to us as conformed or photostatic copies. For purposes of rendering this
opinion, we have investigated such questions of law as we have deemed necessary.
On the basis of the foregoing, and in reliance thereon and subject to
the assumptions, qualifications, exceptions and limitations expressed herein, we
are of the opinion that when the New Notes are issued and exchanged in
accordance with the terms of the Exchange Offer, the New Notes will be binding
obligations
<PAGE>
Securities and Exchange Commission
October 17, 1996
Page 2
of the Company, except as limited by bankruptcy, insolvency, moratorium, and
other similar laws and decisions affecting the rights of creditors generally.
This opinion is limited to the present laws of the State of California
and of the United States of America.
This opinion is solely for your information in connection with the New
Notes to be offered pursuant to the Exchange Offer and is not, without prior
written consent of this firm, to be quoted in full or in part or otherwise
referred to in any documents other than the reference to this firm in the
Prospectus which is part of the Registration Statement under the caption "Legal
Matters," nor to be filed with any governmental agency or other persons, other
than the Securities and Exchange Commission and various state securities
administrators in connection with qualification of the New Notes, to which
reference and filings we hereby consent.
Very truly yours,
Buchalter, Nemer, Fields & Younger
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement") with an effective date of July 1, 1996, between GUITAR CENTER
MANAGEMENT COMPANY, INC., a California corporation (the "Company"), and Barry
F. Soosman (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to the closing of the Stock Purchase Agreement (the
"Purchase Agreement") of even date herewith by and among the Company, Chase
Venture Capital Associates, L.P., Wells Fargo Small Business Investment Company,
Inc., Weston Presidio Capital II, L.P. (collectively, the "Investors"), and the
security holder of the Company.
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company shall employ the Executive, and the Executive
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending as
provided in paragraph 4 hereof (the "Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve
initially as the Vice President-Corporate Development and General Counsel of
the Company and shall have the normal duties, responsibilities and authority
of the Vice President-Corporate Development and General Counsel, subject to
the power of the board of directors of the Company (the "Board") and the
powers delegated to the Executive's superiors (if any) by the Board.
(b) The Executive shall report to the Board or its designee, and the
Executive shall devote his best efforts and substantially all of his business
time, attention and energies (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its Subsidiaries (as defined below). The Executive shall
perform his duties and responsibilities to the best of his abilities in a
diligent, trustworthy, and businesslike manner. During the Employment Period,
the Executive shall not engage in any business activity which, in the reasonable
judgment of the Board, materially conflicts with the duties of the Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage; PROVIDED, HOWEVER, that nothing herein is intended to
prohibit Executive from managing his own investment portfolio; PROVIDED FURTHER,
HOWEVER, that the Company acknowledges that the Executive may devote such time
that
<PAGE>
the Executive deems appropriate to his real estate and law enterprise,
including, without limitation, his "of counsel" relationship with Buchalter,
Nemer, Fields & Younger, so long as Executive shall at all times adequately
fulfill his obligations pursuant to this Section 2(b).
(c) For purposes of this Agreement, (i) "SUBSIDIARIES" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries; and (ii) "PERSON" shall be
construed broadly and shall include, without limitation, an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, a limited liability company and a governmental entity or any
department or agency thereof.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's base salary shall
be $225,000 per annum or such higher rate as the Board (excluding the Executive
if he should be a member of the Board at the time of such determination) may
designate from time to time (the "Base Salary"), which salary shall be payable
in such installments as is the policy of the Company with respect to its senior
executive employees and shall be subject to Federal, state and local withholding
and other payroll taxes. In addition, during the Employment Period, the
Executive shall be entitled to participate in all employee benefit programs for
which all executives of the Company are generally eligible and the Executive
shall be eligible to participate in all insurance plans available generally to
all executives of the Company.
(b) In addition to the Base Salary, for each fiscal year ending
during the Employment Period, Executive shall also be eligible to receive an
annual bonus at the discretion of the Board.
(c) The Company shall reimburse the Executive for all reasonable
expenses incurred by him in the course of performing his duties under this
Agreement which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and documenting
such expenses. The Company shall reimburse the Executive for all bar dues and
real estate broker license fees. The Company shall reimburse the executive for
all library and reference materials and the cost of any continuing education and
seminars approved by the President of the Company.
(d) During the Employment Period, the Executive shall be entitled to
3 weeks paid vacation during each 12-month period worked, commencing on the date
hereof.
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(e) The Company shall issue Executive options to acquire shares of
Common Stock in the amounts and on the dates set forth on A hereto.
(f) Notwithstanding any benefit provided to the Executive as provided
in Section 3(a) hereinabove, the Company shall pay or provide, at a minimum, at
the Company's expense, an automobile allowance of $800.00 per month and a car
phone including monthly access fees.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and the
Executive, the Employment Period shall end on December 31, 1999; PROVIDED,
HOWEVER, that (i) the Employment Period shall terminate prior to such date upon
the Executive's resignation pursuant to the provisions of Section 4(f) or 4(g)
hereof, or the death or Disability (as hereinafter defined) of Executive; and
(ii) the Employment Period may be terminated by the Company at any time prior to
such date for Cause (as defined below) or without Cause. For purposes of this
Agreement the term "DISABILITY" means any long-term disability or incapacity
which (i) renders the Executive unable to substantially perform all of his
duties hereunder for 180 days during any 18-month period or (ii) would
reasonably be expected to render the Executive unable to substantially perform
all of his duties for 180 days during any 18-month period, in each case as
determined by the Board (excluding the Executive if he should be a member of the
Board at the time of such determination) in its good faith judgment after
seeking and reviewing advice from a qualified physician.
(b) If the Employment Period is terminated by the Company without
Cause or by the Executive with Reasonable Justification, the Executive shall be
entitled to receive as severance the Base Salary, an annual cash bonus equal to
the last annual bonus (excluding any portion thereof that the President of the
Company considered extraordinary and non-recurring) he received prior to
termination (such bonus to be pro-rated for any partial year), and continuation
of his medical benefits (or, if such continuation is not permitted by the
Company's insurers beyond the Employment Period, an annual cash payment equal to
the average premium the company pays to obtain health insurance for an
employee), for the period beginning on the date of such termination and ending
on December 31, 1999, unless the Executive has breached the provisions of this
Agreement, in which case the provisions of paragraph 11(a)(iii) shall apply.
For purposes of this Section 4(b), benefits will not include future
participation in any discretionary bonus or equity incentive pool, other than
continuation of annual cash bonuses as contemplated in the previous sentence.
Such severance payments will be made periodically in the same amounts and at the
same intervals as
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the Base Salary, annual bonus and benefits (as applicable) were paid immediately
prior to termination of employment. Executive shall have no duty to mitigate
any damages which Executive may suffer as a result of such termination nor shall
the severance benefits payable be reduced by any sums actually earned by
Executive as a result of any other employment obtained by Executive during the
original Employment Period. In addition, if the Employment Period is terminated
by the Company without Cause, all stock options held by the Executive may
immediately vest pursuant to the terms of the agreements by which such options
were issued.
(c) If the Employment Period is terminated for any reason (including
pursuant to paragraph 4(h)) other than by the Company without Cause or by the
Executive with Reasonable Justification, the Executive shall be entitled to
receive only the Base Salary and then only to the extent such amount has accrued
through the date of termination.
(d) Except as otherwise expressly required by law (E.G., COBRA) or as
specifically provided herein, all of the Executive's rights to salary,
severance, benefits, bonuses and other amounts hereunder (if any) accruing after
the termination of the Employment Period shall cease upon such termination. In
the event that the Employment Period is terminated by the Company without Cause
or by the Executive with Reasonable Justification, the Executive's sole remedy
shall be to receive the severance payments and benefits described in paragraph
4(b) hereof.
(e) For purposes of this Agreement, "Cause" means (i) the repeated
failure by the Executive to perform such lawful duties consistent with
Executive's position as are reasonably requested by the Board as documented in
writing to the Executive, (ii) the Executive's repeated material neglect of his
duties on a general basis (other than as a result of illness or disability),
notwithstanding written notice of objection from the Board and the expiration of
a thirty (30) day cure period, (iii) the commission by the Executive of any act
of fraud, theft or criminal dishonesty with respect to the Company or any of its
Subsidiaries or affiliates, or the conviction of the Executive of any felony,
(iv) the commission of any act involving moral turpitude which (A) brings the
Company or any of its affiliates into public disrepute or disgrace, or (B)
causes material injury to the customer relations, operations or the business
prospects of the Company or any of its affiliates, and (v) material breach by
the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of paragraph 5, 6 or 7 hereof, not cured within
thirty (30) days after written notice to Executive from the Board; PROVIDED,
HOWEVER, that in the event of an intentional breach of the provisions of
paragraph 5, 6 or 7 hereof, the Executive shall not have the opportunity to
cure.
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(f) The Executive may within ninety (90) days, after giving written
notice to the Company and the Company's failure to cure, voluntarily terminate
employment with the Company upon any event giving rise to Reasonable
Justification for such voluntary termination.
(g) For purposes of this Agreement, "Reasonable Justification" shall
mean any voluntary termination by the Executive of his employment with the
Company within ninety (90) days after the occurrence of any of the following
events:
(i) the Executive is directed to perform an act that the
Executive reasonably believes to be in contravention of law, or
which the Executive reasonably believes would subject the Company
and himself to material liability, despite his express written
objection addressed to the Board with respect to such action;
(ii) there has been any change (on other than a temporary basis)
without the Executive's consent in the Executive's title or any
material reduction in the nature or scope of his responsibilities, or
the Executive is assigned duties that are materially inconsistent
with his position (other than on a temporary basis);
(iii) there is any material reduction in the Executive's
compensation or benefits (other than reductions in benefits that
generally effect all employees entitled to such benefits ratably);
(iv) the Executive is required by the Company, after written
objection by the Executive, to relocate his principal place of
employment outside a radius of fifty miles from his place of
employment immediately prior to such relocation; or
(v) there is a material failure, after notice and an
opportunity to cure, by the Company to perform any of its obligations
to the Executive under this Agreement.
(h) If at any time during the Employment Period, there is a Sale of
the Company (as defined in that certain Stockholders Agreement, dated as of June
5, 1996, by and among the Company and certain of its stockholders), Executive
may resign within ninety (90) days of the occurrence of such event by notifying
the Company in writing.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose to a third party or use for his
personal benefit or for the benefit of a third
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party, at any time, either during the Employment Period or thereafter, any
Confidential Information (as defined below) of which the Executive is or becomes
aware, whether or not such information is developed by him, except to the extent
that such disclosure or use is directly related to and required by the
Executive's performance in good faith of duties assigned to the Executive by the
Company. The Executive will take all reasonable and appropriate steps to
safeguard Confidential Information and to protect it against disclosure, misuse,
espionage, loss and theft. The Executive shall deliver to the Company at the
termination of the Employment Period or at any time the Company may request all
memoranda, notes, plans, records, reports, computer tapes and software and other
documents and data (and copies thereof) relating to the Confidential
Information, Work Product (as defined below) or the business of the Company or
any of its Subsidiaries which the Executive may then possess or have under his
control.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) information, observations and data obtained by the
Executive while employed by the Company (including those obtained prior to the
date of this Agreement) concerning the business or affairs of the Company, (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and business
methods, (xi) inventions, devices, new developments, methods and processes,
whether patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) other copyrightable
works, (xiv) all production methods, processes, technology and trade secrets,
and (xv) all similar and related information in whatever form. Confidential
Information will not include any information that has been published in a form
generally available to the public prior to the date the Executive proposes to
disclose or use such information. Confidential Information will not be deemed
to have been published merely because individual portions of the information
have been separately published, but only if all material features comprising
such information have been published in combination.
6. INVENTIONS AND PATENTS.
(a) The Executive agrees that all inventions, innovations,
improvements, technical information, systems, software developments, methods,
designs, analyses, drawings, reports, service marks, trademarks, tradenames,
logos and all similar or related information (whether patentable or
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<PAGE>
unpatentable) which relates to the Company's or any of its Subsidiaries' actual
or anticipated business, research and development or existing or future products
or services and which are conceived, developed or made by the Executive (whether
or not during usual business hours and whether or not alone or in conjunction
with any other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement) together with all patent
applications, letters patent, trademark, tradename and service mark applications
or registrations, copyrights and reissues thereof that may be granted for or
upon any of the foregoing (collectively referred to herein as, the "Work
Product") belong to the Company or such Subsidiary. The Executive will promptly
disclose such Work Product as may be susceptible of such manner of communication
to the Board and perform all actions reasonably requested by the Board (whether
during or after the Employment Period) to establish and confirm such ownership
(including, without limitation, the execution and delivery of assignments,
consents, powers of attorney and other instruments) and to provide reasonable
assistance to the Company or any of its Subsidiaries in connection with the
prosecution of any applications for patents, trademarks, trade names, service
marks or reissues thereof or in the prosecution or defense of interferences
relating to any Work Product.
(b) CALIFORNIA EMPLOYEE PATENT ACT NOTIFICATION. In accordance
with Section 2872 of the California Employee Patent Act, West's Cal. Lab.
Code Section 2870 ET. SEQ, Executive is hereby advised that subparagraph
6(a) does not apply to any invention, new development or method (and all
copies and tangible embodiments thereof) made solely by Executive for which
no equipment, facility, material, Confidential Information or intellectual
property of the Company or any of its Subsidiaries was used and which was
developed entirely on Employee's own time; PROVIDED, HOWEVER, that
subparagraph 6(a) shall apply if the invention, new development or method (i)
relates to the Company's or any of its Subsidiaries' actual or demonstrably
anticipated businesses or research and development, or (ii) results from any
work performed by Executive for the Company or any of its Subsidiaries.
7. NON-COMPETE AND NON-SOLICITATION.
(a) The Executive acknowledges and agrees with the Company that
during the course of the Executive's involvement and/or employment with, or
ownership of options and/or Common Stock in, the Company, such Executive has had
and will continue to have the opportunity to develop relationships with existing
employees, vendors, suppliers, customers and other business associates of the
Company which relationships constitute goodwill of the Company, and the Company
would be irreparably damaged if the Executive were to take actions that would
damage
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<PAGE>
or misappropriate such goodwill. Accordingly, the Executive agrees as follows:
(i) The Executive acknowledges that the Company currently
conducts its business throughout the United States, including without
limitation the areas listed on Exhibit B attached hereto (the "Territory").
Accordingly, during the period commencing on the date hereof and ending on
the later of (x) the termination of the Employment Period or (y) if the
Executive was terminated without Cause or resigns with Reasonable
Justification, December 31, 1999 (such period is referred to herein as the
"Non-Compete Period"), the Executive shall not, directly or indirectly,
enter into, engage in, assist, give or lend funds to or otherwise finance,
be employed by or consult with, or have a financial or other interest in,
any business which engages in selling at retail musical instruments,
pro-audio equipment or related accessories within the Territory (the "Line
of Business"), whether for or by himself or as a representative for any
other Person.
(ii) Notwithstanding the foregoing, the aggregate ownership by
the Executive of no more than two percent (on a fully-diluted basis) of the
outstanding equity securities of any entity, which securities are traded on
a national or foreign securities exchange, quoted on the Nasdaq Stock
Market or other automated quotation system, and which entity competes with
the Company (or any part thereof) within the Territory, shall not (by
itself) be deemed to be giving or lending funds to, otherwise financing or
having a financial interest in a competitor. In the event that any entity
in which the Executive has any financial or other interest directly or
indirectly enters into the Line of Business during the Non-Compete Period,
the Executive shall divest all of his interest (other than any amount
permitted to be held pursuant to the first sentence of this Section 7
(a)(ii)) in such entity within thirty (30) days after learning that such
entity has entered the Line of Business.
(iii) The Executive covenants and agrees that during the
Non-Compete Period, the Executive will not, directly or indirectly, either
for himself or for any other person or entity, solicit any employee of the
Company (other than such Executive's personal assistant or secretary) or
any Subsidiary to terminate his or her employment with the Company or any
Subsidiary or employ any such individual during his or her employment with
the Company or any Subsidiary and for a period of six months after such
individual terminates his or her employment with the Company or any
Subsidiary.
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<PAGE>
(b) The Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to the business of
the Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits as an employee or holder of Common
Stock of the Company and as otherwise provided hereunder to clearly justify such
restrictions which, in any event (given his education, skills and ability), the
Executive does not believe would prevent him from otherwise earning a living.
(c) The provisions of this Section 7 shall terminate in the event the
Company fails to make any payments required by Section 4(b) and such failure
remains uncured for a period equal to at least thirty (30) days after written
notice of such event from Executive.
8. INDEMNIFICATION. The Company and the Executive are entering into an
Indemnification Agreement on the date hereof in substantially the form attached
hereto of Annex A.
9. INSURANCE. The Company may, for its own benefit, maintain "keyman"
life and disability insurance policies covering the Executive, provided the same
does not prevent Executive from obtaining reasonable amounts of insurance for
his family or estate planing needs. The Executive will cooperate with the
Company and provide such information or other assistance as the Company may
reasonably request in connection with the Company obtaining and maintaining such
policies.
10. EXECUTIVE REPRESENTATION. The Executive hereby represents and
warrants to the Company that (a) the execution, delivery and performance of this
Agreement by the Executive does not and will not conflict with, breach, violate
or cause a default under any agreement, contract or instrument to which the
Executive is a party or any judgment, order or decree to which the Executive is
subject, (b) the Executive is not a party to or bound by any employment
agreement, consulting agreement, non-compete agreement, confidentiality
agreement or similar agreement with any other person or entity and (c) upon the
execution and delivery of this Agreement by the Company and the Executive, this
Agreement will be a valid and binding obligation of the Executive, enforceable
in accordance with its terms.
11. NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim or other communication hereunder shall be delivered personally to the
recipient, delivered by United States Post office mail (postage prepaid and
return receipt requested), telecopied to the intended recipient at the number
set forth therefor below (with hard copy to follow), or sent to the recipient by
reputable express courier service
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<PAGE>
(charges prepaid) and addressed to the intended recipient as set forth below:
If to the Company, to:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telephone: (818) 735-8800
Telecopier: (818) 735-4923
With copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400; and
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Harvey M. Eisenberg, Esq.
Telephone: (212) 408-2400
Telecopier: (212) 408-2420
Sidley & Austin
555 W. Fifth St.
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: (213) 896-6600
If to the Executive, to:
Barry Soosman
852 Country Valley Road
Westlake Village, CA 91362
Telephone: (805) 373-1937
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
12. GENERAL PROVISIONS.
(a) SEVERABILITY/ENFORCEMENT.
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(i) It is the desire and intent of the parties hereto that the
provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly
drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn,
without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of such provision in any other
jurisdiction. Without limiting the generality of the preceding sentence,
if at the time of enforcement of paragraph 5, 6 or 7 of this Agreement, a
court holds that the restrictions stated therein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum
period, scope or geographical area reasonable under such circumstances
shall be substituted for the stated period, scope or area and that the
failure of all or any of such provisions to be enforceable shall not
impair or affect the obligations of the Company to pay compensation or
severance obligations under this Agreement.
(ii) Because the Executive's services are unique and because the
Executive has access to Confidential Information and Work Product, the
parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement by the Executive. Therefore, in the event of
a breach or threatened breach of this Agreement, the Company or its
successors or assigns may, in addition to other rights and remedies
existing in their favor, apply to any court of competent jurisdiction for
specific performance and/or injunctive or other relief in order to
enforce, or prevent any violations of, the provisions hereof (without
posting a bond or other security).
(iii) In addition to the foregoing, and not in any way in
limitation thereof, or in limitation of any right or remedy otherwise
available to the Company, if the Executive materially violates any
provision of paragraph 5, 6 or 7 (and such violation, if unintentional on
the part of the Executive, continues for a period of thirty (30) days
following receipt of written notice from the Company), any severance
payments then or thereafter due from the Company to the Executive may be
terminated forthwith and upon such
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election by the Company, the Company's obligation to pay and the
Executive's right to receive such severance payments shall terminate and be
of no further force or effect. The Executive's obligations under
paragraphs 5, 6 or 7 of this Agreement shall not be limited or affected by,
and such provisions shall remain in full force and effect notwithstanding
the termination of any severance payments by the Company in accordance with
this paragraph 11(a)(iii). The exercise of the right to terminate such
payments shall not be deemed to be an election of remedies by the Company
and shall not in any manner modify, limit or preclude the Company from
exercising any other rights or seeking any other remedies available to it
at law or in equity.
(b) COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and all other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by the
Executive and the Company and their respective successors, assigns, heirs,
representatives and estate; PROVIDED, HOWEVER, that the rights and obligations
of the Executive under this Agreement shall not be assigned without the prior
written consent of the Company.
(d) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF CALIFORNIA, OR ANY OTHER JURISDICTION), THAT WOULD CAUSE THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE APPLIED. IN
FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF CALIFORNIA WILL
CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER
SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE
LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(e) JURISDICTION, ETC.
(i) Each of the parties hereto hereby irrevocably
and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any California State court or Federal court of
the United States of America sitting in the State of California, and any
appellate court from any thereof, in any action or proceeding arising out
of or relating to this Agreement or for recognition or enforcement of any
judgment, and each of the parties hereto hereby
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irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such
California State court or, to the extent permitted by law, in such Federal
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Agreement shall affect any right that any party may
otherwise have to bring any action or proceeding relating to this Agreement
in the courts of any jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement in
any California State or Federal court. Each of the parties hereto
irrevocably waives, to the fullest extent permitted by law, the defense of
an inconvenient forum to the maintenance of such action or proceeding in
any such court.
(iii) The Company and the Executive further agree that the
mailing by certified or registered mail, return receipt requested, of any
process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any
other means provided by law.
(f) AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company, the
Executive and the Investors, and no course of conduct or failure or delay in
enforcing the provisions of this Agreement shall affect the validity, binding
effect or enforceability of this Agreement or any provision hereof.
(g) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO
SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING HEREUNDER.
(h) HEADINGS. The section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Marty Albertson
---------------------------
Name: Marty Albertson
Title: Executive Vice President
/s/ Barry F. Soosman
-----------------------------------
Barry F. Soosman
<PAGE>
EXHIBIT A
OPTIONS TO BE GRANTED
TO EXECUTIVE
Defined terms used herein, but not defined herein, shall have the meaning
ascribed to them in the attached Employment Agreement or the Company's 1996
Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached Agreement, the
Company shall grant Executive an option to acquire 8,669 shares of Common
Stock pursuant to the Plan.
2. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(c) of the Plan on 12/31/96 and Executive is still employed by
the Company at such time, then the Company shall grant Executive an option
to receive 10% of such Shares Available for Award.
3. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(c) of the Plan on 12/31/97 and Executive is still employed by
the Company at such time, then the Company shall grant Executive an option
to receive 10% of such Shares Available for Award.
4. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(c) of the Plan on 12/31/98 and Executive is still employed by
the Company at such time, then the Company shall grant Executive an option
to receive 10% of such Shares Available for Award.
5. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(e) of the Plan and Executive is still employed by the Company
at such time, the Company shall grant to Executive an option to acquire
that number of such Shares Available for Award equal to (x) the lesser of
8,669 or 10% of such Shares Available for Award MINUS (y) the number of
Shares Available for Award that were subject to the options issued pursuant
to paragraphs 2, 3 and 4 above. Any share numbers referred to in this
paragraph 5 shall be subject to adjustment as contemplated by Section 11 of
the Plan.
6. All options issued pursuant to this Agreement shall be
exercisable for $1.00 per share of Common Stock.
7. All options issued pursuant to this Agreement prior to the
Company's initial public offering shall be NQ0s.
1
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EXHIBIT B
TERRITORY
CALIFORNIA:
-----------
Los Angeles County metropolitan areas
Orange County metropolitan areas
San Diego County metropolitan areas
San Francisco/Alameda/Contra Costa/Marin/San Mateo
County metropolitan areas
San Bernardino/Riverside County metropolitan area
TEXAS:
------
Dallas/Ft. Worth metropolitan area
Houston metropolitan area
FLORIDA:
--------
Miami metropolitan area
Ft. Lauderdale/Hollywood metropolitan area
ILLINOIS:
---------
Chicago metropolitan area
MASSACHUSETTS:
--------------
Boston metropolitan area
MICHIGAN:
---------
Detroit metropolitan area
MINNESOTA:
----------
Minneapolis/St. Paul metropolitan area
<PAGE>
ANNEX A
Form of Indemnification Agreement.
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of June 5,
1996, by and between Guitar Center Management Company, Inc., a California
corporation (the "Corporation"), and the undersigned director or officer of the
Company ("Indemnitee"), with reference to the following facts:
A. Indemnitee is currently serving as a director or officer of the
Corporation.
B. The Corporation and Indemnitee recognize the substantial increase
in corporate litigation in general, subjecting officers and directors to
expensive litigation risks at the same time as the availability and coverage of
liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available to be
adequate under the present circumstances to protect him or her against the risks
associated with his or her service to the Corporation and the Corporation
recognizes that Indemnitee and other officers and directors of the Corporation
may not be willing to continue to serve as officers or directors without
additional protection.
D. The Corporation desires to attract and retain the services of
highly qualified individuals, including Indemnitee, to serve as officers and
directors of the Corporation and thus desires to indemnify its officers and
directors to provide them with the maximum protection permitted by law.
E. The execution and delivery of this Agreement is a condition to
the closing of those certain transactions contemplated by that certain Agreement
(the "Purchase Agreement"), dated as of May 1, 1996, by and among the
Corporation, the securityholders of the Corporation named therein and certain
other parties.
THEREFORE, IN CONSIDERATION OF the foregoing premises, the Corporation
and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
1.1. THIRD PARTY PROCEEDINGS.
The Corporation shall indemnify the Indemnitee if Indemnitee is or was
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Corporation to procure a judgment in its favor)
by reason of the fact that Indemnitee is or was a director, officer or agent of
the Corporation, or any subsidiary of the Corporation, by reason of any action
or inaction on the part of Indemnitee while an
<PAGE>
officer, director or agent or by reason of the fact that Indemnitee is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including subject to Section 13, attorneys' fees
and any expenses of establishing a right to indemnification pursuant to this
Agreement or under California law), judgments, fines, settlements (if such
settlement is approved in advance by the corporation, which approval shall not
be unreasonably withheld) and other amounts actually and reasonably incurred by
Indemnitee in connection with such proceeding if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Corporation and, in the case of a criminal proceeding, if
Indemnitee had no reasonable cause to believe Indemnitee's conduct was unlawful.
The termination of any proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contenders or its equivalent shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests of
the corporation, or with respect to any criminal proceedings, would not create a
presumption that Indemnitee had reasonable cause to believe that Indemnitee's
conduct was unlawful.
1.2. PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify Indemnitee if Indemnitee was or is a party
or is threatened to be made a party to any threatened, pending or completed
action by or in the right of the Corporation or any subsidiary of the
Corporation to procure a judgment in its favor by reason of the fact that
Indemnitee is or was a director, officer or agent of the Corporation, or any
subsidiary of the Corporation, by reason of any action or inaction on the part
of Indemnitee while an officer, director or agent or by reason of the fact that
Indemnitee is or was serving at the request of the Corporation as a director,
officer or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including subject to Section 13, attorneys'
fees and any expenses of establishing a right to indemnification pursuant to
this Agreement or under California law) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of the proceeding if Indemnitee acted in good faith and in a manner Indemnitee
believed to be in or not opposed to the best interests of the Corporation and
its shareholders, except that no indemnification shall be made with respect to
any claim, issue or matter to which Indemnitee shall have been adjudged to have
been liable to the Corporation in the performance of Indemnitee's duty to the
corporation and its shareholders, unless and only to the extent that the court
in which such proceeding is or was pending shall
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determine upon application that, in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for expenses and then
only to the extent that the court shall determine.
1.3. SUCCESSFUL DEFENSE ON MERITS.
To the extent that Indemnitee has been successful on the merits in
defense of any proceeding referred to in Sections 1.1 or 1.2 above, or in
defense of any claim, issue or matter therein, the Corporation shall indemnify
Indemnitee against expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in connection therewith. An Indemnitee shall be deemed
to have been successful on the merits, if the Plaintiff in the action does not
prevail in obtaining the relief sought in the suit or action of demanded in the
claim.
1.4. CERTAIN TERMS DEFINED.
For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans, references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan,
and references to "proceeding" shall include any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative. References to "corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, or agent of
such a constituent corporation or who, being or having been such a director,
officer, or agent of another corporation, partnership, joint venture, trust or
other enterprise shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as such person
would if he or she had served the resulting or surviving corporation in the same
capacity.
2. AGREEMENT TO SERVE.
Indemnitee agrees to serve or continue to serve as a director and/or
officer of the Corporation for so long as he or she is duly elected or appointed
or until such time as he or she voluntarily resigns. The terms of any existing
employment agreement between Indemnitee and the Corporation shall continue in
effect but shall be modified or supplemented by the terms of this Agreement.
Nothing contained in this Agreement is intended to create in Indemnitee any
right to continued employment.
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3. EXPENSES: INDEMNIFICATION PROCEDURE.
3.1. ADVANCEMENT OF EXPENSES.
The Corporation shall advance all expenses incurred by Indemnitee in
connection with the investigation, defense, settlement (excluding amounts
actually paid in settlement of any action, suit or proceeding) or appeal of any
civil or criminal action, suit or proceeding referenced in Sections 1.1 or 1.2
hereof. Indemnitee hereby undertakes to repay such amounts advanced only if,
and to the extent that, it shall be determined ultimately that Indemnitee is not
entitled to be indemnified by the Corporation as authorized hereby. The
advances to be made hereunder shall be paid by the Corporation to Indemnitee
within 20 days following delivery of a written request therefor by Indemnitee to
the Corporation.
3.2. NOTICE OF CLAIM.
Indemnitee shall, as a condition precedent to his or her right to be
indemnified under this Agreement, give the corporation notice in writing as soon
as practicable of any claim made against Indemnitee for which indemnification
will or could be sought under this Agreement; PROVIDED, HOWEVER, that the
failure to give such notice shall not affect the Indemnitee's rights hereunder
except and only to the extent such failure prejudiced the Corporation's ability
to successfully defend the matter subject to such notice. Notice to the
Corporation shall be directed to the President and the Secretary of the
Corporation at the principal business office of the Corporation with copies to
O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York
10112, Attention: Harvey M. Eisenberg, Esq. (or such other address as the
Corporation shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Corporation such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
3.3. ENFORCEMENT RIGHTS.
Any indemnification provided for in Sections 1.1, 1.2 or 1.3 shall be
made no later than 60 days after receipt of the written request of Indemnitee.
If a claim or request under this Agreement, under any statute, or under any
provision of the Corporation's Articles of Incorporation or Bylaws providing for
indemnification is not paid by the Corporation, or on its behalf, within 60 days
after written request for payment thereof has been received by the Corporation,
Indemnitee may, but need not, at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim or request, and subject to
Section 13, Indemnitee shall also be entitled to be paid for the expenses
(including attorneys' fees) of bringing such action. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in connection with any
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action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the Corporation to indemnify Indemnitee for the amount claimed, but the
burden of proving such defense shall be on the Corporation, and Indemnitee shall
be entitled to receive interim payments of expenses pursuant to Section 3.1
unless and until such defense may be finally adjudicated by court order or
judgment for which no further right of appeal exists. The parties hereto intend
that if the Corporation contests Indemnitee's right to indemnification, the
question of Indemnitee's right to indemnification shall be a decision for the
court, and no presumption regarding whether the applicable standard has been met
will arise based on any determination or lack of determination of such by the
Corporation (including its Board of Directors (the "Board") or any subgroup
thereof, independent legal counsel or its shareholders).
3.4. ASSUMPTION OF DEFENSE.
In the event the Corporation shall be obligated to pay the expenses of
any proceeding against the Indemnitee, the Corporation, if appropriate, shall be
entitled to assume the defense of such proceeding with counsel approved by
Indemnitee which approval shall not be unreasonably withheld, upon the delivery
to Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Corporation, the Corporation will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, unless (i) the employment of counsel by
Indemnitee is authorized by the Corporation, (ii) Indemnitee shall have
reasonably concluded, based upon written advice of counsel, that there may be a
conflict of interest of such counsel retained by the Corporation between the
Corporation and Indemnitee in the conduct of such defense, or (iii) the
Corporation ceases or terminates the employment of such counsel with respect to
the defense of such proceeding, in any of which events then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Corporation. At
all times, Indemnitee shall have the right to employ other counsel in any such
proceeding at Indemnitee's expense, and to participate in the defense of the
proceeding or claim through such counsel.
3.5. NOTICE TO INSURERS.
If, at the time of the receipt of a notice of a claim pursuant to
Section 3.2 hereof, the Corporation has director and officer liability insurance
in effect, the Corporation shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Corporation shall thereafter take all
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necessary or desirable action to cause such insurers to pay, on behalf of the
Indemnitee, all amounts payable as a result of such proceeding in accordance
with the terms of such policies.
3.6. SUBROGATION.
In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee, who shall do all things that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Corporation
effectively to bring suit to enforce such rights.
4. EXCEPTIONS.
Notwithstanding any other provision herein to the contrary, the
Corporation shall not be obligated pursuant to the terms of this Agreement:
4.1. EXCLUDED ACTS.
To indemnify Indemnitee (i) as to circumstances in which indemnity is
expressly prohibited pursuant to California law, or (ii) for any acts or
omissions or transactions from which a director may not be relieved of liability
pursuant to California law; or (iii) any act or acts of bad faith or willful
misconduct; or
4.2. CLAIMS INITIATED BY INDEMNITEE.
To indemnify or advance expenses to Indemnitee with respect to
proceedings or claims initiated or brought voluntarily by Indemnitee and not by
way of defense, except with respect to proceedings brought to establish or
enforce a right to indemnification under this Agreement or any other statute or
law or as otherwise required under the Corporations Code of California, but such
indemnification or advancement of expenses may be provided by the Corporation in
specific cases if the Board has approved the initiation or bringing of such
suit; or
4.3. LACK OF GOOD FAITH.
To indemnify Indemnitee for any expenses incurred by the Indemnitee
with respect to any proceeding instituted by Indemnitee to enforce or interpret
this Agreement, if a court of competent jurisdiction determines that such
proceeding was not made in good faith or was frivolous; or
4.4. INSURED CLAIMS.
To indemnify Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in
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settlement) which have been paid directly to Indemnitee by an insurance carrier
under a policy of officers' and directors' liability insurance maintained by the
Corporation; or
4.5. BREACHES OF AGREEMENTS.
To indemnify Indemnitee for expenses or liabilities (including
indemnification obligations of Indemnitee) of any type whatsoever arising from
his breach of the Purchase Agreement, an employment agreement with the
Corporation (if any) or any other agreement with the Corporation or any of its
subsidiaries; or
4.6. CLAIMS UNDER SECTION 16(B).
To indemnify Indemnitee for expenses and the payment of profits
arising from the purchase and sale by Indemnitee of securities in violation of
Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar
successor statute.
5. PARTIAL INDEMNIFICATION.
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Corporation for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by the
Indemnitee in the investigation, defense, appeal or settlement of any civil
or criminal action, suit or proceeding, but not, however, for the total
amount thereof, the Corporation shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which
Indemnitee is entitled.
6. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
6.1. SCOPE.
In the event of any change in any applicable law, statute or rule
which narrows the right of a California corporation to indemnify a member of its
Board or an officer, such changes, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement shall have no effect on
this Agreement or the parties, rights and obligations hereunder. Nothing in
this Agreement is intended to relieve Indemnitee from any obligations he may
have pursuant to the Purchase Agreement, an employment agreement (if any) or any
other agreement with the corporation or its subsidiaries.
6.2. NON-EXCLUSIVITY.
Nothing herein shall be deemed to diminish or otherwise restrict any
rights to which Indemnitee may be entitled under the Corporation's Amended and
Restated Articles of Incorporation, the Corporation's Amended and Restated
Bylaws, any agreement, any
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vote of shareholders or disinterested directors, or, except as expressly
provided herein, under the laws of the State of California.
7. MUTUAL ACKNOWLEDCRMENT.
Both the Corporation and Indemnitee acknowledge that, in certain
instances, Federal law or applicable public policy may prohibit the Corporation
from indemnifying its directors and officers under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Corporation has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the corporation's right under public policy
to indemnify Indemnitee.
8. OFFICER AND DIRECTOR LIABILITY INSURANCE.
The Corporation shall, from time to time, make the good faith
determination whether or not it is practicable for the Corporation to obtain and
maintain a policy or policies of insurance with reputable insurance companies
providing the officers and directors of the Corporation with coverage for losses
from wrongful acts, or to ensure the Corporation's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Corporation will weigh the costs of obtaining such insurance coverage
against the protection afforded by such coverage. Notwithstanding the
foregoing, the Corporation shall have no obligation to obtain or maintain such
insurance if the Corporation determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Corporation.
9. SEVERABILITY.
Nothing in this Agreement is intended to require or shall be construed
as requiring the Corporation to do or fail to do any act in violation of
applicable law. The Corporation's inability, pursuant to court order, to
perform its obligations under this Agreement shall not constitute a breach of
this Agreement. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify Indemnitee to the fullest extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
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10. EFFECTIVE DATES.
This Agreement shall be effective as of the date set forth on the
first page.
11. COVERAGE.
The provisions of this Agreement shall continue as to Indemnitee for
any action taken or not taken while serving in an indemnified capacity even
though Indemnitee may have ceased to serve in such capacity at the time of any
action, suit or other covered proceeding. This Agreement shall be binding upon
the Corporation and its successors and assigns and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. NOTICE.
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if delivered by
hand and receipted for by the addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement or as subsequently
modified by written notice.
13. ATTORNEYS' FEES.
In the event that any action is instituted by Indemnitee under this
Agreement to enforce or interpret any of the terms hereof, Indemnitee shall
be entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless
as a part of such action, the court of competent jurisdiction determines that
the action was not instituted in good faith or was frivolous. In the event
of an action instituted by or in the name of the Corporation under this
Agreement, or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made
in such action), unless as a part of such action the court determines that
Indemnitee's defenses to such action were not made in good faith or were
frivolous.
14. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, as applied to contracts between California
residents entered into and to be performed entirely within California.
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15. CONSENT TO JURISDICTION.
The Corporation and Indemnitee each hereby irrevocably
consent to the jurisdiction of the courts of the State of California for all
purposes in connection with any action or proceeding which arises out of or
relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts in the State of California.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, all of
which taken together shall constitute one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
GUITAR CENTER MANAGEMENT Address:
COMPANY, INC.
5155 Clareton Drive
Agoura Hills, CA 91301
By:_________________________________
Title:______________________________
INDEMNITEE Address:
______________________________
______________________________
____________________________________
(Signature)
____________________________________
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the GUITAR CENTER MANAGEMENT COMPANY, INC. AMENDED AND
RESTATED 1996 PERFORMANCE STOCK OPTION PLAN (the "Plan") is (i) to further the
growth and success of GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "Company"), and its Subsidiaries (as hereinafter defined) by
enabling employees of, or consultants to, the Company or any of its Subsidiaries
to acquire Units consisting of the Company's Common Stock and Junior Preferred
Stock, thereby increasing their personal interest in such growth and success,
and (ii) to provide a means of rewarding outstanding performance by such persons
to the Company and/or its Subsidiaries. Options granted under the Plan (the
"Options") may be either "incentive stock options" ("ISOs"), intended to qualify
as such under the provisions of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified stock options ("NSOs"). In this
Plan, the terms "Parent" and "Subsidiary" mean "Parent Corporation" and
"Subsidiary Corporation," respectively, as such terms are defined in Sections
424(e) and (f) of the Code. Unless the context otherwise requires, any ISO or
NSO is referred to in this Plan as an "Option." This Plan amends and restates
the Company's 1996 Performance Stock Option Plan as originally adopted on June
3, 1996 and as amended as of July 1, 1996.
2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below:
"AFFILIATE" has the meaning ascribed thereto in the Stockholders
Agreement.
"BOARD" has the meaning set forth in Section 3(a) hereof.
"CALCULATED CORPORATE VALUE" (a) in connection with any EBITDA
Determination means, as at any Measurement Date, an amount equal to the
difference (if any and if positive) between (a) the product of (x) EBITDA for
the immediately preceding twelve calendar months prior to a Vesting Date TIMES
(y) 12.1, MINUS (b) as of the Measurement Date, the sum of (x) all Debt of the
Company (net of all of the Company's available cash) PLUS (y) the aggregate
liquidation preference (including accrued but unpaid dividends) of all
outstanding preferred stock of the Company
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(other than the Junior Preferred Stock); and (b) in connection with any Sale of
the Company means (i) if such Sale of the Company involves a Sale of all the
Common Stock, Common Stock Equivalents, Junior Preferred Stock and Junior
Preferred Stock Equivalents of the Company, the value of the consideration paid
by the purchaser in the Sale of the Company attributed to the Company's Common
Stock, Common Stock Equivalents, Junior Preferred Stock and Junior Preferred
Stock Equivalents; and (ii) if such Sale of the Company involves a Sale of less
than all of the Common Stock, Common Stock Equivalents, Junior Preferred Stock
and Junior Preferred Stock Equivalents of the Company, the sum of (A) the value
of the consideration paid by the purchaser in the Sale of the Company
attributable to the Company's Common Stock, Common Stock Equivalents, Junior
Preferred Stock and Junior Preferred Stock Equivalents actually purchased in
such Sale of the Company, plus (B) the product of the Imputed Value Per Share
and the shares of Common Stock and Common Stock Equivalents not purchased in the
Sale of the Company, plus (C) the aggregate liquidation value of, plus accrued
and unpaid dividends on, all outstanding shares of Junior Preferred Stock
immediately after the Sale of the Company not sold to the purchaser in the Sale
of the Company. Calculated Corporate Value will be calculated on a consolidated
basis and shall be determined in good faith by the Board. For the avoidance of
doubt, no amounts shall be included in the calculation of Calculated Corporate
Value if such amounts were included in the calculation of the Cumulative
Adjustment Amount.
"CAUSE" has the meaning ascribed thereto in the Stockholders
Agreement.
"CODE" has the meaning set forth in Section 1.
"COMMITTEE" has the meaning set forth in Section 3(a) hereof.
"COMMON STOCK" means the Company's Common Stock, without par value.
"COMMON STOCK EQUIVALENTS" has the meaning ascribed thereto in the
Stockholders Agreement; provided that in computing the Calculated Corporate
Value in connection with a Sale of the Company, shall exclude any Common Stock
Equivalents not exercisable immediately prior to such Sale of the Company.
"COMPANY" has the meaning set forth in Section 1 hereof.
"CORPORATE VALUE TARGET" has the meaning set forth in Section 7.
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"CUMULATIVE ADJUSTMENT AMOUNT" shall mean, as of any Vesting Date, the
cumulative amount (without duplication) of the following payments from the date
immediately following the Effective Date through and including such Vesting
Date: (x) all payments received by the Company in consideration of the issuance
after the date hereof of its Common Stock and Junior Preferred Stock or any
options or warrants to acquire Common Stock and/or Junior Preferred Stock, minus
(y) all dividends and other distributions made or declared by the Company with
respect to its Common Stock and Junior Preferred Stock plus all payments by the
Company in consideration of the purchase or redemption of its Common Stock
and/or Junior Preferred Stock or options or warrants to acquire Common Stock
and/or Junior Preferred Stock. The value of any payment which is made with
consideration other than cash shall equal its fair market value, as determined
in good faith by the Board.
"DEBT" has the meaning ascribed thereto in the Stockholders Agreement.
"DISQUALIFYING DISPOSITION" has the meaning set forth in Section 17
hereof.
"EBITDA" has the meaning ascribed thereto in the Stockholders
Agreement.
"EFFECTIVE DATE" means June 3, 1996.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"IMPUTED VALUE PER SHARE" means the Board's good faith determination
of the value of the consideration paid by a purchaser in a Sale of the Company
attributed to one share of Common Stock (minus, in the cases of any Common Stock
Equivalents, the additional consideration payable to the Company upon the
exercise, conversion or exchange therefor).
"INVOLUNTARY TERMINATION" has the meaning set forth in Section 8(a)
hereof.
"ISOS" has the meaning set forth in Section 1 hereof.
"JUNIOR PREFERRED STOCK" means the Company's 8% Junior Preferred
Stock.
"JUNIOR PREFERRED STOCK EQUIVALENTS" means the right to acquire,
whether or not immediately exercisable, one share of Junior Preferred Stock,
whether evidenced by an option, warrant, convertible security or other
instrument or agreement; provided that in computing the Calculated Corporate
Value in connection with a Sale of the Company, shall exclude any Junior
Preferred
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Stock Equivalents not exercisable immediately prior to such Sale of the Company.
"NASDAQ" has the meaning set forth in Section 6(b)(i) hereof.
"NSOS" has the meaning set forth in Section 1 hereof.
"NOTICE" has the meaning set forth in Section 10(b) hereof.
"OPTION" has the meaning set forth in Section 1 hereof.
"OPTION AGREEMENT" has the meaning set forth in Section 5(b) hereof.
"OPTIONED UNITS" has the meaning set forth in Section 10(b)(ii)
hereof.
"OPTIONEES" has the meaning set forth in Section 5(a)(i).
"PERSON" has the meaning ascribed thereto in the Stockholders
Agreement.
"PLAN" has the meaning set forth in Section 1 hereof.
"PUBLIC OFFERING" has the meaning ascribed thereto in the Stockholders
Agreement.
"REASONABLE JUSTIFICATION" has the meaning ascribed thereto in the
Stockholders Agreement.
"REQUISITE APPROVAL" means a determination by either (i) the President
of the Company or (ii) all but one of the members of the Board holding such
positions when the Requisite Approval was obtained, excluding, however, any
members of the Board designated pursuant to Section 10(a)(i) of the Stockholders
Agreement, that a termination of the Optionee's employment without Cause should,
for purposes of this Agreement, be treated as a Termination For Cause.
"REQUISITE STOCKHOLDER SHARES" has the meaning ascribed thereto in the
Stockholders Agreement.
"RESERVED UNITS" means, at any time, an aggregate of 173,375 Units.
"RULE 16B-3" has the meaning set forth in Section 3(a) hereof.
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"SALE OF THE COMPANY" has the meaning ascribed thereto in the
Stockholders Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCKHOLDERS AGREEMENT" means the stockholders agreement dated as of
June 5, 1996 and as hereafter amended from time to time, among the Company and
the stockholders of the Company named therein.
"TERMINATION DATE" means the earlier to occur of the tenth anniversary
of the Effective Date or the consummation of a Sale of the Company.
"TERMINATION FOR CAUSE" has the meaning set forth in Section 8(a)
hereof.
"TERMINATION OF RELATIONSHIP" means (a) if the Optionee is an employee
of the Company or any Subsidiary, the termination of the Optionee's employment
by the Company and its Subsidiaries for any reason and (b) if the Optionee is a
consultant to the Company or any Subsidiary, the termination of the Optionee's
consulting relationship with the Company and its Subsidiaries for any reason.
"UNAVAILABLE UNITS" has the meaning set forth in Section 7(f).
"UNITS" means a strip of securities initially constituting one share
of Common Stock and 99/100th of a share of Junior Preferred Stock, in each case
as may be adjusted pursuant to Section 11 hereof. For purposes of this
Agreement, a single Unit shall be both a Common Stock Equivalent and 99/100ths
of a Junior Preferred Stock Equivalent.
"UNITS AVAILABLE FOR AWARD" means the Reserved Units, if any, which
vest in accordance with Section 7 of this Plan.
"VESTING DATES" means the dates specified as such in Section 7(c)
hereof.
3. ADMINISTRATION OF THE PLAN
(a) UNIT OPTION COMMITTEE
The Plan shall be administered by a committee of two directors (the
"Committee") which Committee shall have the power and authority to grant Options
under the Plan subject to the prior approval of a majority of the Board of
Directors of the
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Company (the "Board"); PROVIDED, HOWEVER, that, so long as it shall be required
to comply with Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and
Exchange Commission (the "SEC") under the Exchange Act in order to permit
executive officers and directors of the Company to be exempt from the provisions
of Section 16(b) of the Exchange Act with respect to transactions effected
pursuant to the Plan, each of such persons, at the effective date of his or her
appointment to the Committee and at all times thereafter while serving on the
Committee, shall be a "disinterested person" within the meaning of Rule 16b-3.
At all times the Committee shall be comprised of two of the members of the Board
selected pursuant to Section 10(a)(i) of the Stockholders Agreement.
(b) PROCEDURES
The Committee shall adopt such rules and regulations as it shall deem
appropriate concerning the holding of meetings and the administration of the
Plan. The entire Committee shall constitute a quorum and the actions of the
entire Committee present at a meeting, or actions approved in writing by the
entire Committee, shall be the actions of the Committee.
(c) INTERPRETATION
Except as may otherwise be expressly reserved to the Board as provided
herein, and, with respect to any Option, except as may otherwise be provided in
the Option Agreement evidencing such Option, the Committee shall have all powers
with respect to the administration of the Plan, including the interpretation of
the provisions of the Plan and any Option Agreement (as defined in Section
5(b)), and all decisions of the Board or the Committee, as the case may be,
shall be conclusive and binding on all participants in the Plan.
4. ELIGIBILITY
(a) GENERAL
Options may be granted under the Plan only to persons who are
employees of, or consultants to, the Company or any of its Subsidiaries on the
date of grant. Options granted to consultants shall be NSOs. Options granted
to employees of the Company or any of its Subsidiaries shall be, in the
discretion of the Committee, either ISOs or NSOs on the date of grant (provided
that the Committee must obtain Board approval to issue ISOs prior to a Qualified
Public Offering).
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(b) EXCEPTIONS
Notwithstanding anything contained in Section 4(a) to the contrary:
(i) no ISO may be granted under the Plan to an
employee who owns, directly or indirectly (within the meaning of
Sections 422(b)(6) and 425(d) of the Code), stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company or of its Parent, if any, or any of its Subsidiaries, unless
(A) the Option Price (as defined in Section 6(a)) of the shares of
Common Stock and Junior Preferred Stock subject to such ISO is fixed
at not less than 110% of the Fair Market Value on the date of grant
(as determined in accordance with Section 6(b)) of such shares and (B)
such ISO by its terms is not exercisable after the expiration of five
years from the date it is granted;
(ii) no Option may be granted to (A) Larry Thomas or
Marty Albertson or (B) any other Person serving on the Committee for
so long as such Person serves on the Committee; and
(iii) no Options may be granted to any Person in any
one taxable year of the Company in excess of 25% of the Options issued
or issuable under the Plan.
5. GRANT OF OPTIONS
(a) GENERAL
Options may be granted under the Plan at any time and from time to
time on or prior to the Termination Date. Subject to the provisions of the
Plan, the Committee shall have plenary authority, in its sole discretion, to
determine:
(i) the persons (from among the class of persons
eligible to receive Options under the Plan) to whom Options shall be
granted (the "Optionees");
(ii) the time or times at which Options shall be
granted; and
(iii) the number of Units Available for Award subject
to each Option.
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(b) OPTION AGREEMENTS
Each Option granted under the Plan shall be designated as an ISO or an
NSO and shall be subject to the terms and conditions applicable to ISOs and/or
NSOs (as the case may be) set forth in the Plan. Each Option shall specify the
number of Units Available for Award for which such Option shall be exercisable
and the exercise price for each such Units Available for Award. In addition,
each Option shall be evidenced by a written agreement (an "Option Agreement"),
in substantially the form of EXHIBIT A for an ISO and EXHIBIT B for an NSO, with
such changes thereto as are consistent with the Plan as the Committee shall deem
appropriate. Each Option Agreement shall be executed by the Company and the
Optionee.
(c) TIME VESTING. The Committee shall determine whether and to what
extent any Options which are exercisable for Units Available for Award are also
subject to time vesting based upon the Optionee's continued service to the
Company and its Subsidiaries; provided that vesting provisions must be on a
basis of no more than five years and provided further that if an Agreement
contains time vesting provisions, such vesting provisions will automatically be
subject to acceleration of time vesting upon a Sale of the Company or a
termination of Optionee's employment relationship with the Company by the
Company without Cause (unless such termination was accompanied by the Requisite
Approval) or by the Optionee with Reasonable Justification. An option may only
be exercised to the extent it has time vested pursuant to such Option Agreement.
(d) NO EVIDENCE OF EMPLOYMENT OR SERVICE
Nothing contained in the Plan or in any Option Agreement shall confer
upon any Optionee any right with respect to the continuation of his or her
employment by or service with the Company or any of its Subsidiaries or
interfere in any way with the right of the Company or any such Subsidiary
(subject to the terms of any separate agreement to the contrary) at any time to
terminate such employment or service or to increase or decrease the compensation
of the Optionee from the rate in existence at the time of the grant of an
Option.
(e) DATE OF GRANT
The date of grant of an Option under this Plan shall be the date as of
which the Committee approves the grant; PROVIDED, HOWEVER, that in the case of
an ISO, the date of grant shall in no event be earlier than the date as of which
the Optionee becomes an employee of the Company or one of its Subsidiaries.
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(f) UNITS
Options shall be granted to purchase a specified number of the
Reserved Units which become Units Available for Award. No Option shall be
granted for Reserved Units that are not Units Available for Award. Options may
only be exercisable for whole Units. Once a Unit is exercised, the securities
constituting a Unit shall be detachable from each other.
6. OPTION PRICE
(a) GENERAL
The price (the "Option Price") at which each Unit Available for Award
may be purchased shall be the Fair Market Value (or such lesser amount (but not
less than 85% of the Fair Market Value) approved by the Board) of the shares of
Common Stock and Junior Preferred Stock that constitute a Unit on the date of
the grant (as determined in accordance with Section 6(b)); PROVIDED, HOWEVER,
that in the case of an ISO, such Option Price shall in no event be less than
100% (or 110% if Section 4(b)(i) hereof is applicable) of the Fair Market Value
on the date of grant (as determined in accordance with Section 6(b)) of the
shares of Common Stock and Junior Preferred Stock that constitute a Unit and
provided further that no NQSO with an exercise price less than 110% of the Fair
Market Value may be granted to an employee who owns, directly or indirectly,
stock possessing more than 10% of the total combined voting power.
(b) DETERMINATION OF FAIR MARKET VALUE
Subject to the requirements of Section 422 of the Code regarding
ISO's, for purposes of the Plan, the "Fair Market Value" of shares of Common
Stock or Junior Preferred Stock shall be equal to:
(i) if such shares are publicly traded, (x) the
closing price on the business day immediately preceding the date of
grant if any trades were made on such business day and such
information is available, otherwise the average of the last bid and
asked prices on the business day immediately preceding the date of
grant, in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotations System
("NASDAQ") or (y) if such shares are then traded on a national
securities exchange, the closing price on the business day immediately
preceding the date of grant, if any trades were made on such business
day and such information is available, otherwise the average of the
high and low prices on the business day immediately preceding the
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<PAGE>
date of grant, on the principal national securities exchange on which it is
so traded; or
(ii) if there is no public trading market for such
shares, the fair value of such shares on the date of grant as
reasonably determined in good faith by the Committee (with the consent
of a majority of the Board) after taking into consideration all
factors which it deems appropriate, including, without limitation,
recent sale and offer prices of such shares in private transactions
negotiated at arms' length; provided that the Fair Market Value of a
share of Junior Preferred Stock shall not be less than its liquidation
value per share.
Notwithstanding anything contained in the Plan to the contrary, all
determinations pursuant to Section 6(b)(ii) shall be made without regard to any
restriction other than a restriction which, by its terms, will never lapse.
(c) REPRICING OF NSOS
Subsequent to the date of grant of any NSO, the Committee may, at its
discretion and with the written consent of the Optionee and the prior approval
of the Board, establish a new Option Price for such NSO so as to increase or
decrease the Option Price of such NSO.
7. PERFORMANCE VESTING OF UNITS
(a) Each Option granted pursuant to the Plan shall be exercisable for
a specified number of the Reserved Units which become Units Available for Award
in accordance with this Section 7.
(b) On the Effective Date, 35% of the Reserved Units shall
automatically become Units Available for Award.
(c) On each Vesting Date prior to the consummation of a Sale of the
Company, or as promptly thereafter as practical, the Committee and the Board
shall jointly calculate (with the assistance of the Company's independent public
accountants) the Company's Calculated Corporate Value. If the Calculated
Corporate Value is equal to or greater than the Corporate Value Target for such
fiscal year as set forth below, then a number of Reserved Units shall
immediately become Units Available for Award pursuant to the following table:
Number of Reserved Units
that Become Units
Vesting Date Corporate Value Target Available for Award
------------ ---------------------- ------------------------
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12/31/97 $249,530,000* 20% of Reserved Units
12/31/98 $362,023,000* 20% of Reserved Units
12/31/99 $498,643,000* 20% of Reserved Units
12/31/2000 $660,230,000* 5% of Reserved Units
(d) If on any Vesting Date the Calculated Corporate Value is less
than the Corporate Value Target no Units shall then vest, but the number of
Units which were available for vesting at such time shall be included in the
number of Units available for vesting on the next Vesting Date.
(e) In connection with any Sale of the Company, the Board shall
calculate (with the assistance of the Company's independent public accountants)
the Company's Calculated Corporate Value and shall compare such calculations to
the Corporate Value Targets listed in Section 7(c). Based upon such
comparisons, the following number of Reserved Units shall become Units Available
for Award: such number of Reserved Units that would have become Units Available
for Award had such Calculated Corporate Value been achieved on the first date
indicated above with a lower Corporate Value Target than the Calculated
Corporate Value minus the number of Reserved Units previously designated Units
Available for Award. For purposes of illustration, if the Calculated Corporate
Value in connection with a Sale of the Company is $365 million and the
Cumulative Adjustment Amount at such time is zero, then 70% of the Reserved
Units would have become Units Available for Award (the 12/31/98 Vesting Date has
a Corporate Value Target lower than the Calculated Corporate Value). Assuming
that only 30% of the Reserved Units had previously become Units Available for
Award, an additional 40% of the Reserved Units become Units Available for Award.
(f) Immediately prior to the occurrence of a Sale of the Company,
each Unit Available for Award which is not subject to purchase upon the exercise
of previously granted Options shall be allocated by the Committee. After a Sale
of the Company, all Reserved Units that are not then Units Available for Award
shall be cancelled and no additional Options shall be issued pursuant to this
Plan.
(g) If upon the occurrence of the Company's initial Public Offering,
all of the Reserved Units are not Units Available for Award (the "Unavailable
Units"), then none of the Unavailable Units shall be available under this Plan
(I.E., they will never become Units Available for Award) and all of the
Unavailable Units shall be included in a successor stock option plan pursuant to
Section 15(c) of the Stockholders' Agreement.
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(h) In the event the Company or its Subsidiaries makes any capital
expenditures, or consummates any merger or acquisition (whether of assets or
stock or other interests) or other extraordinary transactions, in each case, not
contemplated by the assumptions to the projections upon which the Corporate
Value Targets are based (copies of which projections are in the possession of
the Company's chief financial officer), the Board will determine in good faith
the appropriate PRO RATA adjustments which are required to be made to the
Corporate Value Targets to reflect the anticipated increase in the Company's
EBITDA after such expenditures or the consummation of such transaction which
determination shall be binding on all participants in the Plan.
8. AUTOMATIC TERMINATION OF OPTION
(a) Each Option granted under the Plan shall automatically terminate
and shall become null and void and be of no further force or effect upon the
first to occur of the following:
(i) (A) in the case of an ISO, the tenth anniversary of the date
on which such Option is granted or, in the case of any ISO granted to a
person described in Section 4(b)(i), the fifth anniversary of the date on
which such ISO is granted and (B) in the case of a NSO, the tenth
anniversary on which such Option is granted;
(ii) within 90 days after the date that the Optionee ceases to be
an employee of the Company or any of it Subsidiaries (other than as a
result of an Involuntary Termination (as defined in clause (iii) below)) or
a Termination For Cause (as defined in clause (iv) below));
(iii) within 365 days after the date that the Optionee ceases to
be an employee of the Company or any of its Subsidiaries, if such
termination is due to such Optionee's death or permanent and total
disability (within the meaning of Section 22(e) (3) of the Code) (an
"Involuntary Termination");
(iv) within 30 days if the Optionee ceases to be an employee of
the Company or any of its Subsidiaries, if such termination is determined
by the Committee to be for Cause (a "Termination For Cause"); and
(v) simultaneously with the consummation of a Sale of the
Company if prior to such time the Optionees are given the opportunity to
exercise their Options with respect to all Units Available for Award.
(b) The Committee shall have the power to determine
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<PAGE>
what constitutes a Termination For Cause for purposes of the Plan, and the date
upon which such Termination For Cause shall occur. All such determinations
shall be final and conclusive and binding upon the Optionee.
(c) Any Units Available for Award that are not acquired as a result
of an Option expiring without being fully exercised shall be available for award
by the Committee to another eligible person.
9. LIMITATIONS ON ISOS; NOTICE TO OPTIONEES GRANTED ISOS
In accordance with Section 422(d) of the Code, to the extent that the
aggregate Fair Market Value of all stock with respect to which incentive stock
options are exercisable for the first time by such Optionee during any calendar
year (under all plans of the Company and its subsidiaries) exceeds $100,000,
such ISOs shall be treated as NSOs.
Under certain circumstances, the exercise of an ISO may disqualify the
holder from recovering the favorable tax benefits ISOs offer. For example, ISO
tax treatment is currently not available if (i) an ISO is exercised within one
year of its date of grant or (ii) if the shares issuable upon exercise of an ISO
are sold within two years of the grant date of such ISO. Therefore, the Company
recommends that each Optionee holding an ISO consult with a competent tax
advisor before taking any action with respect to his or her ISOs.
10. PROCEDURE FOR EXERCISE
(a) PAYMENT
At the time an Option is granted under the Plan, the Committee shall,
in its discretion, specify one or more of the following forms of payment which
may be used by an Optionee upon exercise of his Option:
(i) cash or personal or certified check payable to
the Company in an amount equal to the aggregate Option Price of the
shares with respect to which the Option is being exercised;
(ii) stock certificates (in negotiable form)
representing shares of Common Stock having a Fair Market Value on the
date of exercise (as determined in accordance with Section 6(b) as if
the date of exercise were the date of grant) equal to the aggregate
Option Price of the shares with respect to which the Option is being
exercised;
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(iii) vested Options to purchase Units Available for
Award, valued for such purposes at the Fair Market Value per Unit on
the date of exercise (as determined in accordance with Section 6(b) as
if the date of exercise were the date of grant), net of the exercise
price for each such share; or
(iv) a combination of the methods set forth in clauses
(i), (ii) and (iii).
(b) NOTICE
An Optionee (or other person, as provided in Section 12(b)) may
exercise an Option (for the Units Available for Award represented thereby)
granted under the Plan in whole or in part (but for the purchase of whole Units
only), as provided in the Option Agreement evidencing his Option, by delivering
a written notice (the "Notice") to the Secretary of the Company. The Notice
shall state:
(i) that the Optionee elects to exercise the Option;
(ii) the number of Units with respect to which the
Option is being exercised (the "Optioned Units");
(iii) the method of payment for the Optioned Units
(which method must be available to the Optionee under the terms of his
or her Option Agreement);
(iv) the date upon which the Optionee desires to
consummate the purchase (which date must be prior to the termination
of such Option);
(v) a copy of any election filed or intended to be
filed by the Optionee with respect to such Optioned Units pursuant to
Section 83(b) of the Code; and
(vi) such further provisions consistent with the Plan
as the Committee may from time to time require.
The exercise date of an Option shall be the date on which the Company
receives the Notice from the Optionee. Such Notice shall also contain, to the
extent such Optionee is not then a party to the Stockholders Agreement, a
Management Stockholder Joinder Agreement (as defined in the Stockholders
Agreement).
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(c) ISSUANCE OF CERTIFICATES
The Company shall issue stock certificates in the name of the Optionee
(or such other person exercising the Option in accordance with the provisions of
Section 12(b)) for the shares of securities purchased upon exercise of an Option
as soon as practicable after receipt of the Notice and payment of the aggregate
Option Price for such shares; provided that the Company may elect to not issue
any fractional shares upon the exercise of any Options (determining the
fractional shares after aggregating all shares issuable to a single holder as a
result of an exercise of an Option for more than one Unit) and in lieu of
issuing such fractional shares, shall pay the Optionee the Fair Market Value
thereof. Neither the Optionee nor any person exercising an Option in accordance
with the provisions of Section 12(b) shall have any privileges as a stockholder
of the Company with respect to any shares of stock subject to an Option granted
under the Plan until the date of issuance of stock certificates pursuant to this
Section 10(c).
11. ADJUSTMENTS
(a) CHANGES IN CAPITAL STRUCTURE
If the Common Stock and/or Junior Preferred Stock is changed by reason
of a stock split, reverse stock split or stock combination, stock dividend or
distribution, or recapitalization, including, without limitation, a conversion
of the Junior Preferred Stock into Common Stock pursuant to the Company's
Certificate of Determination of Preferences of 8% Junior Preferred Stock, or
converted into or exchanged for other securities as a result of a merger,
consolidation or reorganization, the Board shall make such adjustments in the
number and class of shares of stock constituting a Unit as shall be necessary to
preserve to an Optionee rights substantially proportionate to his rights
existing immediately prior to such transaction or event (but subject to the
limitations and restrictions on such rights). The exercise price for each Unit
shall not change notwithstanding any change to the number and class of shares of
stock constituting a Unit. Notwithstanding anything contained in the Plan to
the contrary, in the case of ISOs, no adjustment under this Section 11(a) shall
be appropriate if such adjustment (i) would constitute a modification, extension
or renewal of such ISOs within the meaning of Sections 422 and 425 of the Code,
and the regulations promulgated by the Treasury Department thereunder, or (ii)
would, under Section 422 of the Code and the regulations promulgated by the
Treasury Department thereunder, be considered as the adoption of a new plan
requiring stockholder approval. This Plan reflects the occurrence of a 100-for-
one stock split of the Company's Common Stock which is to become effective
immediately after the closing under the Stock
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Purchase Agreement dated May 1, 1996 among the Company and the other parties
thereto.
(b) SPECIAL RULES
The following rules shall apply in connection with Section 11(a)
above:
(i) no adjustment shall be made for cash dividends
or the issuance to stockholders of rights to subscribe for additional
shares of Common Stock, Junior Preferred Stock or other securities;
and
(ii) any adjustments referred to in Section 11(a)
shall be made by the Board in its sole discretion and shall, absent
manifest error, be conclusive and binding on all persons holding any
Options granted under the Plan.
(c) EXAMPLES
The following examples illustrate the adjustments that would be made
pursuant to Sections 11(a) and 11(b). The examples assume that the initial
exercise price of a Unit was $100
(i) Assume all outstanding shares of the Junior
Preferred Stock are converted into shares of Common Stock pursuant to
Section 7 of the Company's Certificate of Determination of Preferences
of 8% Junior Preferred Stock. Assume each share of Junior Preferred
Stock is converted into 10 shares of Common Stock. Then pursuant to
this Section 11, each Unit shall be exercisable for 10.9 shares of
Common Stock ((99/100 shares of Junior Preferred Stock X 10) + 1 share
of Common Stock). The exercise price of each Unit shall remain $100.
(ii) Assume the Company consummates a 2:1 Common
Stock split. Then pursuant to this Section 11, each Unit shall be
exercisable for 2 shares of Common Stock and 99/100ths of a share of
Junior Preferred Stock. The exercise price of each Unit shall remain
$100.
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12. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES
(a) COMPLIANCE WITH SECURITIES LAWS
No Options shall be granted under the Plan, and no securities shall
be issued and delivered upon the exercise of Options granted under the Plan,
unless and until the Company and/or the Optionee shall have complied with all
applicable Federal or state registration, listing and/or qualification
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
The Committee in its discretion may, as a condition to the exercise of
any Option granted under the Plan, require an Optionee (i) to represent in
writing that the securities received upon exercise of an Option are being
acquired for investment and not with a view to distribution and (ii) to make
such other representations and warranties as are deemed appropriate by the
Company. Stock certificates representing securities acquired upon the exercise
of Options that have not been registered under the Securities Act shall, if
required by the Committee, bear the following legend and such additional legends
as may be required by the Option Agreement evidencing a particular Option:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR
QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THE SHARES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED,
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT OR AN OPINION OF
COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT."
(b) NONASSIGNABILITY OF OPTION RIGHTS
No Option granted under this Plan shall be assignable or otherwise
transferable by the Optionee, except by will or by the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by the Optionee. If an Optionee dies, his or her Options shall thereafter
be exercisable, during the period specified in Section 8(a) or the applicable
Option Agreement (as the case may be), by his or her executors or administrators
to the full extent (but only to such extent) to which such Options were
exercisable by the Optionee at the time of his or her death.
Before issuing any shares upon exercise of Options to any person who
is not already a party to the Stockholders Agreement, the Company shall obtain,
in appropriate form, an executed Management Stockholder Joinder Agreement from
such
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person unless a Qualified Public Offering (as defined in the Stockholders
Agreement) shall have already occurred.
13. EFFECTIVE DATE OF PLAN
This Plan shall become effective on the date of its adoption by the
Board; PROVIDED, HOWEVER, that no option shall be exercisable by an Optionee
unless and until the Plan shall have been approved by the stockholders of the
Company in accordance with the provisions of its Articles of Incorporation and
By-laws, which approval shall be obtained by a simple majority vote of
stockholders, voting either in person or by proxy, at a duly held stockholders'
meeting, or by written consent, within 12 months before or after the adoption of
the Plan by the Board.
14. TERMINATION OF THE PLAN
No Options may be granted after the Termination Date.
15. AMENDMENT OF PLAN
The Plan may be modified or amended in any respect by the Committee
with the prior approval of the Board and the prior written consent of the
holders of the Requisite Stockholder Shares; PROVIDED, HOWEVER, that the
approval of the holders of a majority of the votes that may be cast by all of
the holders of shares of common stock of the Company entitled to vote (voting
together as a single class, with each such holder entitled to cast one vote per
share held by such holder) shall be obtained prior to any such amendment
becoming effective if such approval is required by law or is necessary to comply
with regulations promulgated by the SEC under Section 16(b) of the 1934 Act or
with Section 422 of the Code or the regulations promulgated by the Treasury
Department thereunder.
16. CAPTIONS
The use of captions in this Plan is for convenience. The captions are
not intended to provide substantive rights.
17. DISQUALIFYING DISPOSITIONS
If securities acquired by exercise of an ISO granted under this Plan
are disposed of within two years following the date of grant of the ISO or one
year following the issuance of the securities to the Optionee (a "Disqualifying
Disposition"), the holder of such securities shall, immediately prior to such
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<PAGE>
Disqualifying Disposition, notify the Company in writing of the date and terms
of such Disqualifying Disposition and provide such other information regarding
the Disqualifying Disposition as the Company may reasonably require.
18. WITHHOLDING TAXES
Whenever under the Plan securities are to be delivered by an Optionee
upon exercise of an NSO, the Company shall be entitled to require as a condition
of delivery that the Optionee remit or, in appropriate cases, agree to remit
when due, an amount sufficient to satisfy all current or estimated future
Federal, state and local withholding tax and employment tax requirements
relating thereto. At the time of a Disqualifying Disposition, the Optionee
shall remit to the Company in cash the amount of any applicable Federal, state
and local withholding taxes and employment taxes.
19. OTHER PROVISIONS
Each Option granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Committee,
in its sole discretion. Notwithstanding the foregoing, each ISO granted under
the Plan shall include those terms and conditions which are necessary to qualify
the ISO as an "incentive stock option" within the meaning of Section 422 of the
Code and the regulations thereunder and shall not include any terms or
conditions which are inconsistent therewith.
20. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall
include the plural form, the masculine gender shall include the feminine
gender, and vice-versa, as the context requires.
21. GOVERNING LAW
All questions concerning the construction, interpretation and validity
of this Plan and the instruments evidencing the Options granted hereunder shall
be governed by and construed and enforced in accordance with the domestic laws
of the State of California, without giving effect to any choice or conflict of
law provision or rule (whether in the State of California or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of California. In furtherance of the foregoing, the
internal law
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<PAGE>
of the State of California will control the interpretation and construction of
this Plan, even if under such jurisdiction's choice of law or conflict of law
analysis, the substantive law of some other jurisdiction would ordinarily apply.
22. SECURITIES EXCHANGE ACT COMPLIANCE
In order to satisfy the conditions of paragraph (b) of Rule 16b-3, the
Company shall furnish in writing to the holders of record of the securities
entitled to vote for the Plan substantially the same information concerning the
Plan which would be required by the rules and regulations in effect under
Section 14(a) of the 1934 Act at the time such information is furnished, as if
proxies to be voted with respect to the approval or disapproval of the Plan were
then being solicited, on or prior to the date of the first annual meeting of
security holders held subsequent to the later of (a) the first registration of
an equity security under Section 12 of the 1934 Act or (b) the acquisition of an
equity security for which exemption is claimed. The Company will use its
commercially reasonable efforts to cause the exemption from Section 16 of the
1934 Act afforded by such Rule 16b-3 to be available at the time the Company has
a class of equity securities registered under Section 12 of the 1934 Act.
23. SUCCESSOR AND ASSIGNS; REINCORPORATION
Should the Company merge with another corporation for the sole purpose
of reincorporating the Company into Delaware the surviving corporation of
such merger shall assume all obligations under this agreement and any reference
to the Company herein shall refer to such surviving corporation.
24. FINANCIAL STATEMENTS
The Company shall provide all Optionees under the Plan with financial
statements of the Company at least annually. Such financial statements shall
include, at a minimum, an income statement, balance sheet and cash flow
statement for the Company.
As adopted by the Board of Directors of GUITAR CENTER MANAGEMENT
COMPANY, INC. on June 3, 1996 and amended and restated as of October 15, 1996 to
take effect as of June 3, 1996.
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AMENDMENT NO. 1 TO
STOCK OPTION AGREEMENT
This Amendment No. 1 to the Stock Option Agreement ("Stock Option
Agreement") entered into as of June 5, 1996 between Guitar Center Management
Company, Inc., a California corporation (the "Company"), and Larry Thomas
("Optionee") is dated as of the 15th day of October 1996.
WHEREAS, it was the parties intention that Optionee be granted an option to
purchase securities exercising into 2.5% of the Company's equity;
WHEREAS, the parties acknowledge that a mutual mistake resulted in the
failure of Stock Option Agreement to reflect the true intent of the parties;
WHEREAS, the parties desire to amend the Stock Option Agreement to clarify
the intent of the parties.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Amendment, the parties hereto agree as follows:
Section 1. Section 1 of the Stock Option Agreement is hereby deleted in
its entirety and the following is inserted in lieu therefor:
"Section 1. GRANT OF OPTION
On the terms and subject to the conditions stated in
this Agreement, the Company hereby grants to the Optionee an
option (the "Option") to purchase 43,344 Units (the "Option
Units") for a purchase price of $100.00 per Unit (the
"Exercise
<PAGE>
Price") once a Unit is exercised, the securities constituting a Unit
shall be detachable from each other."
Section 2. The term "Vested Shares" set forth in the last sentence of
Section 2 of the Stock Option Agreement is hereby deleted in its entirety and
the term "Vested Units" is hereby inserted in lieu thereof.
Section 3. The term "Vested Shares" set forth in the second sentence of
Section 3(b) of the Stock Option Agreement is hereby deleted in its entirety and
the term "Vested Units" is hereby inserted in lieu thereof.
Section 4. The term "Option Shares" set forth in the second sentence of
Section 4 of the Stock Option Agreement is hereby deleted in its entirety and
the term "Option Units" is hereby inserted in lieu thereof.
Section 5. The term "Unvested Shares" set forth in Sections 6(a), 6(b),
6(c), and 6(d) of the Stock Option Agreement is hereby deleted in its entirety
in each subsection, respectively, and the term "Unvested Units" is hereby
inserted in each subsection, respectively, in lieu thereof.
Section 6. The phrase "or Junior Preferred Stock" shall hereby be
inserted immediately after the term "Common Stock" in the first sentence of the
first paragraph of Section 9(a), and in the first and second sentence of the
second paragraph of Section 9(a), respectively.
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Section 7. The phrase "including those shares of Common Stock issuable
upon conversion of Junior Preferred Stock" shall hereby be added immediately
following the term "Option" in Section 9(b) of the Stock Option Agreement.
Section 8. The first sentence of Section 10(a) is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"If the Common Stock and/or Junior Preferred Stock is changed by
reason of a stock split, reverse stock split or stock combination,
stock dividend or distribution, or recapitalization or converted into
or exchanged for other securities as a result of a merger,
consolidation or reorganization (including but not limited to
conversion of the Company's Junior Preferred Stock), the Board shall
make such adjustments in the number and class of shares of stock
constituting a Unit as shall be necessary to preserve the rights
substantially proportionate to Optionee's rights existing immediately
prior to such transaction or event (but subject to the limitations and
restrictions on such rights). The exercise price for each Unit shall
not change notwithstanding any change to the number and class of
shares of stock constituting a Unit."
Section 9. The term "Option Shares" set forth in Sections 10(b) and
10(c) of the Stock Option Agreement is hereby deleted in its entirety and the
term "Option Units" is hereby inserted in lieu thereof, and the phrase "or
shares of Junior Preferred Stock, as applicable," shall hereby be inserted
immediately following the term "Common Stock" in Section 10(b) of the Stock
Option Agreement.
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Section 10. The term "Option Shares" set forth in the first sentence of
Section 11(b) of the Stock Option Agreement is hereby deleted in its entirety
and the term "Option Units" is hereby inserted in lieu thereof.
Section 11. The definition of "Calculated Corporate Value" in Section 12
of the Stock Option Agreement is hereby deleted in its entirety and the
following definition is hereby inserted in lieu thereof:
"'Calculated Corporate Value' (a) in connection with any Qualified
Public Offering or Market Price Determination means an amount equal to
the sum of (x) the aggregate liquidation value of the Junior Preferred
Stock outstanding on the date of measurement plus (y) the Public
Offering Price or Current Public Market Value, applicable to such
Qualified Public Offering or Market Price Determination, multiplied by
the number of Option Vesting Determination Shares, and (b) in
connection with any Company Sale means the calculated Corporate Value
as defined in the Company's Amended and Restated 1996 Performance
Stock Option Plan."
Section 12. The definition of "Current Public Market Value" set forth in
Section 12 of the Stock Option Agreement is amended to add the following phrase
immediately after the word "determined" in the last sentence:
"provided that the Current Public Market Value of a share of
Junior Preferred Stock shall not be less than its
liquidation valued per share."
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<PAGE>
Section 13. The definition of "Organic Change" in Section 12 of the
Stock Option Agreement shall be amended to add the phrase "or Junior Preferred
Stock" immediately following the term "Common Stock" in each place it shall
appear.
Section 14. The definition of "Option Shares" set forth in Section 12 of
the Stock Option Agreement is hereby deleted in its entirety and the following
definition is hereby inserted in lieu thereof:
"`Option Units' has the meaning giving to such term in
Section 1."
Section 15. The definition of "Option Vesting Determination Shares" in
Section 12 of the Stock Option Agreement is hereby deleted in its entirety and
the following definition is hereby inserted in lieu thereof:
"`Option Vesting Determination Shares' means the shares of
Common Stock and Common Stock Equivalents outstanding minus
any shares of Common Stock issuable upon exercise of options
to purchase Units not classified under the Company's Amended
and Restated 1996 Performance Stock Option Plan as Units
Available for Award."
Section 16. The following definition is added to Section 12:
"'Junior Preferred Stock Equivalents' means the right to acquire,
whether or not immediately exercisable, one share of Junior Preferred
Stock, whether
5
<PAGE>
evidenced by an option, warrant, convertible security or other
instrument or agreement."
Section 17. The definition of "Purchase Price" in Section 12 of the
Stock Option Agreement is hereby deleted in its entirety and the following
definition is hereby inserted in lieu thereof:
"`Purchase Price' means the Exercise Price multiplied by the
number of Units with respect to which the Option is being
exercised."
Section 18. The definition of "Share" in Section 12 of the Stock Option
Agreement is hereby deleted in its entirety and the following definition is
hereby inserted in lieu thereof:
"`Share' shall mean one share of Common Stock or one share
of Junior Preferred Stock, whichever is the case, as
adjusted in accordance with Section 10 (if applicable)."
Section 19. The definition of the term "Transfer" in Section 12 of the
Stock Option Agreement shall be amended to add the phrase "or Junior Preferred
Stock" inserted immediately following the term "Common Stock."
Section 20. Section 12 of the Stock Option Agreement shall be amended to
add the following definition:
"`Units' shall mean a strip of securities constituting one
share of Common Stock and 99/100th of a share of Junior
Preferred Stock, in each case as adjusted pursuant to
Section 10 hereof.
6
<PAGE>
For purposes of this Agreement a single Unit shall both be a Common
Stock Equivalent and 99/100th of a Junior Stock Equivalent."
Section 21. The definition of "Unvested Shares" in Section 12 of the
Stock Option Agreement is hereby deleted in its entirety and the following is
hereby inserted in lieu thereof:
"`Unvested Units' means the number of Option Units which
have not vested in accordance with Sections 3 or 6 of this
Agreement."
Section 22. The definition of "Vested Shares" set forth in Section 12 of
the Stock Option Agreement is hereby deleted in its entirety and the following
is hereby inserted in lieu thereof:
"`Vested Units' means the number of Option Units, if any,
which have vested in accordance with Sections 3 or 6 of this
Agreement."
Section 23. Except as set forth herein, the provisions of the Stock
Option Agreement shall remain in full force and effect.
7
<PAGE>
Section 24. This Amendment Number 1 to the Stock Option Agreement shall
become effective as of June 5, 1996.
IN WITNESS WHEREOF, the Company has caused this Amendment Number 1 to be
executed on its behalf by its officer duly authorized to act on behalf of the
Board, and the Optionee has personally executed this Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By______________________________________
Name:______________________________
Title:_____________________________
________________________________________
Larry Thomas
8
<PAGE>
AMENDMENT NO. 1 TO
STOCK OPTION AGREEMENT
This Amendment No. 1 to the Stock Option Agreement ("Stock Option
Agreement") entered into as of June 5, 1996 between Guitar Center Management
Company, Inc., a California corporation (the "Company"), and Marty Albertson
("Optionee") is dated as of the 15th day of October 1996.
WHEREAS, it was the parties intention that Optionee be granted an option to
purchase securities exercising into 2.5% of the Company's equity;
WHEREAS, the parties acknowledge that a mutual mistake resulted in the
failure of Stock Option Agreement to reflect the true intent of the parties;
WHEREAS, the parties desire to amend the Stock Option Agreement to clarify
the intent of the parties.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Amendment, the parties hereto agree as follows:
Section 1. Section 1 of the Stock Option Agreement is hereby deleted in
its entirety and the following is inserted in lieu therefor:
"Section 1. GRANT OF OPTION
On the terms and subject to the conditions stated in
this Agreement, the Company hereby grants to the Optionee an
option (the "Option") to purchase 43,344 Units (the "Option
Units") for a purchase price of $100.00 per Unit (the
"Exercise
<PAGE>
Price") once a Unit is exercised, the securities
constituting a Unit shall be detachable from each other."
Section 2. The term "Vested Shares" set forth in the last sentence of
Section 2 of the Stock Option Agreement is hereby deleted in its entirety and
the term "Vested Units" is hereby inserted in lieu thereof.
Section 3. The term "Vested Shares" set forth in the second sentence of
Section 3(b) of the Stock Option Agreement is hereby deleted in its entirety and
the term "Vested Units" is hereby inserted in lieu thereof.
Section 4. The term "Option Shares" set forth in the second sentence of
Section 4 of the Stock Option Agreement is hereby deleted in its entirety and
the term "Option Units" is hereby inserted in lieu thereof.
Section 5. The term "Unvested Shares" set forth in Sections 6(a), 6(b),
6(c), and 6(d) of the Stock Option Agreement is hereby deleted in its entirety
in each subsection, respectively, and the term "Unvested Units" is hereby
inserted in each subsection, respectively, in lieu thereof.
Section 6. The phrase "or Junior Preferred Stock" shall hereby be
inserted immediately after the term "Common Stock" in the first sentence of the
first paragraph of Section 9(a), and in the first and second sentence of the
second paragraph of Section 9(a), respectively.
2
<PAGE>
Section 7. The phrase "including those shares of Common Stock issuable
upon conversion of Junior Preferred Stock" shall hereby be added immediately
following the term "Option" in Section 9(b) of the Stock Option Agreement.
Section 8. The first sentence of Section 10(a) is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"If the Common Stock and/or Junior Preferred Stock is changed by
reason of a stock split, reverse stock split or stock combination,
stock dividend or distribution, or recapitalization or converted into
or exchanged for other securities as a result of a merger,
consolidation or reorganization (including but not limited to the
conversion of the Company's Junior Preferred Stock), the Board shall
make such adjustments in the number and class of shares of stock
constituting a Unit as shall be necessary to preserve the rights
substantially proportionate to Optionee's rights existing immediately
prior to such transaction or event (but subject to the limitations and
restrictions on such rights). The exercise price for each Unit shall
not change notwithstanding any change to the number and class of
shares of stock constituting a Unit."
Section 9. The term "Option Shares" set forth in Sections 10(b) and
10(c) of the Stock Option Agreement is hereby deleted in its entirety and the
term "Option Units" is hereby inserted in lieu thereof, and the phrase "or
shares of Junior Preferred Stock, as applicable," shall hereby be inserted
immediately following the term "Common Stock" in Section 10(b) of the Stock
Option Agreement.
3
<PAGE>
Section 10. The term "Option Shares" set forth in the first sentence of
Section 11(b) of the Stock Option Agreement is hereby deleted in its entirety
and the term "Option Units" is hereby inserted in lieu thereof.
Section 11. The definition of "Calculated Corporate Value" in Section 12
of the Stock Option Agreement is hereby deleted in its entirety and the
following definition is hereby inserted in lieu thereof:
"'Calculated Corporate Value' (a) in connection with any Qualified
Public Offering or Market Price Determination means an amount equal to
the sum of (x) the aggregate liquidation value of the Junior Preferred
Stock outstanding on the date of measurement plus (y) the Public
Offering Price or Current Public Market Value, applicable to such
Qualified Public Offering or Market Price Determination, multiplied by
the number of Option Vesting Determination Shares, and (b) in
connection with any Company Sale means the calculated Corporate Value
as defined in the Company's Amended and Restated 1996 Performance
Stock Option Plan."
Section 12. The definition of "Current Public Market Value" set forth in
Section 12 of the Stock Option Agreement is amended to add the following phrase
immediately after the word "determined" in the last sentence:
"provided that the Current Public Market Value of a share of
Junior Preferred Stock shall not be less than its
liquidation valued per share."
4
<PAGE>
Section 13. The definition of "Organic Change" in Section 12 of the
Stock Option Agreement shall be amended to add the phrase "or Junior Preferred
Stock" immediately following the term "Common Stock" in each place it shall
appear.
Section 14. The definition of "Option Shares" set forth in Section 12 of
the Stock Option Agreement is hereby deleted in its entirety and the following
definition is hereby inserted in lieu thereof:
"'Option Units' has the meaning giving to such term in
Section 1."
Section 15. The definition of "Option Vesting Determination Shares" in
Section 12 of the Stock Option Agreement is hereby deleted in its entirety and
the following definition is hereby inserted in lieu thereof:
"'Option Vesting Determination Shares' means the shares of
Common Stock and Common Stock Equivalents outstanding minus
any shares of Common Stock issuable upon exercise of options
to purchase Units not classified under the Company's Amended
and Restated 1996 Performance Stock Option Plan as Units
Available for Award."
Section 16. The following definition is added to Section 12:
"'Junior Preferred Stock Equivalents' means the right to acquire,
whether or not immediately exercisable, one share of Junior Preferred
Stock, whether
5
<PAGE>
evidenced by an option, warrant, convertible security or other
instrument or agreement."
Section 17. The definition of "Purchase Price" in Section 12 of the
Stock Option Agreement is hereby deleted in its entirety and the following
definition is hereby inserted in lieu thereof:
"'Purchase Price' means the Exercise Price multiplied by the
number of Units with respect to which the Option is being
exercised."
Section 18. The definition of "Share" in Section 12 of the Stock Option
Agreement is hereby deleted in its entirety and the following definition is
hereby inserted in lieu thereof:
"'Share' shall mean one share of Common Stock or one share
of Junior Preferred Stock, whichever is the case, as
adjusted in accordance with Section 10 (if applicable)."
Section 19. The definition of the term "Transfer" in Section 12 of the
Stock Option Agreement shall be amended to add the phrase "or Junior Preferred
Stock" inserted immediately following the term "Common Stock."
Section 20. Section 12 of the Stock Option Agreement shall be amended to
add the following definition:
"'Units' shall mean a strip of securities constituting one
share of Common Stock and 99/100th of a share of Junior
Preferred Stock, in each case as adjusted pursuant to
Section 10 hereof.
6
<PAGE>
For purposes of this Agreement a single Unit shall be both a
Common Stock Equivalent and 99/100th of a Junior Stock Equivalent."
Section 21. The definition of "Unvested Shares" in Section 12 of the
Stock Option Agreement is hereby deleted in its entirety and the following is
hereby inserted in lieu thereof:
"'Unvested Units' means the number of Option Units which
have not vested in accordance with Sections 3 or 6 of this
Agreement."
Section 22. The definition of "Vested Shares" set forth in Section 12 of
the Stock Option Agreement is hereby deleted in its entirety and the following
is hereby inserted in lieu thereof:
"'Vested Units' means the number of Option Units, if any,
which have vested in accordance with Sections 3 or 6 of this
Agreement."
Section 23. Except as set forth herein, the provisions of the Stock
Option Agreement shall remain in full force and effect.
7
<PAGE>
Section 24. This Amendment Number 1 to the Stock Option Agreement shall
become effective as of June 5, 1996.
IN WITNESS WHEREOF, the Company has caused this Amendment Number 1 to be
executed on its behalf by its officer duly authorized to act on behalf of the
Board, and the Optionee has personally executed this Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By
--------------------------------------------
Name:
--------------------------------
Title:
--------------------------------
-------------------------------------------
Marty Albertson
8
<PAGE>
AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement made the 5th day of June,
1996 (the "Agreement"), between Guitar Center Management Company, Inc., a
California corporation (the "Company"), and Bruce Ross (the "Executive") is
entered into this 15th day of October 1996.
WHEREAS, the Company has amended its 1996 Performance Stock Option Plan
(the "Plan");
WHEREAS, material provisions of the Agreement relate to the Executive's
rights to receive options issued pursuant to the Plan;
WHEREAS, the parties wish to amend the Agreement in order to set forth
provisions consistent with the intent of the Agreement and to modify certain
provisions relating to the grant of options under the Plan;
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Section 3(e) of the Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"(e) the Company shall issue Executive options to acquire
units for the purchase of shares of Common Stock and Junior
Preferred Stock as described in the amounts and on the dates
set forth on Exhibit A hereto."
<PAGE>
Section 2. Exhibit A to the Agreement is hereby deleted in its entirety
and the following is hereby inserted in lieu thereof and shall constitute
Exhibit A to the Agreement:
"Exhibit A
Defined terms used herein, but not defined herein,
shall have the meaning ascribed to them in the attached
Employment Agreement or the Company's Amended and Restated
1996 Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached
Agreement, the Company shall grant Executive an option to
acquire 8,669 Units pursuant to the Plan with the Units to
vest 1/3 after one year, 2/3 after two years, 100% after 3
years.
2. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/97 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
3,000 of such Units Available for Award with the Units to
vest 1/2 after one year and 100% after two years.
3. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/98 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
2,000 of
2
<PAGE>
such Units Available for Award with the Units to vest 100%
after one year.
4. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/99 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
3,668 of such Units Available for Award with the Units to
vest immediately upon grant.
5. If any Reserved Units become Units Available for
Award pursuant to Section 7(e) of the Plan and Executive is
still employed by the Company at such time, the Company
shall grant to Executive an option to acquire that number of
such Units Available for Award equal to (x) the lesser of
8,669 or 10% of such Units Available for Award MINUS (y) the
number of Units Available for Award that were subject to the
options issued pursuant to paragraphs 2, 3 and 4 above.
6. Any share numbers referred to in this Exhibit A shall be
subject to adjustment as contemplated by Section 11 of the Plan.
7. All options issued pursuant to this Agreement
shall be exercisable for $100 per Unit.
3
<PAGE>
8. All options issued pursuant to this Agreement
prior to the Company's initial public offering shall be
NQOs."
Section 3. This Amendment shall be effective as of June 5, 1996.
Section 4. Except as provided for in this Amendment Number 1 all of the
provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment Number
1 to the Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By
--------------------------------------------
Name:
--------------------------------
Title:
--------------------------------
-------------------------------------------
BRUCE ROSS
4
<PAGE>
AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement made the 5th day of June,
1996 (the "Agreement"), between Guitar Center Management Company, Inc., a
California corporation (the "Company"), and Barry Soosman (the "Executive") is
entered into this 15th day of October 1996.
WHEREAS, the Company has amended its 1996 Performance Stock Option Plan
(the "Plan");
WHEREAS, material provisions of the Agreement relate to the Executive's
rights to receive options issued pursuant to the Plan;
WHEREAS, the parties wish to amend the Agreement in order to set forth
provisions consistent with the intent of the Agreement and to modify certain
provisions relating to the grant of options under the Plan;
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Section 3(e) of the Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"(e) the Company shall issue Executive options to acquire
units for the purchase of shares of Common Stock and Junior
Preferred Stock as described in the amounts and on the dates
set forth on Exhibit A hereto."
<PAGE>
Section 2. Exhibit A to the Agreement is hereby deleted in its entirety
and the following is hereby inserted in lieu thereof and shall constitute
Exhibit A to the Agreement:
"Exhibit A
Defined terms used herein, but not defined herein,
shall have the meaning ascribed to them in the attached
Employment Agreement or the Company's Amended and Restated
1996 Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached
Agreement, the Company shall grant Executive an option to
acquire 8,669 Units pursuant to the Plan which Units shall
vest immediately upon the date of grant.
2. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/97 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
4,334 of such Units Available for Award; provided, however,
that if the Units Available for Award on 12/31/97 are less
than 34,674, then the option granted to Executive shall be
reduced pro rata. The option for Units granted under this
paragraph 2 shall vest 1/3 on the date of grant, 2/3 after
one year, and 100% after two years.
2
<PAGE>
3. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/98 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
Units equal to the sum of (i) 4,334 less the amount of
options granted pursuant to paragraph 2, plus (ii) 4,334,
provided, however, that if the Units Available for Award on
12/31/98 are less than 34,674, the options granted Executive
in (ii) shall be reduced pro rata. Options for Units
granted under this paragraph 3 shall vest 1/2 on the date of
grant and 100% after one year.
4. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/99 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
an amount of options equal to 8,668 less the amount of
options granted under paragraphs 2 and 3. Options granted
under this paragraph 4 shall vest immediately upon grant.
5. If any Reserved Units become Units Available for
Award pursuant to Section 7(e) of the Plan and Executive is
still employed by the Company at such time, the Company
shall grant to Executive an option to acquire that number of
such
3
<PAGE>
Units Available for Award equal to (x) the lesser of
8,669 or 10% of such Units Available for Award MINUS (y) the
number of Units Available for Award that were subject to the
options issued pursuant to paragraphs 2, 3 and 4 above.
6. Except in the case of paragraph 5, in any case where the
Company accelerates the grant of Units Available for Award, Executive
shall receive 10% of the Executive's allotment for the fiscal year in
which the acceleration occurs.
7. Any share numbers referred to in this Exhibit A shall be
subject to adjustment as contemplated by Section 11 of the Plan.
8. All options issued pursuant to this Agreement
shall be exercisable for $100 per Unit.
9. All options issued pursuant to this Agreement
prior to the Company's initial public offering shall be
NQOs."
Section 3. This Amendment shall be effective as of June 5, 1996.
4
<PAGE>
Section 4. Except as provided for in this Amendment Number 1 all of the
provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Number 1 to the Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By
--------------------------------------------
Name:
--------------------------------
Title:
--------------------------------
-------------------------------------------
BARRY SOOSMAN
5
<PAGE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended Six Months
October 31, December 31, December 31, Ended June 30,
-------------- ------------ ------------------------ --------------
1991 1992 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes 2,755 4,076 1,424 5,251 9,155 11,202 4,919 (74,633)
Add:
Interest expense 738 536 58 304 266 382 87 6,046
Portion of rents representative
of the interest factor 299 318 53 345 601 662 301 409
------ ------ ------ ------ ------ ------ ------ -------
Earnings (loss) as adjusted 3,792 4,930 1,535 5,900 10,022 12,246 5,307 (68,178)
====== ====== ====== ====== ====== ====== ====== =======
Fixed charges:
Interest expense 738 538 58 304 266 382 87 6,046
Portion of rents representative
of the interest factor 299 316 53 345 601 662 301 409
------ ------ ------ ------ ------ ------ ------ -------
Total fixed charges 1,037 854 111 649 867 1,044 388 6,455
====== ====== ====== ====== ====== ====== ====== =======
------ ------ ------ ------ ------ ------ ------ -------
Ratio of earnings to fixed charges 3.7 5.8 13.8 9.1 11.6 11.7 13.7 -(b)
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
PRO FORMA
-----------------------------------------
12 MONTHS ENDED 6 MONTHS ENDED
12/31/95 6/30/96 6/30/95
--------------- ------- -------
Earnings before income taxes 4,488 2,063 972
Add: Interest expense 11,558 5,814 5,762
Portion of rents
representative of the
interest factor 662 409 301
------ ----- -----
Earnings as adjusted 16,708 8,286 7,035
====== ===== =====
Fixed charges:
Interest expense 11,558 5,814 5,762
Portion of rents
representative of the
interest factor 662 409 301
------ ----- -----
Total fixed charges 12,220 6,223 6,063
====== ===== =====
------ ----- -----
Ratio of earnings to fixed charges 1.4 1.3 1.2
====== ===== =====
(a) The ratio of earnings to fixed charges has been computed based upon
earnings (loss) before provision for income taxes and fixed charges.
Fixed charges consist of interest expense and one-third of rental
expense (the proportion deemed representative of the interest factor).
(b) Earnings (loss) before income taxes and fixed charges were insufficient to
cover fixed charges by $74.6 million for the six months ended June 30,
1996.
Page 1
<PAGE>
October 14, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlmen:
We have read the Experts Section on page 89 of the S-1 Registration Statement
dated October 18, 1996, of Guitar Center Management Company, Inc. and are in
agreement with the statements contained in the second paragraph therein.
/s/ ERNST & YOUNG LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Selected
Historical Financial Data" and "Experts" and to the use of our report dated
March 6, 1996, except for Note 10, as to which the date is June 6, 1996, in the
Registration Statement (Form S-1 No. 333-10491) and related Prospectus of Guitar
Center Management Company, Inc. dated October 18, 1996.
/s/ ERNST & YOUNG LLP
Los Angeles, California
October 14, 1996
<PAGE>
LETTER OF TRANSMITTAL
GUITAR CENTER, INC.
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2006
FOR ANY AND ALL OUTSTANDING
11% SENIOR NOTES DUE 2006
PURSUANT TO THE PROSPECTUS, DATED , 1996.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON ,
1996 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
To: EXCHANGE AGENT
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
<TABLE>
<CAPTION>
BY MAIL: BY HAND DELIVERY:
<S> <C>
U.S. Trust Company of California, N.A. U.S. Trust Company of California, N.A.
c/o United States Trust Company of New
York 111 Broadway, Lower Level
P.O. Box 841, Peter Cooper Station New York, New York 10036-1906
New York, New York 10276-0841 Attn: Corporate Trust and Agency Services
Attn: Corporate Trust and Agency Services
BY OVERNIGHT DELIVERY: FACSIMILE TRANSMISSION:
U.S. Trust Company of California, N.A. (212) 420-6504
770 Broadway - 13th Floor TO CONFIRM RECEIPT:
New York, NY 10003 (800) 225-2398
Attn: Corporate Trust and Agency Services
</TABLE>
DELIVERY OF THIS INSTRUMENT 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 CONTAINED HEREIN
SHOULD BE READ CAREFULLY BEFORE THIS LETTER OR TRANSMITTAL IS COMPLETED.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1996 (the "Prospectus"), of Guitar Center, Inc., a
Delaware corporation, successor to Guitar Center Management Company, a
California Corporation (the "Company"), and this Letter of Transmittal (the
"Letter"), which together constitute the Company's offer (the "Exchange Offer")
to exchange an aggregate principal amount of up to $100 million of its 11%
Senior Notes due 2006 (the "New Notes") of the Company for a like principal
amount of the issued and outstanding 11% Senior Notes due 2006 (the "Old Notes")
of the Company from the holders (the "Holders") thereof.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. No interest will be payable on the Old Notes on the date of the
exchange for the New Notes and Old Notes accepted for exchange will cease to
accrue interest from and after the consummation of the Exchange Offer; therefore
no interest will be paid thereon to the Holders at such time. Each New Note will
bear interest at 11% per annum and will be payable in cash semiannually in
arrears on each January 1 and July 1, commencing on January 1, 1997. Holders of
Old Notes accepted for exchange will be deemed to have waived the right to
receive any other payment of interest on the Old Notes. The Company reserves the
right, at any time 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. The Company shall notify the
holders of the Old Notes of any extension by means of an press release or other
public announcement prior to 9:00 A.M., New York City time, on the next business
day after the previously scheduled Expiration Date.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of certificates for Old
Notes, if available, 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 -- Book-Entry Transfer" 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 according to 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.
<PAGE>
List below the Old Notes to which this Letter relates. If the space provided
below is inadequate, the certificate numbers and principal amount of Old Notes
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF OLD NOTES 1 2 3
<CAPTION>
AGGREGATE
PRINCIPAL PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE AMOUNT OF AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OLD NOTE(S) TENDERED**
<S> <C> <C> <C>
TOTAL
*Need not be completed if Old Notes are being tendered by book-entry transfer.
**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.
</TABLE>
/ / 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 PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s) ____________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice 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 AMENDMENTS OR SUPPLEMENTS
THERETO.
NAME: ______________________________________________________________________
ADDRESS: ___________________________________________________________________
___________________________________________________________________
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the 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 hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that 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 irrevocably constitutes and appoints the Exchange Agent its
agent and attorney-in-fact with full power of substitution, for purposes of
delivering this Letter and the Old Notes to the Company. The Power of Attorney
granted in this paragraph shall be deemed irrevocable from and after the
Expiration Date and coupled with an interest. The undersigned hereby further
represents that any New Notes acquired in exchange for Old Notes tendered hereby
will have been acquired in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the undersigned, that
neither the holder of such Old Notes nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the holder of such Old Notes nor any such
other person is an "affiliate," of the Company, as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act").
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") set forth in no-action letters to third parties, based on
which the Company believes 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 any holder 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
<PAGE>
ordinary course of such holder's business and such holder has no arrangement
with any person to participate in the distribution of such New Notes. If the
undersigned is not a broker-dealer, the undersigned represents that it is not
engaged in, and does not intend to engage in, a distribution of 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 the Old Notes to be
exchanged for New Notes were acquired by it as a result of market-making
activities or other trading activities, and acknowledges that it will deliver
the Prospectus in connection with any resale of such New Notes; however, by so
acknowledging and by delivering the Prospectus, the undersigned will not be
deemed to admit that is is an "underwriter" within the meaning of the Securities
Act. The undersigned acknowledges that in reliance on an interpretation by the
staff of the SEC, a broker-dealer may fulfill his prospectus delivery
requirements with respect to the New Notes (other than a resale of an unsold
allotment from the original sale of the Old Notes) with the Prospectus which
constitutes part of this Exchange Offer.
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 Rights"
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, 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 exchange and/or New
Notes are to be issued in the name of and sent to someone other than the person
or persons whose signature(s) 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: ......................................................................
...............................................................................
(ZIP CODE)
/ / 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 or persons whose
signature(s) appear(s) on this Letter above or to such person or persons 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: ......................................................................
...............................................................................
(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., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
Dated: .................................................................., 1996
x ................................ ................................, 1996
x ................................ ................................, 1996
SIGNATURE(S) OF OWNER DATE
Area code and Telephone Number ................................................
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) 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: ........................................................................
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
OF 11% SENIOR NOTES DUE 2006 FOR ANY AND ALL OUTSTANDING 11% SENIOR
NOTES DUE 2006 OF GUITAR CENTER, INC.
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES.
This letter is to be completed by noteholders either if certificates are to
be forwarded herewith or if tenders are to be made pursuant to the procedures
for delivery by book-entry transfer 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 (or manually signed facsimile
hereof) 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 $1,000 and any integral multiple thereof.
Noteholders 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, (ii)
prior to the Expiration Date, the Exchange Agent must receive from such Eligible
Institution a properly completed and duly executed Letter (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by telegram, telex, 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 New York Stock Exchange ("NYSE") trading 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, and any other documents required by the 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 NYSE trading 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 the tendering holders, but the delivery
will be deemed make only when actually received or confirmed by the Exchange
Agent. If such delivery is by mail, it is recommended that registered mail,
properly insured, with return receipt requested, be used. In all cases, 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., New York City
time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS 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." Holders whose Old Notes are not tendered or
are tendered but not accepted in the Exchange Offer will continue to hold such
Old Notes and will be entitled to all the rights and preferences and subject to
the limitations applicable thereto under the Indenture. Following consummation
of the Exchange Offer, the Holders will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such Holders to provide for the registration under the Securities
Act of the Old Notes held by them. 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 exactly 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 or Holders 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 certificate(s) must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered Holder or
Holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
<PAGE>
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
Old Notes not exchanged are to be 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. Noteholders 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 noteholder may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter.
5. 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,
certificates representing New Notes and/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 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 5, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
6. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
7. 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.
8. 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.
9. 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.
