<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GUITAR CENTER MANAGEMENT COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 5733 95-3266031
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or organization)
</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 MANAGEMENT COMPANY, 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. / /
- --------------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE FEE
<S> <C> <C> <C> <C>
11% Senior Notes due 2006............... $100,000,000 100% $100,000,000 $34,483
</TABLE>
------------------------
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; Pro
Forma Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Shareholders; 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
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2006
FOR ANY AND ALL OUTSTANDING
11% SENIOR NOTES DUE 2006
OF
GUITAR CENTER MANAGEMENT COMPANY, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1996, UNLESS EXTENDED.
Guitar Center Management Company, 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 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 New Notes will be general, unsecured obligations of the Company, ranking
senior in right of payment to all subordinated indebtedness of the Company and
PARI PASSU in right of payment with all other senior indebtedness of the
Company. The Company has a revolving credit facility, which, 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.
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.
This Prospectus has been prepared for use in connection with the Exchange
Offer and may be used by Chase Securities Inc. ("CSI") in connection with offers
and sales related to market-making transactions in the Notes. CSI may act as
principal or agent in such transactions. Such sales will be made at prices
related to prevailing market prices at the time of sale.
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."
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. 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 COMPANY
Guitar Center is the nation's leading retailer of guitars, amplifiers,
percussion instruments, keyboards and pro audio and recording equipment with 27
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 six new stores. For the
twelve months ended June 30, 1996, the Company generated net sales of $184.8
million and PRO FORMA operating income of approximately $17.1 million.
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 make, or hope to make, their living from music and 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.
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 operating
income and store 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 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)............................ 7,731,000
Average 1995 store-level operating income (1)................... 1,124,000
Average 1995 store-level operating income margin................ 14.5%
</TABLE>
- ------------------------
(1) Excludes results of the Company's 33,000 square foot flagship Hollywood
store and the Company's Brea, California store opened in December 1995.
The United States retail market for music products in 1995 was estimated in
a study by MUSIC TRADES magazine to be approximately $5.5 billion in net sales,
representing a five-year compound annual growth rate of 7.9%. Products currently
offered by Guitar Center account for approximately $4.1 billion of this market,
representing a five-year compound annual growth rate of 9.0%. 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.
Furthermore, ninety percent of the industry's estimated 8,200 retailers operate
only one or two stores. The Company believes it benefits from several advantages
relative to smaller competitors, including volume purchasing discounts,
advertising economies and the ability to offer an extremely broad and deep
selection of merchandise.
3
<PAGE>
Management is highly committed to the success of Guitar Center. As part of
the Recapitalization, nine members of management invested in securities of the
Company valued at $50.0 million and owned approximately 35.7% of the Company's
outstanding Common Stock immediately thereafter. 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 expansion 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 expects to open a total of seven stores in fiscal 1996,
six of which are already in operation, and 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.
The Company is a California corporation with its principal executive offices
located at 5155 Clareton Drive, Agoura Hills, California 91301.
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. 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 its vendors'
largest customer and thereby benefits from volume purchasing discounts 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 provides
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 expects to open a total of seven stores in fiscal 1996, six of which are
already in operation, and approximately eight stores in each of fiscal 1997 and
1998. In
4
<PAGE>
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, Guitar Center consummated a series of transactions to
effect a recapitalization of the Company (the "Recapitalization"). The
Recapitalization included the following transactions: (i) members of the
Company's management purchased 500,000 shares of the Company's Common Stock for
$0.5 million cash; (ii) members of the Company's management received 495,000
shares of 8% Junior Preferred Stock, no par value (the "Junior Preferred
Stock"), with an aggregate liquidation value of $49.5 million in exchange for
cancellation of outstanding options exercisable for 495,000 shares of Common
Stock; (iii) the Company's sole shareholder, the Scherr Living Trust (the
"Scherr Trust"), received 198,000 shares of Junior Preferred Stock with an
aggregate liquidation value 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 Junior Preferred Stock for $70.0 million
cash; (v) the DLJ Investors (as defined herein) purchased 800,000 shares of 14%
Senior Preferred Stock, no par value, with an aggregate liquidation value of
$20.0 million (the "Senior Preferred Stock") and warrants (the "Warrants") to
purchase 73,684 shares of Common Stock and 72,947 shares of Junior Preferred
Stock, all 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
aggregated approximately $11.0 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 "Description of Certain Indebtedness -- The
New Credit Facility." Immediately following the Recapitalization, the Company
effected a 100 to 1 stock split. Unless stated otherwise in this Prospectus, all
amounts have been adjusted to reflect such stock split.
On July 2, 1996 the Company issued an aggregate of $100 million principal
amount of its 11% Senior Notes due 2006 (the "Old Notes") to Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and CSI, as initial purchasers (the
"Initial Purchasers"), who resold the Old Notes pursuant to Rule 144A under the
Securities Act. The Company applied the net proceeds of the offering of the Old
Notes to the retirement of the Bridge Facility.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary information below presents historical financial data and
unaudited PRO FORMA condensed financial data for the periods indicated which
have been derived from audited and unaudited financial statements of the
Company. 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) and the Exchange Offer as if they
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
statements. 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 "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
------- ------- ------------ ------- -------- -------- ------- --------
(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
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 18,354
Deferred compensation (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 (62,447)
Non recurring transaction expense............... -- -- -- -- -- -- -- 6,176
Net income (loss)............................... 2,702 3,987 1,385 5,105 8,829 10,857 4,845 (74,800)
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 $(74,669)
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 $(74,669)
------- ------- ------------ ------- -------- -------- ------- --------
------- ------- ------------ ------- -------- -------- ------- --------
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% 23.2% 26.9% 11.8%
Inventory turns (e)............................. 3.3x 3.5x 3.6x 3.3x 3.6x 4.0x 3.8x 3.9x
Ratio of earnings to fixed charges (f).......... 3.7x 5.8x 13.9x 9.0x 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
----------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA DATA:
Net sales.................................................. $ 170,671 $ 76,888 $ 91,048
Operating income........................................... 15,967 6,734 7,877
Net income................................................. 2,551 554 1,176
Ratio of earnings to fixed charges (f)..................... 1.1x 1.1x 1.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 6,494
Net working capital (g).................................... 26,525
Total assets............................................... 65,366
Total long term and revolving debt (including current
maturities)............................................... 105,421
Senior preferred stock..................................... 13,512
Warrants................................................... 6,500
Shareholders' equity (deficit)............................. (71,425)
</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 month period ended December
31, 1992 is not meaningful.
(d) Compares net sales for the comparable periods, excluding net sales
attributable to stores not open for both full periods.
(e) For the purpose of calculating inventory turns, vintage and used
inventories have been excluded.
(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 $76.3 million for the six
months ended June 30, 1996.
(g) Net working capital is defined as current assets less current liabilities
and excluding cash and revolving line of credit.
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.
<TABLE>
<S> <C>
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 on the back cover
page of this Prospectus 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."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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 Note 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 applicable state securities
laws. See "The Exchange Offer -- Consequences of
Failure to Exchange" and "Description of Senior
Notes."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
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.
RANKING................................ The Notes will be general, unsecured obligations of
the Company, ranking senior in right of payment to
all subordinated indebtedness of the Company and
PARI PASSU in right of payment with all other
senior indebtedness of the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Company. 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 Recapitalization and the Exchange Offer, on a
PRO FORMA basis, as of June 30, 1996, the Company
would have had approximately $105.4 million of
outstanding Indebtedness and remaining capacity
under the New Credit Facility 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. 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 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."
</TABLE>
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.
11
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PRIOR
TO TENDERING THEIR OLD NOTES.
FAILURE TO EXCHANGE 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
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.
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 shareholders' deficit of
approximately $71.4 million.
The degree to which the Company is leveraged could have important
consequences to the holders of the Company's Notes, including the following: (i)
the Company may not generate sufficient cash to service its debt obligations;
(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
under which the Notes were issued (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, the Company may be
required to raise additional financing through capital contributions, the
refinancing of all or part of its indebtedness 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.
12
<PAGE>
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 shareholders, 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 Bridge Facility or 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.
A court would likely conclude that the Company did not receive reasonably
equivalent value or fair consideration for incurring its obligation under the
Notes to the extent that the proceeds of the Notes were used to refinance the
Bridge Facility and the Bridge Facility was used to repurchase stock of the
Company from any of its shareholders. 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 27 stores, plans to open seven stores in fiscal 1996, six of which are
already in operation, and 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 financing, the
adaptation of its distribution and other operational systems to such sites 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.
The Company's expansion strategy includes clustering new stores in existing
markets, which may result in some transfer of sales from existing stores to new
locations. In addition, the Company's expansion into new markets may present
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
13
<PAGE>
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 management
information systems 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."
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 planned growth. The loss or
unavailability of the services of one or both of these individuals 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."
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.
The Company's business may be materially adversely affected by an economic
downturn or a decline in consumer spending. Weak economic conditions or changes
in the retail environment, demographics or other general economic conditions
that impact the level of spending for the types of merchandise sold by the
Company could have a material adverse effect on the Company.
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.
14
<PAGE>
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. 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 will have no further obligation to such Holders to provide for
the registration under the Securities Act of the Old
15
<PAGE>
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 -- Failure
to Exchange 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.
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 confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Notes into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the
16
<PAGE>
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 DEPOSITORY OR THE COMPANY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
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
17
<PAGE>
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 Notes so tendered will only be made after timely
confirmation of such book-entry transfer of 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 participant tendering Notes that are the subject of such Book-Entry
Confirmation that such participant has received an 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
18
<PAGE>
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 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
19
<PAGE>
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, against the Company under the
Registration Rights Agreement should the Company fail to consummate the Exchange
Offer within a certain period of time, notwithstanding a failure to satisfy 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.
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.
20
<PAGE>
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 $ and
include 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.
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, the Company believes that 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 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.
21
<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.................................................................. 13,512 13,512
Shareholders' equity (deficit)
Junior preferred stock................................................................ 138,600 138,600
Warrants.............................................................................. 6,500 6,500
Common stock 10,000,000 shares, no par value, authorized; 1,400,000 shares
outstanding.......................................................................... 1,436 1,436
Retained earnings (deficit)........................................................... (217,961) (217,961)
----------- -----------
Total shareholders' equity (deficit)................................................ (71,425) (71,425)
----------- -----------
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 Notes and cash on hand.
22
<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 Exchange Offer
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 and the Exchange Offer as if they had occurred on such date.
The financial effects of the Recapitalization and the Exchange Offer 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 the Exchange Offer
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."
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
HISTORICAL RECAPITALIZATION RECAPITALIZATION
----------- --------------- ---------------
(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 shareholders................................. $ 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.
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
HISTORICAL RECAPITALIZATION RECAPITALIZATION
---------- ---------------- ----------------
(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............................. 18,354 (432)(a) 17,922
Deferred compensation expense.................. 69,892 (69,892)(b) --
---------- -------- --------
Operating income............................... (62,447) 70,324 7,877
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......................................... (74,669) 76,732 2,063
Provision for income taxes..................... 131 756(e) 887
---------- -------- --------
Net income (loss).............................. (74,800) 75,976 1,176
Preferred stock dividends...................... (962) (6,071)(f) (7,033)
---------- -------- --------
Net income (loss) available for common
shareholders.................................. $(75,762) $ 69,905 $ (5,857)
---------- -------- --------
---------- -------- --------
PRO FORMA
Historical income (loss) before provision for
income taxes.................................. $(74,669)
Pro forma provision for income taxes (g)....... --
----------
Pro forma net income (loss).................... $(74,669)
----------
----------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
HISTORICAL RECAPITALIZATION RECAPITALIZATION
---------- ---------------- ----------------
(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
shareholders.................................. $ 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.
25
<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 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.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------------
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
ACTUAL RECAPITALIZATION RECAPITALIZATION
--------- ---------------- ----------------
(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 SHAREHOLDERS' 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.......................................... 13,512 -- 13,512
Shareholders' equity (deficit):
Common stock.................................................. 1,436 -- 1,436
Warrants...................................................... 6,500 -- 6,500
Junior preferred stock........................................ 138,600 -- 138,600
Retained deficit.............................................. (217,961) -- (217,961)
--------- ---------------- ----------------
Total shareholders' equity (deficit)........................ (71,425) -- (71,425)
--------- ---------------- ----------------
Total liabilities and shareholders' 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.
27
<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. The selected PRO
FORMA income statement data set forth below is for informational purposes only
and may not necessarily be indicative of future results of operations of the
Company. 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.
28
<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 18,354
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 (62,447)
--------- --------- ------------- --------- --------- --------- --------- ---------
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 (74,669)
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 $ (74,800)
--------- --------- ------------- --------- --------- --------- --------- ---------
--------- --------- ------------- --------- --------- --------- --------- ---------
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 $ (74,669)
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 $ (74,669)
--------- --------- ------------- --------- --------- --------- --------- ---------
--------- --------- ------------- --------- --------- --------- --------- ---------
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% 23.2% 26.9% 11.8%
Stores open at end of period....... 15 15 15 17 20 21 20 24
Inventory turns (f)................ 3.3x 3.5x 3.6x 3.3x 3.6x 4.0x 3.8x 3.9x
Ratio of earnings to fixed charges
(g)............................... 3.7x 5.8x 13.9x 9.0x 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 (h)............ $ 13,455 $ 13,449 $ 11,838 $ 14,623 $ 13,055 $ 12,115 $ 20,999 $ 26,525
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............. -- -- -- -- -- -- -- 13,512
Stockholders' equity (deficit)..... 12,625 16,612 17,997 18,464 23,424 19,764 18,687 (71,425)
</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, excluding net sales
attributable to stores not open for both full periods.
(f) For the purpose of calculating inventory turns, vintage and used
inventories have been excluded.
(g) 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 $76.3 million for the six
months ended June 30, 1996.
(h) Net working capital is defined as current assets less current liabilities,
excluding cash, loan from stockholder, deferred compensation and revolving
line of credit.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Guitar Center is the nation's largest specialty retailer of guitars,
amplifiers, percussion instruments, keyboards and pro audio and recording
equipment with 27 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% and 23.2% for the fiscal years ended December 31, 1993,
1994 and 1995, respectively. These increases were primarily attributable to
increases in unit sales rather than increases in prices or changes in the mix of
products sold. 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 expects to open a greater number of new stores in fiscal years
1996 and 1997 than it has in recent years. 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. The Company opened one store in December
1995 and anticipates opening seven stores in fiscal 1996, six of which are
already in operation. 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 20.2
----------- ----------- ----------- ----------- -----------
Operating income before deferred compensation
expense.......................................... 7.1 8.2 8.5 7.9 8.1
Deferred compensation expense..................... 1.4 0.9 1.8 1.4 76.8
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................... 5.7 7.3 6.7 6.5 (68.7)
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 (82.1)
Income taxes...................................... 0.2 0.3 0.2 0.1 0.1
----------- ----------- ----------- ----------- -----------
Net income........................................ 5.2% 6.8% 6.4% 6.3% (82.2)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
30
<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 21.6% to $18.4 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
20.2% 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 23.1% to $7.4
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 8.1% 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 23.2% 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 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
31
<PAGE>
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 growth.
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-recurring 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 shareholder.
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 $16.5 million, or 52.1% of the
increase. In addition, $15.2 million was contributed from new store sales which
accounted for 47.9% 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 27.8% 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 comparable store sales growth.
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-recurring, non-cash expenses associated with the Company's prior stock
option program.
32
<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 profit as a percentage of net sales.
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 New
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.
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 shareholder 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.
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 a 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, following the consummation of the Exchange Offer,
the Company will have 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.
The Company operated as an "S" corporation for all reported periods prior to
the Recapitalization. Accordingly, federal taxes were paid at the shareholder
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.
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.
33
<PAGE>
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
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.
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.
34
<PAGE>
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 and best-known 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 27
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 six new stores. For the
twelve months ended June 30, 1996, the Company generated net sales of $184.8
million and PRO FORMA operating income of approximately $17.1 million.
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 make, or hope to make, their living from music and 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. 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 operating income
and store 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.
35
<PAGE>
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)............................ 7,731,000
Average 1995 store-level operating income (1)................... 1,124,000
Average 1995 store-level operating income margin................ 14.5%
</TABLE>
- ------------------------
(1) Excludes results of the Company's 33,000 square foot flagship Hollywood
store and the Company's Brea, California store opened in December 1995.
Management is highly committed to the success of Guitar Center. As part of
the Recapitalization, nine members of management invested in securities of the
Company valued at $50.0 million and currently own 35.7% of the Company's
outstanding Common Stock. The Company's expansion 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 expects to open a total of seven stores in fiscal 1996, six
of which are already in operation, and 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.
INDUSTRY OVERVIEW
The United States retail market for music products in 1995 was estimated in
a study by MUSIC TRADES 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. Products currently
offered by Guitar Center account for approximately $4.1 billion of this market,
representing a five-year compound annual growth rate of 9.0%. 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 Gallop
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 with the nation's leading five music
products retailers accounting for approximately 7.9% of the industry's net sales
in 1994. Furthermore, ninety percent of the industry's estimated 8,200 retailers
operate only one or two stores. A typical music products store averages 3,230
square feet and generates an average of approximately $0.6 million in annual net
sales. In comparison, Guitar Center stores carry five major product categories
and generate an average of approximately $7.7 million in annual net sales.
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 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.
36
<PAGE>
Management believes that there exists an opportunity 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 print advertising
campaigns and guaranteed low prices.
The following graph depicts the stronger comparable store net sales growth
of Guitar Center indexed against the net sales growth of the relevant industry:
GUITAR CENTER & RELEVANT INDUSTRY -- RELATIVE NET SALES GROWTH
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GUITAR CENTER RELEVANT INDUSTRY(2)
<S> <C> <C>
1988 1.0000 1.0000
1989 1.0103 0.9997
1990 1.0733 1.0436
1991 1.1393 1.0913
1992 1.2770 1.1316
1993 1.4055 1.2590
1994 1.6480 1.4107
1995 2.0229 1.5411
</TABLE>
- ------------------------
(1) The index is calculated using 1988 as the base year and plotting compound
growth over the periods presented.
(2) Represents net sales of the music products industry excluding products
which Guitar Center does not sell.
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.
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<PAGE>
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. 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 its vendors' largest customer and thereby benefits from volume
purchasing discounts 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 provides
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 expects to open a total of seven stores in fiscal 1996,
six of which are already in operation, and 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.
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 the deepest and broadest
in the industry. Each store features a display of 300 to 500 guitars on the
"guitar wall" as well as many autographed instruments from world-renowned
musicians. Each major manufacturer, including Fender, Gibson, Taylor,
Martin, Ovation and Ibanez, is well represented in popular models and
colors. The Company has the largest selection of custom guitars,
one-of-a-kind and used/vintage guitars of any retailer, with prices ranging
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
38
<PAGE>
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 believes that it has the largest
selection of electric and bass guitar amplifiers in the industry and in
addition carries a broad selection of boutique and vintage amplifiers.
Guitar Center represents most manufacturers, including Marshall, Fender,
Crate, Ampeg and Roland.
PERCUSSION INSTRUMENTS. The Company believes that Guitar
Center is the largest retailer 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. 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. 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 for musicians at
every level, from the casual hobbyist to the professional recording
engineer. Guitar Center's products 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 its
vendors' largest customer, 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. In addition, the Company offers a
30-day unconditional return policy on all products.
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
39
<PAGE>
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 print 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 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.
40
<PAGE>
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 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 3.3x in 1993 to 4.0x 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 twenty-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,
41
<PAGE>
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 attractiveness 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 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 stores in the Miami, 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, and store location. 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 which 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.
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<PAGE>
STORE LOCATIONS
The table below sets forth certain information concerning Guitar Center
stores:
<TABLE>
<CAPTION>
YEAR GROSS
STORE OPENED SQUARE 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 10,600 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 Lease
Pleasant Hill (1).................................................. 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
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) Anticipated to be opened by the end of fiscal 1996.
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.
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THE RECAPITALIZATION
On June 5, 1996, Guitar Center consummated a series of transactions to
effect a Recapitalization of the Company. The Recapitalization included the
following transactions: (i) members of the Company's management purchased
500,000 shares of the Company's 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 value of $49.5 million in exchange for
cancellation of outstanding options exercisable for 495,000 shares of Common
Stock; (iii) the Company's sole shareholder, the Scherr Trust, received 198,000
shares of Junior Preferred Stock with an aggregate liquidation value of $19.8
million in exchange for 19,800,000 shares of Common Stock; (iv) the Investors
purchased 700,000 shares of Common Stock and 693,000 shares of Junior Preferred
Stock for $70.0 million cash; (v) the DLJ Investors purchased 800,000 shares of
Senior Preferred Stock with an aggregate liquidation value of $20.0 million and
Warrants to purchase 73,684 shares of Common Stock and 72,947 shares of Junior
Preferred Stock, all for an aggregate purchase price of $20.0 million cash; (vi)
DLJ Bridge purchased $51.0 million aggregate principal amount of senior
unsecured increasing rate notes for cash and Chemical loaned $49.0 million to
the Company; (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 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 aggregated approximately
$11.0 million.
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 the New Credit Facility. See "Description of Certain Indebtedness -- The
New Credit Facility." Immediately following the Recapitalization, the Company
effected a 100 to 1 stock split. Unless stated otherwise in this Prospectus, all
amounts have been adjusted as appropriate to reflect such stock split.
On July 2, 1996 the Company issued an aggregate of $100 million of Old Notes
to DLJ and 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. See "Certain
Transactions."
44
<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
Raymond Scherr...................... 48 Director
David Ferguson...................... 41 Director
Jeffrey Walker...................... 40 Director
Michael Lazarus..................... 41 Director
Steven Burge........................ 40 Director
KEY PERSONNEL
Barry Soosman....................... 36 Vice President of Corporate Development and
General Counsel
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 Amended and Restated 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 Shareholders Agreement among all of the shareholders of
the Company. See "Certain Transactions -- Terms of the Shareholders Agreement."
LARRY THOMAS has served as President and Chief Executive Officer since 1990.
Mr. Thomas has been with Guitar Center since 1977. 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 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.
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
45
<PAGE>
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.
RAYMOND SCHERR served as the Chairman of the Board from 1990 until
consummation of the Recapitalization. From 1981 through 1990 Mr. Scherr was also
the Company's President and Chief Executive Officer. Mr. Scherr joined the
Company in 1975 as a salesperson in the Company's San Francisco, California
store.
DAVID FERGUSON is a general partner of Chase Capital Partners, an affiliate
of Chase Securities Inc. 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
Oates 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 from Loyola
College in Baltimore, Maryland and an M.B.A. 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 Securities Inc., and a senior managing director and member of
the Policy Council of Chase Manhattan Bank. 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 from the
University of Virginia and received an M.B.A. 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 and 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. 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. From 1987 through 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.
BARRY SOOSMAN joined the Company in July 1996 as Vice President of Corporate
Development and General Counsel. Mr. Soosman has been a practicing attorney with
Soosman & Associates for eleven 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 in Business Administration (corporate finance and real estate
valuation) with honors and a Juris Doctorate 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.
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.
46
<PAGE>
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 of 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 of Store
Administration in 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has 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 benefit plans (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.
47
<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 ($)
SHARES ACQUIRED VALUE -------------------------- -----------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE (1) EXERCISABLE/UNEXERCISABLE (1)(2)
- ---------------------------- --------------- --------------- -------------------------- -----------------------------
<S> <C> <C> <C> <C>
Larry Thomas................ -- -- 77,778(3) $ 7,390,660
233,333(4) $ 19,616,305
Marty Albertson............. -- -- 38,888(3) $ 3,695,234
168,519(4) $ 14,167,392
Bruce Ross.................. -- -- -- --
Raymond Scherr (5).......... -- -- -- --
</TABLE>
- ------------------------
(1) All options listed in the table were exercisable in fiscal 1995.
(2) Represents the difference between the per share value of Common Stock
calculated in connection with the Recapitalization and the exercise price
per share.
(3) These options were granted in September 1989.
(4) These options were granted in October 1992.
(5) 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 each of Larry Thomas and Marty Albertson,
and a three-year employment agreement with Bruce Ross (collectively, the
"Employment Agreements"). The Employment Agreements provide Messrs. Thomas,
Albertson and Ross (each a "Senior Officer" and collectively, the "Senior
Officers") with base salaries of $500,000, $375,000 and $195,000, respectively.
Each Senior Officer is entitled to participate in all insurance and benefit
plans generally available to executives of the Company. In addition to their
base
48
<PAGE>
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). Mr. Ross will receive annual bonuses at the discretion of the
Board. Mr. Ross is entitled to receive options under the Company's 1996
Performance Stock Option Plan to purchase 8,669 shares of Common Stock at an
exercise price of $1.00 per share.
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. 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 granted options to each
of Larry Thomas and Marty 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 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 a public offering or sale of the Company or 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.
1996 PERFORMANCE STOCK OPTION PLAN
The Company's 1996 Performance Stock Option Plan (the "Plan") was adopted by
the Board of Directors and approved by its sole shareholder on June 3, 1996 and
became effective on that date.
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"). The maximum number of
shares of Common Stock which may be awarded under the Plan is 173,374 shares
(which constitutes 10% of the Common Stock of the Company on a fully diluted
basis following completion of the Recapitalization). Such shares 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.
49
<PAGE>
ELIGIBILITY. Options may be granted under the Plan to employees of and
consultants to the Company, or any of its subsidiaries. However, options may not
be granted to Larry Thomas, Marty Albertson, or any other person serving on the
Committee, and 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 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 upon a public
offering of the Company's stock, 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).
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 on the grant date (or such other value approved
by the Board).
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 Shareholders Agreement described under the caption "Certain
Transactions -- Terms of the Shareholders Agreement" prior to issuing any
options to such person. The Committee, with the Board's approval, and the prior
written consent of the shareholders as provided in the Shareholders 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 rules or the Code.
50
<PAGE>
PRINCIPAL SHAREHOLDERS
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(2) PERCENT
- ----------------------------------------------------------------------------------- ------------------- -----------
<S> <C> <C>
Chase Venture Capital Associates, L.P.............................................. 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)
Scherr Living Trust(3)............................................................. 187,250 13.4%
David Ferguson(4)
Jeffrey Walker(5)
Michael Lazarus(6)
Steven Burge(7)
Larry Thomas(8).................................................................... 191,083 13.7%
Marty Albertson(9)................................................................. 127,388 9.1%
Bruce Ross(10)..................................................................... 8,669 *
Di Martino Family Trust(11)........................................................ 95,542 6.8%
All Executive Officers and Directors as a group (8 persons)........................ 514,390 36.7%
</TABLE>
- ------------------------
* Represents less than 1% of the issued and outstanding shares.
(1)The address is the Company's address at 5155 Clareton Drive, Agoura Hills,
CA 91362.
(2)The number of shares gives effect to a 100 to 1 stock split that was
effectuated following the Recapitalization.
(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)Mr. Ferguson is a general partner of Chase Capital Partners, an affiliate of
Chase VCA and CSI.
(5)Mr. Walker is the managing general partner of Chase Capital Partners, an
affiliate of Chase VCA and CSI.
(6)Mr. Lazarus is a general partner of WPC.
(7)Mr. Burge is a managing director of WFSB.
(8)Does not include 43,344 shares subject to options granted to Mr. Thomas,
which options have not vested as of the date hereof.
(9)Does not include 43,344 shares subject to options granted to Mr. Albertson,
which options have not vested as of the date hereof.
(10)Includes 8,669 shares subject to options granted pursuant to the 1996
Performance Stock Option Plan, which options have not vested as of the date
hereof.
(11)Dave Di Martino is the trustee of the Di Martino Family Trust and exercises
voting and investment control over the shares of common stock.
51
<PAGE>
CERTAIN TRANSACTIONS
MANAGEMENT TRANSACTIONS
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%. The loan,
excluding accrued interest (which was forgiven), was repaid concurrently with
the Recapitalization.
The Company leases the following four properties on a triple-net basis from
entities controlled by Raymond Scherr, a director of the Company: (a) the
Covina, California store for $9,900 per month; (b) the North Chicago, Illinois
store for $8,570 per month; (c) the Arlington, Texas store for $7,687 per month;
and (d) the South Chicago, Illinois store for $8,250 per month. 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.
EQUITY PURCHASE
In connection with the Recapitalization, pursuant to an Agreement dated as
of May 1, 1996 (the "Investor Agreement"), among the Company, the shareholders
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. Chase VCA, one of the Investors, is an affiliate of CSI. The
aggregate purchase price for the shares of Common Stock and Junior Preferred
Stock was $70.0 million, which was paid in cash. Pursuant to the Investor
Agreement, the Scherr Trust and shareholders holding management positions (the
"Management Shareholders") 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. Subsequent to
the Recapitalization, the Company declared a 100 to 1 stock split.
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, 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 the Company granted
certain registration rights to securities held by the DLJ Investors and any
future holders of such securities at any time after the earlier of June 5, 2001
or 180 days after a public offering of the Company's equity securities.
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
cash and Chemical, an affiliate of CSI, loaned $49.0 million to the Company. The
Company applied the net proceeds of the offering of the Senior 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
Effective with the Recapitalization, WFSB, an affiliate of WFB, owns
approximately 7.14% of the Common Stock of the Company. See "Principal
Shareholders." WFB is acting as lender under the New Credit Facility, and is
being paid customary fees therefor. See "Description of Certain Indebtedness --
The New Credit Facility."
TERMS OF THE SHAREHOLDERS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Stockholders Agreement (the "Shareholders Agreement") with all of its holders of
Common Stock and Junior Preferred Stock and any
52
<PAGE>
other securities exercisable or exchangeable for or convertible into Common
Stock or Junior Preferred Stock (collectively, the "Shareholders"). Until the
occurrence of certain events specified in the Shareholders Agreement, the
Shareholders will have certain rights, including the following: (i) to designate
the members of an eleven person Board of Directors as follows: (A) management
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 (ii) to subscribe for a
proportional share of certain future equity issuances by the Company. The
Shareholders Agreement will also (i) prohibit the Company from taking certain
actions without the consent of two-thirds of the 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
Shareholders Agreement, the sale of the Company, and the consummation of an
initial public offering; (ii) obligate the Company to provide certain
Shareholders with financial and other information regarding the Company and with
inspection rights; and (iii) subject to certain exceptions, require Shareholders
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 Shareholder, the Company and
the other Shareholders shall have the right to purchase the Common Stock of such
Management Shareholder at its fair market value.
The provisions of the Shareholders Agreement described above regarding
voting rights, negative covenants, information/inspection rights, restrictions
on transfer and restrictions on the sale of the Company will expire generally
upon the occurrence of certain events including (i) the sale of the Company and
(ii) the date following an underwritten public offering of the Company's Common
Stock having an aggregate offering value of at least $35 million.
SHAREHOLDER REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Registration Rights Agreement (the "Shareholder Registration Rights Agreement")
with all of its holders of Common Stock and any other securities exercisable or
exchangeable for or convertible into Common Stock (the "Equity Holders"). Under
this agreement, the Equity Holders have certain rights to require the Company to
register such holders shares in accordance with the requirements of the
Securities Act to effectuate a public offering of such shares. 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
Shareholder 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 Shareholders (the "Restricted Stock Agreements"). Under
the terms of the Restricted Stock Agreements, Management Shareholders may not
transfer their shares of Junior Preferred Stock before the earlier of (i) the
completion of an underwritten public offering of the Company's Common Stock
having an aggregate offering value of at least $35 million ("Qualified Public
Offering"); (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 Shareholder 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
Shareholder 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 Shareholder 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 Shareholders' tax obligations relating
to such sale or redemption, then the Company will loan to such Management
Shareholder an amount equal to (i) the amount necessary for the Management
Shareholder to pay such tax obligations, as and when such tax obligations shall
become payable by the
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Management Shareholder, less (ii) the aggregate amount of net proceeds from the
sale or redemption of Common Stock or Junior Preferred Stock received by the
Management Shareholders during the Restricted Period. Alternatively, the Company
may, at its option, repurchase from the Management Shareholder for cash a number
of shares of Junior Preferred Stock sufficient in amount to allow the Management
Shareholder 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 Shareholders to grant a first priority security interest
to the Company in all of the Common Stock and Junior Preferred Stock then owned
by the Management Shareholder. The Management Shareholder 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
Internal Revenue Code of 1986, as amended. The Management Shareholders have
agreed to individually reimburse the Company on a pro rata basis for any amounts
paid to Scherr by the Company as required by the Tax Indemnification Agreement,
PROVIDED, HOWEVER, that the aggregate amount reimbursed by the Management
Shareholders 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 shareholder,
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
Shareholders Agreement and 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 Mr. 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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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
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
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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.
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
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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, 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
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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 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
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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 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
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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.
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
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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.
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.
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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, 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),
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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, 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
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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 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.
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"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.
"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,
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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 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
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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.
"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
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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 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
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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 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.
"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.
"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
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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;
(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,
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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
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,
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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.
"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.
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"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.
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
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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 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
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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. 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 require the Company to maintain its
existence and rights and franchises, to maintain its properties, to maintain
insurance on such
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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. 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
COMMON STOCK
The total number of shares of Common Stock that the Company is authorized to
issue is 10,000,000. Subject to the rights of the holders of any Preferred Stock
which may be outstanding, all shares of Common Stock will participate equally in
dividends payable to holders of Common Stock when, as and if declared by the
Company's Board and in net assets available for distribution to holders of
Common Stock on liquidation or dissolution, will have one vote per share on all
matters submitted to a vote of the Company's shareholders and will have
cumulative voting rights in the election of directors. All issued and
outstanding shares of Common Stock are fully paid and nonassessable, and the
holders thereof do not have preemptive rights, except as provided in the
Shareholders Agreement.
PREFERRED STOCK
The Restated Articles of Incorporation of the Company authorize the issuance
of 10,000,000 shares of Preferred Stock. The Board is authorized to determine or
fix for any series of Preferred Stock, the designations, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof. In connection with the
consummation of the Recapitalization, the Board authorized the issuance of
Senior Preferred Stock and Junior Preferred Stock, the terms of which are
described below.
THE SENIOR PREFERRED STOCK
The Certificate of Determination of Preferences of the Senior Preferred
Stock (the "Senior Preferred Stock Certificate of Determination") authorizes the
issuance of up to 4,250,000 shares of Senior Preferred Stock. In connection with
the Recapitalization, the Company issued 800,000 shares of Senior Preferred
Stock with an initial aggregate liquidation preference of $20.0 million. All
outstanding shares of Senior Preferred Stock are fully paid and nonassessable.
RANK. 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 of such
dates being 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 Senior Preferred Stock Certificate of Determination) 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, plus all accrued and unpaid cash
dividends per share to the date fixed for redemption, 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.
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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 plus all accrued and unpaid cash dividends per share to the
date fixed for redemption, 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 (as defined in the Senior Preferred Stock Certificate of Determination)
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, plus all accrued and unpaid cash dividends to the date
fixed for redemption, without interest.
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
Senior Preferred Stock Certificate of Determination. 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 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 Senior Preferred Stock Certificate of Determination 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 Restated
Articles of Incorporation, 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 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 (as an entirety 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 in 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
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effect to such transaction on a PRO FORMA basis, the Consolidated Net Worth (as
defined in the DLJ Preferred Stock Certificate of Determination) of the
surviving entity is at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction.
JUNIOR PREFERRED STOCK
The Company's Certificate of Determination of Preferences of the Junior
Preferred Stock (the "Junior Preferred Stock Certificate of Determination")
authorizes the issuance of up to 1,500,000 shares of 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 DLJ
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 of such dates being 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 Junior Preferred Stock Certificate of Determination), 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 Junior Preferred Stock Certificate of
Determination) 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 (as defined in the Junior
Preferred Stock Certificate of Determination) 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.
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
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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.
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
Junior Preferred Certificate of Determination. The Junior Preferred Certificate
of Determination 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
Restated Articles of Incorporation, 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, 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 (as an entirety 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 in 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 Junior Preferred Certificate of Determination) of
the surviving entity is at least equal to the Consolidated Net Worth of the
Company immediately prior to such transaction.
LIMITATION ON LIABILITY AND INDEMNIFICATION
The Restated Articles 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 shareholders, to the extent
permitted by the California 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 California 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.
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 had 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.
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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
Each broker-dealer that participates in the Exchange Offer ("Participating
Broker-Dealer") that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a 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. 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 in connection with the offers and sales related to
market-making transactions in the Notes. CSI may act as principal or agent 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
proceeds of such sales. CSI has 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 against certain
liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments which CSI might be required to make in respect thereof.
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Chase Venture Capital Associates, L.P. and CB Capital Investors, Inc.,
affiliates of CSI, own in the aggregate 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, an affiliate of CSI. CSI acted as an initial purchaser
in connection with the offering of the Old Notes. In addition, 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 the 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 by
KPMG Peat Marwick LLP as the Company's independent certified public accountant.
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, 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- , (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 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.
83
<PAGE>
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 Cash Flows for the six months ended June 30, 1995
and 1996 (unaudited)..................................................... F-4
Notes to Condensed Financial Statements................................... F-5
Report of Independent Auditors............................................ F-7
Balance Sheets as of December 31, 1994 and 1995........................... F-8
Statements of Income for the years ended December 31, 1993, 1994 and
1995..................................................................... F-9
Statements of Shareholder's Equity for the years ended December 31, 1993,
1994 and 1995............................................................ F-10
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995..................................................................... F-11
Notes to Financial Statements............................................. F-12
</TABLE>
F-1
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1996
----------- -----------
(DOLLARS 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 SHAREHOLDER'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................................................................ -- 13,512
Shareholder's equity:
Common stock, no par value; authorized 2,500,000 shares, issued and outstanding
1,400,000.......................................................................... 4,987 1,436
Warrants............................................................................ -- 6,500
Junior preferred stock.............................................................. -- 138,600
Retained earnings (deficit)......................................................... 13,700 (217,961)
----------- -----------
Total shareholder's equity (deficit).................................................. 18,687 (71,425)
----------- -----------
Total liabilities and shareholder'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
--------- ----------
(DOLLARS 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 18,354
Deferred compensation expense............................................................ 1,040 69,892
--------- ----------
Operating income (loss).................................................................. 5,006 (62,447)
Interest expense, net.................................................................... 87 6,046
Transaction expenses..................................................................... -- 6,176
--------- ----------
Income (loss) before income taxes........................................................ 4,919 (74,669)
Income taxes............................................................................. 74 131
--------- ----------
Net income (loss)........................................................................ $ 4,845 $ (74,800)
--------- ----------
--------- ----------
Pro forma data:
Income (loss) before taxes............................................................. $ 4,919 $ (74,669)
Pro forma tax provision................................................................ 2,562 --
--------- ----------
Pro forma net income (loss)............................................................ $ 2,357 $ (74,669)
---------
---------
Senior and junior preferred stock dividends.............................................. (962)
----------
Pro forma net loss applicable to common shareholder...................................... $ (75,631)
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1996
--------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................................................... $ 4,845 $ (74,800)
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
Compensation related to stock options................................................... -- 36
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 shareholder 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 shareholder.............................................................. (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>
SEE ACCOMPANYING NOTES.
F-4
<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 the Company as
of June 30, 1996, the results of operations and cash flows for the six months
ended June 30, 1996 and 1995.
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.
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 shareholder 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 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 shareholder 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.
F-5
<PAGE>
4. RECAPITALIZATION (CONTINUED)
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.
5. STOCK OPTION PLANS
The Company granted to four officers of the Company stock options to
purchase Common Stock. The options are compensatory under the provisions of
Accounting Principal Board Statement No. 25 and vest over various periods.
Compensation expense of $36,000 has been recorded in the June 30, 1996 statement
of operations. The option agreements contain provisions whereby in the event of
certain initial public offering transactions, the options will immediately vest
and the related compensation expense will be recorded.
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% Notes due 2006 and cash on hand. The 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.
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. ACCUMULATED DIVIDENDS
Accumulated but unpaid dividends on the Junior Preferred Stock and Senior
Preferred Stock aggregated $950,000 as of June 30, 1996.
9. EARNINGS PER SHARE
Earnings per share information is not presented as it is not considered
meaningful.
F-6
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholder
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, shareholder'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-7
<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 SHAREHOLDER'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)
Shareholder'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 shareholder's equity....................................................... 23,423,963 19,763,706
------------- -------------
Total liabilities and shareholder's equity....................................... $ 46,900,080 $ 49,718,614
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<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-9
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF SHAREHOLDER'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 shareholder..................................... -- (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 shareholder..................................... -- (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 shareholder..................................... -- (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-10
<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)
Employee notes............................................. (872) (38,883) (42,241)
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...................... 5,004,285 13,555,221 16,496,559
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)
------------- ------------- --------------
Net cash used in investing activities.......................... (2,618,031) (3,134,247) (3,416,852)
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 shareholder loans................................. (845,790) -- --
Distributions to shareholder................................... (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-11
<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 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.
INCOME TAXES
Effective November 1, 1988, the Company elected to be taxed as a Subchapter
S corporation. This election generally requires the individual shareholder
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 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.
F-12
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.............................................................. $ 21,432,530 $ 23,419,148
Associated accessories................................................... 5,682,753 6,138,663
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-13
<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
F-14
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 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, 1994 and 1995, the Company declared total
contributions of $1,003,128 and $1,272,025 respectively, which is included in
accrued liabilities.
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 $1,755,000 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-15
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Wages, salaries and benefits.......................................................... $ 1,936,953 $ 2,765,613
Sales tax payable..................................................................... 1,460,167 1,666,157
Profit sharing accrual................................................................ 1,003,128 1,272,025
Other................................................................................. 1,208,122 1,456,950
------------ ------------
$ 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
shareholder, 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-16
<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 Exchange Offer...................................................... 15
Capitalization.......................................................... 22
Unaudited Pro Forma Condensed Financial Data............................ 23
Selected Historical Financial Data...................................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 29
Business................................................................ 34
The Recapitalization.................................................... 43
Management.............................................................. 44
Principal Shareholders.................................................. 50
Certain Transactions.................................................... 51
Description of Notes.................................................... 54
The New Credit Facility................................................. 75
Description of Capital Stock............................................ 77
Federal Income Tax Considerations....................................... 81
Plan of Distribution.................................................... 81
Legal Matters........................................................... 82
Experts................................................................. 82
Available Information................................................... 82
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
MANAGEMENT COMPANY, 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 Offering are as follows:
<TABLE>
<CAPTION>
EXPENSE AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
The Commission's Registration Fee.................................................. $ 34,483
Printing Expenses.................................................................. *
Legal Fees and Expenses............................................................ *
Accounting Fees and Expenses....................................................... *
Exchange Agent Fees................................................................ *
Miscellaneous Expenses............................................................. *
---------
Total.......................................................................... *
---------
---------
</TABLE>
- ------------------------
* to be provided by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Restated Articles 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 shareholders, to the extent
permitted by the California 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 California 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 495,000 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 of 198,000 shares of Junior Preferred Stock,
(iv) the Investors purchased 800,000 shares of Senior Preferred Stock and
Warrants to purchase 73,864 shares of Common Stock for $70.0 million in cash,
(v) DLJ Bridge purchased $51.0 million aggregate principal amount of senior
unsecured increasing rate notes for $51.0 million in cash, and (vi) the Company
granted options to purchase an aggregate of 43,344 shares of Common Stock
pursuant to the 1996 Performance Stock Plan.
On July 2, 1996, the Company sold an aggregate of $100 million principal
amount of Old Notes to DLJ and Chase Securities Inc. (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.
II-1
<PAGE>
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 The Company's Restated Articles of Incorporation
3.2* The Company's Amended and Restated 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 validity of the
shares of Common Stock offered hereby
9.1 Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
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
11.1* Computation of Earnings to Fixed Charges
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>
- ------------------------
* To be filed by amendment
(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 August 1996.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By: /s/ LARRY THOMAS
------------------------------------------
Name: Larry Thomas
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Larry Thomas, Marty Albertson and Bruce
Ross his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him in his true name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
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 August 16, 1996
Larry Thomas Officer]
/s/ BRUCE ROSS Vice President, Chief Financial
------------------------------------------- Officer and Secretary [Principal August 16, 1996
Bruce Ross Financial and Accounting Officer]
/s/ MARTY ALBERTSON
------------------------------------------- Executive Vice President, Chief August 16, 1996
Marty Albertson Operating Officer and Director
------------------------------------------- Director August , 1996
Raymond Scherr
/s/ DAVID FERGUSON
------------------------------------------- Director August 16, 1996
David Ferguson
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------- ------------------
------------------------------------------- Director August , 1996
Jeffrey Walker
/s/ MICHAEL LAZARUS
------------------------------------------- Director August 16, 1996
Michael Lazarus
------------------------------------------- Director August , 1996
Steven Burge
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
3.1 The Company's Restated Articles of Incorporation
3.2* The Company's Amended and Restated 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 validity of
the shares of Common Stock offered hereby
9.1 Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
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
11.1* Computation of Earnings to Fixed Charges
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>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
GUITAR CENTER MANAGEMENT COMPANY, INC.
LARRY THOMAS and BRUCE ROSS certify that:
1. They are the President and Secretary, respectively, of GUITAR CENTER
MANAGEMENT COMPANY, INC., a California corporation.
2. The Articles of Incorporation of this corporation are amended and restated
to read as follows:
ARTICLE I
The name of this corporation is GUITAR CENTER MANAGEMENT COMPANY, INC.
ARTICLE II
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 California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the
California Corporations Code.
ARTICLE III
This corporation is authorized to issue two classes of stock designated,
respectively, Common Stock and Preferred Stock. The total number of shares
of Common Stock which this corporation is authorized to issue is
10,000,000. The total number of shares of Preferred Stock which this
corporation is authorized to issue is 10,000,000. The Shares of Preferred
Stock authorized by these Restated Articles 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 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.
ARTICLE IV
Pursuant to Section 301.5 of the General Corporation Law of the State of
California, in the event that the corporation becomes a listed corporation
(as defined in Section 301.5), shareholders shall not be entitled to
cumulate votes with respect to the election of directors.
<PAGE>
ARTICLE V
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 California law. Neither any amendment nor
repeal of this Article V, nor the adoption of any provision of the Articles
of Incorporation inconsistent with this Article V, shall eliminate or
reduce the effect of this Article V in respect of any matter occurring, or
any cause of action, suit or claim that, but for this Article V would
accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE VI
The corporation shall be authorized, whether by bylaw, agreement or
otherwise, to provide indemnification of agents (as defined in Section 317
of the California Corporations Code) , for breach of duty to the
corporation and its shareholders in excess of indemnification expressly
permitted by Section 317 of the California Corporations Code, subject to
the limits on such excess indemnification set forth in Section 204 of the
California Corporations Code.
3. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding
shares of the corporation was One Million Four Hundred Thousand (1,400,000)
Common Shares; and the number of shares voting in favor of the amendment
equaled or exceeded the vote required, such required vote being a majority
of the outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: May 31, 1996.
/s/ LARRY E. THOMAS
---------------------------------
Larry Thomas, President
/s/ BRUCE ROSS
---------------------------------
Bruce Ross, Secretary
2
<PAGE>
------------------------------
------------------------------
GUITAR CENTER MANAGEMENT COMPANY, INC.
ISSUER,
AND
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
TRUSTEE
--------------------
INDENTURE
Dated as of July 2, 1996
----------
$100,000,000
11% Senior Notes due 2006
------------------------------
------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
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ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . 1
SECTION 1.1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2. INCORPORATION BY REFERENCE OF TIA . . . . . . . . . . . 24
SECTION 1.3. RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . . 24
ARTICLE II
THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.1. FORM AND DATING. . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.2. EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . . 25
SECTION 2.3. REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . . 26
SECTION 2.4. PAYING AGENT TO HOLD ASSETS IN TRUST . . . . . . . . . . 27
SECTION 2.5. SECURITYHOLDER LISTS . . . . . . . . . . . . . . . . . . 28
SECTION 2.6. TRANSFER AND EXCHANGE. . . . . . . . . . . . . . . . . . 28
SECTION 2.7. REPLACEMENT SECURITIES . . . . . . . . . . . . . . . . . 36
SECTION 2.8. OUTSTANDING SECURITIES . . . . . . . . . . . . . . . . . 36
SECTION 2.9. TREASURY SECURITIES. . . . . . . . . . . . . . . . . . . 37
SECTION 2.10. TEMPORARY SECURITIES . . . . . . . . . . . . . . . . . . 37
SECTION 2.11. CANCELLATION . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.12. DEFAULTED INTEREST . . . . . . . . . . . . . . . . . . . 38
ARTICLE III
REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 3.1. OPTIONAL REDEMPTION. . . . . . . . . . . . . . . . . . . 39
SECTION 3.2. NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . . . 40
SECTION 3.3. SELECTION OF SECURITIES TO BE REDEEMED . . . . . . . . . 40
SECTION 3.4. NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . 41
SECTION 3.5. EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . 42
SECTION 3.6. DEPOSIT OF REDEMPTION PRICE. . . . . . . . . . . . . . . 42
SECTION 3.7. SECURITIES REDEEMED IN PART. . . . . . . . . . . . . . . 43
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ARTICLE IV
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COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.1. PAYMENT OF SECURITIES. . . . . . . . . . . . . . . . . . 43
SECTION 4.2. MAINTENANCE OF OFFICE OR AGENCY. . . . . . . . . . . . . 44
SECTION 4.3. LIMITATION ON RESTRICTED PAYMENTS. . . . . . . . . . . . 44
SECTION 4.4. CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . . 45
SECTION 4.5. PAYMENT OF TAXES AND OTHER CLAIMS. . . . . . . . . . . . 46
SECTION 4.6. MAINTENANCE OF PROPERTIES AND INSURANCE. . . . . . . . . 46
SECTION 4.7. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT. . . . . . . . 46
SECTION 4.8. REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 4.9. LIMITATION ON STATUS AS INVESTMENT COMPANY . . . . . . . 48
SECTION 4.10. LIMITATION ON TRANSACTIONS WITH AFFILIATES.. . . . . . . 48
SECTION 4.11. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
AND DISQUALIFIED CAPITAL STOCK. . . . . . . . . . . 49
SECTION 4.12. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES. . . . . . . . . . . . . . . 49
SECTION 4.13. LIMITATION ON LIENS SECURING INDEBTEDNESS. . . . . . . . 50
SECTION 4.14. LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK. . . . 50
SECTION 4.15. LIMITATION ON LINES OF BUSINESS. . . . . . . . . . . . . 55
SECTION 4.16. RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK.. . 55
SECTION 4.17. WAIVER OF STAY, EXTENSION OR USURY LAWS. . . . . . . . . 55
ARTICLE V
SUCCESSOR CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 5.1. LIMITATION ON MERGER, SALE OR CONSOLIDATION. . . . . . . 56
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED. . . . . . . . . . . . 57
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 6.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . 57
SECTION 6.2. ACCELERATION OF STATED MATURITY; RESCISSION AND
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ANNULMENT . . . . . . . . . . . . . . . . . . . . . 59
SECTION 6.3. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 6.4. TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . 61
SECTION 6.5. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
SECURITIES. . . . . . . . . . . . . . . . . . . . . 62
SECTION 6.6. PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 6.7. LIMITATION ON SUITS. . . . . . . . . . . . . . . . . . . 63
SECTION 6.8. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST. . . . . . . . . . . . . . . . 64
SECTION 6.9. RIGHTS AND REMEDIES CUMULATIVE . . . . . . . . . . . . . 64
SECTION 6.10. DELAY OR OMISSION NOT WAIVER . . . . . . . . . . . . . . 65
SECTION 6.11. CONTROL BY HOLDERS . . . . . . . . . . . . . . . . . . . 65
SECTION 6.12. WAIVER OF PAST DEFAULT . . . . . . . . . . . . . . . . . 65
SECTION 6.13. UNDERTAKING FOR COSTS. . . . . . . . . . . . . . . . . . 66
SECTION 6.14. RESTORATION OF RIGHTS AND REMEDIES . . . . . . . . . . . 66
ARTICLE VII
TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 7.1. DUTIES OF TRUSTEE. . . . . . . . . . . . . . . . . . . . 67
SECTION 7.2. RIGHTS OF TRUSTEE. . . . . . . . . . . . . . . . . . . . 68
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . 69
SECTION 7.4. TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . 69
SECTION 7.5. NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . . .70
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS. . . . . . . . . . . . . . 70
SECTION 7.7. COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . 70
SECTION 7.8. REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . 71
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC.. . . . . . . . . . . . 72
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. . . . . . . . . . . . . . 73
SECTION 7.11. REFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY . . . . 73
ARTICLE VIII
LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . 73
SECTION 8.1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
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DEFEASANCE. . . . . . . . . . . . . . . . . . . . . 73
SECTION 8.2. LEGAL DEFEASANCE AND DISCHARGE . . . . . . . . . . . . . 73
SECTION 8.3. COVENANT DEFEASANCE. . . . . . . . . . . . . . . . . . . 74
SECTION 8.4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE . . . . . . . 74
SECTION 8.5. DEPOSITED CASH AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD
IN TRUST; OTHER MISCELLANEOUS PROVISIONS . . . . . . . . 76
SECTION 8.6. REPAYMENT TO THE COMPANY . . . . . . . . . . . . . . . . 77
SECTION 8.7. REINSTATEMENT. . . . . . . . . . . . . . . . . . . . . . 77
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS. . . . . . . . . . . . . . . . . . . . . 78
SECTION 9.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS . . . 78
SECTION 9.2. AMENDMENTS, SUPPLEMENTAL INDENTURES AND WAIVERS
WITH CONSENT OF HOLDERS . . . . . . . . . . . . . . 79
SECTION 9.3. COMPLIANCE WITH TIA. . . . . . . . . . . . . . . . . . . 80
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS. . . . . . . . . . . . 81
SECTION 9.5. NOTATION ON OR EXCHANGE OF SECURITIES. . . . . . . . . . 81
SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS, ETC. . . . . . . . . . . . . 82
ARTICLE X
RIGHT TO REQUIRE REPURCHASE. . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 10.1. REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER
UPON A CHANGE OF CONTROL. . . . . . . . . . . . . . 82
ARTICLE XI
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 11.1. TIA CONTROLS . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 11.2. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 11.3. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS . . . . . . 87
SECTION 11.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . 87
SECTION 11.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. . . . . . 87
SECTION 11.6. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR. . . . . . . . 88
SECTION 11.7. NON-BUSINESS DAYS. . . . . . . . . . . . . . . . . . . . 88
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SECTION 11.8. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . 88
SECTION 11.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. . . . . . 89
SECTION 11.10. NO RECOURSE AGAINST OTHERS . . . . . . . . . . . . . . . 89
SECTION 11.11. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . 89
SECTION 11.12. DUPLICATE ORIGINALS. . . . . . . . . . . . . . . . . . . 89
SECTION 11.13. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . 89
SECTION 11.14. TABLE OF CONTENTS, HEADINGS, ETC.. . . . . . . . . . . . 90
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Exhibit A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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INDENTURE, dated as of July 2, 1996, by and among Guitar Center
Management Company, Inc., a California corporation (the "Company"), and U.S.
Trust Company of California, N.A., as Trustee.
Each party hereto agrees as follows for the benefit of each other
party and for the equal and ratable benefit of the Holders of the Company's 11%
Senior Notes due 2006:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1. Definitions.
"ACCELERATION NOTICE" shall have the meaning specified in Section 6.2.
"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.
"AFFILIATE TRANSACTION" shall have the meaning specified in Section
4.10.
"AGENT" means any authenticating agent, Registrar, Paying Agent or
transfer agent.
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"ANCILLARY DOCUMENTS" means the amendment to the Company's Articles of
Incorporation creating the Junior Preferred Stock, the Restricted Stock
Agreements, the Stockholders Agreement, the Shareholder Registration Rights
Agreement, the Employment Agreements, the Management Stock Option Agreements and
the Plan.
"ASSET SALE" shall have the meaning specified in Section 4.14.
"ASSET SALE OFFER" shall have the meaning specified in Section 4.14.
"ASSET SALE OFFER AMOUNT" shall have the meaning specified in
Section 4.14.
"ASSET SALE OFFER PERIOD" shall have the meaning specified in Section
4.14.
"ASSET SALE OFFER PRICE" shall have the meaning specified in Section
4.14.
"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.
"BANKRUPTCY LAW" means Title 11, U.S. Code, or any similar Federal,
state or foreign law for the relief of debtors.
"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.
"BOARD OF DIRECTORS" or "BOARD" means, with respect to the Company,
the Board of Directors of the Company or any committee of the Board of Directors
of the Company authorized, with respect to any particular matter, to exercise
the power of the Board of Directors of the Company.
"BOARD RESOLUTION" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
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"BORROWING BASE" means at any time the sum of (i) 75% of Eligible
Receivables, plus (ii) 65% of Eligible Inventory.
"BRIDGE FACILITY" means the $51.0 million aggregate principal amount
of the Company's senior unsecured increasing rate notes purchased by GCMC
Funding, Inc. and the loan of $49.0 million aggregate principal amount by
Chemical Bank to the Company.
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement,
dated as of June 5, 1996, among the Company, Chemical Bank and GCMC Funding,
Inc.
"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" or "CASH" means such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
"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
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market accounts substantially all of whose assets comprise securities of the
types described in clauses (i) and (ii) above.
"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), 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.
"CHANGE OF CONTROL OFFER" shall have the meaning specified in Section
10.1.
"CHANGE OF CONTROL OFFER PERIOD" shall have the meaning specified in
Section 10.1.
"CHANGE OF CONTROL PURCHASE DATE" shall have the meaning specified in
Section 10.1.
"CHANGE OF CONTROL PURCHASE PRICE" shall have the meaning specified in
Section 10.1.
"CHANGE OF CONTROL PUT DATE" shall have the meaning specified in
Section 10.1.
"COMMISSION" means the SEC.
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"COMPANY" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture, and
thereafter means such successor.
"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 DEPRECIATION AND AMORTIZATION EXPENSE" of any Person
means consolidated depreciation and amortization expense of such Person and its
Consolidated Subsidiaries as reported in accordance with GAAP.
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"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 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 deter-
mined 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 INCOME TAX EXPENSE" of any Person means the provision
for taxes based on income or profits of such Person and its Consolidated
Subsidiaries as reported in accordance with GAAP.
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"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.
"CONSOLIDATED SUBSIDIARY" means, for any Person, each Subsidiary of
such Person (whether now existing or hereafter created or acquired) the
financial statements of
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which are consolidated for financial statement reporting purposes with the
financial statements of such Person in accordance with GAAP.
"COVENANT DEFEASANCE" shall have the meaning specified in Section 8.3.
"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.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"DEBT INCURRENCE RATIO" shall have the meaning specified in Section
4.11.
"DEFAULT" means any event or condition that is, or after notice or
passage of time or both would be, an Event of Default.
"DEFAULTED INTEREST" shall have the meaning specified in Section 2.12.
"DEFINITIVE SECURITIES" means Securities that are in the form of the
Security attached hereto as Exhibit A that do not include the information called
for by footnotes 1 and 3 thereof.
"DEPOSITARY" means, with respect to the Securities issuable or issued
in whole or in part in global form, the person specified in Section 2.3 as the
Depositary with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"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 Securities 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.
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<PAGE>
"DLJ INVESTORS" means DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V. and DLJ Merchant
Banking Funding, Inc.
"DTC" shall have the meaning specified in Section 2.3.
"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 net 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.
"EMPLOYMENT AGREEMENTS" means those employment agreements dated June
5, 1996, between the Company and each of Larry Thomas, Marty Albertson, Bruce
Ross and Barry Soosman.
"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 DEFAULT" shall have the meaning specified in Section 6.1.
"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.
"EXCESS PROCEEDS" shall have the meaning specified in Section 4.14.
"EXCESS PROCEEDS DATE" shall have the meaning specified in Section
4.14.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"EXCHANGE SECURITIES" means the 11% Senior Notes due 2006 to be issued
pursuant to this Indenture, as supplemented from time to time, in connection
with the offer
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<PAGE>
to exchange Securities for the Initial Securities that may be made by the
Company pursuant to the Registration Rights Agreement.
"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,and by 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 Subsidiaries
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.
"FAIR MARKET VALUE" or "FAIR MARKET VALUE" means, with respect to any
assets or properties, the amount at which such assets or properties would change
hands between a willing buyer and a willing seller, within a commercially
reasonable time, each having reasonable knowledge of the relevant facts, neither
being under a compulsion to sell or buy, as such amount is determined by (i) the
Board of Directors of the Company acting reasonably and in good faith or (ii) an
appraisal or valuation firm of national or regional standing selected by the
Company, with experience in the appraisal or valuation of properties or assets
of the type for which value is being determined.
"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 ac-
counting profession as in effect on the Issue Date.
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"GLOBAL SECURITY" means a Security that contains the paragraph
referred to in footnote 1 and the additional schedule referred to in footnote 3
to the form of Security attached hereto as Exhibit A.
"HOLDER" or "SECURITYHOLDER" means the Person in whose name a Security
is registered on the Registrar's books.
"INCUR" or "INCURRENCE" shall have the meaning specified in Section
4.11.
"INCURRENCE DATE" shall have the meaning specified in Section 4.11.
"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 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 Indebted-
ness 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
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<PAGE>
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 this 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.
"INDENTURE" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"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.
"INITIAL PURCHASERS" means Donaldson, Lufkin & Jenrette Securities
Corporation and Chase Securities Inc.
"INITIAL SECURITIES" means the 11% Senior Notes due 2006, as
supplemented from time to time in accordance with the terms hereof, issued under
this Indenture on the Issue Date.
"INTEREST PAYMENT DATE" means the stated due date of an installment of
interest on the Securities.
"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,
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<PAGE>
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 Section 4.11, 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 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.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended.
"INVESTOR AGREEMENT" means the agreement dated as of May 1, 1996,
among the Company, the shareholders named therein and Chase Venture Capital
Associates, L.P., Wells Fargo Small Business Investment Company, Inc. and Weston
Presidio Capital II, L.P.
"INVESTORS" means (i) Chase Venture Capital Associates, L.P., CB
Capital Investors, Inc., Weston Presidio Capital II, L.P., Wells Fargo Small
Business Investment 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
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.
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<PAGE>
"ISSUE DATE" means the date of first issuance of the Securities under
the Indenture.
"JUNIOR PREFERRED STOCK" means the Company's 8% Junior Preferred
Stock, no par value, with such terms and preferences as in effect on the Issue
Date.
"LEGAL DEFEASANCE" shall have the meaning specified in Section 8.2.
"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).
"MANAGEMENT STOCK OPTION AGREEMENTS" means the stock option agreements
between the Company and each of Larry Thomas and Marty Albertson, dated June 5,
1996.
"MATURITY DATE" means, when used with respect to any Security, the
date on which the principal of such Security becomes due and payable as therein
or herein provided, whether at Stated Maturity, the Change of Control Offer, the
Asset Sale Offer, or by declaration of acceleration, call for redemption,
mandatory redemption or otherwise.
"NASDAQ" means the National Association of Securities Dealers
Automated Quotations systems.
"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
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<PAGE>
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 Securities).
"OFFERING MEMORANDUM" means the confidential offering memorandum,
dated June 27, 1996, relating to the Securities.
"OFFICER" means with respect to the Company, the Chief Executive
Officer, the President, any Executive or Senior Vice President, the Chief
Financial Officer, the Treasurer, the Controller, or the Secretary of the
Company.
"OFFICERS' CERTIFICATE" means, with respect to the Company, a
certificate signed by two Officers or by an Officer and an Assistant Secretary
of the Company and otherwise complying with the requirements of Sections 11.4
and 11.5, and delivered to the Trustee or an Agent, as applicable.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee (which may include counsel to the Trustee
or the Company including an employee of the Company) or an Agent, as applicable,
complying with the requirements of Sections 11.4 and 11.5, and delivered to the
Trustee or an Agent, as applicable.
"PAYING AGENT" shall have the meaning specified in Section 2.3 (except
for purposes of Article VIII, it shall have the meaning specified in Section
8.5).
"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
Securities and the date of any event that causes such Subsidiary to no longer to
be a Wholly Owned Subsidiary shall be an Incurrence Date;
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<PAGE>
(b) Indebtedness incurred by the Company evidenced by the
Securities and represented by this Indenture up to the amounts specified herein
as of the date hereof;
(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;
(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 Section 4.11 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 the 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.
16
<PAGE>
"PERMITTED INVESTMENT" means Investments in (a) any of the Securities;
(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 Securities; (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 secur-
ing 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
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<PAGE>
materially interfering with the conduct of the business of the Company or any of
its Subsidiaries or 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 Securities 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.
"PERSON" or "PERSON" means any corporation, individual, partnership,
trust, unincorporated association, or a government or any agency or political
subdivision thereof.
"PLAN" means the Company's 1996 Performance Stock Option Plan as
adopted and in effect on June 3, 1996.
"PREFERRED STOCK" of any Person, means Capital Stock of such Person
(other than common stock of such Person) of any class or classes (however
designated) that ranks prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of stock of such Person.
"PRINCIPAL CORPORATE TRUST OFFICE OF THE TRUSTEE" means the office of
the Trustee as set forth in Section 11.2, provided, however, for the purpose of
maintenance of registration books and presentation of Securities for payment,
transfer or exchange, such term means the office at which the Trustee conducts
its corporate agency business in New York, New York, and such other offices as
the Trustee may designate from time to time.
"PROPERTY" or "PROPERTY" means any right or interest in or to property
or assets of any kind whatsoever, whether real, personal or mixed and whether
tangible or intangible.
"PURCHASE DATE" shall have the meaning specified in Section 4.14.
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<PAGE>
"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 the 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.
"RECAPITALIZATION" means the consummation of a series of transactions
on June 5, 1996, which effected a recapitalization of the Company, as described
in the Offering Memorandum.
"RECORD DATE" means a Record Date specified in the Securities whether
or not such Record Date is a Business Day.
"REDEMPTION DATE," when used with respect to any Security to be
redeemed, means the date fixed for such redemption pursuant to Article III of
this Indenture and Paragraph 5 in the form of Security attached hereto as
Exhibit A.
"REDEMPTION PRICE," when used with respect to any Security to be
redeemed, means the redemption price for such redemption pursuant to Paragraph 5
in the form of Security attached hereto as Exhibit A, which shall include,
without duplication, in each case, accrued and unpaid interest to the Redemption
Date (subject to the provisions of Section 3.5).
"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 Securities or this Indenture.
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<PAGE>
"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, decease, 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 Securities 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.
"REGISTRAR" shall have the meaning specified in Section 2.3.
"REGISTRATION AGREEMENT" means the registration agreement dated June
5, 1996, among the Company and the DLJ Investors.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of the Issue Date by and between the Company, on the one
hand, and the Initial Purchasers, on the other hand, providing for certain
registration rights for the Securities.
"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.
"RESTRICTED STOCK AGREEMENTS" means the restricted stock agreements
entered into on June 5, 1996, between the Company and each of Larry Thomas,
Marty Albertson, Dave DiMartino, Rod Barger, Rich Pidanick, Don Kelsey, George
Lampos, Bill McGarry and Andy Heyneman.
"SEC" means the Securities and Exchange Commission of the United
States of America.
"SECURITIES" means, collectively, the Initial Securities and, when and
if issued as provided in the Registration Rights Agreement, the Exchange
Securities.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"SECURITIES CUSTODIAN" means the Registrar, as custodian with respect
to the Securities in global form, or any successor entity thereto.
"SECURITIES PURCHASE AGREEMENT" means the securities purchase
agreement dated June 5, 1996, between the Company and the DLJ Investors.
"SECURITYHOLDER" or "HOLDER" means the Person in whose name a Security
is registered on the Registrar's books.
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"SENIOR PREFERRED STOCK" means the Company's 14% Senior Preferred
Stock, no par value, with such terms and preferences as in effect on the Issue
Date.
"SHAREHOLDER REGISTRATION RIGHTS AGREEMENT" means the registration
rights agreement dated June 5, 1996, among the Company and all of the holders of
the Company's common stock and any other securities exercisable or exchangeable
for or convertible into common stock.
"SPECIAL RECORD DATE" for payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 2.12.
"STATED MATURITY," when used with respect to any Security, 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 Securities 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.
"TAX INDEMNIFICATION AGREEMENT" means the tax indemnification
agreement dated June 5, 1996, between the Company and Raymond Scherr.
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"TIA" means the Trust Indenture Act of 1939, as amended (15 U.S. Code
Sections 77aaa-77bbbb), as in effect on the date of the execution of this
Indenture, except as otherwise provided in Section 9.3.
"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 the shares of Senior
Preferred Stock are first issued.
"TRANSFER RESTRICTED SECURITIES" means Securities that bear or are
required to bear the legend set forth in Section 2.6 hereof.
"TRUSTEE" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture, and
thereafter means such successor.
"TRUST OFFICER" means any officer within the corporate trust
administration division (or any successor group) of the Trustee or any other
officer of the Trustee customarily performing functions similar to those per-
formed by the Persons who at that time shall be such officers, and also means,
with respect to a particular corporate trust matter, any other officer of the
Trustee to whom such trust matter is referred because of such officer's
knowledge of and familiarity with the particular subject.
"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations
of, or noncallable obligations guaranteed by, the United States of America for
the payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
"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 Section
4.3. 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
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FORMA basis, the Company could incur at least $1.00 of Indebtedness pursuant to
the Debt Incurrence Ratio. 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.
SECTION 2. INCORPORATION BY REFERENCE OF TIA.
Whenever this Indenture refers to a provision of the TIA, such
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"COMMISSION" means the SEC.
"INDENTURE SECURITIES" means the Securities.
"INDENTURE SECURITYHOLDER" means a Holder or a Securityholder.
"INDENTURE TO BE QUALIFIED" means this Indenture.
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee.
"OBLIGOR" on the indenture securities means the Company and any other
obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them thereby.
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SECTION 3. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) provisions apply to successive events and transactions;
(6) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or other
subdivision; and
(7) references to Sections or Articles means reference to such
Section or Article in this Indenture, unless stated otherwise.
ARTICLE II
THE SECURITIES
SECTION 1. FORM AND DATING.
The Securities and the Trustee's certificate of authentication, in respect
thereof, shall be substantially in the form of Exhibit A hereto, which Exhibit
is part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule or usage or the terms hereof.
The Company shall approve the form of the Securities and any notation, legend or
endorsement thereon. Any such notations, legends or endorsements not contained
in the form of Security attached as Exhibit A hereto shall be delivered in
writing to the Trustee. Each Security shall be dated the date of its
authentication.
The terms and provisions contained in the form of Securities shall
constitute, and are hereby expressly made, a part of this Indenture and, to the
extent
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applicable, the Company and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
SECTION 2. EXECUTION AND AUTHENTICATION.
Two Officers shall sign, or one Officer shall sign and one Officer
shall attest to, the Security for the Company by manual or facsimile signature.
The Company's seal shall be impressed, affixed, imprinted or reproduced on the
Securities and may be in facsimile form.
If an Officer whose signature is on a Security was an Officer at the
time of such execution but no longer holds that office at the time the Trustee
authenticates the Security, the Security shall be valid nevertheless and the
Company shall nevertheless be bound by the terms of the Securities and this
Indenture.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security but
such signature shall be conclusive evidence that the Security has been
authenticated pursuant to the terms of this Indenture.
The Trustee shall authenticate or cause to be authenticated the
Initial Securities for original issue in the aggregate principal amount of up to
$100,000,000 and shall authenticate Exchange Securities for original issue in
the aggregate principal amount of up to $100,000,000, in each case upon a
written order of the Company, PROVIDED that such Exchange Securities shall be
issuable only upon the valid surrender for cancellation of Initial Securities of
a like aggregate principal amount. The Officers' Certificate shall specify the
amount of Securities to be authenticated and the date on which the Securities
are to be authenticated. The aggregate principal amount of Securities
outstanding at any time may not exceed $100,000,000, except as provided in
Section 2.7. Upon the written order of the Company in the form of an Officers'
Certificate, the Trustee shall authenticate Securities in substitution of
Securities originally issued to reflect any name change of the Company.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities. Unless otherwise provided in the
appointment, an authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company, any Affiliate of the Company,
or any of their respective Subsidiaries.
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Securities shall be issuable only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
SECTION 3. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency in the Borough of
Manhattan, The City of New York, where Securities may be presented for
registration of transfer or exchange ("Registrar") and an office or agency of
the Company where Securities may be presented for payment ("Paying Agent") and
where notices and demands to or upon the Company in respect of the Securities
may be served. The Company may act as Registrar or Paying Agent, except that
for the purposes of Articles III, VIII, X and Section 4.14 and as otherwise
specified in this Indenture, neither the Company nor any Affiliate of the
Company shall act as Paying Agent. The Registrar shall keep a register of the
Securities and of their transfer and exchange. The Company may have one or more
co-Registrars and one or more additional Paying Agents. The term "Registrar"
includes any co-registrar and the term "Paying Agent" includes any additional
Paying Agent. The Company hereby initially appoints the Trustee as Registrar
and Paying Agent, and by its signature hereto, the Trustee hereby agrees so to
act. The Company may at any time change any Paying Agent or Registrar without
notice to any Holder.
The Company shall enter into an appropriate written agency agreement
with any Agent (including the Paying Agent) not a party to this Indenture, which
agreement shall implement the provisions of this Indenture that relate to such
Agent, and shall furnish a copy of each such agreement to the Trustee. The
Company shall promptly notify the Trustee in writing of the name and address of
any such Agent. If the Company fails to maintain a Registrar or Paying Agent,
the Trustee shall act as such.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depositary with respect to the Global Securities.
The Company initially appoints the Registrar to act as Securities
Custodian with respect to the Global Securities.
Upon the occurrence of an Event of Default described in Section 6.1(d)
or (f), the Trustee shall, or upon the occurrence of any other Event of Default
by notice to the Company, the Registrar and the Paying Agent, the Trustee may,
assume the duties and obligations of the Registrar and the Paying Agent
hereunder.
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The Trustee is authorized to enter into a letter of representation
with DTC in the form provided to the Trustee by the Company and to act in
accordance with such letter.
SECTION 4. PAYING AGENT TO HOLD ASSETS IN TRUST.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that such Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all assets held by the Paying Agent for the payment of
principal of, premium, if any, or interest on, the Securities (whether such
assets have been distributed to it by the Company or any other obligor on the
Securities), and shall notify the Trustee in writing of any Default in making
any such payment. If either of the Company or a Subsidiary of the Company acts
as Paying Agent, it shall segregate such assets and hold them as a separate
trust fund for the benefit of the Holders or the Trustee. The Company at any
time may require a Paying Agent to distribute all assets held by it to the
Trustee and account for any assets disbursed and the Trustee may at any time
during the continuance of any payment Default or any Event of Default, upon
written request to a Paying Agent, require such Paying Agent to distribute all
assets held by it to the Trustee and to account for any assets distributed.
Upon distribution to the Trustee of all assets that shall have been delivered by
the Company to the Paying Agent, the Paying Agent (if other than the Company)
shall have no further liability for such assets.
SECTION 5. SECURITYHOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee on or before the
third Business Day after each Record Date and at such other times as the Trustee
or any such Paying Agent may request in writing a list in such form and as of
such date as the Trustee reasonably may require of the names and addresses of
Holders and the Company shall otherwise comply with TIA Section 312(a).
SECTION 6. TRANSFER AND EXCHANGE.
(a) TRANSFER AND EXCHANGE OF DEFINITIVE SECURITIES. When
Definitive Securities are presented to the Registrar with a request:
(x) to register the transfer of such Definitive Securities; or
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(y) to exchange such Definitive Securities for an equal principal
amount of Definitive Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; PROVIDED, HOWEVER,
that the Definitive Securities surrendered for registration of transfer or
exchange:
(i) shall be duly endorsed or accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company and
the Registrar duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(ii) in the case of Definitive Securities that are
Transfer Restricted Securities, such request shall be accompanied by the
following additional information and documents, as applicable:
(A) if such Transfer Restricted Securities are being
delivered to the Registrar by a Holder for registration in the name of
such Holder, without transfer, a certification from such Holder to
that effect (in substantially the form set forth on the reverse of the
Security); or
(B) if such Transfer Restricted Security is being
transferred to a "qualified institutional buyer" (as defined in Rule
144A under the Securities Act) in accordance with Rule 144A under the
Securities Act, a certification to that effect (in substantially the
form set forth on the reverse of the Security); or
(C) if such Transfer Restricted Security is being
transferred (i) pursuant to an exemption from registration in
accordance with Rule 144 or Regulation S under the Securities Act or
(ii) pursuant to an effective registration statement under the
Securities Act, or (iii) to an "institutional accredited investor"
within the meaning of Rule 501(a)(1), (2), (3) or (7) under the
Securities Act that is acquiring the security for its own account, or
for the account of such an institutional accredited investor, in each
case in a minimum principal amount of the Securities of $100,000, not
with a view to or for offer or sale in connection with any
distribution in violation of the Securities Act, or (iv) in reliance
on another exemption from the registration requirements of the
Securities Act, a certification to that effect (in substantially the
form set forth on the reverse of the Security)
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and in the case of (i), (iii) and (iv) above, if the Company or the
Trustee so request, an Opinion of Counsel reasonably acceptable to the
Company and to the Trustee to the effect that such transfer is in
compliance with the Securities Act.
(b) RESTRICTIONS ON TRANSFER OF A DEFINITIVE SECURITY FOR A
BENEFICIAL INTEREST IN A GLOBAL SECURITY. A Definitive Security may not be
exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below. Upon receipt by the Registrar
of a Definitive Security, duly endorsed or accompanied by appropriate
instruments of transfer, in form satisfactory to the Registrar, together with:
(i) if such Definitive Security is a Transfer Restricted
Security, certification, substantially in the form set forth on the reverse
of the Security, that such Definitive Security is being transferred to a
"qualified institutional buyer" (as defined in Rule 144A under the
Securities Act) in accordance with Rule 144A under the Securities Act; and
(ii) whether or not such Definitive Security is a
Transfer Restricted Security, written instructions of the Holder directing
the Registrar to make, or to direct the Securities Custodian to make, an
endorsement on the Global Security to reflect an increase in the aggregate
principal amount of the Securities represented by the Global Security,
then the Registrar shall cancel such Definitive Security and cause, or direct
the Securities Custodian to cause, in accordance with the standing instructions
and procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased accordingly. If no Global Securities are then outstanding, the
Company shall issue and the Trustee shall authenticate a new Global Security in
the appropriate principal amount.
(c) TRANSFER AND EXCHANGE OF GLOBAL SECURITIES. The transfer
and exchange of Global Securities or beneficial interests therein shall be
effected through the Depositary, in accordance with this Indenture (including
applicable restrictions on transfer set forth herein, if any) and the procedures
of the Depositary therefor which shall include restrictions on transfer
comparable to those set forth herein to the extent required by the Securities
Act.
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(d) TRANSFER OF A BENEFICIAL INTEREST IN A GLOBAL SECURITY FOR A
DEFINITIVE SECURITY.
(i) Any Person having a beneficial interest in a
Global Security may, upon request, exchange such beneficial interest for a
Definitive Security. Upon receipt by the Registrar of written instructions
or such other form of instructions as is customary for the Depositary from
the Depositary or its nominee on behalf of any Person having a beneficial
interest in a Global Security and upon receipt by the Registrar of a
written order or such other form of instructions as is customary for the
Depositary or the Person designated by the Depositary as having such a
beneficial interest in a Transfer Restricted Security only, the following
additional information and documents (all of which may be submitted by
facsimile):
(A) if such beneficial interest is being transferred to the
Person designated by the Depositary as being the beneficial owner, a
certification from such person to that effect (in substantially the
form set forth on the reverse of the Security); or
(B) if such beneficial interest is being transferred to a
"qualified institutional buyer" (as defined in Rule 144A under the
Securities Act) in accordance with Rule 144A under the Securities Act
a certification to that effect from the transferor (in substantially
the form set forth on the reverse of the Security); or
(C) if such beneficial interest is being transferred (i)
pursuant to an exemption from registration in accordance with Rule 144
or Regulation S under the Securities Act or (ii) pursuant to an
effective registration statement under the Securities Act, or (iii) to
an "institutional accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring
the security for its own account, or for the account of such an
institutional accredited investor, in each case in a minimum principal
amount of the Securities of $100,000, not with any distribution in
violation of the Securities Act, or (iv) in reliance on another
exemption from the registration requirements of the Securities Act, a
certification to that effect from the transferee or transferor (in
substantially the form set forth on the reverse of the Security) and
in the case of (i), (iii) and (iv) above, if the Company or the
Trustee so requests, an Opinion of Counsel from the transferee or
transferor reasonably acceptable to the Company
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and to the Trustee to the effect that such transfer is in compliance
with the Securities Act;
then the Registrar or the Securities Custodian, at the direction of the Trustee,
will cause, in accordance with the standing instructions and procedures existing
between the Depositary and the Securities Custodian, the aggregate principal
amount of the Global Security to be reduced and, following such reduction, the
Company will execute and, upon receipt of an authentication order in the form of
an Officers' Certificate, the Trustee or the Trustee's authenticating agent will
authenticate and deliver to the transferee a Definitive Security in the
appropriate principal amount.
(ii) Definitive Securities issued in exchange for a
beneficial interest in a Global Security pursuant to this Section 2.6(d)
shall be registered in such names and in such authorized denominations as
the Depositary, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Registrar. The Registrar
shall deliver such Definitive Securities to the persons in whose names such
Securities are so registered.
(e) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL SECURITIES.
Notwithstanding any other provisions of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.6), a Global Security
may not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) AUTHENTICATION OF DEFINITIVE SECURITIES IN ABSENCE OF
DEPOSITARY. If at any time:
(i) the Depositary for the Securities notifies the
Company that the Depositary is unwilling or unable to continue as
Depositary for the Global Securities and a successor Depositary for the
Global Securities is not appointed by the Company within 90 days after
delivery of such notice; or
(ii) the Company, in its sole discretion, notifies the
Trustee and the Registrar in writing that they elect to cause the issuance
of Definitive Securities under this Indenture,
then the Company will execute, and the Trustee, upon receipt of an Officers'
Certificate requesting the authentication and delivery of Definitive Securities,
will, or its authen-
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ticating agent will, authenticate and deliver Definitive Securities, in an
aggregate principal amount equal to the principal amount of the Global
Securities, in exchange for such Global Securities.
(g) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL SECURITY. At such
time as all beneficial interests in a Global Security have either been exchanged
for Definitive Securities, redeemed, repurchased or cancelled, such Global
Security shall be returned to or retained and cancelled by the Trustee. At any
time prior to such cancellation, if any beneficial interest in a Global Security
is exchanged for Definitive Securities, redeemed, repurchased or cancelled, the
principal amount of Securities represented by such Global Security shall be
reduced and an endorsement shall be made on such Global Security, by the Trustee
or the Securities Custodian, at the direction of the Trustee, to reflect such
reduction.
(h) LEGENDS.
(i) Except as permitted by the following paragraph
(ii), each Security certificate evidencing the Global Securities and the
Definitive Securities (and all Securities issued in exchange therefor or
substitution thereof other than the Exchange Securities) shall bear a
legend in substantially the following form:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION
UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
SUCH REGISTRATION.
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THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES
NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY,
PRIOR TO THE DATE THAT IS THREE YEARS (OR SUCH SHORTER
PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(K) AS
PERMITTING THE RESALE BY NON-AFFILIATES OF RESTRICTED
SECURITIES WITHOUT RESTRICTION) AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATED PERSON OF THE COMPANY WAS THE
OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY)
(THE "RESALE RESTRICTION TERMINATION DATE"), EXCEPT (A) TO
THE COMPANY; (B) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT; (C)
PURSUANT TO RULE 144A, FOR SO LONG AS IT IS AVAILABLE, TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A; (D)
PURSUANT TO OFFERS AND SALES
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THAT OCCUR OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S
OF THE SECURITIES ACT; (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR,"
WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR
FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT;
OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S, AND THE
TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATIONS AND OTHER INFORMATION SATISFACTORY TO EACH OF
THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN
THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF
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THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
(i) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by a
Global Security) pursuant to Rule 144 under the Securities Act or an
effective registration statement under the Securities Act:
(A) in the case of any Transfer Restricted Security that is
a Definitive Security, the Registrar shall permit the Holder thereof
to exchange such Transfer Restricted Security for a Definitive
Security that does not bear the legend set forth in (i) above and
rescind any restriction on the transfer of such Transfer Restricted
Security in the case of a sale or transfer pursuant to Rule 144 under
the Securities Act, after the Resale Restriction Termination Date (as
defined in clause (h)(i) above) or delivery of an Opinion of Counsel;
and
(B) any such Transfer Restricted Security represented by a
Global Security shall not be subject to the provisions set forth in
(i) above (such sales or transfers being subject only to the
provisions of Section 2.6(c) hereof); PROVIDED, HOWEVER, that with
respect to any request for an exchange of a Transfer Restricted
Security that is represented by a Global Security for a Definitive
Security that does not bear the legend set forth in (i) above, which
request is made in reliance upon Rule 144 under the Securities Act,
the Holder thereof shall certify in writing (to be accompanied by an
Opinion of Counsel) to the Registrar that such request is being made
pursuant to Rule 144 under the Securities Act (such certification to
be substantially in the form set forth on the reverse of the
Security).
(j) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF
DEFINITIVE SECURITIES.
(i) To permit registrations of transfers and
exchanges, the Company shall execute and the Trustee or any authenticating
agent of the Trustee shall authenticate Definitive Securities and Global
Securities at the Registrar's request.
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(ii) No service charge shall be made to a Holder for
any registration of transfer or exchange, but the Company may require
payment of a sum sufficient to cover any transfer tax, assessment, or
similar governmental charge payable in connection therewith (other than any
such transfer taxes, assessments, or similar governmental charge payable
upon exchanges or transfers pursuant to Section 2.2 (fourth paragraph),
2.10, 3.7, 4.14(8), 9.5, or 10.1 (final paragraph)).
(iii) The Registrar shall not be required to register
the transfer of or exchange (a) any Definitive Security selected for
redemption in whole or in part pursuant to Article III, except the
unredeemed portion of any Definitive Security being redeemed in part, or
(b) any Security for a period beginning 15 Business Days before the mailing
of a notice of an offer to repurchase pursuant to Article X or Section 4.14
hereof or redeem Securities pursuant to Article III hereof and ending at
the close of business on the day of such mailing.
(iv) Prior to due presentment for registration or
transfer of any Security, the Trustee, any Agent and the Company may deem
and treat the Person in whose name the Security is registered as the
absolute owner of such Security, and none of the Trustee, Agent or the
Company shall be affected by notice to the contrary.
SECTION 7. REPLACEMENT SECURITIES.
If a mutilated Security is surrendered to the Trustee or if the Holder
of a Security claims and submits an affidavit or other evidence, satisfactory to
the Trustee to the effect that the Security has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee or any authenticating
agent of the Trustee shall authenticate a replacement Security if the Trustee's
requirements are met. If required by the Trustee or the Company, such Holder
must provide an indemnity bond or other indemnity, sufficient in the judgment of
both the Company and the Trustee, to protect the Company, the Trustee or any
Agent from any loss which any of them may suffer if a Security is replaced. The
Company may require the payment of a sum sufficient to cover any transfer tax,
assessment or similar governmental charge that may be imposed in relation to the
issuance of any new Security and charge such Holder for its reasonable, out-of-
pocket expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company
and shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Securities duly issued hereunder.
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SECTION 8. OUTSTANDING SECURITIES.
Securities outstanding at any time are all the Securities that have
been authenticated by the Trustee (including any Security represented by a
Global Security) except those cancelled by it, those delivered to it for
cancellation and those described in this Section 2.8 as not outstanding. A
Security does not cease to be outstanding because the Company or an Affiliate of
the Company holds the Security, except as provided in Section 2.9.
If a Security is replaced pursuant to Section 2.7 (other than a
mutilated Security surrendered for replacement), it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Security
is held by a BONA FIDE purchaser. A mutilated Security ceases to be outstanding
upon surrender of such Security and replacement thereof pursuant to Section 2.7.
If on a Redemption Date or the Maturity Date the Paying Agent (other
than the Company or an Affiliate of the Company) holds Cash or U.S. Government
Obligations sufficient to pay all of the principal and interest and premium, if
any, due on the Securities payable on that date and payment of the Securities
called for redemption is not otherwise prohibited, then on and after that date
such Securities cease to be outstanding and interest on them ceases to accrue.
SECTION 9. TREASURY SECURITIES.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, amendment, supplement, waiver or
consent, Securities owned by the Company or Affiliates of the Company shall be
disregarded, except that, for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, amendment, supplement,
waiver or consent, only Securities that a Trust Officer of the Trustee knows are
so owned shall be disregarded.
SECTION 10. TEMPORARY SECURITIES.
Until Definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of Definitive Securities but may
have variations that the Company reasonably and in good faith considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate Definitive Securities in
exchange for temporary Securities. Until so exchanged, the temporary
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Securities shall in all respects be entitled to the same benefits under this
Indenture as permanent Securities authenticated and delivered hereunder.
SECTION 11. CANCELLATION.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to it or them (as applicable) for registration of
transfer, exchange or payment. The Trustee or, at the direction of the Trustee,
the Registrar or the Paying Agent (other than the Company or an Affiliate of the
Company), and no one else shall cancel and, at the written direction of the
Company, shall dispose of all Securities surrendered for registration of
transfer, exchange, payment or cancellation. Subject to Section 2.7, the
Company may not issue new Securities to replace Securities that have been paid
or delivered to the Trustee for cancellation. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as provided
in this Section 2.11, except as expressly permitted in the form of Securities
and as permitted by this Indenture.
SECTION 12. DEFAULTED INTEREST.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date, plus, to the extent
lawful, any interest payable on the defaulted interest (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered holder on the
relevant Record Date, and such Defaulted Interest may be paid by the Company, at
its election in each case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the persons in whose names the Securities (or their respective
predecessor Securities) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest, which shall
be fixed in the following manner. The Company shall notify the Trustee and
the Paying Agent in writing of the amount of Defaulted Interest proposed to
be paid on each Security and the date of the proposed payment, and at the
same time the Company shall deposit with the Paying Agent an amount of Cash
equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Paying
Agent for such deposit prior to the date of the proposed payment, such Cash
when deposited to be held in trust for the benefit of the persons entitled
to such Defaulted Interest as provided in this clause (1). Thereupon the
Trustee shall fix a Special Record Date for the payment of such
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Defaulted Interest which shall be not more than 15 days and not less than
10 days prior to the date of the proposed payment and not less than 10 days
after the receipt by the Trustee of the notice of the proposed payment.
The Trustee shall promptly notify the Company of such Special Record Date
and, in the name and at the expense of the Company, shall cause notice of
the proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder at his
address as it appears in the Security register not less than 10 days prior
to such Special Record Date. Notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor having been mailed
as aforesaid, such Defaulted Interest shall be paid to the persons in whose
names the Securities (or their respective predecessor Securities) are
registered on such Special Record Date and shall no longer be payable
pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest
in any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee and the Paying Agent of the proposed payment
pursuant to this clause, such manner shall be deemed practicable by the
Trustee and the Paying Agent.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
ARTICLE III
REDEMPTION
SECTION 1. OPTIONAL REDEMPTION.
Redemption of Securities, as permitted by any provision of this
Indenture, shall be made in accordance with such provision and this Article III.
The Company will not have the right to redeem any Securities prior to July 1,
2001, except as provided in the immediately following paragraph. On or after
July 1, 2001, the Company will have the right to redeem all or any part of the
Securities at the Redemption Prices specified in the form of Security attached
as Exhibit A set forth therein in Paragraph 5 thereof, including accrued and
unpaid interest to the Redemption Date (subject to the right of Holders of
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record on a Record Date to receive interest due on an Interest Payment Date that
is on or prior to such Redemption Date, and subject to the provisions set forth
in Section 3.5).
Notwithstanding the foregoing, prior to July 1, 1999, upon an Initial
Public Equity Offering for cash, up to 33 1/3% of the aggregate principal amount
of the Securities originally outstanding 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 than 60 days, notice to each Holder of the Securities to
be redeemed, with cash from the Net Cash Proceeds of such Initial Public Equity
Offering, at 110% of the 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 and subject to the provisions set forth
in Section 3.5), together with accrued and unpaid interest thereon, if any, 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 Securities remain outstanding.
SECTION 2. NOTICES TO TRUSTEE.
If the Company elects to redeem Securities pursuant to Paragraph 5 of
the Securities, it shall notify the Trustee in writing of the Redemption Date
and the principal amount of Securities to be redeemed and whether it wants the
Trustee to give notice of redemption to the Holders.
If the Company elects to reduce the principal amount of Securities to
be redeemed pursuant to Paragraph 5 of the Securities by crediting against any
such redemption Securities it has not previously delivered to the Trustee for
cancellation, it shall so notify the Trustee of the amount of the reduction and
deliver such Securities with such notice.
The Company shall give each notice to the Trustee provided for in this
Section 3.2 at least 45 days before the Redemption Date (unless a shorter notice
shall be satisfactory to the Trustee). Any such notice may be cancelled at any
time prior to notice of such redemption being mailed to any Holder and shall
thereby be void and of no effect.
SECTION 3. SELECTION OF SECURITIES TO BE REDEEMED.
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If less than all of the Securities are to be redeemed pursuant to
Paragraph 5 of the Securities, the Trustee shall select the Securities or
portions thereof for redemption on a PRO RATA basis.
The Trustee shall make the selection from the Securities outstanding
and not previously called for redemption and shall promptly notify the Company
in writing of the Securities selected for redemption and, in the case of any
Security selected for partial redemption, the principal amount thereof to be
redeemed. Securities in denominations of $1,000 may be redeemed only in whole.
The Trustee may select for redemption portions (equal to $1,000 or any integral
multiple thereof) of the principal of Securities that have denominations larger
than $1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption.
SECTION 4. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a Redemption Date,
the Company shall mail a notice of redemption by first class mail, postage
prepaid, to the Trustee and each Holder whose Securities are to be redeemed to
such Holder's last address as then shown on the registry books of the Registrar.
At the Company's request, the Trustee shall give the notice of redemption in the
Company's name and at the Company's expense. Each notice for redemption shall
identify the Securities to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price, including the amount of accrued
and unpaid interest to be paid upon such redemption;
(3) the name, address and telephone number of the Paying
Agent;
(4) that Securities called for redemption must be
surrendered to the Paying Agent at the address specified in such notice to
collect the Redemption Price;
(5) that, unless the Company defaults in its obligation to
deposit Cash or U.S. Government Obligations which through the scheduled
payment of principal and interest in respect thereof in accordance with
their terms will provide, not later than one day before the due date of any
payment, Cash in
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an amount to fund the Redemption Price with the Paying Agent in accordance
with Section 3.6 hereof or such redemption payment is otherwise prohibited,
interest on Securities called for redemption ceases to accrue on and after
the Redemption Date and the only remaining right of the Holders of such
Securities is to receive payment of the Redemption Price, including accrued
and unpaid interest to the Redemption Date, upon surrender to the Paying
Agent of the Securities called for redemption and to be redeemed;
(6) if any Security is being redeemed in part, the portion
of the principal amount equal to $1,000 or any integral multiple thereof,
of such Security to be redeemed and that, after the Redemption Date, and
upon surrender of such Security, a new Security or Securities in aggregate
principal amount equal to the unredeemed portion thereof will be issued;
(7) if less than all the Securities are to be redeemed, the
identification of the particular Securities (or portion thereof) to be
redeemed, as well as the aggregate principal amount of such Securities to
be redeemed and the aggregate principal amount of Securities to be
outstanding after such partial redemption;
(8) the CUSIP number of the Securities to be redeemed;
(9) that the notice is being sent pursuant to this Section
3.4 and pursuant to the optional redemption provisions of Paragraph 5 of
the Securities; and
(10) disclaimer language regarding CUSIP numbers in the
Trustee's standard form.
SECTION 5. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.4,
Securities called for redemption become due and payable on the Redemption Date
and at the Redemption Price, including accrued and unpaid interest to the
Redemption Date. Upon surrender to the Trustee or, if the Trustee is no longer
the paying agent, to the Paying Agent, such Securities called for redemption
shall be paid at the Redemption Price, including interest, if any, accrued and
unpaid to the Redemption Date; PROVIDED that if the Redemption Date is on or
after a regular Record Date and on or prior to the Interest Payment Date to
which such Record Date relates, the accrued interest shall be payable to the
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Holder of the redeemed Securities registered on the relevant Record Date and no
additional interest will be payable to Holders of the redeemed Securities on the
Redemption Date; and PROVIDED, FURTHER, that if a Redemption Date is a non-
Business Day, payment shall be made on the next succeeding Business Day and no
interest shall accrue for the period from such Redemption Date to such
succeeding Business Day.
SECTION 6. DEPOSIT OF REDEMPTION PRICE.
At least one Business Day prior to the Redemption Date, the Company
shall deposit with the Paying Agent (other than the Company or an Affiliate of
the Company) Cash or U.S. Government Obligations sufficient to pay the
Redemption Price of, and accrued and unpaid interest on, all Securities to be
redeemed on such Redemption Date (other than Securities or portions thereof
called for redemption on that date that have been delivered by the Company to
the Trustee for cancellation). The Paying Agent shall promptly return to the
Company any Cash or U.S. Government Obligations so deposited which is not
required for that purpose upon the written request of the Company.
If the Company complies with the preceding paragraph and the other
provisions of this Article III and payment of the Securities called for
redemption is not otherwise prohibited, interest on the Securities to be
redeemed will cease to accrue on the applicable Redemption Date, whether or not
such Securities are presented for payment. Notwithstanding anything herein to
the contrary, if any Security surrendered for redemption in the manner provided
in the Securities shall not be so paid upon surrender for redemption because of
the failure of the Company to comply with the preceding paragraph, interest
shall continue to accrue and be paid from the Redemption Date until such payment
is made on the unpaid principal, and, to the extent lawful, on any interest not
paid on such unpaid principal, in each case at the rate and in the manner
provided in Section 4.1 hereof and the Security.
SECTION 7. SECURITIES REDEEMED IN PART.
Upon surrender of a Security that is to be redeemed in part, the
Company shall execute, and the Trustee shall authenticate and deliver to the
Holder, without service charge to the Holder, a new Security or Securities equal
in principal amount to the unredeemed portion of the Security surrendered.
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ARTICLES IV
COVENANTS
SECTION 1. PAYMENT OF SECURITIES.
The Company shall pay the principal of and interest and premium, if
any, on the Securities on the dates and in the manner provided herein and in the
Securities. An installment of principal of or interest and premium, if
applicable, on the Securities shall be considered paid on the date it is due if
the Trustee or Paying Agent (other than the Company, a Subsidiary of the Company
or an Affiliate of the Company) holds for the benefit of the Holders, on or
before 10:00 a.m. New York City time on that date, Cash deposited and designated
for and sufficient to pay the installment.
The Company shall pay interest on overdue principal and on overdue
installments of interest at the rate specified in the Securities compounded
semi-annually, to the extent lawful.
SECTION 2. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, The City of
New York, an office or agency where Securities may be presented or surrendered
for payment, where Securities may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Company in respect of the
Securities and this Indenture may be served. The Company shall give prompt
written notice to the Trustee of the location, and any change in the location,
of such office or agency. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the address of the Trustee set forth in Section 11.2.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
PROVIDED, HOWEVER, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York, for such purposes. The Company
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or agency.
The Company hereby initially designates the Trustee's corporate trust office as
such office.
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SECTION 3. LIMITATION ON RESTRICTED PAYMENTS.
The Company and its Subsidiaries shall not, and shall 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, 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 Invest-
ment, 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
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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 first paragraph of this Section 4.3.
SECTION 4. CORPORATE EXISTENCE.
Except as otherwise provided or permitted in Article V or elsewhere in
this Indenture, the Company shall do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence in accordance
with its organizational documents (as the same may be amended from time to time)
and the rights (charter and statutory) and corporate franchises of the Company;
PROVIDED, HOWEVER, that the Company shall not be required to preserve any right
or franchise if the Board of Directors of the Company shall reasonably determine
in good faith that the preservation thereof is no longer desirable in the
conduct of its business.
SECTION 5. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company shall pay, and shall cause each of its Subsidiaries to
pay, prior to delinquency, all material taxes, assessments, and governmental
levies, except (i) as contested in good faith by appropriate proceedings and
with respect to which appropriate reserves have been taken to the extent
required by GAAP, or (ii) where the failure to effect such payment is not
adverse in any material respect to the Holders.
SECTION 6. MAINTENANCE OF PROPERTIES AND INSURANCE.
The Company shall cause all material properties used or useful to the
conduct of its business and the business of each of its Subsidiaries to be
maintained and kept in good condition, repair and working order (reasonable wear
and tear excepted) and supplied with all necessary equipment and shall cause to
be made all necessary repairs, renewals, replacements, betterments and improve-
ments thereof, all as in its reasonable judgment may be necessary, so that the
business carried on in connection therewith may be properly conducted at all
times; PROVIDED, HOWEVER, that nothing in this Section 4.6 shall (a) prohibit
the Company from engaging in any transaction permitted under Section 4.14 or
Article V, and (b) prevent the Company from discontinuing any operation or
maintenance of any of such properties, or disposing of any of them, if such
discontinuance
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or disposal is (i) in the judgment of the Company desirable in the conduct of
the business of such entity and (ii) not disadvantageous in any material respect
to the Holders.
The Company shall provide, or cause to be provided, for itself and
each of its Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds that, in the reasonable, good faith opinion
of the Company is adequate and appropriate for the conduct of the business of
the Company and its Subsidiaries.
SECTION 7. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT.
(a) The Company shall deliver to the Trustee within 120 days
after the end of its fiscal year an Officers' Certificate complying with Section
314(a)(4) of the TIA and stating that a review of its activities and the activi-
ties of its Subsidiaries during the preceding fiscal year has been made under
the supervision of the signing Officers with a view to determining whether the
Company has kept, observed, performed and fulfilled its obligations under this
Indenture and further stating, as to each such Officer signing such certificate,
whether or not the signer knows of any failure by the Company to comply with any
conditions or covenants in this Indenture or any Event of Default or event which
with notice or the passage of time would become an Event of Default which has
occurred and is continuing and, if such signer does know of such a failure or
default, the certificate shall describe such failure or default with
particularity. The Officers' Certificate shall also notify the Trustee should
the relevant fiscal year end on any date other than the current fiscal year end
date.
(b) The Company shall, so long as any of the Securities are
outstanding, deliver to the Trustee, promptly upon becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto. The Trustee shall not be deemed to have knowledge of any
Default or any Event of Default unless one of its Trust Officers receives
written notice thereof from the Company or any of the Holders.
SECTION 8. REPORTS.
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, commencing with the fiscal quarter ending September 30, 1996, annual
and quarterly financial statements sub-
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stantially 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. In addition, from and after the effectiveness of the
Exchange Offer Registration Statement (as defined in the Registration Rights
Agreement) or the Shelf Registration (as defined in the Registration Rights
Agreement), whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
SECTION 9. LIMITATION ON STATUS AS INVESTMENT COMPANY.
Neither the Company nor any Subsidiary shall be required to register
as an "investment company" (as that term is defined in the Investment Company
Act) or otherwise become subject to regulation under the Investment Company Act.
SECTION 10. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company and its Subsidiaries shall not, 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 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
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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 invest-
ment 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.
SECTION 11. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND
DISQUALIFIED CAPITAL STOCK.
Except as set forth in this Section 4.11, the Company shall not, and
shall 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, 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
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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.
SECTION 12. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES.
The Company and its Subsidiaries shall not, and shall not permit any
of their Subsidiaries to, directly or indirectly, create, assume or suffer to
exist any consensual restriction on 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 Securi-
ties or this 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 this 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 sub-
stantially 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 Section 4.12 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.
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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.
SECTION 13. LIMITATION ON LIENS SECURING INDEBTEDNESS.
The Company shall not, and shall 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.
SECTION 14. LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK.
The Company shall not, and shall 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
Securities in accordance with the terms of this Indenture, (ii) to the
repurchase of the Securities pursuant to an irrevocable and unconditional cash
offer (the "Asset Sale Offer") to repurchase the Securities 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 than subsidiaries, which are received as a result of transactions
effected in compliance with Section 4.3) 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
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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.
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 provisions of Article V;
(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.
An acquisition of the Securities 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 clause (1)(a) or (1)(b) above (the "Excess Proceeds")
exceeds $5 million (the date on which the Excess Proceeds exceed $5 million
being herein referred to as the "Excess Proceeds Date") and that each Asset Sale
Offer shall remain open for 20 Business Days following its commencement (the
"Asset Sale Offer Period"). Upon expiration of
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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 Securities properly tendered (on a PRO RATA basis if the Asset Sale Offer
Amount is insufficient to purchase all Securities so tendered) at the Asset Sale
Offer Price (together with accrued and unpaid interest). To the extent that the
aggregate amount of Securities 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 this Indenture
and following the consummation of each Asset Sale Offer in compliance herewith
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, 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 Section 4.14.
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 Section 4.14, all within the period and as otherwise provided in clause
1(a) or 1(b) of the first paragraph of this Section 4.14.
Notice of an Asset Sale Offer will be sent 20 Business Days prior to
the close of business on the third Business Day prior to the date set by the
Company to repurchase Securities pursuant to this Section 4.14 (the "Purchase
Date"), by first-class mail, by the Company to each Holder at its registered
address, with a copy to the Trustee. The notice to the Holders will contain all
information, instructions and materials required by applicable law. The notice,
which (to the extent consistent with this Indenture) shall govern the terms of
the Asset Sale Offer, shall state:
(1) that the Asset Sale Offer is being made pursuant to such
notice and this Section 4.14;
(2) the Asset Sale Offer, the Asset Sale Offer Price (including
the amount of accrued and unpaid interest), and the Purchase
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Date, which Purchase Date shall be on or prior to 45 Business Days following the
Excess Proceeds Date;
(3) that any Security or portion thereof not tendered or accepted
for payment will continue to accrue interest;
(4) that, unless the Company defaults in depositing Cash with the
Paying Agent in accordance with the provisions of this Section 4.14, any
Security, or portion thereof, accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Purchase Date;
(5) that Holders electing to have a Security, or portion thereof,
purchased pursuant to an Asset Sale Offer will be required to surrender the
Security, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Security completed, to the Paying Agent (which may not for
purposes of this Section 4.14, notwithstanding anything in this Indenture to the
contrary, be the Company or any Affiliate of the Company) at the address
specified in the notice prior to the close of business on the third Business Day
prior to the Purchase Date;
(6) that Holders will be entitled to withdraw their elections, in
whole or in part, if the Paying Agent receives, up to the close of business on
the third Business Day prior to the Purchase Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Securities the Holder is withholding and a statement that such
Holder is withdrawing his election to have such principal amount of Securities
purchased;
(7) that if Securities in a principal amount in excess of the
principal amount of Securities to be acquired pursuant to the Asset Sale Offer
are tendered and not withdrawn, the Company shall purchase Securities on a PRO
RATA basis (with such adjustments as may be deemed appropriate by the Company so
that only Securities in denominations of $1,000 or integral multiples of $1,000
shall be acquired);
(8) that Holders whose Securities were purchased only in part
will be issued new Securities equal in principal amount to the unpurchased
portion of the Securities surrendered; and
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(9) a brief description of the circumstances and relevant facts
regarding such Asset Sales.
On or before the Purchase Date, the Company shall (i) accept for
payment Securities or portions thereof properly tendered pursuant to the Asset
Sale Offer on or before the third Business Day prior to the Purchase Date (on a
PRO RATA basis if required pursuant to paragraph (7) hereof) and (ii) deposit
with the Paying Agent Cash sufficient to pay the Asset Sale Offer Price for all
Securities or portions thereof so tendered and accepted, plus accrued and unpaid
interest thereon to the Purchase Date. On the Purchase Date, the Company shall
deliver to the Trustee Securities so accepted together with an Officers'
Certificate stating the Securities or portions thereof being purchased by the
Company. The Paying Agent shall on the Purchase Date mail or deliver to Holders
of Securities so accepted payment in an amount equal to the Asset Sale Offer
Price for such Securities (together with accrued and unpaid interest), and the
Trustee shall promptly authenticate and mail or deliver to such Holders a new
Security equal in principal amount to any unpurchased portion of the Security
surrendered. Any Security not so accepted shall be promptly mailed or delivered
by the Company to the Holder thereof.
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, and any provisions of this
Indenture which conflict with such laws shall be deemed to be superseded by the
provisions of such laws.
SECTION 15. LIMITATION ON LINES OF BUSINESS.
Neither the Company nor any of its Subsidiaries or Unrestricted
Subsidiaries shall 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.
SECTION 16. RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK.
The Company shall not sell, and shall 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.
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SECTION 17. WAIVER OF STAY, EXTENSION OR USURY LAWS.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time voluntarily insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
or any usury law or other law which would prohibit or forgive the Company from
paying all or any portion of the principal of, premium of, or interest on the
Securities as contemplated herein, wherever enacted, now or at any time
hereafter in force or which may affect the covenants or the performance of this
Indenture; and (to the extent that it may lawfully do so) the Company hereby
expressly waives all benefit or advantage of any such law, and covenants that it
will not hinder, delay or impede the execution of any power herein granted to
the Trustee relating to any such law, but will suffer and permit the execution
of every such power as though no such law had been enacted.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 1. LIMITATION ON MERGER, SALE OR CONSOLIDATION.
The Company shall 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 Securities and this 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
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would immediately thereafter be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio; 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.
For purposes of this Section 5.1, 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.
SECTION 2. SUCCESSOR CORPORATION SUBSTITUTED.
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 Section 5.1, 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
this Indenture with the same effect as if such successor corporation had been
named herein 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 Securities and this Indenture, except with respect to
any obligations that arise from, or are related to, such transaction.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 1. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be caused voluntarily or involuntarily, or effected, without limitation,
by operation of law or
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pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(a) the failure by the Company to pay any installment of interest
on the Securities as and when the same becomes due and payable and the
continuance of any such failure for 30 days;
(b) the failure by the Company to pay all or any part of the
principal, or premium, if any, on the Securities 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;
(c) the failure by the Company or any Subsidiary to observe or
perform any covenant or agreement contained in the Securities or this Indenture
(other than a default in the performance of any covenant or agreement which is
specifically dealt with elsewhere in this Section 6.1) and 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 Securities outstanding;
(d) a decree, judgment, or order by a court of competent
jurisdiction shall have been entered adjudicating the Company or any of its
Subsidiaries as bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization of the Company or any of its Subsidiaries under any
bankruptcy or similar law, and such decree or order shall have continued
undischarged and unstayed for a period of 60 consecutive days; or a decree or
order of a court of competent jurisdiction, judgment appointing a receiver,
liquidator, trustee, or assignee in bankruptcy or insolvency for the Company,
any of its Subsidiaries, or any substantial part of the property of any such
Person, or for the winding up or liquidation of the affairs of any such Person,
shall have been entered, and such decree, judgment, or order shall have remained
in force undischarged and unstayed for a period of 60 days;
(e) 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;
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(f) the Company or any of its Subsidiaries shall institute
proceedings to be adjudicated a voluntary bankrupt, or shall consent to the
filing of a bankruptcy proceeding against it, or shall file a petition or answer
or consent seeking reorganization under any bankruptcy or similar law or similar
statute, or shall consent to the filing of any such petition, or shall consent
to the appointment of a Custodian, receiver, liquidator, trustee, or assignee in
bankruptcy or insolvency of it or any substantial part of its assets or
property, or shall make a general assignment for the benefit of creditors, or
shall admit in writing its inability to pay its debts as they become due, or
take any corporate action in furtherance of or to facilitate, conditionally or
otherwise, any of the foregoing; and
(g) 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.
Notwithstanding the 60-day period and notice requirement contained in
Section 6.1(c) above, (i) with respect to a default under Article X, the 60-day
period referred to in Section 6.1(c) shall be deemed to have begun as of the
date notice of a Change of Control Offer is required to be sent to the Holders
in the event that the Company has not complied with the provisions of Section
10.1, and the Trustee or Holders of at least 25% in principal amount of the
outstanding Securities thereafter give the notice of default referred to in
Section 6.1(c) in respect of such compliance to the Company and, if applicable,
the Trustee; PROVIDED, HOWEVER, that if the breach or default is a result of a
default in the payment when due of the Change of Control Purchase Price on the
Change of Control Payment Date, such default shall be deemed, for purposes of
this Section 6.1, to arise on the Change of Control Payment Date; and (ii) with
respect to a default under Section 4.14 requiring the giving of such notice, the
60-day period referred to in Section 6.1(c) shall be deemed to have begun as of
the date the notice of an Asset Sale Offer is required to be sent in the event
that the Company has not complied with the provisions of Section 4.14, and the
Trustee or Holders of at least 25% in principal amount of the outstanding
Securities thereafter give the notice of default referred to in Section 6.1(c)
in respect of such compliance to the Company and, if applicable, the Trustee;
PROVIDED, HOWEVER, that if the breach or default is a result of a default in the
payment when due of the Asset Sale Offer Price on the Purchase Date, such
default shall be deemed, for purposes of this Section 6.1, to arise no later
than on the Purchase Date.
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SECTION 2. ACCELERATION OF STATED MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing (other than an Event
of Default specified in clauses (d) and (f) of Section 6.1, relating to the
Company or any Subsidiary), then in every such case, unless the principal of all
of the Securities shall have already become due and payable, either the Trustee
or the Holders of 25% in aggregate principal amount of the Securities 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
(including any premium reflected in the Change of Control Purchase Price or the
Asset Sale Offer Price as a consequence of an Event of Default resulting from a
breach of Section 4.14 or Article X, whether or not any offer has been made by
the Company pursuant thereto), if any, and accrued and unpaid interest thereon
to be due and payable immediately. If an Event of Default specified in clauses
(d) and (f) of Section 6.1 relating to the Company or any Subsidiary occurs, all
principal and accrued interest thereon will be immediately due and payable on
all outstanding Securities without any declaration or other act on the part of
the Trustee or the Holders.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter provided in this Article VI, the Holders of not less
than a majority in aggregate principal amount of then outstanding Securities, by
written notice to the Company and the Trustee, may rescind, on behalf of all
Holders, any such declaration of acceleration if:
(1) the Company has paid or deposited with the Trustee Cash
sufficient to pay
(A) all overdue interest on all Securities,
(B) the principal of (and premium, if any, applicable
to) any Securities which would become due other than by reason of such
declaration of acceleration, and interest thereon at the rate borne by
the Securities,
(C) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate borne by the
Securities,
(D) all sums paid or advanced by the Trustee hereunder
and the compensation, expenses, disbursements and advances of the
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Trustee and its agents and counsel, and any other amounts due the
Trustee under Section 7.7, and
(2) all Events of Default, other than the non-payment of the
principal of, premium, if any, and interest on Securities which have become
due solely by such declaration of acceleration, have been cured or waived
as provided in Section 6.12.
Notwithstanding the previous sentence of this Section 6.2, no waiver shall be
effective against any Holder for any Event of Default or event which with notice
or lapse of time or both would be an Event of Default with respect to any
covenant or provision which cannot be modified or amended without the consent of
the Holder of each outstanding Security affected thereby, unless all such
affected Holders agree, in writing, to waive such Event of Default or other
event. No such waiver shall cure or waive any subsequent default or impair any
right consequent thereon.
SECTION 3. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if an Event of Default in payment of
principal, premium, or interest specified in clause (a) or (b) of Section 6.1
occurs and is continuing, the Company shall, upon demand of the Trustee, pay to
it, for the benefit of the Holders of such Securities, the whole amount then due
and payable on such Securities for principal, premium (if any) and interest,
and, to the extent that payment of such interest shall be legally enforceable,
interest on any overdue principal (and premium, if any) and on any overdue
interest, at the rate borne by the Securities, and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including compensation to, and expenses, disbursements and advances
of the Trustee and its agents and counsel and all other amounts due the Trustee
under Section 7.7.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust in favor of the
Holders, may institute a judicial proceeding for the collection of the sums so
due and unpaid, may prosecute such proceeding to judgment or final decree and
may enforce the same against the Company and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the property of the
Company, wherever situated.
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If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effective to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 4. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or the property of the Company or
its creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of overdue principal and premium, if any, or
interest) shall be entitled and empowered, by intervention in such proceeding or
otherwise to take any and all actions under the TIA, including
(1) to file and prove a claim for the whole amount of
principal (and premium, if any) and interest owing and unpaid in respect of
the Securities and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee (includ-
ing any claim for the reasonable compensation, expenses, disbursements and
advances of the Trustee and its agent and counsel and all other amounts due
the Trustee under Section 7.7) and of the Holders allowed in such judicial
proceeding, and
(2) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee and its agents and counsel, and any
other amounts due the Trustee under Section 7.7.
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Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment, or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 5. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECU-
RITIES.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust in favor of the Holders, and any recovery of
judgment shall, after provision for the payment of compensation to, and
expenses, disbursements and advances of the Trustee, its agents and counsel and
all other amounts due the Trustee under Section 7.7, be for the ratable benefit
of the Holders of the Securities in respect of which such judgment has been
recovered.
SECTION 6. PRIORITIES.
Any money collected by the Trustee pursuant to this Article VI shall
be applied in the following order, at the date or dates fixed by the Trustee
and, in case of the distribution of such money on account of principal, premium
(if any) or interest, upon presentation of the Securities and the notation
thereon of the payment if only partially paid and upon surrender thereof if
fully paid:
FIRST: To the Trustee in payment of all amounts due pursuant to
Section 7.7;
SECOND: To the Holders in payment of the amounts then due and unpaid
for principal of, premium (if any) and interest on, the Securities in respect of
which or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts due and
payable on such Securities for principal, premium (if any) and interest, re-
spectively; and
THIRD: To the Company or such other Person as may be lawfully
entitled thereto, the remainder, if any.
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The Trustee may, but shall not be obligated to, fix a record date and
payment date for any payment to the Holders under this Section 6.6.
SECTION 7. LIMITATION ON SUITS.
No Holder of any Security shall have any right to order or direct the
Trustee to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(A) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(B) the Holders of not less than 25% in aggregate principal
amount of then outstanding Securities shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(C) such Holder or Holders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and
liabilities to be incurred or reasonably probable to be incurred in
compliance with such request;
(D) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(E) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in aggregate principal amount of the outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatsoever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
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SECTION 8. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST.
Notwithstanding any other provision of this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of, and premium (if any) and interest on, such
Security on the respective dates such payments are due as expressed in such
Security (in the case of redemption, the Redemption Price on the applicable
Redemption Date, in the case of an Asset Sale Offer the Asset Sale Offer Price,
on the date of payment thereof, and in the case of the Change of Control
Purchase Price, on the applicable Change of Control Purchase Date) and to
institute suit for the enforcement of any such payment after such respective
dates, and such rights shall not be impaired without the consent of such Holder.
SECTION 9. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in Section 2.7, no
right or remedy herein conferred upon or reserved to the Trustee or to the
Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 10. DELAY OR OMISSION NOT WAIVER.
No delay or omission by the Trustee or by any Holder of any Security
to exercise any right or remedy arising upon any Event of Default shall impair
the exercise of any such right or remedy or constitute a waiver of any such
Event of Default. Every right and remedy given by this Article VI or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
SECTION 11. CONTROL BY HOLDERS.
The Holder or Holders of a majority in aggregate principal amount of
then outstanding Securities shall 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 upon the Trustee, PROVIDED that
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(1) such direction shall not be in conflict with any rule of law
or with this Indenture or involve the Trustee in personal liability,
(2) the Trustee shall not determine that the action so directed
would be unjustly prejudicial to the Holders not taking part in such
direction, and
(3) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 12. WAIVER OF PAST DEFAULT.
Subject to Section 6.8, prior to the declaration of acceleration of
the maturity of the Securities, the Holder or Holders of a majority in aggregate
principal amount of the Securities then outstanding may waive on behalf of all
Holders any past default hereunder and its consequences, except a default
(A) in the payment of the principal of, premium, if any, or
interest on any Security as specified in clauses (a) and (b) of Section 6.1
and not yet cured; or
(B) in respect of a covenant or provision hereof which,
under Article IX, cannot be modified or amended without the consent of the
Holder of each outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair the exercise of any right arising therefrom.
SECTION 13. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted to be taken by it
as Trustee, any court may in its discretion require the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this
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Section 6.13 shall not apply to any suit instituted by the Company, to any suit
instituted by the Trustee, to any suit instituted by any Holder, or group of
Holders, holding in the aggregate more than 10% in aggregate principal amount of
the outstanding Securities, or to any suit instituted by any Holder for
enforcement of the payment of principal of, or premium (if any) or interest on,
any Security on or after the respective Maturity Date expressed in such Security
(including, in the case of redemption, on or after the Redemption Date).
SECTION 14. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
ARTICLE VII
TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this Indenture
and covenants and agrees to perform the same, as herein expressed, subject to
the terms hereof.
SECTION 1. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and use the same degree of care and skill in their exercise as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(I) The Trustee need perform only those duties as are
specifically set forth in this Indenture and no others, and no covenants or
obligations shall be implied in or read into this Indenture which are
adverse to the Trustee, and
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(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
in the case of any such certificates or opinions which by any provision
hereof are specifically required to be furnished to the Trustee, the
Trustee shall examine the certificates and opinions to determine whether or
not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b) of
this Section 7.1,
(2) The Trustee shall not be liable for any error of judgment
made in good faith by it, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts, and
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.11.
(d) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or to take or omit to take any action
under this Indenture or at the request, order or direction of the Holders or in
the exercise of any of its rights or powers if it shall have reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b), (c), (d) and (f) of this Section
7.1.
(f) The Trustee shall not be liable for interest on any assets
received by it except as the Trustee may agree in writing with the Company.
Assets held in trust by the Trustee need not be segregated from other assets,
except to the extent required by law.
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SECTION 2. RIGHTS OF TRUSTEE.
Subject to Section 7.1:
(a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper Person. The Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
consult with counsel and may require an Officers' Certificate or an Opinion of
Counsel, which shall conform to Sections 11.4 and 11.5. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such certificate or advice of counsel.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent appointed
with due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers conferred upon it by this Indenture, nor for any action
permitted to be taken or omitted hereunder by any Agent.
(e) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture, or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters as it may
see fit.
(f) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders, pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
(g) Unless otherwise specifically provided for in this
Indenture, any demand, request, direction or notice from the Company shall be
sufficient if signed by an Officer of the Company.
(h) The Trustee shall have no duty to inquire as to the
performance of the Company's covenants in Article IV hereof or as to the
performance by any Agent
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of its duties hereunder. In addition, the Trustee shall not be deemed to have
knowledge of any Default or Event of Default except any Default or Event of
Default of which the Trustee shall have received written notification or with
respect to which a Trust Officer shall have actual knowledge.
(i) Whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate.
SECTION 3. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company, any of
its Subsidiaries, or its Affiliates with the same rights it would have if it
were not Trustee. Any Agent may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11.
SECTION 4. TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities and it shall not be accountable for the
Company's use of the proceeds from the Securities, and it shall not be
responsible for any statement in the Securities, other than the Trustee's
certificate of authentication (if executed by the Trustee), or the use or
application of any funds received by a Paying Agent other than the Trustee.
SECTION 5. NOTICE OF DEFAULT.
If a Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail to each Securityholder notice of the uncured
Default or Event of Default within 90 days after such Default or Event of
Default becomes known to the Trustee. Except in the case of a Default or an
Event of Default in payment of principal (or premium, if any) of, or interest
on, any Security (including the payment of the Change of Control Purchase Price
on the Change of Control Purchase Date, the payment of the Redemption Price on
the Redemption Date and the payment of the Asset Sale Price on the date of
payment thereof), the Trustee may withhold the notice if and so long as the
board of directors, the executive committee or a trust committee of directors
and/or reasonable
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officers, of the Trustee in good faith determine that withholding the notice is
in the interest of the Securityholders.
SECTION 6. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after each May 15, beginning with May 15, 1997, the
Trustee shall, if required by law, mail to each Securityholder a brief report
dated as of such December 15 that complies with TIA Section 313(a). The Trustee
also shall comply with TIA Sections 313(b) and 313(c).
The Company shall promptly notify the Trustee in writing if the
Securities become listed on any stock exchange or automated quotation system.
A copy of each report at the time of its mailing to Securityholders
shall be mailed to the Company and filed with the SEC and each stock exchange,
if any, on which the Securities are listed.
SECTION 7. COMPENSATION AND INDEMNITY.
The Company agrees to pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable disbursements, expenses
and advances incurred or made by it in accordance with this Indenture. Such
expenses shall include the reasonable compensation, disbursements and expenses
of the Trustee's agents, accountants, experts and counsel.
The Company agrees to indemnify the Trustee and each of its officers
and each of them, directors, attorneys-in-fact and agents for, and hold it
harmless against, any claim, demand, expense (including but not limited to
reasonable compensation, disbursements and expenses of the Trustee's agents and
counsel), loss or liability incurred by it without negligence or bad faith on
the part of the Trustee, arising out of or in connection with the administration
of this trust and its rights or duties hereunder including the reasonable costs
and expenses of defending itself against any claim or liability in connection
with the exercise or performance of any of its powers or duties hereunder. The
Trustee shall notify the Company promptly of any claim asserted against the
Trustee for which it may seek indemnity. The Company shall defend the claim and
the Trustee shall provide reasonable cooperation at the Company's expense in the
defense. The Trustee may have separate counsel and the Company shall pay the
reasonable fees and expenses
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of such counsel. The Company need not pay for any settlement made without its
written consent, which consent shall not be unreasonably withheld. The Company
need not reimburse any expense or indemnify against any loss or liability to the
extent incurred by the Trustee through its negligence, bad faith or willful
misconduct.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a lien prior to the Securities on all assets held or
collected by the Trustee, in its capacity as Trustee, except assets held in
trust to pay principal and premium, if any, of or interest on particular
Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(d) or (f) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
The Company's obligations under this Section 7.7 and any lien arising
hereunder shall survive the resignation or removal of the Trustee, the discharge
of the Company's obligations pursuant to Article VIII of this Indenture and any
rejection or termination of this Indenture under any Bankruptcy Law.
SECTION 8. REPLACEMENT OF TRUSTEE.
The Trustee may resign by so notifying the Company in writing, to
become effective upon the appointment of a successor trustee. The Holder or
Holders of a majority in aggregate principal amount of the outstanding
Securities may remove the Trustee by so notifying the Company and the Trustee in
writing and may appoint a successor trustee with the Company's consent. The
Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10;
(b) the Trustee is adjudged bankrupt or insolvent or an order
for relief is entered with respect to the Trustee under Bankruptcy Law;
(c) a receiver, Custodian, or other public officer takes charge
of the Trustee or its property; or
(d) the Trustee becomes incapable of acting.
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If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holder
or Holders of a majority in aggregate principal amount of the Securities may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that
and provided that all sums owing to the retiring Trustee provided for in Section
7.7 have been paid, the retiring Trustee shall transfer all property held by it
as trustee to the successor Trustee, subject to the lien provided in Section
7.7, the resignation or removal of the retiring Trustee shall become effective,
and the successor Trustee shall have all the rights, powers and duties of the
Trustee under this Indenture. A successor Trustee shall mail notice of its
succession to each Holder.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holder or Holders of at least 10% in aggregate principal amount of the
outstanding Securities may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section
7.8, the Company's obligations under Section 7.7 shall continue for the benefit
of the retiring Trustee.
SECTION 9. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee corporation is
otherwise eligible hereunder, be the successor Trustee.
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SECTION 10. ELIGIBILITY; DISQUALIFICATION.
The Trustee shall at all times satisfy the requirements of TIA Section
310(a)(1), (2) and (5). The Trustee (together with its corporate parent) shall
have a combined capital and surplus of at least $100,000,000 as set forth in its
most recent published annual report of condition. The Trustee shall comply with
TIA Section 310(b).
SECTION 11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE VIII
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
DEFEASANCE.
The Company may, at its option and at any time within one year of the
Stated Maturity of the Securities, elect to have Section 8.2 or Section 8.3
applied to all outstanding Securities upon compliance with the conditions set
forth below in this Article VIII.
SECTION 2. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.1 of the option applicable
to this Section 8.2, the Company shall be deemed to have been discharged from
its obligations with respect to all outstanding Securities on the date the
conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For
this purpose, such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Securities, which shall thereafter be deemed to be "outstanding" only for the
purposes of Section 8.5 and the other Sections of this Indenture referred to in
(a) and (b) below, and to have satisfied all its other obligations under such
Securities and this Indenture (and the Trustee, on demand of and at the expense
of the Company, shall execute proper instruments acknowledging the same), except
for the following which shall survive until otherwise terminated or discharged
hereunder: (a) rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on such Securities when such
payments are due from the trust funds; (b) the
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Company's obligations with respect to such Securities concerning issuing tempo-
rary Securities, registration of Securities, mutilated, destroyed, lost or
stolen Securities, and the maintenance of an office or agency for payment and
money for security payments held in trust; (c) the rights, powers, trust,
duties, and immunities of the Trustee, and the Company's obligations in
connection therewith; and (d) this Article VIII. Upon Legal Defeasance as
provided herein, the Trustee shall promptly execute and deliver to the Company
any documents reasonably requested by the Company to evidence or effect the
foregoing. Subject to compliance with this Article VIII, the Company may
exercise its option under this Section 8.2 notwithstanding the prior exercise of
its option under Section 8.3 with respect to the Securities.
SECTION 3. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.1 of the option applicable
to this Section 8.3, the Company shall be released from its obligations under
the covenants contained in Sections 4.3, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10, 4.11,
4.12, 4.13, 4.14, 4.15, 4.16 and 4.17, Article V and Article X with respect to
the outstanding Securities on and after the date the conditions set forth below
are satisfied (hereinafter, "Covenant Defeasance"), and the Securities shall
thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder. For this purpose, such Covenant
Defeasance means that, with respect to the outstanding Securities, the Company
need not comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document (and Section 6.1(c) shall not apply to any such covenant),
but, except as specified above, the remainder of this Indenture and such
Securities shall be unaffected thereby. In addition, upon the Company's
exercise under Section 8.1 of the option applicable to this Section 8.3,
Sections 6.1(e) and (g) shall not constitute Events of Default.
SECTION 4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Section 8.2 or Section 8.3 to the outstanding Securities:
(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose of making the
following
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payments, specifically pledged as security for, and dedicated solely to, the
benefit of the Holders of such Securities, (a) Cash in an amount, or (b) U.S.
Government Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, Cash in an amount, or (c)
a combination thereof, in such amounts, as in each case will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
and discharge and which shall be applied by the Paying Agent (or other
qualifying trustee) to pay and discharge the principal of, premium, if any, and
interest on the outstanding Securities on the stated maturity or on the
applicable redemption date, as the case may be, of such principal or installment
of principal, premium, if any, or interest on the Securities; PROVIDED that the
Paying Agent shall have been irrevocably instructed to apply such Cash and the
proceeds of such U.S. Government Obligations to said payments with respect to
the Securities. The Paying Agent shall promptly advise the Trustee in writing
of any Cash or Securities deposited pursuant to this Section 8.4;
(b) In the case of an election under Section 8.2, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that (i) the Company has
received from, or there has been published by, the Internal Revenue Service, a
ruling or (ii) since the date hereof, there has been a change in the applicable
Federal income tax law, in either case to the effect that, and based thereon
such opinion shall confirm that, the Holders of the outstanding Securities 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;
(c) In the case of an election under Section 8.3, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Securities 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;
(d) No Default or Event of Default with respect to the
Securities shall have occurred and be continuing on the date of such deposit or,
insofar as Section 6.1(d) or Section 6.1(f) is concerned, at any time in the
period ending on the 91st day after the date of such deposit (it being
understood that this condition is a condition subsequent
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which shall not be deemed satisfied until the expiration of such period, but in
the case of Covenant Defeasance, the covenants which are described under Section
8.3 will cease to be in effect unless an Event of Default under Section 6.1(d)
or Section 6.1(f) occurs during such period);
(e) Such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under this Indenture
or any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them is bound;
(f) In the case of an election under either Section 8.2 or 8.3,
the Company shall have delivered to the Trustee an Officers' Certificate stating
that the deposit made by the Company pursuant to its election under Section 8.2
or 8.3 was not made by the Company with the intent of preferring the Holders of
the Securities 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
(g) 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 Officer's Certificate, clauses (a)
through (f) of this Section 8.4, and, in the case of the Opinion of Counsel,
clauses (a) (with respect to the validity and perfection of the security
interest), (b), (c) and (e) of this Section 8.4 have been complied with.
SECTION 5. DEPOSITED CASH AND U.S. GOVERNMENT OBLIGATIONS TO BE
HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.6, all Cash and U.S. Government Obligations
(including the proceeds thereof) deposited with the Paying Agent (or other
qualifying trustee, collectively for purposes of this Section 8.5, the "Paying
Agent") pursuant to Section 8.4 in respect of the outstanding Securities shall
be held in trust and applied by the Paying Agent, in accordance with the
provisions of such Securities and this Indenture, to the payment, either
directly or through any other Paying Agent as the Trustee may determine, to the
Holders of such Securities of all sums due and to become due thereon in respect
of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
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SECTION 6. REPAYMENT TO THE COMPANY.
Anything in this Article VIII to the contrary notwithstanding, the
Trustee or the Paying Agent, as applicable, shall deliver or pay to the Company
from time to time upon the request of the Company any Cash or U.S. Government
Obligations held by it as provided in Section 8.4 hereof which in the opinion of
a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(a) hereof), are in excess of the amount thereof that
would then be required to be deposited to effect an equivalent Legal Defeasance
or Covenant Defeasance.
Any Cash and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee or any Paying Agent, or then held by the
Company, in trust for the payment of the principal of, premium, if any, or
interest on any Security and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall,
subject to the requirements of applicable law, be paid to the Company on its
request; and the Holder of such Security shall thereafter look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money shall thereupon cease; PROVIDED,
HOWEVER, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Company cause to be published
once, in the NEW YORK TIMES and THE WALL STREET JOURNAL (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such notification
or publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
SECTION 7. REINSTATEMENT.
If (i) the Trustee or Paying Agent is unable to apply any Cash or U.S.
Government Obligations in accordance with Section 8.2 or 8.3, as the case may
be, by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, or (ii) 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 Securities when due, then the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to Section 8.2 or 8.3 until such time as the
Trustee or Paying Agent is permitted to apply such money in accordance with
Sections 8.2 and 8.3, as the case may be; PROVIDED, HOWEVER, that, if the
Company makes any payment of principal of, premium, if any, or interest on any
Security following the reinstatement of
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its obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the Cash and U.S. Government
Obligations held by the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holder, the Company, when authorized by
Board Resolutions, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to cure any ambiguity, defect, or inconsistency, or make any
other provisions with respect to matters or questions arising under this
Indenture which shall not be inconsistent with the provisions of this Indenture,
PROVIDED such action pursuant to this clause shall not adversely affect the
interests of any Holder in any respect;
(2) to add to the covenants of the Company for the benefit of
the Holders, or to surrender any right or power herein conferred upon the
Company;
(3) to provide for guarantors of the Securities;
(4) to evidence the succession of another Person to the Company,
and the assumption by any such successor of the obligations of the Company,
herein and in the Securities in accordance with Article V;
(5) to comply with the TIA;
(6) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities;
(7) to provide for collateral for the Securities; or
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(8) to provide for the issuance and authentication of the
Exchange Securities in exchange for the Initial Securities in compliance with
this Indenture and the Registration Rights Agreement.
SECTION 2. AMENDMENTS, SUPPLEMENTAL INDENTURES AND WAIVERS WITH
CONSENT OF HOLDERS.
Subject to Section 6.8, with the consent of the Holders of not less
than a majority in aggregate principal amount of then outstanding Securities, by
written act of said Holders delivered to the Company and the Trustee, the
Company, when authorized by Board Resolutions, and the Trustee may amend or
supplement this Indenture or the Securities or enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
the Securities or of modifying in any manner the rights of the Holders under
this Indenture or the Securities. Subject to Section 6.8, the Holder or Holders
of not less than a majority in aggregate principal amount of then outstanding
Securities may waive compliance by the Company with any provision of this
Indenture or the Securities. Notwithstanding any of the above, however, no such
amendment, supplemental indenture or waiver shall, without the written consent
of the Holder of each outstanding Security affected thereby:
(1) reduce the percentage of principal amount of Securities
whose Holders must consent to an amendment, supplemental indenture or waiver of
any provision of this Indenture or the Securities;
(2) reduce the rate or extend the time for payment of interest
on any Security;
(3) reduce the principal or premium amount of any Security, or
reduce the Change of Control Purchase Price, the Asset Sale Offer Price or the
Redemption Price;
(4) change the Stated Maturity;
(5) alter the redemption provisions (including the defined terms
used therein) of Article III in a manner adverse to any Holder;
(6) alter the terms or provisions of Section 10.1 in a manner
adverse to the Holders;
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(7) make any changes in the provisions concerning waivers of
Defaults or Events of Default by Holders of the Securities or the rights of
Holders to recover the principal or premium of, interest on, or redemption
payment with respect to, any Security, including without limitation any changes
in Section 6.8, 6.12 or this third sentence of this Section 9.2, except to
increase any required percentage or to provide that certain other provisions of
this Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Security affected thereby;
(8) make the principal of, or the interest or premium on, any
Security payable with anything or in any manner other than as provided for in
this Indenture (including changing the place of payment where, or the coin or
currency in which, any Security or any premium or the interest thereon is
payable) and the Securities as in effect on the date hereof; or
(9) make the Securities subordinate in right of payment to any
extent or under any circumstances to any other Indebtedness.
It shall not be necessary for the consent of the Holders under this
Section 9.2 to approve the particular form of any proposed amendment, supplement
or waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section 9.2
becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture or
waiver.
After an amendment, supplement or waiver under this Section 9.2 or
Section 9.4 becomes effective, it shall bind each Holder.
In connection with any amendment, supplement or waiver under this
Article IX, the Company may, but shall not be obligated to, offer to any Holder
who consents to such amendment, supplement or waiver, or to all Holders,
consideration for such Holder's consent to such amendment, supplement or waiver.
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SECTION 3. COMPLIANCE WITH TIA.
Every amendment, waiver or supplement of this Indenture or the
Securities shall comply with the TIA as then in effect.
SECTION 4. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made on
any Security. However, any such Holder or subsequent Holder may revoke the
consent as to his Security or portion of his Security by written notice to the
Company or the Person designated by the Company as the Person to whom consents
should be sent if such revocation is received by the Company or such Person
before the date on which the Trustee receives an Officers' Certificate
certifying that the Holders of the requisite principal amount of Securities have
consented (and not theretofore revoked such consent) to the amendment,
supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which record date shall be the date so fixed by the
Company notwithstanding the provisions of the TIA. If a record date is fixed,
then notwithstanding the last sentence of the immediately preceding paragraph,
those Persons who were Holders at such record date, and only those Persons (or
their duly designated proxies), shall be entitled to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
record date. No such consent shall be valid or effective for more than 90 days
after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Securityholder, unless it makes a change described in any of clauses
(1) through (9) of Section 9.2, in which case, the amendment, supplement or
waiver shall bind only each Holder of a Security who has consented to it and
every subsequent Holder of a Security or portion of a Security that evidences
the same debt as the consenting Holder's Security; PROVIDED that any such waiver
shall not impair or affect the right of any other Holder to receive payment of
principal and premium of and interest on a Security, on or after the respective
dates set for such amounts to become due and payable expressed in such Security,
or to bring suit for the enforcement of any such payment on or after such
respective dates.
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SECTION 5. NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee
or require the Holder to put an appropriate notation on the Security. The
Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Security shall issue and the
Trustee shall authenticate a new Security that reflects the changed terms. Any
failure to make the appropriate notation or to issue a new Security shall not
affect the validity of such amendment, supplement or waiver.
SECTION 6. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall execute any amendment, supplement or waiver
authorized pursuant to this Article IX; PROVIDED that the Trustee may, but shall
not be obligated to, execute any such amendment, supplement or waiver which
affects the Trustee's own rights, duties or immunities under this Indenture.
The Trustee shall be entitled to receive, and shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of any amendment,
supplement or waiver authorized pursuant to this Article IX is authorized or
permitted by this Indenture.
ARTICLE X
RIGHT TO REQUIRE REPURCHASE
SECTION 1. REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER UPON A
CHANGE OF CONTROL.
(a) In the event that a Change of Control occurs, each Holder
shall have the right, at such Holder's option, pursuant to an irrevocable and
unconditional offer by the Company (the "Change of Control Offer") subject to
the terms and conditions of this Indenture, to require the Company to repurchase
all or any part of such Holder's Securities (PROVIDED that the principal amount
of such Securities must be $1,000 or an integral multiple thereof) on a date
selected by the Company that is no later than 35 Business Days after the
occurrence of such Change of Control (the "Change of Control Purchase Date"), at
a cash price (the "Change of Control Purchase Price") equal to 101% of the
principal amount thereof, plus (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 repur-
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chase date and subject to clause (b)(4) below) accrued and unpaid interest, if
any, to the Change of Control Purchase Date.
(b) In the event of a Change of Control, the Company shall be
required to commence an offer to purchase Securities (a "Change of Control
Offer") as follows:
(1) the Change of Control Offer shall commence within 10
Business Days following the occurrence of the Change of Control;
(2) the Change of Control Offer shall remain open for 20
Business Days following its commencement (the "Change of Control Offer Period");
(3) upon the expiration of the Change of Control Offer Period,
the Company shall purchase all of the properly tendered Securities at the Change
of Control Purchase Price, plus accrued and unpaid interest thereon;
(4) if the Change of Control Purchase Date is on or after a
Record Date and on or before the related Interest Payment Date, any accrued
interest will be paid to the Person in whose name a Security is registered at
the close of business on such Record Date, and no additional interest will be
payable to Securityholders who tender Securities pursuant to the Change of
Control Offer;
(5) the Company shall provide the Trustee and the Paying Agent
with written notice of the Change of Control Offer at least three Business Days
before the commencement of any Change of Control Offer; and
(6) on or before the commencement of any Change of Control
Offer, the Company or the Registrar (upon the request and at the expense of the
Company) shall send, by first-class mail, a notice to each of the
Securityholders, which (to the extent consistent with this Indenture) shall
govern the terms of the Change of Control Offer and shall state:
(i) that the Change of Control Offer is being made
pursuant to such notice and this Section 10.1 and that all Securities, or
portions thereof, tendered will be accepted for payment;
(ii) the Change of Control Purchase Price (including the
amount of accrued and unpaid interest, subject to clause (b)(4) above), the
Change
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of Control Purchase Date and the Change of Control Put Date (as hereinafter
defined);
(iii) that any Security, or portion thereof, not tendered
or accepted for payment will continue to accrue interest;
(iv) that, unless the Company defaults in depositing Cash
with the Paying Agent in accordance with the last paragraph of this Article X or
such payment is prevented, any Security, or portion thereof, accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Purchase Date;
(v) that Holders electing to have a Security, or portion
thereof, purchased pursuant to a Change of Control Offer will be required to
surrender the Security, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Security completed, to the Paying Agent (which
may not for purposes of this Section 10.1, notwithstanding anything in this
Indenture to the contrary, be the Company or any Affiliate of the Company) at
the address specified in the notice prior to the close of business on the
earlier of (a) the third Business Day prior to the Change of Control Purchase
Date and (b) the third Business Day following the expiration of the Change of
Control Offer (such earlier date being the "Change of Control Put Date");
(vi) that Holders will be entitled to withdraw their elec-
tion, in whole or in part, if the Paying Agent (which may not for purposes of
this Section 10.1, notwithstanding anything in this Indenture to the contrary,
be the Company or any Affiliate of the Company) receives, up to the close of
business on the Change of Control Put Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Securities the Holder is withdrawing and a statement that such
Holder is withdrawing his election to have such principal amount of Securities
purchased; and
(vii) a brief description of the events resulting in such
Change of Control.
Any such Change of Control Offer shall be made in compliance with all
applicable Federal and state laws, rules and regulations, including, if
applicable, Regulation 14E under the Exchange Act and the rules and regulations
and regulations thereunder and all other applicable Federal and state securities
laws, and any provisions of this Inden-
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ture which conflict with such laws shall be deemed to be superseded by the
provisions of such laws.
On or before the Change of Control Purchase Date, the Company shall
(i) accept for payment Securities or portions thereof properly tendered pursuant
to the Change of Control Offer on or before the Change of Control Put Date, (ii)
deposit with the Paying Agent Cash sufficient to pay the Change of Control
Purchase Price (together with accrued and unpaid interest, subject to clause
(b)(4) above) for all Securities or portions thereof so tendered and (iii)
deliver to the Trustee Securities so accepted together with an Officers' Certif-
icate listing the Securities or portions thereof being purchased by the Company.
The Paying Agent shall promptly pay to Holders of Securities so accepted an
amount equal to the Change of Control Purchase Price (together with accrued and
unpaid interest, subject to clause (b)(4) above), for such Securities (subject
to clause (b)(4) above), and the Trustee or its authenticating agent shall
promptly authenticate and deliver (or cause to be transferred by book entry) to
such Holders a new Security equal in principal amount to any unpurchased portion
of the Security surrendered; PROVIDED that each such new Security will be in a
principal amount of $1,000 or an integral multiple thereof. Any Securities not
so accepted shall be promptly delivered by the Company to the Holder thereof.
The Company shall publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Purchase Date. Any
Security (or 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.
ARTICLE XI
MISCELLANEOUS
SECTION 1. TIA CONTROLS.
If any provision of this Indenture limits, qualifies, or conflicts
with the duties imposed by operation of the TIA, the imposed duties, upon
qualification of this Indenture under the TIA, shall control.
SECTION 2. NOTICES.
Any notices or other communications to the Company, Paying Agent,
Registrar, Securities Custodian, transfer agent or the Trustee required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex,
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by telecopier or registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
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if to the Company:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, California 91301
Attention: Bruce Ross
Telephone: (818) 735-8800
Telecopy: (818) 735-8855
if to the Trustee:
U.S. Trust Company of California, N.A.
515 South Flower Street, Suite 2700
Los Angeles, CA 90071
Attention: Sandee Parks
Telephone: (213) 861-5066
Telecopy: (213) 488-1370
Any party by notice to each other party may designate additional or
different addresses as shall be furnished in writing by such party. Any notice
or communication to any party shall be deemed to have been given or made as of
the date so delivered, if personally delivered; when answered back, if telexed;
when receipt is acknowledged, if telecopied; and five Business Days after
mailing if sent by registered or certified mail, postage prepaid (except that a
notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Securityholder shall be mailed
to him or her by first-class mail or other equivalent means at his or her
address as it appears on the registration books of the Registrar and shall be
sufficiently given to him or her if so mailed within the time prescribed. Any
notice or communication shall also be mailed to any Person described in TIA
Section 313(c) to the extent required by the TIA.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
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SECTION 3. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to TIA Section 312(b) with
other Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other Person shall
have the protection of TIA Section 312(c).
SECTION 4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate (in form and substance
reasonably satisfactory to the Trustee) stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been met; and
(2) an Opinion of Counsel (in form and substance reasonably
satisfactory to the Trustee) stating that, in the opinion of such counsel,
all such conditions precedent have been met;
PROVIDED, HOWEVER, that in the case of any such request or application as to
which the furnishing of particular documents is specifically required by any
provision of this Indenture, no additional certificate or opinion need be
furnished under this Section 11.4.
SECTION 5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of
TIA Section 314(e) and shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
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(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been met; and
(4) a statement as to whether or not, in the opinion of
each such Person, such condition or covenant has been met; PROVIDED,
HOWEVER, that with respect to matters of fact an Opinion of Counsel may
rely on an Officers' Certificate or certificates of public officials.
SECTION 6. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR.
The Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Paying Agent or Registrar may make reasonable rules for
its functions.
SECTION 7. NON-BUSINESS DAYS.
If a payment date is not a Business Day at such place, payment may be
made at such place on the next succeeding day that is a Business Day, and no
interest shall accrue for the intervening period.
SECTION 8. GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE
AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
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SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY
SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER
JURISDICTION.
SECTION 9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
SECTION 10. NO RECOURSE AGAINST OTHERS.
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 Securities or this Indenture by reason of his, her or its status as such
stockholder, employee, officer or director. Each Securityholder by accepting a
Security waives and releases all such liability. Such waiver and release are
part of the consideration for the issuance of the Securities.
SECTION 11. SUCCESSORS.
All agreements of the Company in this Indenture and the Securities
shall bind its successors. All agreements of the Trustee in this Indenture
shall bind its successor.
SECTION 12. DUPLICATE ORIGINALS.
All parties may sign any number of copies or counterparts of this
Indenture. Each signed copy or counterpart shall be an original, but all of
them together shall represent the same agreement.
SECTION 13. SEVERABILITY.
In case any one or more of the provisions in this Indenture or in the
Securities shall be held invalid, illegal or unenforceable, in any respect for
any reason, the
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validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions shall not in any way be affected or
impaired thereby, it being intended that all of the provisions hereof shall be
enforceable to the full extent permitted by law.
SECTION 14. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents and headings of the Articles and the Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms or provisions hereof.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the date first written above.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Larry E. Thomas
-----------------------------
Name: Larry Thomas
Title: President and Chief Executive
Officer
U.S. TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By: /s/ Sandra H. Leess
-----------------------------
Name: Sandra Leess
Title: Authorized Officer
<PAGE>
EXHIBIT 4.2
RESTRICTED STOCK AGREEMENT
This Agreement, dated as of June 5, 1996 (this "AGREEMENT"), by and between
Guitar Center Management Company, Inc., a California corporation (the
"COMPANY"), and _______________, an individual ("EMPLOYEE").
RECITALS
A. The Company and Employee are party to that certain Employment Letter,
dated as of May 31, 1996 (the "EMPLOYMENT LETTER"), pursuant to which the
Company has engaged Employee to serve as its Executive Vice President and Chief
Operating Officer subject to the terms and conditions therein.
B. Pursuant to the Company's Amended and Restated 1987 Stock Option Plan,
dated October 21, 1992, Employee was granted options to acquire _______ shares
of the Company's Common Stock.
C. In connection with the Employment Letter and the transactions
contemplated by that certain Agreement, dated as of May 1, 1996 (the "Purchase
Agreement"), among the Company, Chase Venture Capital Associates, L.P., Weston
Presidio Capital II, L.P., Wells Fargo Small Business Investment Company, Inc.
and the Stockholders (as defined therein), the Company and Employee desire,
among other things, to cancel the Common Stock options granted to Employee and,
in recognition of Employee's services to the Company, to issue shares of the
Company's Preferred Stock, subject to the restrictions contained herein.
D. As a condition precedent to the Purchase Agreement, the Company and
Employee are required to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained in this Agreement, the parties agree as follows.
1. DEFINITIONS. Terms used in this Agreement shall have the following
meanings:
"ACT" means the Securities Act of 1933, as amended.
"COMMON STOCK" mean the common stock, no par value, of the Company,
and any other securities that may be distributed by the Company or its successor
with respect thereto or in exchange thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAMILY GROUP" shall have the meaning ascribed to it in the
Stockholders Agreement.
"LIQUIDATION VALUE" shall have the meaning set forth in the
Certificate of Designations, Preferences and Rights of 8% Junior Preferred Stock
of the Company.
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"LIQUIDITY EVENT" means the sale or redemption of any shares of Common
Stock or Preferred Stock of the Company for cash.
"NET PROCEEDS FROM LIQUIDITY EVENTS" means the proceeds received by
Employee or any of his Permitted Transferees in connection with a Liquidity
Event (net of any transaction costs payable by Employee or a Permitted
Transferee in connection with such Liquidity Event and net of any federal or
state income taxes or any gain realized as a result of such Liquidity Event,
other than taxes resulting from the lapsing of the Restricted Period).
"PERMITTED TRANSFEREE" means any direct or indirect transferee of any
shares of Preferred Stock or Common Stock from Employee pursuant to Section 3
hereof or Section 5 of the Stockholders Agreement.
"PREFERRED STOCK" means the 8% Junior Preferred Stock of the Company,
created pursuant to the Certificate of Designations, Preferences and Rights of
8% Junior Preference Stock of the Company, and any other securities that may be
distributed by the Company or its successor with respect thereto or in exchange
thereof.
"QUALIFIED PUBLIC OFFERING" shall have the meaning ascribed to it in
the Stockholders Agreement.
"RESTRICTED PERIOD" means the period commencing on the date hereof and
ending on the earliest to occur of: (a) the completion of a Qualified Public
Offering of the Company; (b) a Sale of the Company; or (c) the fifth anniversary
of the date of this Agreement.
"SALE OF THE COMPANY" shall have the meaning ascribed to it in the
Stockholders Agreement.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement, dated as of
June 5, 1996, among the Company, Employee and the other Stockholders defined
therein.
"TAX OBLIGATIONS" means all state and federal income and payroll taxes
due as a result of the deemed receipt of compensation deriving from the issuance
of the Shares hereunder and/or such lapsing of the Restricted Period with
respect to the Shares.
"TERRITORY" means the cities and metropolitan area specified on
EXHIBIT A hereto.
"TRANSFER" or "TRANSFERRED" shall have the meaning ascribed to it in
the Stockholders Agreement.
2. ISSUANCE OF PREFERRED STOCK; CANCELLATION OF COMMON STOCK OPTIONS. In
recognition of Employee's services to the Company, the Company hereby issues and
grants to Employee __________ shares of the Company's Preferred Stock (the
"SHARES"). Employee hereby acknowledges the cancellation pursuant to the
Purchase Agreement of
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Employee's options under the Stock Option Plan to purchase __________ shares of
Common Stock.
3. RESTRICTIONS ON TRANSFER. (a) During the Restricted Period, none of
the Shares may be Transferred; PROVIDED, HOWEVER, all or part of Employee's
legal interest in the Shares may, upon request by Employee, be Transferred (i)
to a member of Employee's Family Group; (ii) upon the dissolution of the
marriage of Employee; or (iii) upon the bankruptcy of Employee; PROVIDED,
FURTHER, that in each such case the restrictions contained herein shall continue
to be applicable based on Employee's actions or circumstances with respect to
the Shares held by the transferee, and shall also be subject to the provisions
of Stockholders Agreement.
(b) Any attempted Transfer other than in accordance with this Section
3 shall be void, and the Company shall refuse to recognize any such Transfer and
shall not reflect on its records any change in record ownership of the Shares
pursuant to any such attempted Transfer.
4. FORFEITURE OF SHARES. If, during the Restricted Period, Employee
directly or indirectly engages in, assists, gives or lends funds to or otherwise
finances, becomes employed by or consults with, or has 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
whether for or by himself or as a representative for any other person (PROVIDED,
HOWEVER, that the aggregate ownership by Employee of no more than two percent
(or a fully diluted basis) of the outstanding equity securities 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), then the Shares shall be automatically forfeited, without
consideration, and returned to the Company and Employee (or his Permitted
Transferees) shall have no rights or interest with respect to the Shares as of
such date.
5. VOTING RIGHTS; DIVIDENDS AND OTHER DISTRIBUTIONS. Subject to Section
4, during the Restricted Period Employee may exercise full voting rights with
respect to the Shares and Employee (or his Permitted Transferees) shall be
entitled to receive all dividends and other distributions paid with respect to
the Shares. If any such dividends or distributions are paid in additional
shares of Preferred Stock, the shares will be subject to the same restrictions
hereunder as the Shares with respect to which they were paid.
6. PAYMENT OF TAXES. (a) If, at the end of the Restricted Period (or at
such other time as Employee is deemed for federal income tax purposes to realize
compensation income from receipt of the Shares), Employee's Shares have not
otherwise been forfeited under Section 4 and the Net Proceeds From Liquidity
Events received by Employee and his Permitted Transferees during the Restricted
Period, if any, does not equal or exceed an amount sufficient to discharge such
Employee's Tax Obligations, then the Company (or its designee) shall loan to
Employee an amount sufficient for Employee to pay such Tax
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Obligations, as and when such Tax Obligations shall be payable by Employee, less
the amount of Net Proceeds From Liquidity Events received by Employee and his
Permitted Transferees during the Restricted Period. The Company (or its
designee) may, at its option, alternatively repurchase from Employee for cash a
number of Shares at the Liquidation Value thereof sufficient in amount to pay
the Tax Obligations. In the event the Company (or its designee) makes a loan
for payment of the taxes due, such loan will be fully recourse to Employee, will
bear interest at an interest rate then being paid by the Company on its
revolving credit facility and principal will be payable in five equal annual
installments. To secure the prompt payment of such loan, the Company (or its
designee) may, as a condition to effectiveness of the loan, require Employee to
grant a first priority perfected security interest to the Company (or its
designee) in all of the Common Stock and Preferred Stock then owned by Employee
and his Permitted Transferees (collectively, the "PLEDGED STOCK"), and in such
event Employee and his Permitted Transferees shall enter into such customary
security agreements and pledge agreements (including transferring custody of the
share certificates along with any stock powers assigned in blank) for the
benefit of the Company (or its designee) as may be reasonably necessary to
effectuate such security interests. Employee and his Permitted Transferees
shall retain the right to vote with respect to the Pledged Stock notwithstanding
the grant of such security interest. Any dividends and distributions payable
with respect to the Pledged Stock shall be paid to the Company (or its designee)
and applied by the Company (or its designee) to reduce principal of the loan,
applied in inverse order of maturity, until such time as all outstanding
principal and interest is paid in full. Subject to the terms of the
Stockholders Agreement and the restrictions on transfer in this Agreement,
Employee or his Permitted Transferee may sell, in a bona-fide arms-length
transaction, all or any portion of the Pledged Stock free and clear of the
Company's (or its designee's) security interest; PROVIDED, HOWEVER, that the Net
Proceeds from Liquidity Events subsequent to the Restricted Period shall be
remitted to the Company (or its designee) to the extent required to repay the
loan. Payments so received by the Company (or its designee) shall be applied by
the Company (or its designee) to reduce principal of the loan applied in inverse
order of maturity, until such time as all principal and interest is paid in
full. The receipt of any security for any loan made to Employee hereunder shall
not relieve Employee of his obligations to repay such loan in full, including
any deficiency that may exist after the application of the collateral. As a
condition to making any loan hereunder, the Company (or its designee) must be
reasonably satisfied that no legal restrictions on enforcement of the loan, in
the manner described herein, exists as a result of (i) any action or omission of
employee or (ii) his legal incapacity to borrow.
(b) The Company will take the minimum tax withholding as may be
required by law from any payment to be made by Company to Employee which is
concurrent with, or is triggered by, a payment of tax. Employee agrees to pay
to the Company amounts equal to any withholding amount that the Company is
required to collect with respect to any income recognized by Employee as a
result of the issuance of the Shares, the lapsing of the Restricted Period or
any other disposition of the Shares. All such amounts shall be payable to the
Company within five days of the Company's request therefor. Company shall lend
such funds to Employee to the extent provided in Section 6(a) hereof and if
Employee fails to pay any other sum so requested to be withheld on a timely
basis, the Company may offset
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<PAGE>
such amounts against any other payments (including loan proceeds) that the
Company is otherwise required to make to Employee.
(c) If the Company elects to repurchase certain Shares as provided
above, then from and after such time, Employee (or his Permitted Transferees)
shall no longer have any rights as a holder of such repurchased Shares (other
than the right to receive the consideration therefor), and such shares shall be
deemed repurchased and the Company shall be deemed the owner and holder of such
shares. Employee shall deliver to Company certificates representing the
repurchased shares, although the failure to deliver such certificates shall not
affect Company's ownership thereof.
(d) The Employee recognizes and agrees that the Company's ability to
make loans to, or to repurchase Shares from, the Employee pursuant to this
Section is subject to the restrictions contained in the Company's agreements
with its lenders and the Certificate of Designations for the Company's 14%
Senior Exchangeable Preferred Stock, as such restrictions exist as of the date
hereof, or are hereafter modified with the consent of at least one of the
directors designated to the Company's Board of Directors pursuant to Section
10(a)(i) of the Stockholders' Agreement. The Company agrees to use its
commercially reasonable best efforts to obtain consent from such lenders and the
requisite holders of the 14% Senior Exchangeable Preferred Stock if, as, and to
the extent necessary, in order to permit the Company to make loans, as, and
when, and in the amount, required by this Section 6.
7. REPRESENTATIONS REGARDING SHARES.
(a) The Shares have not been registered under the Act and are being
issued to Employee in reliance upon an exemption from such registration.
Employee hereby acknowledges receipt of a copy of this Agreement. The Shares
have not been qualified under the California Corporate Securities Law of 1968
and are being issued to Employee in reliance upon the exemption from
qualification provided by Section 25102(f) thereof.
(b) As an inducement to the Company to issue the Shares to Employee,
and in order to establish the suitability of Employee in such an investment,
Employee hereby represents and warrants to the Company as follows:
(i) Employee is aware of and familiar with the Company's
business affairs and financial condition and has acquired sufficient information
about the Company to reach a knowledgeable and informed decision to acquire the
Shares. Employee is acquiring the Shares for investment for his own account,
not for resale, without any intention of or view toward or for participating,
directly or indirectly, in a distribution of the Shares or any portion thereof.
(ii) Employee has consulted with such professional advisors
(the "REPRESENTATIVES"), if any, as Employee has seen fit in connection with
this proposed investment.
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(iii) Employee and his Representatives, if any, have such
knowledge and experience in financial and business matters that Employee is
capable of evaluating the merits and risks of investment in the Shares.
(iv) Employee understands that an investment in the Company
is speculative, that any possible profits therefrom are uncertain, and that
Employee must bear the economic risks of the investment in the Company for an
indefinite period of time. Employee is able to bear these economic risks and to
hold the Shares for an indefinite period.
(v) Employee and his Representatives, if any, have received
all information and data with respect to the Company which Employee or his
Representatives have requested and have deemed relevant in connection with an
evaluation of the merits and risk of this investment in the Company, and do not
desire any further information or data with respect to the Company prior to the
purchase of the Shares.
(vi) Employee is a bona fide resident and domiciliary, not a
temporary transient resident, of and Employee's principal residence is in the
State of California, and Employee does not have any present intention of moving
his principal residence from California.
(vii) Employee understands and agrees that (i) the legends
set forth in Section 8 will be placed on the certificates evidencing the Shares
and on certificates issued to transferees; (ii) the stock records of the Company
will be noted with respect to such restrictions; and (iii) the Company will not
be under any obligation to register the Shares or to comply with any exemption
available for sale of the Shares without registration.
(viii) Employee understands that, under relevant securities
law requirements, additional restrictions on the transferability of the Shares
will apply, unless Company, in its discretion, otherwise determines. Employee
understands that the Shares must be held indefinitely unless they are
subsequently registered under the Act or an exemption from such registration is
available. The Company is under no obligation to so register the Shares.
Employee understands that Rule 144 of the Securities and Exchange Commission
permits limited public resale of securities acquired in a non-public offering
subject to satisfaction of certain conditions. Employee understands that the
Company may not be satisfying, and is not obligated to satisfy, any requirement
of Rule 144 at such time as Employee might wish to sell any of the Shares, and,
if so, Employee might be precluded from selling any of the Shares under Rule
144.
8. LEGENDS ON SHARES. In addition to any legends which may be
required under the Stockholders Agreement or otherwise, each certificate
representing the Shares shall have conspicuously printed on it the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS AS SET FORTH IN A RESTRICTED STOCK AGREEMENT BETWEEN
THE CORPORATION AND THE
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<PAGE>
REGISTERED HOLDER OR HIS PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION."
(b) Any legend required to be placed thereon by the California
Commissioner of Corporations, or required by the applicable blue sky laws of any
state.
9. EMPLOYMENT. The parties acknowledge that nothing in this Agreement
shall affect in any manner whatsoever the rights or obligations of the parties
with respect to Employee's employment by the Company.
10. ATTORNEYS' FEES. The prevailing party in any legal action arising out
of this Agreement shall be entitled, in addition to any other rights and
remedies such party may have, to reimbursement for its expenses, including costs
and reasonable attorneys' fees.
11. RIGHTS AS A SHAREHOLDER. Subject to the provisions and limitations
hereof and the terms of the Stockholders Agreement, Employee may, during the
term of this Agreement, exercise all rights and privileges of a shareholder of
the Company with respect to the Shares.
12. MISCELLANEOUS PROVISIONS.
(a) The parties will execute such further instruments and take such
further action as may reasonably be necessary to carry out the intent of this
Agreement.
(b) All notices, requests, demands, claims and other communications
hereunder shall be in writing. Any notices, requests, demands, claims or other
communications 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 (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
Telecopier: 818-735-8833
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<PAGE>
With copies to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10012
Attention: Harvey M. Eisenberg, Esq.
Telephone: (212) 408-2400
Telecopier: (212) 408-2420
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, #2400
Los Angeles, California 90017
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400
Sidley & Austin
555 W. Fifth St.
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky
Telecopier: 213-896-6600
If to Employee, to:
_______________
_______________________
_______________________
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.
(c) The Company may assign its rights under this Agreement. If any
such assignment requires consent of the California Commissioner of Corporations,
the parties agree to cooperate in requesting such consent. This Agreement shall
inure to the benefit of the successors and assigns of the Company and, subject
to the restrictions on transfer herein set forth, be binding upon Employee,
Employee's heirs, executors, administrators, successors and assigns.
(d) No waiver of any breach or condition of this Agreement shall be
deemed to be a waiver of any other or subsequent breach or condition, whether of
like or different nature.
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<PAGE>
(e) This Agreement constitutes the entire contract between the
parties hereto with regard to the subject matter hereof.
(f) THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE 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.
(g) This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
(h) 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 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 4(b) 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.
(i) This Agreement may not be amended, modified or supplemented
except by a writing executed by both parties.
(j) The section headings contained in this Agreement are included for
convenience of reference only and are not intended by the parties to be a part
of or to affect the meaning or interpretation of this Agreement.
(k) EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"The Company"
GUITAR CENTER MANAGEMENT
COMPANY, INC., a California corporation
By: ______________________________________
Name:
Title:
"Employee"
_______________
__________________________________________
Address:
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<PAGE>
CONSENT
The undersigned spouse of Employee agrees that the spouse's interest in the
Shares subject to this Agreement shall be irrevocably bound by this Agreement
and further understands and agrees that any community property interest, if any,
shall be similarly bound by this Agreement.
______________________________________
Spouse of Employee
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<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
Warrant for the Purchase of Shares of Common Stock and
Junior Preferred Stock of Guitar Center Management Company. Inc.
----------------------------------------------------------------
No. *1*
THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE HOLDER OF SUCH
SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS
AND CONDITIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF JUNE 5, 1996,
AMONG GUITAR CENTER MANAGEMENT COMPANY, INC. AND CERTAIN HOLDERS OF
OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION. COPIES OF SUCH AGREEMENT MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE SECRETARY OF GUITAR CENTER MANAGEMENT COMPANY, INC.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). 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 (SUBJECT TO CERTAIN EXCEPTIONS)
AN OPINION OF COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
FOR VALUE RECEIVED, GUITAR CENTER MANAGEMENT COMPANY, INC., a
California corporation (the "COMPANY"), hereby certifies that DLJ Merchant
Banking Partners, L.P., a Delaware limited partnership, its successors or
permitted assigns (the "HOLDER"), is entitled, subject to the provisions of this
Warrant, to purchase from the Company, at the times specified herein, (x) a
number of shares of Common Stock (as hereinafter defined) of the Company, equal
to the Common Stock Amount (as hereinafter defined) at a purchase price per
share equal to
<PAGE>
the Common Stock Exercise Price (as hereinafter defined) and (y) a number of
shares of Junior Preferred Stock (as hereinafter defined) of the Company, equal
to the Junior Preferred Stock Amount (as hereinafter defined) at a purchase
price per share equal to the Junior Preferred Stock Exercise Price (as
hereinafter defined). The Common Stock Amount, Common Stock Exercise Price,
Junior Preferred Stock Amount and Junior Preferred Stock Exercise Price are
subject to adjustment from time to time as hereinafter set forth.
SECTION 1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement
dated June 5, 1996, among the Company, GCMC Funding, Inc. and Chemical Bank, as
such agreement is in effect on the date the Warrants are first issued.
"BRIDGE LOAN WARRANTS" means the warrants for the purchase of shares
of Common Stock, issued on June 5, 1996, to be held in escrow as provided in the
Bridge Financing Agreement.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which the New York Stock Exchange is closed.
"COMMON SHARE EQUIVALENT" means, with respect to any security of the
Company and as of a given date, a number which is, (i) in the case of a share of
Common Stock, one, (ii) in the case of all or a portion of any right, warrant or
other security which may be exercised for a share or shares of Common Stock, the
number of shares of Common Stock receivable upon exercise of such security (or
such portion of such security) and (iii) in the case of any security convertible
or exchangeable into a share or shares of Common Stock, the number of shares of
Common Stock that would be received if such security were converted or exchanged
on such date.
"COMMON STOCK" means the Common Stock of the Company, without par
value.
"COMMON STOCK AMOUNT" means 34,221 fully paid and non-assessable
shares of Common Stock, as adjusted pursuant to Sections 9 and 10.
"COMMON STOCK EXERCISE PRICE" means $.01 per share of Common Stock,
such amount to be adjusted from time to time upon the adjustment of the Common
Stock Amount pursuant to Section 9 below.
"COMMON STOCK PORTION" means 1%; PROVIDED that (A) if any of the
shares of Junior Preferred Stock are converted, from time to time in part only
(but
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<PAGE>
not in whole), into shares of Common Stock or redeemed from time to time in part
only (but not in whole), the Common Stock Portion after any such conversion or
redemption shall mean the percentage obtained by dividing (x) the Fair Market
Value of all shares of Common Stock and Common Share Equivalents outstanding
after such conversion or redemption (the "COMMON AMOUNT") by (y) the sum of the
Common Amount and the Fair Market Value of all shares of Junior Preferred Stock
and Junior Preferred Share Equivalents outstanding after such conversion or
redemption and (B) if all shares of Junior Preferred Stock are converted into
shares of Common Stock and/or redeemed, the Common Stock Portion shall mean
100%.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the sum of the Common Stock Exercise Price and
the Junior Preferred Stock Exercise Price.
"EXPIRATION DATE" means June 5, 2006.
"FAIR MARKET VALUE" means on any date:
(a) for any security,
(i) if such security is of a class then listed or admitted to
trading on any national securities exchange or traded on any national
market system, the average of the daily closing prices for the thirty (30)
trading day before such date, excluding any trades which are not bona fide,
arm's length transactions. The closing price for each day shall be the last
sale price on such date or, if no such sale takes place on such date, the
average of the closing bid and asked prices on such date, in each case as
officially reported on the principal national securities exchange or
national market system on which such shares are then listed, admitted to
trading or traded;
(ii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market system, the average of the reported closing bid and asked prices
thereof on such date in the over-the-counter market as shown by the
National Association of Securities Dealers automated quotation system or,
if such securities are not then quoted in such system, as published by the
National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by any member firm of the New
York Stock Exchange selected by the Holder seeking a determination of Fair
Market Value; and
(iii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market
3
<PAGE>
system, and if no closing bid and asked prices thereof are then so quoted
or published in the over-the-counter market, the Fair Market Value of such
security shall be as mutually agreed by the Company and the Majority
Holders; PROVIDED that if the Company and the Majority Holders are unable
to mutually agree upon the Fair Market Value, the Company and the Majority
Holders shall, within five (5) days from the date that either party
determines that they cannot agree and so notifies the other party in
writing, jointly retain an investment banking firm, nationally recognized
accounting firm or other firm providing similar valuation services (any of
the foregoing, a "VALUATION FIRM"), satisfactory to each of them. Within 3
days of selection of the Valuation Firm, the Company shall provide the
Valuation Firm and the Holders with a certificate setting forth its opinion
as to the fair market value of the security (the "COMPANY'S ESTIMATE"). The
Majority Holders shall have 3 days to accept, or disagree with, the
Company's Estimate. If the Majority Holders disagree with the Company's
Estimate, the Majority Holders shall so indicate in writing to the Company
and the Valuation Firm and provide them with their opinion as to the fair
market value of the security (the "MAJORITY HOLDERS' ESTIMATE"), in each
case within 3 days of receipt of the Company's Estimate. If the Majority
Holders do not indicate their disagreement with the Company's Estimate in
writing (and provide their opinion referred to in the immediately preceding
sentence) within such 3-day period, the Fair Market Value of the security
shall be equal to the Company's Estimate. If the Majority Holders indicate
their disagreement with the Company's Estimate (and provide such opinion)
within such 3-day period, the Valuation Firm shall select either the
Company's Estimate or the Majority Holders' Estimate as the estimate that
more closely reflects the fair market value of the security, and the
estimate thus selected shall be the Fair Market Value of the security. All
fees and expenses of the Valuation Firm shall be paid by the party
(treating all Holders as one party) whose estimate was not selected as the
Fair Market Value.
(b) notwithstanding paragraph (a), in the event of any repurchase or
redemption of preferred stock, the Fair Market Value shall not be less than the
stated value thereof plus any accrued and unpaid dividends as of the date of
such repurchase or redemption plus any premium payable in such repurchase or
redemption pursuant to the terms of such preferred stock in effect on the date
such shares of preferred stock are first issued; and
(c) for each Warrant, the Fair Market Value of the Warrant shall be
the aggregate Fair Market Value of the Warrant Shares obtainable on exercise of
such Warrant minus the aggregate Common Stock Exercise Price and Junior
Preferred Stock Exercise Price therefor.
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"HOLDERS" means, collectively, the Holder of this Warrant and the
holders of all other Warrants.
"JUNIOR PREFERRED PORTION" means 99%; PROVIDED that (A) if any of the
shares of Junior Preferred Stock are converted, from time to time in part only
(but not in whole), into shares of Common Stock or redeemed from time to time in
part only (but not in whole), the Junior Preferred Portion after any such
conversion or redemption shall mean the percentage obtained by dividing (x) the
Fair Market Value of all shares of Junior Preferred Stock and Junior Preferred
Share Equivalents outstanding after such conversion or redemption (the "JUNIOR
PREFERRED AMOUNT") by (y) the sum of the Junior Preferred Amount and the Fair
Market Value of all shares of Common Stock and Common Share Equivalents
outstanding after such conversion or redemption and (B) if all shares of Junior
Preferred Stock are converted into shares of Common Stock and/or redeemed, the
Junior Preferred Portion shall mean 0%.
"JUNIOR PREFERRED STOCK" means the 8% Junior Preferred Stock of the
Company, without par value.
"JUNIOR PREFERRED STOCK AMOUNT" means 33,878.45 fully paid and
non-assessable shares of Junior Preferred Stock, plus (x) any additional shares
of Junior Preferred Stock that would have been declared as dividends on the
Junior Preferred Stock Amount had such shares been outstanding, compounded on
each date such dividends would have been declared and (y) a number of shares of
Junior Preferred Stock equal to the amount of any accrued and unpaid dividends
(compounded on each scheduled dividend payment date) that would have been
applicable to the Junior Preferred Stock Amount had such shares been
outstanding, up to but not including the relevant Exercise Date divided by
$100.00, as adjusted pursuant to Sections 9 and 10.
"JUNIOR PREFERRED STOCK EXERCISE PRICE" means $.01 per share of Junior
Preferred Stock, such amount to be adjusted from time to time upon the
adjustment of the Junior Preferred Stock Amount pursuant to Section 9 below.
"JUNIOR PREFERRED SHARE EQUIVALENT" means, with respect to any
security of the Company and as of a given date, a number which is, (i) in the
case of a share of Junior Preferred Stock, one, (ii) in the case of all or a
portion of any right, warrant or other security which may be exercised for a
share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock receivable upon exercise of such security (or such portion of
such security) and (iii) in the case of any security convertible or exchangeable
into a share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock that would be received if such security were converted or
exchanged on such date.
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"MAJORITY HOLDERS" means those Holders holding Warrants representing
the right to purchase the majority of the shares of Common Stock and Junior
Preferred Stock issuable upon the exercise of all Warrants held by all Holders.
"PERSON" means an individual, general partnership, limited
partnership, corporation, trust, joint stock company, association, joint venture
or any other entity or organization, whether or not legal entities, including a
government or political subdivision or an agency or instrumentality thereof.
"REGISTRATION AGREEMENT" means the Registration Agreement dated June
5, 1996 among the DLJMB Entities and the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase
Agreement dated as of June 5, 1996 by and 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 "DLJMB Entities"), and the
Company.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of
June 5, 1996 among the Company, the DLJMB Entities and the other stockholders of
the Company party thereto.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
"WARRANT SHARES" means the shares of Common Stock and Junior Preferred
Stock issued or to be issued to the Holder upon exercise of this Warrant, as
adjusted from time to time.
"WARRANTS" means this Warrant and all other warrants to purchase
shares of Common Stock and Junior Preferred Stock issued pursuant to the
Securities Purchase Agreement
SECTION 2. EXERCISE OF WARRANT. (a) The Holder is entitled to
exercise this Warrant, in whole or in part, at any time, or from time to time,
until 5:00 p.m. New York City time on the Expiration Date or, if such day is not
a Business Day, then on the next succeeding day that shall be a Business Day, by
presentation and surrender hereof to the Company with the Exercise Subscription
Form annexed hereto duly executed and accompanied by proper payment of the
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Exercise Price for the Warrant Shares that the Holder wishes to purchase as
specified in such form, all subject to the terms and conditions hereof. The
Holder will exercise a pro rata portion of the Common Stock Amount and the
Junior Preferred Stock Amount (based on the relative number of shares comprising
each) each time this Warrant is exercised, to the extent that each such amount
has not been exercised.
(b) At the option of the Holder, the Exercise Price may be paid in
cash or by official bank check or bank cashier's check payable to the order of
the Company or by any combination of such cash or check. At the option of the
Holder, the Exercise Price may in the alternative be paid by reducing the number
of Warrant Shares that would otherwise have been issued upon such exercise by
the number of Warrant Shares that have a Fair Market Value equal to the Exercise
Price which otherwise would have been paid (ratably based on the amounts of
Common Stock and Junior Preferred Stock that would otherwise have been
exercisable). Upon the date (the "EXERCISE DATE") of receipt by the Company of
this Warrant and the Exercise Subscription Form, together with payment of the
applicable Exercise Price, at the Company's office designated for such purpose
(which office initially shall be that set forth in Section 12 herein), in proper
form for exercise, the Holder shall, to the extent permitted by applicable law,
be deemed to be the holder of record of the number of shares of Common Stock and
Junior Preferred Stock constituting the Common Stock Amount and Junior Preferred
Stock Amount, respectively (or, in the case of a partial exercise of this
Warrant, a ratable number of such shares) and any other securities or property
(including any money) to which the Holder is entitled, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock, Junior Preferred Stock or other
securities shall not then be actually delivered to the Holder. The Company shall
pay any and all documentary, stamp or similar issue or transfer taxes of the
United States or any state thereof payable in respect of the issue or delivery
of the shares of Common Stock and Junior Preferred Stock. The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common
Stock, Junior Preferred Stock or other securities, including any Warrant issued
pursuant to Section 2(c), and in such case the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
(c) If the Holder exercises this Warrant in part, this Warrant shall
be surrendered by the Holder to the Company and a new Warrant in substantially
the same form and for the unexercised Common Stock Amount and Preferred Stock
Amount remaining shall be executed by the Company. The Company shall register
the new Warrant in the name of the Holder and deliver the new Warrant to the
Holder without charge.
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(d) Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any shares of Common Stock, Junior Preferred Stock or
other securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in, or payable to the order of, such
name or names as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the person or persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share as provided in Section 5
below.
(e) Certificates representing securities issued pursuant to this
Warrant shall bear legends substantially in the form of the legends set forth on
the first page of this Warrant to the extent that and for so long as such
legends are required pursuant to the Stockholders Agreement.
SECTION 3. RESERVATION OF SHARES. The Company hereby agrees at all
times to keep reserved for issuance and delivery upon exercise of the Warrants
such number of its authorized but unissued shares (or treasury shares) of Common
Stock, Junior Preferred Stock, or other securities of the Company from time to
time issuable upon exercise of the Warrants as will be sufficient to permit the
exercise in full of the Warrants. All such shares shall be duly authorized and,
when issued upon such exercise, shall be validly issued, fully paid and
non-assessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (except to the extent set forth in
the Stockholders Agreement, Securities Purchase Agreement or Registration
Agreement) and free and clear of all preemptive or similar rights.
SECTION 4. SECURITIES LAW COMPLIANCE. If the issuance of any shares
of Common Stock or Junior Preferred Stock or other securities required to be
reserved for purposes of the exercise of any Warrants requires the registration
with, or approval of, any governmental authority or requires listing on any
national securities exchange or national market system before such shares or
other securities may be so issued, the Company shall at its expense use its best
efforts to cause such shares to be duly registered, approved or listed, as the
case may be, so that such shares or other securities may be issued in accordance
with the terms hereof; PROVIDED that this Section 4 shall not obligate the
Company to register such securities under the Securities Act or qualify them
under state securities or blue sky laws.
SECTION 5. FRACTIONAL SHARES. No fractional shares of Common Stock or
Junior Preferred Stock or fractional interests in other securities or scrip
representing fractional shares or interests shall be issued upon the exercise of
this Warrant. With respect to any fraction of a share of Common Stock or Junior
Preferred Stock or fractional interests in other securities called for upon any
exercise hereof (and any other Warrants then held by the Holder hereof which are
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contemporaneously exercised), the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the Fair Market Value thereof at the
date of such exercise; PROVIDED, HOWEVER, that in the event that the Company
undertakes a reduction in the number of shares of Common Stock or Junior
Preferred Stock or other securities outstanding, it shall be required to issue
fractional shares or fractional interests in other securities to the Holder if
the Holder exercises all or any part of this Warrant, unless the Holder has
consented in writing to such reduction and provided the Company with a written
waiver of its right to receive fractional shares or interests in accordance with
this Section 5.
SECTION 6. TRANSFER, EXCHANGE OR ASSIGNMENT OF WARRANT. (a) This
Warrant and all rights hereunder are not transferable by the registered holder
hereof except to any Person who, prior to such transfer, agrees in writing, in
form and substance reasonably satisfactory to the Company, to be bound by the
terms of the Stockholders Agreement to the extent required thereby in accordance
with the provisions thereof. Each taker and holder of this Warrant by taking or
holding the same, consents and agrees that the registered holder hereof may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented hereby.
(b) Subject to compliance with the Stockholders Agreement, the
Registration Agreement and Securities Purchase Agreement, in each case, to the
extent applicable, the Holder of this Warrant shall be entitled, without
obtaining the consent of the Company, to assign and transfer this Warrant, at
any time in whole or from time to time in part, to any Person or Persons.
Subject to the preceding sentence, upon surrender of this Warrant to the
Company, together with the attached Warrant Assignment Form duly executed, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder and
this Warrant shall promptly be canceled.
(c) The Holder shall be deemed to have assigned a pro rata portion of
the Common Stock Amount and the Junior Preferred Stock Amount (based on the
relative number of shares comprising each) each time this Warrant is assigned in
part, to the extent that each such amount has not been exercised.
SECTION 7. LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the
Company of evidence satisfactory to it (in the exercise of its reasonable
discretion) of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction), if requested by the Company, of
reasonably satisfactory indemnification, or (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company shall, without charge,
execute and deliver a new Warrant of like date and having substantially the same
form; PROVIDED that (in the case of loss, theft or destruction) no indemnity
bond shall be required unless the Company has a
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class of securities registered pursuant to the Exchange Act and the Company's
transfer agent requires such indemnity bond as a condition to the issuance of a
new Warrant.
SECTION 8. RIGHTS OF THE HOLDER. Prior to the exercise of this
Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a
shareholder of the Company including, without limitation, the right to receive
dividends or other distributions or to receive any notice of meetings of
shareholders or any notice of any proceedings of the Company.
SECTION 9. ANTI-DILUTION PROVISIONS. So long as any Warrants are
outstanding, the Common Stock Amount and Junior Preferred Stock Amount shall be
subject to change or adjustment as follows:
(a) DIVIDENDS, SUBDIVISIONS, COMBINATIONS. In case the Company
shall (i) pay or make a dividend or other distribution to (x) all holders of its
Common Stock in shares of Common Stock or shares of Junior Preferred Stock or
(y) all holders of its Junior Preferred Stock in shares of Common Stock or
Junior Preferred Stock (other than ordinary dividends on the Junior Preferred
Stock contemplated by the definition of Junior Preferred Stock Amount), (ii)
subdivide, split or reclassify the outstanding shares of its Common Stock or
Junior Preferred Stock into a larger number of shares or (iii) combine or
reclassify the outstanding shares of its Common Stock or Junior Preferred Stock
into a smaller number of shares, then in each such case the Common Stock Amount
or Junior Preferred Stock Amount, respectively, shall be adjusted to equal the
number of such shares to which the holder of this Warrant would have been
entitled upon the occurrence of such event had this Warrant been exercised
immediately prior to the happening of such event or, in the case of a stock
dividend or other distribution, prior to the record date for determination of
shareholders entitled thereto. Adjustments for distributions of shares of Junior
Preferred Stock to holders of Common Stock shall be made to the Junior Preferred
Stock Amount, and adjustments for distributions of shares of Common Stock to
holders of Junior Preferred Stock shall be made to the Common Stock Amount. An
adjustment made pursuant to this Section 9(a) shall become effective immediately
after such record date in the case of a dividend or distribution and immediately
after the effective date in the case of a subdivision, split, combination or
reclassification.
(b) REORGANIZATION OR RECLASSIFICATION; CONVERSION OF JUNIOR
PREFERRED STOCK INTO COMMON STOCK; REDEMPTION OF JUNIOR PREFERRED STOCK. (i) In
case of any capital reorganization or any reclassification of the capital stock
of the Company (whether pursuant to a merger or consolidation or otherwise),
this Warrant shall thereafter be exercisable for the number of shares of stock
or other securities or property receivable upon such capital reorganization or
reclassification of capital stock, as the case may be, by a holder of the number
of shares of Common Stock and Junior Preferred Stock into which this Warrant was
exercisable immediately prior to such capital reorganization or reclassification
of capital stock; and, in any such case,
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appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(ii) If all or a portion of the shares of Junior Preferred Stock are
converted into shares of Common Stock pursuant to the terms of the Junior
Preferred Stock, then (x) the Common Stock Amount shall be increased by the
number of additional shares of Common Stock the Holder would have received had
this Warrant been exercised immediately prior to the conversion and (y) the
Junior Preferred Stock Amount shall be decreased by the number of shares of
Junior Preferred Stock issuable upon exercise of this Warrant which would have
been converted into Common Stock in such conversion had this Warrant been
exercised immediately prior to the conversion.
(iii) If all or a portion of the shares of Junior Preferred Stock are
redeemed pursuant to the terms of the Junior Preferred Stock (except any
repurchase pursuant to the Restricted Stock Agreements (as defined in the
Stockholders Agreement) or Stockholders Agreement), then (x) the Holder of this
Warrant shall be paid the amount he would have received (assuming a redemption
PRO RATA from all holders of Junior Preferred Stock) had this Warrant been
exercised immediately prior to the redemption and (y) the Junior Preferred Stock
Amount shall be decreased by the number of shares of Junior Preferred Stock
issuable upon exercise of this Warrant which would have been redeemed in such
redemption (assuming a redemption PRO RATA from all holders of Junior Preferred
Stock) had this Warrant been exercised immediately prior to the redemption.
(c) DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK OR
JUNIOR PREFERRED STOCK. In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock or Junior Preferred Stock shares
of any of its capital stock (other than a distribution of Common Stock or Junior
Preferred Stock referred to in Section 9(a) or in the definition of Junior
Preferred Stock Amount), rights or warrants to purchase any of its securities
(other than those referred to in Sections 9(d) and 9(e) below), cash, other
assets or evidences of its indebtedness, then, in each such case:
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to the date of such dividend or distribution
by a fraction, of which (x) the numerator shall be the Fair Market Value
per share of Common Stock (the "COMMON VALUE") at the record date (the
"RECORD DATE") for determining shareholders entitled to such dividend or
distribution, and of which (y) the denominator shall be (a) the Common
Value less (b) (i) the Common Stock Portion of the fair market value (the
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"DISTRIBUTION VALUE") of the securities, cash, assets or evidences of
indebtedness so distributed divided by (ii) the number of shares of
Common Stock outstanding immediately prior to the Record Date, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying
the Junior Preferred Stock Amount immediately prior to the Record Date
by a fraction, of which (x) the numerator shall be the Fair Market
Value per share of Junior Preferred Stock (the "JUNIOR PREFERRED
VALUE") at the record date for determining shareholders entitled to
such dividend or distribution, and of which (y) the denominator shall
be (a) the Junior Preferred Value less (b) (i) the Junior Preferred
Portion of the Distribution Value divided by (ii) the number of shares
of Junior Preferred Stock outstanding immediately prior to the Record
Date.
The Distribution Value shall be determined in good faith by the Board of
Directors of the Company; PROVIDED that if the Majority Holders in their
discretion do not agree with such determination, such fair market value shall be
determined in the same manner as the fair market value of a security is
determined pursuant to clause (iii) of the definition of Fair Market Value. All
fees and expenses of the Valuation Firm shall be paid by the party whose
estimate was not selected as the fair market value.
Notwithstanding the foregoing provisions of this Section 9(c), no adjustment
shall be made as aforesaid if the Company distributes to the Holder an amount of
securities, cash, other assets or evidences of indebtedness, as the case may be,
equal to the amount thereof that would have been distributed to the Holder had
this Warrant been exercised immediately prior to the making of such
distribution, or if a record date has been set with respect to such
distribution, immediately prior to the record date for determination of
shareholders entitled thereto.
(d) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF COMMON STOCK. In case
the Company shall issue Common Stock (or options, rights, warrants or other
securities convertible into or exchangeable or exercisable for shares of Common
Stock) at a price per share (or having an effective exercise, exchange or
conversion price per share together with the purchase price thereof) less than
the Fair Market Value per share of Common Stock on the date such Common Stock
(or options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock) is sold or issued
(PROVIDED that no sale of securities pursuant to an underwritten public offering
shall be deemed to be for less than Fair Market Value), then in each such case,
the Common Stock Amount shall thereafter be adjusted by multiplying the Common
Stock Amount immediately prior to the date of issuance of such Common Stock (or
options, rights, warrants or other securities) by a fraction,
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(A) the numerator of which shall be (x) the sum of (i) the number of Common
Share Equivalents represented by all securities outstanding immediately
prior to such issuance and (ii) the number of additional Common Share
Equivalents represented by all securities so issued multiplied by (y) the
Fair Market Value of a share of Common Stock immediately prior to the date
of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Common Stock immediately prior to the date of
such issuance and (ii) the number of Common Share Equivalents represented
by all securities outstanding immediately prior to such issuance plus (y)
the aggregate consideration received by the Company for the total number of
securities so issued plus (z) in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares
of Common Stock, the additional consideration required to be received by
the Company upon the exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Common Stock to which the holders of such rights, options
or warrants are entitled, the Common Stock Amount shall again be adjusted to be
the Common Stock Amount which would then be in effect if such rights, options or
warrants had never been issued, in the former event, or the Common Stock Amount
which would then be in effect if such holder had initially been entitled to such
changed number of shares of Common Stock, if applicable, and at such changed
cost, if applicable, in the latter event. An adjustment made pursuant to this
Section 9(d) shall become effective immediately after the date such Common Stock
or other security is issued or sold.
Notwithstanding anything herein to the contrary, (1) no further adjustment to
the Common Stock Amount or Junior Preferred Stock Amount shall be made upon the
issuance or sale of Common Stock or Junior Preferred Stock pursuant to (x) the
exercise of any options, rights or warrants or (y) the conversion or exchange of
any convertible securities, if in each case the adjustment in the Common Stock
Amount or Junior Preferred Stock Amount was made as required hereby upon the
issuance or sale of such options, rights, warrants or securities or no
adjustment was required hereby at the time such option, right, warrant or
convertible security was issued, (2) no adjustment to the Common Stock Amount or
the Junior Preferred Stock Amount shall be made upon the issuance or sale of
Common Stock or Junior Preferred Stock upon the exercise of any warrants or
options existing on the date hereof, on the terms contained in such securities
on the date of original issuance of this Warrant and (3) no adjustment to the
Common Stock Amount or the Junior Preferred Stock Amount shall be made upon the
issuance of options under the Company's 1996 Performance Stock Option Plan as in
effect on the date of original issuance of this Warrant.
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(e) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF JUNIOR PREFERRED
STOCK. In case the Company shall issue Junior Preferred Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior Preferred Stock) at a price per share (or
having an effective exercise, exchange or conversion price per share together
with the purchase price thereof) less than the Fair Marker Value per share of
Junior Preferred Stock on the date such Junior Preferred Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior Preferred Stock) is sold or issued (PROVIDED
that no sale of securities pursuant to an underwritten public offering shall be
deemed to be for less than Fair Market Value), then in each such case the Junior
Preferred Stock Amount shall thereafter be adjusted by multiplying the Junior
Preferred Stock Amount immediately prior to the date of issuance of such Junior
Preferred Stock (or options, rights, warrants or other securities) by a
fraction,
(A) the numerator of which shall be (x) the sum of (i) the number of Junior
Preferred Share Equivalents represented by all securities outstanding
immediately prior to such issuance and (ii) the number of additional Junior
Preferred Share Equivalents represented by all securities so issued
multiplied by (y) the Fair Market Value of a share of Junior Preferred
Stock immediately prior to the date of such issuance, and
(B)the denominator of which shall be (x) the product of (i) the Fair Market
Value of a share of Junior Preferred Stock immediately prior to the date of
such issuance and (ii) the number of Junior Preferred Share Equivalents
represented by all securities outstanding immediately prior to such
issuance plus (y) the aggregate consideration received by the Company for
the total number of securities so issued plus (z) in the case of options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior Preferred Stock, the additional
consideration required to be received by the Company upon the exercise,
exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Junior Preferred Stock to which the holders of such rights,
options or warrants are entitled, the Junior Preferred Stock Amount shall again
be adjusted to be the Junior Preferred Stock Amount which would then be in
effect if such rights, options or warrants had never been issued, in the former
event, or the Junior Preferred Stock Amount which would then be in effect if
such holder had initially been entitled to such changed number of shares of
Junior Preferred Stock, if applicable, and at such changed cost, if applicable,
in the latter event. An adjustment made pursuant to this Section 9(e) shall
become effective immediately after the date such Junior Preferred Stock or other
security is issued or sold.
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(f) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF OTHER SECURITIES. In
case the Company shall issue preferred stock or other securities of the Company
(other than Common Stock, Junior Preferred Stock or options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares of
Common Stock or Junior Preferred Stock) at a price per share (or other similar
unit) less than the Fair Market Value per share (or other similar unit) of such
preferred stock (or other security) on the date such preferred stock (or other
security) is sold or issued (provided that no sale of preferred stock or other
security pursuant to an underwritten public offering shall be deemed to be for
less than its fair market value), then in each such case:
(A) the Common Stock Amount shall thereafter be adjusted by multiplying the
Common Stock Amount immediately prior to the date of issuance of such
preferred stock (or other security) by a fraction, the numerator of which
shall be (x) the product of (a) the number of shares of Common Stock
outstanding immediately prior to such issuance and (b) the Fair Market
Value of a share of Common Stock immediately prior to the date of such
issuance (the "AGGREGATE COMMON VALUE"), and the denominator of which shall
be (x) the Aggregate Common Value minus (y) the Common Stock Portion of the
difference (the "DILUTION AMOUNT") between (a) the aggregate Fair Market
Value of such preferred stock (or other security) and (b) the aggregate
consideration received by the Company for such preferred stock (or other
security), and
(B) the Junior Preferred Stock Amount shall thereafter be adjusted by
multiplying the Junior Preferred Stock Amount immediately prior to the date
of issuance of such preferred stock (or other security) by a fraction, the
numerator of which shall be (x) the product of (a) the number of shares of
Junior Preferred Stock outstanding immediately prior to such issuance and
(b) the Fair Market Value of a share of Junior Preferred Stock immediately
prior to the date of such issuance (the "AGGREGATE PREFERRED VALUE"), and
the denominator of which shall be (x) the Aggregate Preferred Value minus
(y) the Preferred Stock Portion of the Dilution Amount;
PROVIDED, HOWEVER, that in the event that any such rights, options, warrants or
other securities expire unexercised, or in the event of a change in the number
or cost of the securities to which the holders of such rights, options, warrants
or other securities are entitled, the Junior Preferred Stock Amount and Common
Stock Amount shall again be adjusted to be the Junior Preferred Stock Amount and
Common Stock Amount which would then be in effect if such rights, options,
warrants or other securities had never been issued, in the former event, or the
Junior Preferred Stock Amount and Common Stock Amount which would then be in
effect if such holder had initially been entitled to such changed number of
securities, if applicable, and at such changed cost, if applicable, in the
latter event.
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An adjustment made pursuant to this Section 9(f) shall become effective
immediately after the date such preferred stock (or other security) is sold or
issued.
Notwithstanding the foregoing provisions of this Section 9(f), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Dilution Amount by having been
issued any of such preferred stock (or other securities) so as to put such
Holder in the same economic position he would have been in had the foregoing
adjustment been made.
(g) ABOVE MARKER REPURCHASES OF SECURITIES. If at any time, or from
time to time, the Company or any Subsidiary thereof shall repurchase (a
"REPURCHASE"), by self-tender offer or otherwise, any securities of the Company
at a weighted average purchase price in excess of the Fair Market Value thereof
(PROVIDED that the repurchase of securities in accordance with their terms as
set forth therein (or pursuant to the terms of the Restricted Stock Agreements
(as defined in the Stockholders Agreement) at the time of issue thereof shall
not be deemed to be a purchase in excess of Fair Market Value), on the Business
Day immediately prior to the earliest of (i) the date of such Repurchase, (ii)
the commencement of an offer to repurchase or (iii) the public announcement of
either (such date being referred to as the "DETERMINATION DATE"),
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to such Determination Date by a fraction,
(x) the numerator of which shall be the Fair Market Value of a share of
Common Stock immediately prior to such Determination Date, and (y) the
denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Common Stock
outstanding immediately prior to such Determination Date and the Fair
Market Value of a share of Common Stock immediately prior to such date
less (b) the sum of (I) the product of the number of shares of Common
Stock, if any, repurchased or to be repurchased by the Company or any
Subsidiary thereof in such Repurchase and the Fair Market Value of a
share of Common Stock immediately prior to the Determination Date and
(II) the Common Stock Portion of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Common Stock outstanding immediately
prior to the Determination Date less (b) the number shares of Common
Stock, if any, repurchased or to be purchased by the Company or any
Subsidiary thereof in such Repurchase, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to such Determination Date
16
<PAGE>
by a fraction, (x) the numerator of which shall be the Fair Market Value of
a share of Junior Preferred Stock immediately prior to such Determination
Date, and (y) the denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Junior Preferred Stock
outstanding immediately prior to such Determination Date and the Fair
Market Value of a share of Junior Preferred Stock immediately prior to
such date less (b) the sum of (I) the product of the number of shares
of Junior Preferred Stock, if any, repurchased or to be repurchased in
such transaction and the Fair Market Value of a share of Junior
Preferred Stock immediately prior to the Determination Date and (II)
the Junior Preferred Portion of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Junior Preferred Stock outstanding
immediately prior to the Determination Date less (b) the number shares
of Junior Preferred Stock, if any, repurchased or to be purchased by
the Company or any Subsidiary thereof in such Repurchase;
PROVIDED, HOWEVER, that in the event that any proposed Repurchase is not
effected, or in the event of a change in the number or cost of securities
repurchased or the aggregate purchase price paid, the Common Stock Amount and
Preferred Stock Amount shall again be adjusted to be the Common Stock Amount and
Preferred Stock
Amount which would then be in effect if proposed Repurchase never occurred, in
the former event, or the Common Stock Amount and Junior Preferred Stock Amount
which would then be in effect if the Repurchase had initially been for such
changed number of securities, if applicable, and at such changed purchase price,
if applicable, in the latter event.
"REPURCHASE DILUTION AMOUNT" means the aggregate consideration paid by the
Company in connection with a Repurchase in excess of the Fair Market Value of
the securities repurchased plus, in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for securities
of the Company, the additional consideration required to be received by the
Company upon the exercise, exchange or conversion of such securities.
An adjustment made pursuant to this Section 9(g) shall become effective
immediately on the Determination Date.
Notwithstanding the foregoing provisions of this Section 9(g), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Repurchase Dilution Amount by
having been paid such amount so as to put such Holder in the same economic
position he would have been in had the foregoing adjustment been made.
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<PAGE>
(h) NO IMPAIRMENT. The Company will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 9 and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder against
impairment. Without limiting the generality of the foregoing, the Company will
not increase the par value of any shares of Common Stock or Junior Preferred
Stock or other securities receivable on the exercise of the Warrants above the
amount payable therefor on such exercise.
(i) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Common Stock Amount or Junior Preferred Stock
Amount pursuant to this Section 9, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of the Holder, furnish or cause to be furnished to Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the number of shares
of Common Stock and Junior Preferred Stock or other securities, if any, and the
amount, if any, of other property which at the time would be received upon the
exercise of this Warrant; and (iii) the adjusted Common Stock Exercise Price and
Junior Preferred Stock Exercise Price.
(j) NOTICES. (i) In the event that the Company shall propose at any
time to pay or make any dividend or other distribution or effect any transaction
of the type described in Sections 9(a) through 9(g) hereof or to take any
similar extraordinary corporate action affecting the Company's capital stock,
then, in connection with each such event, the Company shall send to the Holder
at least 10 days prior to (x) in the case of a dividend or other distribution,
the applicable record date, a notice specifying the record date for purposes of
such dividend or distribution and the date on which such dividend or other
distribution is to be made, and (y) in any other case, the date on which such
event is to become effective or the first date on which the Company intends to
effect any such transaction, as the case may be, in each case specifying in
reasonable detail what the transaction or event consists of and, if applicable,
the aggregate amount or value of any cash or property proposed to be
distributed, paid, purchased or received by the Company in connection therewith.
(ii) In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall send to the
Holder written notice thereof at least (x) 30 days' prior to the proposed
consummation of such dissolution, winding up or liquidation or (y) 15 days
before the record date therefor, whichever is earlier.
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<PAGE>
(iii) Unless notice is otherwise required pursuant to Section
9(j)(i) hereof, the Company shall send written notice to the Holder immediately
upon any public announcement with respect to an open market repurchase program
for, any self-tender offer for or any other repurchase of shares of Common Stock
or Junior Preferred Stock or options, rights, warrants or other securities
convertible into or exchangeable or exercisable for shares of Common Stock or
Junior Preferred Stock.
(k) MISCELLANEOUS. Notwithstanding anything to the contrary contained
herein, there shall be no adjustment to the Common Stock Amount or the Junior
Preferred Stock Amount as a result of the issuance or exercise of the Bridge
Loan Warrants on the terms contained therein on the date of the first issuance
of the Warrants. The computations of all amounts under this Section 9 shall be
made assuming all other anti-dilution or similar adjustments to be made to the
terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 9 have previously been made so as to
maintain the relative economic interest of the Warrants VIS A VIS all other
securities issued by the Company.
SECTION 10. CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any
consolidation of the Company with, or merger of the Company into, any other
Person, any merger of another Person into the Company (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or Junior Preferred Stock) or any sale or
transfer of all or substantially all of the assets of the Company to the Person
formed by such consolidation or resulting from such merger or which acquires
such assets, as the case may be, the Holder shall have the right thereafter to
exercise this Warrant for the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock, Junior Preferred Stock or other
securities for which this Warrant may have been exercised immediately prior to
such consolidation, merger, sale or transfer. Adjustments for events subsequent
to the effective date of such a consolidation, merger, sale or transfer of
assets shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. In any such event, effective provisions shall be
made in the certificate or articles of incorporation of the resulting or
surviving corporation, in any contract of sale, conveyance, lease, transfer or
otherwise so that the provisions set forth herein for the protection of the
rights of the Holder shall thereafter continue to be applicable, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon exercise, such shares of stock, other securities, cash and
property. The provisions of this Section 10 shall similarly apply to successive
consolidations, mergers, sales, leases or transfers.
SECTION 11. NO FURTHER ISSUANCES OF WARRANTS. The Company will issue
no Warrants other than this Warrant, those issued concurrently
19
<PAGE>
with this Warrant and those issued upon registration of transfer, exchange or
exercise hereof and thereof.
SECTION 12. NOTICES. Any notice, demand or delivery authorized by this
Warrant shall be in writing and shall be given to the Holder or to the Company,
as the case may be, at its address (or telecopier number) set forth below, or
such other address (or telecopier number) as shall have been furnished to the
party giving or making such notice, demand or delivery:
If to the Company: Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: Larry Thomas
Telecopier: (818) 735-4923
With copies to: Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2200
Los Angeles, CA 90017
Attn: Mark A. Bonenfant
Telecopier: (213) 896-0400;
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Attention: Harvey M. Eisenberg
Telecopier: (212) 408-2420; and
Sidley & Austin
555 West 5th Street
Los Angeles, CA 90013
Attention: Moshe Kupietzky
Telecopier: (213) 896-6600
If to the Holder: DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Los Angeles, CA 90067-5014
Attn: David Wilson
Telecopier: (310) 282-6178
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<PAGE>
With a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attn: George R. Bason, Jr.
Telecopier: (212) 450-4800
Each such notice, demand or delivery shall be effective (a) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answerback is received or (b) if given by mail, three
business days after such communication is deposited in the mails with first
class postage prepaid addressed as aforesaid or (c) if given by any other means,
when delivered at the address specified herein.
SECTION 13. APPLICABLE LAW. This Warrant and all rights arising
hereunder shall be construed and determined in accordance with the laws of the
State of New York and the performance thereof shall be governed and enforced in
accordance with such laws.
SECTION 14. AMENDMENTS; WAIVERS. Any provision of this Warrant may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company and the Holder of this
Warrant and, in the case of a waiver, by the party against whom the waiver is to
be effective. No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
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<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed
and attested by its duly authorized officers and to be dated as of June 5, 1996.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Lawrence E. Thomas
----------------------------
Name: LAWRENCE E. THOMAS
Title: PRESIDENT
ATTEST:
By: /s/ Marty Albertson
------------------------------
Name: MARTY ALBERTSON
Title: EXECUTIVE VICE PRESIDENT
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
Warrant for the Purchase of Shares of Common Stock and
Junior Preferred Stock of Guitar Center Management Company. Inc.
----------------------------------------------------------------
No *2*
THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE HOLDER OF SUCH
SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS
AND CONDITIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF JUNE 5, 1996,
AMONG GUITAR CENTER MANAGEMENT COMPANY, INC. AND CERTAIN HOLDERS OF
OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION. COPIES OF SUCH AGREEMENT MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE SECRETARY OF GUITAR CENTER MANAGEMENT COMPANY, INC.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). 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 (SUBJECT TO CERTAIN EXCEPTIONS)
AN OPINION OF COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
FOR VALUE RECEIVED, GUITAR CENTER MANAGEMENT COMPANY, INC., a
California corporation (the "COMPANY"), hereby certifies that DLJ International
Partners, C.V., a Netherlands Antilles limited partnership, its successors or
permitted assigns (the "HOLDER"), is entitled, subject to the provisions of this
Warrant, to purchase from the Company, at the times specified herein, (x) a
number of shares of Common Stock (as hereinafter defined) of the Company, equal
to the Common Stock Amount (as hereinafter defined) at a purchase price per
share
<PAGE>
equal to the Common Stock Exercise Price (as hereinafter defined) and (y) a
number of shares of Junior Preferred Stock (as hereinafter defined) of the
Company, equal to the Junior Preferred Stock Amount (as hereinafter defined) at
a purchase price per share equal to the Junior Preferred Stock Exercise Price
(as hereinafter defined). The Common Stock Amount, Common Stock Exercise Price,
Junior Preferred Stock Amount and Junior Preferred Stock Exercise Price are
subject to adjustment from time to time as hereinafter set forth.
SECTION 1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement
dated June 5, 1996, among the Company, GCMC Funding, Inc. and Chemical Bank, as
such agreement is in effect on the date the Warrants are first issued.
"BRIDGE LOAN WARRANTS" means the warrants for the purchase of shares
of Common Stock, issued on June 5, 1996, to be held in escrow as provided in the
Bridge Financing Agreement.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which the New York Stock Exchange is closed.
"COMMON SHARE EQUIVALENT" means, with respect to any security of the
Company and as of a given date, a number which is, (i) in the case of a share of
Common Stock, one, (ii) in the case of all or a portion of any right, warrant or
other security which may be exercised for a share or shares of Common Stock, the
number of shares of Common Stock receivable upon exercise of such security (or
such portion of such security) and (iii) in the case of any security convertible
or exchangeable into a share or shares of Common Stock, the number of shares of
Common Stock that would be received if such security were converted or exchanged
on such date.
"COMMON STOCK" means the Common Stock of the Company, without par
value.
"COMMON STOCK AMOUNT" means 16,550 fully paid and non-assessable
shares of Common Stock, as adjusted pursuant to Sections 9 and 10.
"COMMON STOCK EXERCISE PRICE" means $.01 per share of Common Stock,
such amount to be adjusted from time to time upon the adjustment of the Common
Stock Amount pursuant to Section 9 below.
"COMMON STOCK PORTION" means 1%; PROVIDED that (A) if any of the
shares of Junior Preferred Stock are converted, from time to time in part only
(but
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<PAGE>
not in whole), into shares of Common Stock or redeemed from time to time in part
only (but not in whole), the Common Stock Portion after any such conversion or
redemption shall mean the percentage obtained by dividing (x) the Fair Market
Value of all shares of Common Stock and Common Share Equivalents outstanding
after such conversion or redemption (the "COMMON AMOUNT") by (y) the sum of the
Common Amount and the Fair Market Value of all shares of Junior Preferred Stock
and Junior Preferred Share Equivalents outstanding after such conversion or
redemption and (B) if all shares of Junior Preferred Stock are converted into
shares of Common Stock and/or redeemed, the Common Stock Portion shall mean
100%.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the sum of the Common Stock Exercise Price and
the Junior Preferred Stock Exercise Price.
"EXPIRATION DATE" means June 5, 2006.
"FAIR MARKET VALUE" means on any date:
(a) for any security,
(i) if such security is of a class then listed or admitted to
trading on any national securities exchange or traded on any national
market system, the average of the daily closing prices for the thirty
(30) trading days before such date, excluding any trades which are not
bona fide, arm's length transactions. The closing price for each day
shall be the last sale price on such date or, if no such sale takes
place on such date, the average of the closing bid and asked prices on
such date, in each case as officially reported on the principal
national securities exchange or national market system on which such
shares are then listed, admitted to trading or traded;
(ii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any
national market system, the average of the reported closing bid and
asked prices thereof on such date in the over-the-counter market as
shown by the National Association of Securities Dealers automated
quotation system or, if such securities are not then quoted in such
system, as published by the National Quotation Bureau, Incorporated or
any similar successor organization, and in either case as reported by
any member firm of the New York Stock Exchange selected by the Holder
seeking a determination of Fair Market Value; and
(iii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market
3
<PAGE>
system, and if no closing bid and asked prices thereof are then so
quoted or published in the over-the-counter market, the Fair Market
Value of such security shall be as mutually agreed by the Company and
the Majority Holders; PROVIDED that if the Company and the Majority
Holders are unable to mutually agree upon the Fair Market Value, the
Company and the Majority Holders shall, within five (5) days from the
date that either party determines that they cannot agree and so
notifies the other party in writing, jointly retain an investment
banking firm, nationally recognized accounting firm or other firm
providing similar valuation services (any of the foregoing, a
"VALUATION FIRM"), satisfactory to each of them. Within 3 days of
selection of the Valuation Firm, the Company shall provide the
Valuation Firm and the Holders with a certificate setting forth its
opinion as to the fair market value of the security (the "COMPANY'S
ESTIMATE"). The Majority Holders shall have 3 days to accept, or
disagree with, the Company's Estimate. If the Majority Holders
disagree with the Company's Estimate, the Majority Holders shall so
indicate in writing to the Company and the Valuation Firm and provide
them with their opinion as to the fair market value of the security
(the "MAJORITY HOLDERS' ESTIMATE"), in each case within 3 days of
receipt of the Company's Estimate. If the Majority Holders do not
indicate their disagreement with the Company's Estimate in writing
(and provide their opinion referred to in the immediately preceding
sentence) within such 3-day period, the Fair Market Value of the
security shall be equal to the Company's Estimate. If the Majority
Holders indicate their disagreement with the Company's Estimate (and
provide such opinion) within such 3-day period, the Valuation Firm
shall select either the Company's Estimate or the Majority Holders'
Estimate as the estimate that more closely reflects the fair market
value of the security, and the estimate thus selected shall be the
Fair Market Value of the security. All fees and expenses of the
Valuation Firm shall be paid by the party (treating all Holders as one
party) whose estimate was not selected as the Fair Market Value.
(b) notwithstanding paragraph (a), in the event of any
repurchase or redemption of preferred stock, the Fair Market Value shall-not be
less than the stated value thereof plus any accrued and unpaid dividends as of
the date of such repurchase or redemption plus any premium payable in such
repurchase or redemption pursuant to the terms of such preferred stock in effect
on the date such shares of preferred stock are first issued; and
(c) for each Warrant, the Fair Market Value of the Warrant shall
be the aggregate Fair Market Value of the Warrant Shares obtainable on exercise
of such Warrant minus the aggregate Common Stock Exercise Price and Junior
Preferred Stock Exercise Price therefor.
4
<PAGE>
"HOLDERS" means, collectively, the Holder of this Warrant and the
holders of all other Warrants.
"JUNIOR PREFERRED PORTION" means 99%; PROVIDED that (A) if any of the
shares of Junior Preferred Stock are converted, from time to time in part only
(but not in whole), into shares of Common Stock or redeemed from time to time in
part only (but not in whole), the Junior Preferred Portion after any such
conversion or redemption shall mean the percentage obtained by dividing (x) the
Fair Market Value of all shares of Junior Preferred Stock and Junior Preferred
Share Equivalents outstanding after such conversion or redemption (the "JUNIOR
PREFERRED AMOUNT") by (y) the sum of the Junior Preferred Amount and the Fair
Market Value of all shares of Common Stock and Common Share Equivalents
outstanding after such conversion or redemption and (B) if all shares of Junior
Preferred Stock are converted into shares of Common Stock and/or redeemed, the
Junior Preferred Portion shall mean 0%.
"JUNIOR PREFERRED STOCK" means the 8% Junior Preferred Stock of the
Company, without par value.
"JUNIOR PREFERRED STOCK AMOUNT" means 16,385.01 fully paid and non-
assessable shares of Junior Preferred Stock, plus (x) any additional shares of
Junior Preferred Stock that would have been declared as dividends on the Junior
Preferred Stock Amount had such shares been outstanding, compounded on each date
such dividends would have been declared and (y) a number of shares of Junior
Preferred Stock equal to the amount of any accrued and unpaid dividends
(compounded on each scheduled dividend payment date) that would have been
applicable to the Junior Preferred Stock Amount had such shares been
outstanding, up to but not including the relevant Exercise Date divided by
$100.00, as adjusted pursuant to Sections 9 and 10.
"JUNIOR PREFERRED STOCK EXERCISE PRICE" means $.01 per share of
Junior Preferred Stock, such amount to be adjusted from time to time upon the
adjustment of the Junior Preferred Stock Amount pursuant to Section 9 below.
"JUNIOR PREFERRED SHARE EQUIVALENT" means, with respect to any
security of the Company and as of a given date, a number which is, (i) in the
case of a share of Junior Preferred Stock, one, (ii) in the case of all or a
portion of any right, warrant or other security which may be exercised for a
share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock receivable upon exercise of such security (or such portion of
such security) and (iii) in the case of any security convertible or
exchangeable into a share or shares of Junior Preferred Stock, the number of
shares of Junior Preferred Stock that would be received if such security were
converted or exchanged on such date.
5
<PAGE>
"MAJORITY HOLDERS" means those Holders holding Warrants representing
the right to purchase the majority of the shares of Common Stock and Junior
Preferred Stock issuable upon the exercise of all Warrants held by all Holders.
"PERSON" means an individual, general partnership, limited
partnership, corporation, trust, joint stock company, association, joint venture
or any other entity or organization, whether or not legal entities, including a
government or political subdivision or an agency or instrumentality thereof.
"REGISTRATION AGREEMENT" means the Registration Agreement dated June
5, 1996 among the DLJMB Entities and the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase
Agreement dated as of June 5, 1996 by and 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 "DLJMB ENTITIES"), and the
Company.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of
June 5, 1996 among the Company, the DLJMB Entities and the other stockholders of
the Company party thereto.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
"WARRANT SHARES" means the shares of Common Stock and Junior Preferred
Stock issued or to be issued to the Holder upon exercise of this Warrant, as
adjusted from time to time.
"WARRANTS" means this Warrant and all other warrants to purchase
shares of Common Stock and Junior Preferred Stock issued pursuant to the
Securities Purchase Agreement
SECTION 2. EXERCISE OF WARRANT. (a) The Holder is entitled to exercise
this Warrant, in whole or in part, at any time, or from time to time, until 5:00
p.m. New York City time on the Expiration Date or, if such day is not a Business
Day, then on the next succeeding day that shall be a Business Day, by
presentation and surrender hereof to the Company with the Exercise Subscription
Form annexed hereto duly executed and accompanied by proper payment of the
6
<PAGE>
Exercise Price for the Warrant Shares that the Holder wishes to purchase as
specified in such form, all subject to the terms and conditions hereof. The
Holder will exercise a pro rata portion of the Common Stock Amount and the
Junior Preferred Stock Amount (based on the relative number of shares comprising
each) each time this Warrant is exercised, to the extent that each such amount
has not been exercised.
(b) At the option of the Holder, the Exercise Price may be paid in
cash or by official bank check or bank cashier's check payable to the order of
the Company or by any combination of such cash or check. At the option of the
Holder, the Exercise Price may in the alternative be paid by reducing the number
of Warrant Shares that would otherwise have been issued upon such exercise by
the number of Warrant Shares that have a Fair Market Value equal to the Exercise
Price which otherwise would have been paid (ratably based on the amounts of
Common Stock and Junior Preferred Stock that would otherwise have been
exercisable). Upon the date (the "EXERCISE DATE") of receipt by the Company of
this Warrant and the Exercise Subscription Form, together with payment of the
applicable Exercise Price, at the Company's office designated for such purpose
(which office initially shall be that set forth in Section 12 herein), in proper
form for exercise, the Holder shall, to the extent permitted by applicable law,
be deemed to be the holder of record of the number of shares of Common Stock and
Junior Preferred Stock constituting the Common Stock Amount and Junior Preferred
Stock Amount, respectively (or, in the case of a partial exercise of this
Warrant, a ratable number of such shares) and any other securities or property
(including any money) to which the Holder is entitled, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock, Junior Preferred Stock or other
securities shall not then be actually delivered to the Holder. The Company shall
pay any and all documentary, stamp or similar issue or transfer taxes of the
United States or any state thereof payable in respect of the issue or delivery
of the shares of Common Stock and Junior Preferred Stock. The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common
Stock, Junior Preferred Stock or other securities, including any Warrant issued
pursuant to Section 2(c), and in such case the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
(c) If the Holder exercises this Warrant in part, this Warrant shall
be surrendered by the Holder to the Company and a new Warrant in substantially
the same form and for the unexercised Common Stock Amount and Preferred Stock
Amount remaining shall be executed by the Company. The Company shall register
the new Warrant in the name of the Holder and deliver the new Warrant to the
Holder without charge.
7
<PAGE>
(d) Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any shares of Common Stock, Junior Preferred Stock or
other securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in, or payable to the order of, such
name or names as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the person or persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share as provided in Section 5
below.
(e) Certificates representing securities issued pursuant to this
Warrant shall bear legends substantially in the form of the legends set forth on
the first page of this Warrant to the extent that and for so long as such
legends are required pursuant to the Stockholders Agreement.
SECTION 3. RESERVATION OF SHARES. The Company hereby agrees at all
times to keep reserved for issuance and delivery upon exercise of the Warrants
such number of its authorized but unissued shares (or treasury shares) of Common
Stock, Junior Preferred Stock, or other securities of the Company from time to
time issuable upon exercise of the Warrants as will be sufficient to permit the
exercise in full of the Warrants. All such shares shall be duly authorized and,
when issued upon such exercise, shall be validly issued, fully paid and non-
assessable, free and clear of all liens, security interests, charges and other
encumbrances or restrictions on sale (except to the extent set forth in the
Stockholders Agreement, Securities Purchase Agreement or Registration Agreement)
and free and clear of all preemptive or similar rights.
SECTION 4. SECURITIES LAW COMPLIANCE. If the issuance of any shares of
Common Stock or Junior Preferred Stock or other securities required to be
reserved for purposes of the exercise of any Warrants requires the registration
with, or approval of, any governmental authority or requires listing on any
national securities exchange or national market system before such shares or
other securities may be so issued, the Company shall at its expense use its best
efforts to cause such shares to be duly registered, approved or listed, as the
case may be, so that such shares or other securities may be issued in accordance
with the terms hereof; PROVIDED that this Section 4 shall not obligate the
Company to register such securities under the Securities Act or qualify them
under state securities or blue sky laws.
SECTION 5. FRACTIONAL SHARES. No fractional shares of Common Stock or
Junior Preferred Stock or fractional interests in other securities or scrip
representing fractional shares or interests shall be issued upon the exercise of
this Warrant. With respect to any fraction of a share of Common Stock or Junior
Preferred Stock or fractional interests in other securities called for upon any
exercise hereof (and any other Warrants then held by the Holder hereof which are
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contemporaneously exercised), the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the Fair Market Value thereof at the
date of such exercise; PROVIDED, HOWEVER, that in the event that the Company
undertakes a reduction in the number of shares of Common Stock or Junior
Preferred Stock or other securities outstanding, it shall be required to issue
fractional shares or fractional interests in other securities to the Holder if
the Holder exercises all or any part of this Warrant, unless the Holder has
consented in writing to such reduction and provided the Company with a written
waiver of its right to receive fractional shares or interests in accordance with
this Section 5.
SECTION 6. TRANSFER, EXCHANGE OR ASSIGNMENT OF WARRANT. (a) This
Warrant and all rights hereunder are not transferable by the registered holder
hereof except to any Person who, prior to such transfer, agrees in writing, in
form and substance reasonably satisfactory to the Company, to be bound by the
terms of the Stockholders Agreement to the extent required thereby in accordance
with the provisions thereof. Each taker and holder of this Warrant by taking or
holding the same, consents and agrees that the registered holder hereof may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented hereby.
(b) Subject to compliance with the Stockholders Agreement, the
Registration Agreement and Securities Purchase Agreement, in each case, to the
extent applicable, the Holder of this Warrant shall be entitled, without
obtaining the consent of the Company, to assign and transfer this Warrant, at
any time in whole or from time to time in part, to any Person or Persons.
Subject to the preceding sentence, upon surrender of this Warrant to the
Company, together with the attached Warrant Assignment Form duly executed, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder and
this Warrant shall promptly be canceled.
(c) The Holder shall be deemed to have assigned a pro rata portion
of the Common Stock Amount and the Junior Preferred Stock Amount (based on the
relative number of shares comprising each) each time this Warrant is assigned in
part, to the extent that each such amount has not been exercised.
SECTION 7. LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the Company
of evidence satisfactory to it (in the exercise of its reasonable discretion) of
the loss, theft, destruction or mutilation of this Warrant and (in the case of
loss, theft or destruction), if requested by the Company, of reasonably
satisfactory indemnification, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company shall, without charge, execute and
deliver a new Warrant of like date and having substantially the same form;
PROVIDED that (in the case of loss, theft or destruction) no indemnity bond
shall be required unless the Company has a
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class of securities registered pursuant to the Exchange Act and the Company's
transfer agent requires such indemnity bond as a condition to the issuance of a
new Warrant.
SECTION 8. RIGHTS OF THE HOLDER. Prior to the exercise of this
Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a
shareholder of the Company including, without limitation, the right to receive
dividends or other distributions or to receive any notice of meetings of
shareholders or any notice of any proceedings of the Company.
SECTION 9. ANTI-DILUTION PROVISIONS. So long as any Warrants are
outstanding, the Common Stock Amount and Junior Preferred Stock Amount shall be
subject to change or adjustment as follows:
(a) DIVIDENDS, SUBDIVISIONS, COMBINATIONS. In case the Company shall
(i) pay or make a dividend or other distribution to (x) all holders of its
Common Stock in shares of Common Stock or shares of Junior Preferred Stock or
(y) all holders of its Junior Preferred Stock in shares of Common Stock or
Junior Preferred Stock (other than ordinary dividends on the Junior Preferred
Stock contemplated by the definition of Junior Preferred Stock Amount), (ii)
subdivide, split or reclassify the outstanding shares of its Common Stock or
Junior Preferred Stock into a larger number of shares or (iii) combine or
reclassify the outstanding shares of its Common Stock or Junior Preferred Stock
into a smaller number of shares, then in each such case the Common Stock Amount
or Junior Preferred Stock Amount, respectively, shall be adjusted to equal the
number of such shares to which the holder of this Warrant would have been
entitled upon the occurrence of such event had this Warrant been exercised
immediately prior to the happening of such event or, in the case of a stock
dividend or other distribution, prior to the record date for determination of
shareholders entitled thereto. Adjustments for distributions of shares of Junior
Preferred Stock to holders of Common Stock shall be made to the Junior Preferred
Stock Amount, and adjustments for distributions of shares of Common Stock to
holders of Junior Preferred Stock shall be made to the Common Stock Amount. An
adjustment made pursuant to this Section 9(a) shall become effective immediately
after such record date in the case of a dividend or distribution and immediately
after the effective date in the case of a subdivision, split, combination or
reclassification.
(b) REORGANIZATION OR RECLASSIFICATION; CONVERSION OF JUNIOR
PREFERRED STOCK INTO COMMON STOCK; REDEMPTION OF JUNIOR PREFERRED STOCK. (i) In
case of any capital reorganization or any reclassification of the capital stock
of the Company (whether pursuant to a merger or consolidation or otherwise),
this Warrant shall thereafter be exercisable for the number of shares of stock
or other securities or property receivable upon such capital reorganization or
reclassification of capital stock, as the case may be, by a holder of the number
of shares of Common Stock and Junior Preferred Stock into which this Warrant was
exercisable immediately prior to such capital reorganization or reclassification
of capital stock; and, in any such case,
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appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(ii) If all or a portion of the shares of Junior Preferred Stock are
converted into shares of Common Stock pursuant to the terms of the Junior
Preferred Stock, then (x) the Common Stock Amount shall be increased by the
number of additional shares of Common Stock the Holder would have received had
this Warrant been exercised immediately prior to the conversion and (y) the
Junior Preferred Stock Amount shall be decreased by the number of shares of
Junior Preferred Stock issuable upon exercise of this Warrant which would have
been converted into Common Stock in such conversion had this Warrant been
exercised immediately prior to the conversion.
(iii) If all or a portion of the shares of Junior Preferred Stock are
redeemed pursuant to the terms of the Junior Preferred Stock (except any
repurchase pursuant to the Restricted Stock Agreements (as defined in the
Stockholders Agreement) or Stockholders Agreement), then (x) the Holder of this
Warrant shall be paid the amount he would have received (assuming a redemption
PRO RATA from all holders of Junior Preferred Stock) had this Warrant been
exercised immediately prior to the redemption and (y) the Junior Preferred Stock
Amount shall be decreased by the number of shares of Junior Preferred Stock
issuable upon exercise of this Warrant which would have been redeemed in such
redemption (assuming a redemption PRO RATA from all holders of Junior Preferred
Stock) had this Warrant been exercised immediately prior to the redemption.
(c) DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK OR
JUNIOR PREFERRED STOCK. In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock or Junior Preferred Stock shares
of any of its capital stock (other than a distribution of Common Stock or Junior
Preferred Stock referred to in Section 9(a) or in the definition of Junior
Preferred Stock Amount), rights or warrants to purchase any of its securities
(other than those referred to in Sections 9(d) and 9(e) below), cash, other
assets or evidences of its indebtedness, then, in each such case:
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to the date of such dividend or distribution
by a fraction, of which (x) the numerator shall be the Fair Market Value
per share of Common Stock (the "COMMON VALUE") at the record date (the
"RECORD DATE") for determining shareholders entitled to such dividend or
distribution, and of which (y) the denominator shall be (a) the Common
Value less (b) (i) the Common Stock Portion of the fair market value (the
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"Distribution Value") of the securities, cash, assets or evidences of
indebtedness so distributed divided by (ii) the number of shares of Common
Stock outstanding immediately prior to the Record Date, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to the Record Date by a
fraction, of which (x) the numerator shall be the Fair Market Value per
share of Junior Preferred Stock (the "JUNIOR PREFERRED VALUE") at the
record date for determining shareholders entitled to such dividend or
distribution, and of which (y) the denominator shall be (a) the Junior
Preferred Value less (b) (i) the Junior Preferred Portion of the
Distribution Value divided by (ii) the number of shares of Junior Preferred
Stock outstanding immediately prior to the Record Date.
The Distribution Value shall be determined in good faith by the Board of
Directors of the Company; PROVIDED that if the Majority Holders in their
discretion do not agree with such determination, such fair market value shall be
determined in the same manner as the fair market value of a security is
determined pursuant to clause (iii) of the definition of Fair Market Value. All
fees and expenses of the Valuation Firm shall be paid by the party whose
estimate was not selected as the fair market value.
Notwithstanding the foregoing provisions of this Section 9(c), no adjustment
shall be made as aforesaid if the Company distributes to the Holder an amount of
securities, cash, other assets or evidences of indebtedness, as the case may be,
equal to the amount thereof that would have been distributed to the Holder had
this Warrant been exercised immediately prior to the making of such
distribution, or if a record date has been set with respect to such
distribution, immediately prior to the record date for determination of
shareholders entitled thereto.
(d) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF COMMON STOCK. In case
the Company shall issue Common Stock (or options, rights, warrants or other
securities convertible into or exchangeable or exercisable for shares of Common
Stock) at a price per share (or having an effective exercise, exchange or
conversion price per share together with the purchase price thereof) less than
the Fair Marker Value per share of Common Stock on the date such Common Stock
(or options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock) is sold or issued
(PROVIDED that no sale of securities pursuant to an underwritten public offering
shall be deemed to be for less than Fair Market Value), then in each such case,
the Common Stock Amount shall thereafter be adjusted by multiplying the Common
Stock Amount immediately prior to the date of issuance of such Common Stock (or
options, rights, warrants or other securities) by a fraction,
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(A) the numerator of which shall be (x) the sum of (i) the number of Common
Share Equivalents represented by all securities outstanding immediately
prior to such issuance and (ii) the number of additional Common Share
Equivalents represented by all securities so issued multiplied by (y) the
Fair Market Value of a share of Common Stock immediately prior to the date
of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Common Stock immediately prior to the date of
such issuance and (ii) the number of Common Share Equivalents represented
by all securities outstanding immediately prior to such issuance plus (y)
the aggregate consideration received by the Company for the total number of
securities so issued plus (z) in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares
of Common Stock, the additional consideration required to be received by
the Company upon the exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Common Stock to which the holders of such rights, options
or warrants are entitled, the Common Stock Amount shall again be adjusted to be
the Common Stock Amount which would then be in effect if such rights, options or
warrants had never been issued, in the former event, or the Common Stock Amount
which would then be in effect if such holder had initially been entitled to such
changed number of shares of Common Stock, if applicable, and at such changed
cost, if applicable, in the latter event. An adjustment made pursuant to this
Section 9(d) shall become effective immediately after the date such Common Stock
or other security is issued or sold.
Notwithstandiag anything herein to the contrary, (1) no further adjustment to
the Common Stock Amount or Junior Preferred Stock Amount shall be made upon the
issuance or sale of Common Stock or Junior Preferred Stock pursuant to (x) the
exercise of any options, rights or warrants or (y) the conversion or exchange of
any convertible securities, if in each case the adjustment in the Common Stock
Amount or Junior Preferred Stock Amount was made as required hereby upon the
issuance or sale of such options, rights, warrants or securities or no
adjustment was required hereby at the time such option, right, warrant or
convertible security was issued, (2) no adjustment to the Common Stock Amount or
the Junior Preferred Stock Amount shall be made upon the issuance or sale of
Common Stock or Junior Preferred Stock upon the exercise of any warrants or
options existing on the date hereof, on the terms contained in such securities
on the date of original issuance of this Warrant and (3) no adjustment to the
Common Stock Amount or the Junior Preferred Stock Amount shall be made upon the
issuance of options under the Company's 1996 Performance Stock Option Plan as in
effect on the date of original issuance of this Warrant.
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(e) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF JUNIOR PREFERRED
STOCK. In case the Company shall issue Junior Preferred Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior Preferred Stock) at a price per share (or
having an effective exercise, exchange or conversion price per share together
with the purchase price thereof) less than the Fair Market Value per share of
Junior Preferred Stock on the date such Junior Preferred Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior Preferred Stock) is sold or issued (PROVIDED
that no sale of securities pursuant to an underwritten public offering shall be
deemed to be for less than Fair Market Value), then in each such case the Junior
Preferred Stock Amount shall thereafter be adjusted by multiplying the Junior
Preferred Stock Amount immediately prior to the date of issuance of such Junior
Preferred Stock (or options, rights, warrants or other securities) by a
fraction,
(A) the numerator of which shall be (x) the sum of (i) the number of Junior
Preferred Share Equivalents represented by all securities outstanding
immediately prior to such issuance and (ii) the number of additional Junior
Preferred Share Equivalents represented by all securities so issued
multiplied by (y) the Fair Market Value of a share of Junior Preferred
Stock immediately prior to the date of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Junior Preferred Stock immediately prior to the
date of such issuance and (ii) the number of Junior Preferred Share
Equivalents represented by all securities outstanding immediately prior to
such issuance plus (y) the aggregate consideration received by the Company
for the total number of securities so issued plus (z) in the case of
options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Junior Preferred Stock, the
additional consideration required to be received by the Company upon the
exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Junior Preferred Stock to which the holders of such rights,
options or warrants are entitled, the Junior Preferred Stock Amount shall again
be adjusted to be the Junior Preferred Stock Amount which would then be in
effect if such rights, options or warrants had never been issued, in the former
event, or the Junior Preferred Stock Amount which would then be in effect if
such holder had initially been entitled to such changed number of shares of
Junior Preferred Stock, if applicable, and at such changed cost, if applicable,
in the latter event. An adjustment made pursuant to this Section 9(e) shall
become effective immediately after the date such Junior Preferred Stock or other
security is issued or sold.
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(f) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF OTHER SECURITIES. In
case the Company shall issue preferred stock or other securities of the Company
(other than Common Stock, Junior Preferred Stock or options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares of
Common Stock or Junior Preferred Stock) at a price per share (or other similar
unit) less than the Fair Market Value per share (or other similar unit) of such
preferred stock (or other security) on the date such preferred stock (or other
security) is sold or issued (provided that no sale of preferred stock or other
security pursuant to an underwritten public offering shall be deemed to be for
less than its fair market value), then in each such case:
(A) the Common Stock Amount shall thereafter be adjusted by multiplying the
Common Stock Amount immediately prior to the date of issuance of such
preferred stock (or other security) by a fraction, the numerator of which
shall be (x) the product of (a) the number of shares of Common Stock
outstanding immediately prior to such issuance and (b) the Fair Market
Value of a share of Common Stock immediately prior to the date of such
issuance (the "AGGREGATE COMMON VALUE"), and the denominator of which shall
be (x) the Aggregate Common Value minus (y) the Common Stock Portion of the
difference (the "DILUTION AMOUNT") between (a) the aggregate Fair Market
Value of such preferred stock (or other security) and (b) the aggregate
consideration received by the Company for such preferred stock (or other
security), and
(B) the Junior Preferred Stock Amount shall thereafter be adjusted by
multiplying the Junior Preferred Stock Amount immediately prior to the date
of issuance of such preferred stock (or other security) by a fraction, the
numerator of which shall be (x) the product of (a) the number of shares of
Junior Preferred Stock outstanding immediately prior to such issuance and
(b) the Fair Market Value of a share of Junior Preferred Stock immediately
prior to the date of such issuance (the "AGGREGATE PREFERRED VALUE"), and
the denominator of which shall be (x) the Aggregate Preferred Value minus
(y) the Preferred Stock Portion of the Dilution Amount;
PROVIDED, HOWEVER, that in the event that any such rights, options, warrants or
other securities expire unexercised, or in the event of a change in the number
or cost of the securities to which the holders of such rights, options, warrants
or other securities are entitled, the Junior Preferred Stock Amount and Common
Stock Amount shall again be adjusted to be the Junior Preferred Stock Amount and
Common Stock Amount which would then be in effect if such rights, options,
warrants or other securities had never been issued, in the former event, or the
Junior Preferred Stock Amount and Common Stock Amount which would then be in
effect if such holder had initially been entitled to such changed number of
securities, if applicable, and at such changed cost, if applicable, in the
latter event.
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An adjustment made pursuant to this Section 9(f) shall become effective
immediately after the date such preferred stock (or other security) is sold or
issued.
Notwithstanding the foregoing provisions of this Section 9(f), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Dilution Amount by having been
issued any of such preferred stock (or other securities) so as to put such
Holder in the same economic position he would have been in had the foregoing
adjustment been made.
(g) ABOVE MARKET REPURCHASES OF SECURITIES. If at any time, or from
time to time, the Company or any Subsidiary thereof shall repurchase (a
"REPURCHASE"), by self-tender offer or otherwise, any securities of the Company
at a weighted average purchase price in excess of the Fair Market Value thereof
(PROVIDED that the repurchase of securities in accordance with their terms as
set forth therein (or pursuant to the terms of the Restricted Stock Agreements
(as defined in the Stockholders Agreement) at the time of issue thereof shall
not be deemed to be a purchase in excess of Fair Market Value), on the Business
Day immediately prior to the earliest of (i) the date of such Repurchase, (ii)
the commencement of an offer to repurchase or (iii) the public announcement of
either (such date being referred to as the "DETERMINATION DATE"),
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to such Determination Date by a fraction,
(x) the numerator of which shall be the Fair Market Value of a share of
Common Stock immediately prior to such Determination Date, and (y) the
denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Common Stock
outstanding immediately prior to such Determination Date and the Fair
Market Value of a share of Common Stock immediately prior to such date
less (b) the sum of (I) the product of the number of shares of Common
Stock, if any, repurchased or to be repurchased by the Company or any
Subsidiary thereof in such Repurchase and the Fair Market Value of a
share of Common Stock immediately prior to the Determination Date and
(II) the Common Stock Portion of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Common Stock outstanding immediately
prior to the Determination Date less (b) the number shares of Common
Stock, if any, repurchased or to be purchased by the Company or any
Subsidiary thereof in such Repurchase, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to such Determination Date
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by a fraction, (x) the numerator of which shall be the Fair Market Value of
a share of Junior Preferred Stock immediately prior to such Determination
Date, and (y) the denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Junior Preferred Stock
outstanding immediately prior to such Determination Date and the Fair
Market Value of a share of Junior Preferred Stock immediately prior to
such date less (b) the sum of (I) the product of the number of shares
of Junior Preferred Stock, if any, repurchased or to be repurchased in
such transaction and the Fair Market Value of a share of Junior
Preferred Stock immediately prior to the Determination Date and (II)
the Junior Preferred Portion of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Junior Preferred Stock outstanding
immediately prior to the Determination Date less (b) the number shares
of Junior Preferred Stock, if any, repurchased or to be purchased by
the Company or any Subsidiary thereof in such Repurchase;
PROVIDED, HOWEVER, that in the event that any proposed Repurchase is not
effected, or in the event of a change in the number or cost of securities
repurchased or the aggregate purchase price paid, the Common Stock Amount and
Preferred Stock Amount shall again be adjusted to be the Common Stock Amount and
Preferred Stock.
Amount which would then be in effect if proposed Repurchase never occurred, in
the former event, or the Common Stock Amount and Junior Preferred Stock Amount
which would then be in effect if the Repurchase had initially been for such
changed number of securities, if applicable, and at such changed purchase price,
if applicable, in the latter event.
"REPURCHASE DILUTION AMOUNT" means the aggregate consideration paid by the
Company in connection with a Repurchase in excess of the Fair Market Value of
the securities repurchased plus, in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for securities
of the Company, the additional consideration required to be received by the
Company upon the exercise, exchange or conversion of such securities.
An adjustment made pursuant to this Section 9(g) shall become effective
immediately on the Determination Date.
Notwithstanding the foregoing provisions of this Section 9(g), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Repurchase Dilution Amount by
having been paid such amount so as to put such Holder in the same economic
position he would have been in had the foregoing adjustment been made.
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(h) NO IMPAIRMENT. The Company will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 9 and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder against
impairment. Without limiting the generality of the foregoing, the Company will
not increase the par value of any shares of Common Stock or Junior Preferred
Stock or other securities receivable on the exercise of the Warrants above the
amount payable therefor on such exercise.
(i) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Common Stock Amount or Junior Preferred Stock
Amount pursuant to this Section 9, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of the Holder, furnish or cause to be furnished to Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the number of shares
of Common Stock and Junior Preferred Stock or other securities, if any, and the
amount, if any, of other property which at the time would be received upon the
exercise of this Warrant; and (iii) the adjusted Common Stock Exercise Price and
Junior Preferred Stock Exercise Price.
(j) NOTICES. (i) In the event that the Company shall propose at any
time to pay or make any dividend or other distribution or effect any transaction
of the type described in Sections 9(a) through 9(g) hereof or to take any
similar extraordinary corporate action affecting the Company's capital stock,
then, in connection with each such event, the Company shall send to the Holder
at least 10 days prior to (x) in the case of a dividend or other distribution,
the applicable record date, a notice specifying the record date for purposes of
such dividend or distribution and the date on which such dividend or other
distribution is to be made, and (y) in any other case, the date on which such
event is to become effective or the first date on which the Company intends to
effect any such transaction, as the case may be, in each case specifying in
reasonable detail what the transaction or event consists of and, if applicable,
the aggregate amount or value of any cash or property proposed to be
distributed, paid, purchased or received by the Company in connection therewith.
(ii) In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall send to the
Holder written notice thereof at least (x) 30 days' prior to the proposed
consummation of such dissolution, winding up or liquidation or (y) 15 days
before the record date therefor, whichever is earlier.
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(iii) Unless notice is otherwise required pursuant to Section
9(j)(i) hereof, the Company shall send written notice to the Holder
immediately upon any public announcement with respect to an open market
repurchase program for, any self-tender offer for or any other repurchase
of shares of Common Stock or Junior Preferred Stock or options, rights,
warrants or other securities convertible into or exchangeable or
exercisable for shares of Common Stock or Junior Preferred Stock.
(k) MISCELLANEOUS. Notwithstanding anything to the contrary contained
herein, there shall be no adjustment to the Common Stock Amount or the Junior
Preferred Stock Amount as a result of the issuance or exercise of the Bridge
Loan Warrants on the terms contained therein on the date of the first issuance
of the Warrants. The computations of all amounts under this Section 9 shall be
made assuming all other anti-dilution or similar adjustments to be made to the
terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 9 have previously been made so as to
maintain the relative economic interest of the Warrants VIS a VIS all other
securities issued by the Company.
SECTION 10. CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any
consolidation of the Company with, or merger of the Company into, any other
Person, any merger of another Person into the Company (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or Junior Preferred Stock) or any sale or
transfer of all or substantially all of the assets of the Company to the Person
formed by such consolidation or resulting from such merger or which acquires
such assets, as the case may be, the Holder shall have the right thereafter to
exercise this Warrant for the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock, Junior Preferred Stock or other
securities for which this Warrant may have been exercised immediately prior to
such consolidation, merger, sale or transfer. Adjustments for events subsequent
to the effective date of such a consolidation, merger, sale or transfer of
assets shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. In any such event, effective provisions shall be
made in the certificate or articles of incorporation of the resulting or
surviving corporation, in any contract of sale, conveyance, lease, transfer or
otherwise so that the provisions set forth herein for the protection of the
rights of the Holder shall thereafter continue to be applicable, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon exercise, such shares of stock, other securities, cash and
property. The provisions of this Section 10 shall similarly apply to successive
consolidations, mergers, sales, leases or transfers.
SECTION 11. NO FURTHER ISSUANCES OF WARRANTS. The Company will issue no
Warrants other than this Warrant, those issued concurrently
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with this Warrant and those issued upon registration of transfer, exchange or
exercise hereof and thereof.
SECTION 12. NOTICES. Any notice, demand or delivery authorized by this
Warrant shall be in writing and shall be given to the Holder or to the Company,
as the case may be, at its address (or telecopier number) set forth below, or
such other address (or telecopier number) as shall have been furnished to the
party giving or making such notice, demand or delivery:
If to the Company: Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: Larry Thomas
Telecopier: (818) 735-4923
With copies to: Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2200
Los Angeles, CA 90017
Attn: Mark A. Bonenfant
Telecopier: (213) 896-0400;
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Attention: Harvey M. Eisenberg
Telecopier: (212) 408-2420; and
Sidley & Austin
555 West 5th Street
Los Angeles, CA 90013
Attention: Moshe Kupietzky
Telecopier: (213) 896-6600
If to the Holder: DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Los Angeles, CA 90067-5014
Attn: David Wilson
Telecopier: (310) 282-6178
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With a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attn: George R. Bason, Jr.
Telecopier: (212) 450-4800
Each such notice, demand or delivery shall be effective (a) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answerback is received or (b) if given by mail, three
business days after such communication is deposited in the mails with first
class postage prepaid addressed as aforesaid or (c) if given by any other means,
when delivered at the address specified herein.
SECTION 13. APPLICABLE LAW. This Warrant and all rights arising
hereunder shall be construed and determined in accordance with the laws of the
State of New York and the performance thereof shall be governed and enforced in
accordance with such laws.
SECTION 14. AMENDMENTS; WAIVERS. Any provision of this Warrant may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company and the Holder of this
Warrant and, in the case of a waiver, by the party against whom the waiver is to
be effective. No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
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IN WITNESS WHERE OF, the Company has duly caused this Warrant to be
signed and attested by its duly authorized officers and to be dated as of June
5, 1996.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By /s/ Larry E. Thomas
---------------------------
Name: LARRY E. THOMAS
Title: PRESIDENT
ATTEST:
By: /s/ Marty Albertson
------------------------------------------
Name: MARTY ALBERTSON
Title: EXECUTIVE VICE PRESIDENT
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
Warrant for the Purchase of Shares of Common Stock and
Junior Preferred Stock of Guitar Center Management Company, Inc.
----------------------------------------------------------------
No. *3*
THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE HOLDER OF SUCH
SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS
AND CONDITIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF JUNE 5, 1996,
AMONG GUITAR CENTER MANAGEMENT COMPANY, INC. AND CERTAIN HOLDERS OF
OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
OF THIS CERTIFICATE TO THE SECRETARY OF GUITAR CENTER MANAGEMENT COMPANY,
INC.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). 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 (SUBJECT TO CERTAIN EXCEPTIONS)
AN OPINION OF COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
FOR VALUE RECEIVED, GUITAR CENTER MANAGEMENT COMPANY, INC., a
California corporation (the "COMPANY"), hereby certifies that DLJ Offshore
Partners, C.V., a Netherlands Antilles limited partnership, its successors or
permitted assigns (the "HOLDER"), is entitled, subject to the provisions of this
Warrant, to purchase from the Company, at the times specified herein, (x) a
number of shares of Common Stock (as hereinafter defined) of the Company, equal
to the Common Stock Amount (as hereinafter defined) at a purchase price per
share
<PAGE>
equal to the Common Stock Exercise Price (as hereinafter defined) and (y) a
number of shares of Junior Preferred Stock (as hereinafter defined) of the
Company, equal to the Junior Preferred Stock Amount (as hereinafter defined) at
a purchase price per share equal to the Junior Preferred Stock Exercise Price
(as hereinafter defined). The Common Stock Amount, Common Stock Exercise Price,
Junior Preferred Stock Amount and Junior Preferred Stock Exercise Price are
subject to adjustment from time to time as hereinafter set forth.
SECTION 1. DEFINITIONS. The following terms, as used herein, have
the following meanings:
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement
dated June 5, 1996, among the Company, GCMC Funding, Inc. and Chemical Bank, as
such agreement is in effect on the date the Warrants are first issued.
"BRIDGE LOAN WARRANTS" means the warrants for the purchase of shares
of Common Stock, issued on June 5, 1996, to be held in escrow as provided in the
Bridge Financing Agreement.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which the New York Stock Exchange is closed.
"COMMON SHARE EQUIVALENT" means, with respect to any security of the
Company and as of a given date, a number which is, (i) in the case of a share of
Common Stock, one, (ii) in the case of all or a portion of any right, warrant or
other security which may be exercised for a share or shares of Common Stock, the
number of shares of Common Stock receivable upon exercise of such security (or
such portion of such security) and (iii) in the case of any security convertible
or exchangeable into a share or shares of Common Stock, the number of shares of
Common Stock that would be received if such security were converted or exchanged
on such date.
"COMMON STOCK" means the Common Stock of the Company, without par
value.
"COMMON STOCK AMOUNT" means 880 fully paid and non-assessable shares
of Common Stock, as adjusted pursuant to Sections 9 and 10.
"COMMON STOCK EXERCISE PRICE" means $.01 per share of Common Stock,
such amount to be adjusted from time to time upon the adjustment of the Common
Stock Amount pursuant to Section 9 below.
"COMMON STOCK PORTION" means 1%; PROVIDED the (A) if any of the shares
of Junior Preferred Stock are converted, from time to time in part only (but
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not in whole), into shares of Common Stock or redeemed from time to time in part
only (but not in whole), the Common Stock Portion after any such conversion or
redemption shall mean the percentage obtained by dividing (x) the Fair Market
Value of all shares of Common Stock and Common Share Equivalents outstanding
after such conversion or redemption (the "COMMON AMOUNT") by (y) the sum of the
Common Amount and the Fair Market Value of all shares of Junior Preferred Stock
and Junior Preferred Share Equivalents outstanding after such conversion or
redemption and (B) if all shares of Junior Preferred Stock are converted into
shares of Common Stock and/or redeemed, the Common Stock Portion shall mean
100%.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the sum of the Common Stock Exercise Price and
the Junior Preferred Stock Exercise Price.
"EXPIRATION DATE" means June 5, 2006.
"FAIR MARKET VALUE" means on any date:
(a) for any security,
(i) if such security is of a class then listed or admitted to
trading on any national securities exchange or traded on any national
market system, the average of the daily closing prices for the thirty (30)
trading days before such date, excluding any trades which are not bona
fide, arm's length transactions. The closing price for each day shall be
the last sale price on such date or, if no such sale takes place on such
date, the average of the closing bid and asked prices on such date, in each
case as officially reported on the principal national securities exchange
or national market system on which such shares are then listed, admitted to
trading or traded;
(ii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market system, the average of the reported closing bid and asked prices
thereof on such date in the over-the-counter market as shown by the
National Association of Securities Dealers automated quotation system or,
if such securities are not then quoted in such system, as published by the
National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by any member firm of the New
York Stock Exchange selected by the Holder seeking a determination of Fair
Market Value; and
(iii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market
3
<PAGE>
system, and if no closing bid and asked prices thereof are then so quoted
or published in the over-the-counter market, the Fair Market Value of such
security shall be as mutually agreed by the Company and the Majority
Holders; PROVIDED that if the Company and the Majority Holders are unable
to mutually agree upon the Fair Market Value, the Company and the Majority
Holders shall, within five (5) days from the date that either party
determines that they cannot agree and so notifies the other party in
writing, jointly retain an investment banking firm, nationally recognized
accounting firm or other firm providing similar valuation services (any of
the foregoing, a "VALUATION FIRM"), satisfactory to each of them. Within 3
days of selection of the Valuation Firm, the Company shall provide the
Valuation Firm and the Holders with a certificate setting forth its opinion
as to the fair market value of the security (the "COMPANY'S ESTIMATE").
The Majority Holders shall have 3 days to accept, or disagree with, the
Company's Estimate. If the Majority Holders disagree with the Company's
Estimate, the majority Holders shall so indicate in writing to the Company
and the Valuation Firm and provide them with their opinion as to the fair
market value of the security (the "MAJORITY HOLDERS' ESTIMATE"), in each
case within 3 days of receipt of the Company's Estimate. If the Majority
Holders do not indicate their disagreement with the Company's Estimate in
writing (and provide their opinion referred to in the immediately preceding
sentence) within such 3-day period, the Fair Market Value of the security
shall be equal to the Company's Estimate. If the Majority Holders indicate
their disagreement with the Company's Estimate (and provide such opinion)
within such 3-day period, the Valuation Firm shall select either the
Company's Estimate or the Majority Holders' Estimate as the estimate that
more closely reflects the fair market value of the security, and the
estimate thus selected shall be the Fair Market Value of the security. All
fees and expenses of the Valuation Firm shall be paid by the party
(treating all Holders as one party) whose estimate was not selected as the
Fair Market Value.
(b) notwithstanding paragraph (a), in the event of any repurchase or
redemption of preferred stock, the Fair Market Value shall not be less than the
stated value thereof plus any accrued and unpaid dividends as of the date of
such repurchase or redemption plus any premium payable in such repurchase or
redemption pursuant to the terms of such preferred stock in effect on the date
such shares of preferred stock are first issued; and
(c) for each Warrant, the Fair Market Value of the Warrant shall be
the aggregate Fair Market Value of the Warrant Shares obtainable on exercise of
such Warrant minus the aggregate Common Stock Exercise Price and Junior
Preferred Stock Exercise Price therefor.
4
<PAGE>
"HOLDERS" means, collectively, the Holder of this Warrant and the
holders of all other Warrants.
"JUNIOR PREFERRED PORTION" means 99%; PROVIDED that (A) if any of the
shares of Junior Preferred Stock are converted, from time to time in part only
(but not in whole), into shares of Common Stock or redeemed from time to time in
part only (but not in whole), the Junior Preferred Portion after any such
conversion or redemption shall mean the percentage obtained by dividing (x) the
Fair Market Value of all shares of Junior Preferred Stock and Junior Preferred
Share Equivalents outstanding after such conversion or redemption (the "JUNIOR
PREFERRED AMOUNT") by (y) the sum of the Junior Preferred Amount and the Fair
Market Value of all shares of Common Stock and Common Share Equivalents
outstanding after such conversion or redemption and (B) if all shares of Junior
Preferred Stock are converted into shares of Common Stock and/or redeemed, the
Junior Preferred Portion shall mean 0%.
"JUNIOR PREFERRED STOCK" means the 8% Junior Preferred Stock of the
Company, without par value.
"JUNIOR PREFERRED STOCK AMOUNT" means 870.93 fully paid and
nonassessable shares of Junior Preferred Stock, plus (x) any additional shares
of Junior Preferred Stock that would have been declared as dividends on the
Junior Preferred Stock Amount had such shares been outstanding, compounded on
each date such dividends would have been declared and (y) a number of shares of
Junior Preferred Stock equal to the amount of any accrued and unpaid dividends
(compounded on each scheduled dividend payment date) that would have been
applicable to the Junior Preferred Stock Amount had such shares been
outstanding, up to but not including the relevant Exercise Date divided by
$100.00, as adjusted pursuant to Sections 9 and 10.
"JUNIOR PREFERRED STOCK EXERCISE PRICE" means $.01 per share of
Junior Preferred Stock, such amount to be adjusted from time to time upon the
adjustment of the Junior Preferred Stock Amount pursuant to Section 9 below.
"JUNIOR PREFERRED SHARE EQUIVALENT" means, with respect to any
security of the Company and as of a given date, a number which is, (i) in the
case of a share of Junior Preferred Stock, one, (ii) in the case of all or a
portion of any right, warrant or other security which may be exercised for a
share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock receivable upon exercise of such security (or such portion of
such security) and (iii) in the case of any security convertible or exchangeable
into a share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock that would be received if such security were converted or
exchanged on such date.
5
<PAGE>
"MAJORITY HOLDERS" means those Holders holding Warrants representing
the right to purchase the majority of the shares of Common Stock and Junior
Preferred Stock issuable upon the exercise of all Warrants held by all Holders.
"PERSON" means an individual, general partnership, limited
partnership, corporation, trust, joint stock company, association, joint venture
or any other entity or organization, whether or not legal entities, including a
government or political subdivision or an agency or instrumentality thereof.
"REGISTRATION AGREEMENT" means the Registration Agreement dated June
5, 1996 among the DLJMB Entities and the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase
Agreement dated as of June 5, 1996 by and 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 "DLJMB ENTITIES"), and the
Company.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of
June 5, 1996 among the Company, the DLJMB Entities and the other stockholders of
the Company party thereto.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
"WARRANT SHARES" means the shares of Common Stock and Junior Preferred
Stock issued or to be issued to the Holder upon exercise of this Warrant, as
adjusted from time to time.
"WARRANTS" means this Warrant and all other warrants to purchase
shares of Common Stock and Junior Preferred Stock issued pursuant to the
Securities Purchase Agreement
SECTION 2. EXERCISE OF WARRANT. (a) The Holder is entitled to exercise
this Warrant, in whole or in part, at any time, or from time to time, until 5:00
p.m. New York City time on the Expiration Date or, if such day is not a Business
Day, then on the next succeeding day that shall be a Business Day, by
presentation and surrender hereof to the Company with the Exercise Subscription
Form annexed hereto duly executed and accompanied by proper payment of the
6
<PAGE>
Exercise Price for the Warrant Shares that the Holder wishes to purchase as
specified in such form, all subject to the terms and conditions hereof. The
Holder will exercise a pro rata portion of the Common Stock Amount and the
Junior Preferred Stock Amount (based on the relative number of shares comprising
each) each time this Warrant is exercised, to the extent that each such amount
has not been exercised.
(b) At the option of the Holder, the Exercise Price may be paid in
cash or by official bank check or bank cashier's check payable to the order of
the Company or by any combination of such cash or check. At the option of the
Holder, the Exercise Price may in the alternative be paid by reducing the number
of Warrant Shares that would otherwise have been issued upon such exercise by
the number of Warrant Shares that have a Fair Market Value equal to the Exercise
Price which otherwise would have been paid (ratably based on the amounts of
Common Stock and Junior Preferred Stock that would otherwise have been
exercisable). Upon the date (the "EXERCISE DATE") of receipt by the Company of
this Warrant and the Exercise Subscription Form, together with payment of the
applicable Exercise Price, at the Company's office designated for such purpose
(which office initially shall be that set forth in Section 12 herein), in proper
form for exercise, the Holder shall, to the extent permitted by applicable law,
be deemed to be the holder of record of the number of shares of Common Stock and
Junior Preferred Stock constituting the Common Stock Amount and Junior Preferred
Stock Amount, respectively (or, in the case of a partial exercise of this
Warrant, a ratable number of such shares) and any other securities or property
(including any money) to which the Holder is entitled, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock, Junior Preferred Stock or other
securities shall not then be actually delivered to the Holder. The Company shall
pay any and all documentary, stamp or similar issue or transfer taxes of the
United States or any state thereof payable in respect of the issue or delivery
of the shares of Common Stock and Junior Preferred Stock. The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common
Stock, Junior Preferred Stock or other securities, including any Warrant issued
pursuant to Section 2(c), and in such case the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
(c) If the Holder exercises this Warrant in part, this Warrant shall
be surrendered by the Holder to the Company and a new Warrant in substantially
the same form and for the unexercised Common Stock Amount and Preferred Stock
Amount remaining shall be executed by the Company. The Company shall register
the new Warrant in the name of the Holder and deliver the new Warrant to the
Holder without charge.
7
<PAGE>
(d) Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any shares of Common Stock, Junior Preferred Stock or
pier Securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in, or payable to the order of, such
name or names as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the person or persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share as provided in Section 5
below.
(e) Certificates representing securities issued pursuant to this
Warrant shall bear legends substantially in the form of the legends set forth on
the first page of this Warrant to the extent that and for so long as such
legends are required pursuant to the Stockholders Agreement.
SECTION 3. RESERVATION OF SHARES. The Company hereby agrees at all
times to keep reserved for issuance and delivery upon exercise of the Warrants
such number of its authorized but unissued shares (or treasury shares) of Common
Stock, Junior Preferred Stock, or other securities of the Company from time to
time issuable upon exercise of the Warrants as will be sufficient to permit the
exercise in full of the Warrants. All such shares shall be duly authorized and,
when issued upon such exercise, shall be validly issued, fully paid and non-
assessable, free and clear of all liens, security interests, charges and other
encumbrances or restrictions on sale (except to the extent set forth in the
Stockholders Agreement, Securities Purchase Agreement or Registration Agreement)
and free and clear of all preemptive or similar rights.
SECTION 4. SECURITIES LAW COMPLIANCE. If the issuance of any
shares of Common Stock or Junior Preferred Stock or other securities required to
be reserved for purposes of the exercise of any Warrants requires the
registration with, or approval of, any governmental authority or requires
listing on any national securities exchange or national market system before
such shares or other securities may be so issued, the Company shall at its
expense use its best efforts to cause such shares to be duly registered,
approved or listed, as the case may be, so that such shares or other securities
may be issued in accordance with the terms hereof; PROVIDED that this Section 4
shall not obligate the Company to register such securities under the Securities
Act or qualify them under state securities or blue sky laws.
SECTION 5. FRACTIONAL SHARES. No fractional shares of Common Stock
or Junior Preferred Stock or fractional interests in other securities or scrip
representing fractional shares or interests shall be issued upon the exercise of
this Warrant. With respect to any fraction of a share of Common Stock or Junior
Preferred Stock or fractional interests in other securities called for upon any
exercise hereof (and any other Warrants then held by the Holder hereof which are
8
<PAGE>
contemporaneously exercised), the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the Fair Market Value thereof at the
date of such exercise; PROVIDED, HOWEVER, that in the event that the Company
undertakes a reduction in the number of shares of Common Stock or Junior
Preferred Stock or other securities outstanding, it shall be required to issue
fractional shares or fractional interests in other securities to the Holder if
the Holder exercises all or any part of this Warrant, unless the Holder has
consented in writing to such reduction and provided the Company with a written
waiver of its right to receive fractional shares or interests in accordance with
this Section 5.
SECTION 6. TRANSFER, EXCHANGE OR ASSIGNMENT OF WARRANT. (a) This
Warrant and all rights hereunder are not transferable by the registered holder
hereof except to any Person who, prior to such transfer, agrees in writing, in
form and substance reasonably satisfactory to the Company, to be bound by the
terms of the Stockholders Agreement to the extent required thereby in accordance
with the provisions thereof. Each taker and holder of this Warrant by taking or
holding the same, consents and agrees that the registered holder hereof may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented hereby.
(b) Subject to compliance with the Stockholders Agreement, the
Registration Agreement and Securities Purchase Agreement, in each case, to the
extent applicable, the Holder of this Warrant shall be entitled, without
obtaining the consent of the Company, to assign and transfer this Warrant, at
any time in whole or from time to time in part, to any Person or Persons.
Subject to the preceding sentence, upon surrender of this Warrant to the
Company, together with the attached Warrant Assignment Form duly executed, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder and
this Warrant shall promptly be canceled.
(c) The Holder shall be deemed to have assigned a pro rata portion
of the Common Stock Amount and the Junior Preferred Stock Amount (based on the
relative number of shares comprising each) each time this Warrant is assigned in
part, to the extent that each such amount has not been exercised.
SECTION 7. LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the
Company of evidence satisfactory to it (in the exercise of its reasonable
discretion) of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction), if requested by the Company, of
reasonably satisfactory indemnification, or (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company shall, without charge,
execute and deliver a new Warrant of like date and having substantially the same
form; PROVIDED that (in the case of loss, theft or destruction) no indemnity
bond shall be required unless the Company has a
9
<PAGE>
class of securities registered pursuant to the Exchange Act and the Company's
transfer agent requires such indemnity bond as a condition to the issuance of a
new Warrant.
SECTION 8. RIGHTS OF THE HOLDER. Prior to the exercise of this
Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a
shareholder of the Company including, without limitation, the right to receive
dividends or other distributions or to receive any notice of meetings of
shareholders or any notice of any proceedings of the Company.
SECTION 9. ANTI-DILUTION PROVISIONS. So long as any Warrants are
outstanding, the Common Stock Amount and Junior Preferred Stock Amount shall be
subject to change or adjustment as follows:
(a) DIVIDENDS, SUBDIVISIONS, COMBINATIONS. In case the Company
shall (i) pay or make a dividend or other distribution to (x) all holders of its
Common Stock in shares of Common Stock or shares of Junior Preferred Stock or
(y) all holders of its Junior Preferred Stock in shares of Common Stock or
Junior Preferred Stock (other than ordinary dividends on the Junior Preferred
Stock contemplated by the definition of Junior Preferred Stock Amount), (ii)
subdivide, split or reclassify the outstanding shares of its Common Stock or
Junior Preferred Stock into a larger number of shares or (iii) combine or
reclassify the outstanding shares of its Common Stock or Junior Preferred Stock
into a smaller number of shares, then in each such case the Common Stock Amount
or Junior Preferred Stock Amount, respectively, shall be adjusted to equal the
number of such shares to which the holder of this Warrant would have been
entitled upon the occurrence of such event had this Warrant been exercised
immediately prior to the happening of such event or, in the case of a
stock dividend or other distribution, prior to the record date for determination
of shareholders entitled thereto. Adjustments for distributions of shares of
Junior Preferred Stock to holders of Common Stock shall be made to the Junior
Preferred Stock Amount, and adjustments for distributions of shares of Common
Stock to holders of Junior Preferred Stock shall be made to the Common Stock
Amount. An adjustment made pursuant to this Section 9(a) shall become effective
immediately after such record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, split,
combination or reclassification.
(b) REORGANIZATION OR RECLASSIFICATION; CONVERSION OF JUNIOR
PREFERRED STOCK INTO COMMON STOCK; REDEMPTION OF JUNIOR PREFERRED STOCK. (i) In
case of any capital reorganization or any reclassification of the capital stock
of the Company (whether pursuant to a merger or consolidation or otherwise),
this Warrant shall thereafter be exercisable for the number of shares of stock
or other securities or property receivable upon such capital reorganization or
reclassification of capital stock, as the case may be, by a holder of the number
of shares of Common Stock and Junior Preferred Stock into which this Warrant was
exercisable immediately prior to such capital reorganization or reclassification
of capital stock; and, in any such case,
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appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(ii) If all or a portion of the shares of Junior Preferred Stock are
converted into shares of Common Stock pursuant to the terms of the Junior
Preferred Stock, then (x) the Common Stock Amount shall be increased by the
number of additional shares of Common Stock the Holder would have received had
this Warrant been exercised immediately prior to the conversion and (y) the
Junior Preferred Stock Amount shall be decreased by the number of shares of
Junior Preferred Stock issuable upon exercise of this Warrant which would have
been converted into Common Stock in such conversion had this Warrant been
exercised immediately prior to the conversion.
(iii) If all or a portion of the shares of Junior Preferred Stock are
redeemed pursuant to the terms of the Junior Preferred Stock (except any
repurchase pursuant to the Restricted Stock Agreements (as defined in the
Stockholders Agreement) or Stockholders Agreement), then (x) the Holder of this
Warrant shall be paid the amount he would have received (assuming a redemption
PRO RATA from all holders of Junior Preferred Stock) had this Warrant been
exercised immediately prior to the redemption and (y) the Junior Preferred Stock
Amount shall be decreased by the number of shares of Junior Preferred Stock
issuable upon exercise of this Warrant which would have been redeemed in such
redemption (assuming a redemption PRO RATA from all holders of Junior Preferred
Stock) had this Warrant been exercised immediately prior to the redemption.
(c) DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK
OR JUNIOR PREFERRED STOCK. In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock or Junior Preferred Stock shares
of any of its capital stock (other than a distribution of Common Stock or Junior
Preferred Stock referred to in Section 9(a) or in the definition of Junior
Preferred Stock Amount), rights or warrants to purchase any of its securities
(other than those referred to in Sections 9(d) and 9(e) below), cash, other
assets or evidences of its indebtedness, then, in each such case:
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to the date of such dividend or distribution
by a fraction, of which (x) the numerator shall be the Fair Market Value
per share of Common Stock (the "COMMON VALUE") at the record date (the
"RECORD DATE") for determining shareholders entitled to such dividend or
distribution, and of which (y) the denominator shall be (a) the Common
Value less (b) (i) the Common Stock Portion of the fair market value (the
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<PAGE>
"DISTRIBUTION VALUE") of the securities, cash, assets or evidences of
indebtedness so distributed divided by (ii) the number of shares of Common
Stock outstanding immediately prior to the Record Date, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to the Record Date by a
fraction, of which (x) the numerator shall be the Fair Market Value per
share of Junior Preferred Stock (the "JUNIOR PREFERRED VALUE") at the
record date for determining shareholders entitled to such dividend or
distribution, and of which (y) the denominator shall be (a) the Junior
Preferred Value less (b) (i) the Junior Preferred Portion of the
Distribution Value divided by (ii) the number of shares of Junior Preferred
Stock outstanding immediately prior to the Record Date.
The Distribution Value shall be determined in good faith by the Board of
Directors of the Company; PROVIDED that if the Majority Holders in their
discretion do not agree with such determination, such fair market value shall be
determined in the same manner as the fair market value of a security is
determined pursuant to clause (iii) of the definition of Fair Market Value. All
fees and expenses of the Valuation Firm shall be paid by the party whose
estimate was not selected as the fair market value.
Notwithstanding the foregoing provisions of this Section 9(c), no adjustment
shall be made as aforesaid if the Company distributes to the Holder an amount of
securities, cash, other assets or evidences of indebtedness, as the case may be,
equal to the amount thereof that would have been distributed to the Holder had
this Warrant been exercised immediately prior to the making of such
distribution, or if a record date has been set with respect to such
distribution, immediately prior to the record date for determination of
shareholders entitled thereto.
(d) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF COMMON STOCK. In
case the Company shall issue Common Stock (or options, rights, warrants or other
securities convertible into or exchangeable or exercisable for shares of Common
Stock) at a price per share (or having an effective exercise, exchange or
conversion price per share together with the purchase price thereof) less than
the Fair Market Value per share of Common Stock on the date such Common Stock
(or options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock) is sold or issued
(PROVIDED that no sale of securities pursuant to an underwritten public offering
shall be deemed to be for less than Fair Market Value), then in each such case,
the Common Stock Amount shall thereafter be adjusted by multiplying the Common
Stock Amount immediately prior to the date of issuance of such Common Stock (or
options, rights, warrants or other securities) by a fraction,
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<PAGE>
(A) the numerator of which shall be (x) the sum of (i) the number of
Common Share Equivalents represented by all securities outstanding
immediately prior to such issuance and (ii) the number of additional Common
Share Equivalents represented by all securities so issued multiplied by (y)
the Fair Market Value of a share of Common Stock immediately prior to the
date of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Common Stock immediately prior to the date of
such issuance and (ii) the number of Common Share Equivalents represented
by all securities outstanding immediately prior to such issuance plus (y)
the aggregate consideration received by the Company for the total number of
securities so issued plus (z) in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares
of Common Stock, the additional consideration required to be received by
the Company upon the exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Common Stock to which the holders of such rights, options
or warrants are entitled, the Common Stock Amount shall again be adjusted to be
the Common Stock Amount which would then be in effect if such rights, options or
warrants had never been issued, in the former event, or the Common Stock Amount
which would then be in effect if such holder had initially been entitled to such
changed number of shares of Common Stock, if applicable, and at such changed
cost, if applicable, in the latter event. An adjustment made pursuant to this
Section 9(d) shall become effective immediately after the date such Common
Stock or other security is issued or sold.
Notwithstanding anything herein to the contrary, (1) no further adjustment to
the Common Stock Amount or Junior Preferred Stock Amount shall be made upon the
issuance or sale of Common Stock or Junior Preferred Stock pursuant to (x) the
exercise of any options, rights or warrants or (y) the conversion or exchange of
any convertible securities, if in each case the adjustment in the Common Stock
Amount or Junior Preferred Stock Amount was made as required hereby upon the
issuance or sale of such options, rights, warrants or securities or no
adjustment was required hereby at the time such option, right, warrant or
convertible security was issued, (2) no adjustment to the Common Stock Amount or
the Junior Preferred Stock Amount shall be made upon the issuance or sale of
Common Stock or Junior Preferred Stock upon the exercise of any warrants or
options existing on the date hereof, on the terms contained in such securities
on the date of original issuance of this Warrant and (3) no adjustment to the
Common Stock Amount or the Junior Preferred Stock Amount shall be made upon the
issuance of options under the Company's 1996 Performance Stock Option Plan as in
effect on the date of original issuance of this Warrant.
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<PAGE>
(e) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF JUNIOR PREFERRED
STOCK. In case the Company shall issue Junior Preferred Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior preferred Stock) at a price per share (or
having an effective exercise, exchange or conversion price per share together
with the purchase price thereof) less than the Fair Market Value per share of
Junior Preferred Stock on the date such Junior Preferred Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Junior Preferred Stock) is sold or issued (PROVIDED
that no sale of securities pursuant to an underwritten public offering shall be
deemed to be for less than Fair Market Value), then in each such case the Junior
Preferred Stock Amount shall thereafter be adjusted by multiplying the Junior
Preferred Stock Amount immediately prior to the date of issuance of such Junior
Preferred Stock (or options, rights, warrants or other securities) by a
fraction,
(A) the numerator of which shall be (x) the sum of (i) the number of
Junior Preferred Share Equivalents represented by all securities
outstanding immediately prior to such issuance and (ii) the number of
additional Junior Preferred Share Equivalents represented by all securities
so issued multiplied by (y) the Fair Market Value of a share of Junior
Preferred Stock immediately prior to the date of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Junior Preferred Stock immediately prior to the
date of such issuance and (ii) the number of Junior Preferred Share
Equivalents represented by all securities outstanding immediately prior to
such issuance plus (y) the aggregate consideration received by the Company
for the total number of securities so issued plus (z) in the case of
options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Junior Preferred Stock, the
additional consideration required to be received by the Company upon the
exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Junior Preferred Stock to which the holders of such rights,
options or warrants are entitled, the Junior Preferred Stock Amount shall again
be adjusted to be the Junior Preferred Stock Amount which would then be in
effect if such rights, options or warrants had never been issued, in the former
event, or the Junior Preferred Stock Amount which would then be in effect if
such holder had initially been entitled to such changed number of shares of
Junior Preferred Stock, if applicable, and at such changed cost, if applicable,
in the latter event. An adjustment made pursuant to this Section 9(e) shall
become effective immediately after the date such Junior Preferred Stock or other
security is issued or sold.
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<PAGE>
(f) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF OTHER SECURITIES. In
case the Company shall issue preferred stock or other securities of the Company
(other than Common Stock, Junior Preferred Stock or options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares of
Common Stock or Junior Preferred Stock) at a price per share (or other similar
unit) less than the Fair Market Value per share (or other similar unit) of such
preferred stock (or other security) on the date such preferred stock (or other
security) is sold or issued (provided that no sale of preferred stock or other
security pursuant to an underwritten public offering shall be deemed to be for
less than its fair market value), then in each such case:
(A) the Common Stock Amount shall thereafter be adjusted by multiplying
the Common Stock Amount immediately prior to the date of issuance of such
preferred stock (or other security) by a fraction, the numerator of which
shall be (x) the product of (a) the number of shares of Common Stock
outstanding immediately prior to such issuance and (b) the Fair Market
Value of a share of Common Stock immediately prior to the date of such
issuance (the "AGGREGATE COMMON VALUE"), and the denominator of which shall
be (x) the Aggregate Common Value minus (y) the Common Stock Portion of the
difference (the "DILUTION AMOUNT") between (a) the aggregate Fair Market
Value of such preferred stock (or other security) and lb) the aggregate
consideration received by the Company for such preferred stock (or other
security), and
(B) the Junior Preferred Stock Amount shall thereafter be adjusted by
multiplying the Junior Preferred Stock Amount immediately prior to the date
of issuance of such preferred stock (or other security) by a fraction, the
numerator of which shall be (x) the product of (a) the number of shares of
Junior Preferred Stock outstanding immediately prior to such issuance and
(b) the Fair Market Value of a share of Junior Preferred Stock immediately
prior to the date of such issuance (the "AGGREGATE PREFERRED VALUE"), and
the denominator of which shall be (x) the Aggregate Preferred Value minus
(y) the Preferred Stock Portion of the Dilution Amount;
PROVIDED, HOWEVER, that in the event that any such rights, options, warrants or
other securities expire unexercised, or in the event of a change in the number
or cost of the securities to which the holders of such rights, options, warrants
or other securities are entitled, the Junior Preferred Stock Amount and Common
Stock Amount shall again be adjusted to be due Junior Preferred Stock Amount and
Common Stock Amount which would then be in effect if such rights, options,
warrants or other securities had never been issued, in the former event, or the
Junior Preferred Stock Amount and Common Stock Amount which would then be in
effect if such holder had initially been entitled to such changed number of
securities, if applicable, and at such changed cost, if applicable, in the
latter event.
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<PAGE>
An adjustment made pursuant to this Section 9(f) shall become effective
immediately after the date such preferred stock (or other security) is sold or
issued.
Notwithstanding the foregoing provisions of this Section 9(f), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Dilution Amount by having been
issued any of such preferred stock (or other securities) so as to put such
Holder in the same economic position he would have been in had the foregoing
adjustment been made.
(g) ABOVE MARKET REPURCHASES OF SECURITIES. If at any time, or from
time to time, the Company or any Subsidiary thereof shall repurchase (a
"REPURCHASE"), by self-tender offer or otherwise, any securities of the Company
at a weighted average purchase price in excess of the Fair Market Value thereof
(PROVIDED that the repurchase of securities in accordance with their terms as
set forth therein or pursuant to the terms of the Restricted Stock Agreements
(as defined in the Stockholders Agreement) at the time of issue thereof shall
not be deemed to be a purchase in excess of Fair Market Value), on the Business
Day immediately prior to the earliest of (i) the date of such Repurchase, (ii)
the commencement of an offer to repurchase or (iii) the public announcement of
either (such date being referred to as the "DETERMINATION DATE"),
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to such Determination Date by a fraction,
(x) the numerator of which shall be the Fair Market Value of a share of
Common Stock immediately prior to such Determination Date, and (y) the
denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Common Stock
outstanding immediately prior to such Determination Date and the
Fair Market Value of a share of Common Stock immediately prior to
such date less (b) the sum of (I) the product of the number of
shares of Common Stock, if any, repurchased or to be repurchased
by the Company or any Subsidiary thereof in such Repurchase and
the Fair Market Value of a share of Common Stock immediately
prior to the Determination Date and (II) the Common Stock Portion
of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Common Stock outstanding
immediately prior to the Determination Date less (b) the number
shares of Common Stock, if any, repurchased or to be purchased by
the Company or any Subsidiary thereof in such Repurchase, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to such Determination Date
16
<PAGE>
by a fraction, (x) the numerator of which shall be the Fair Market
Value of a share of Junior Preferred Stock immediately prior to such
Determination Date, and (y) the denominator of which shall be the
result of dividing:
(i) (a) the product of the number of shares of Junior Preferred
Stock outstanding immediately prior to such Determination Date and the
Fair Market Value of a share of Junior Preferred Stock immediately
prior to such date less (b) the sum of (I) the product of the number
of shares of Junior Preferred Stock, if any, repurchased or to be
repurchased in such transaction and the Fair Market Value of a share
of Junior Preferred Stock immediately prior to the Determination Date
and (II) the Junior Preferred Portion of the Repurchase Dilution
Amount; by
(ii) (a) the number of shares of Junior Preferred Stock outstanding
immediately prior to the Determination Date less (b) the number shares
of Junior Preferred Stock, if any, repurchased or to be purchased by
the Company or any Subsidiary thereof in such Repurchase;
PROVIDED, HOWEVER, that in the event that any proposed Repurchase is not
effected, or in the event of a change in the number or cost of securities
repurchased or the aggregate purchase price paid, the Common Stock Amount and
Preferred Stock Amount shall again be adjusted to be the Common Stock Amount and
Preferred Stock.
Amount which would then be in effect if proposed Repurchase never occurred, in
the former event, or the Common Stock Amount and Junior Preferred Stock Amount
which would then be in effect if the Repurchase had initially been for such
changed number of securities, if applicable, and at such changed purchase price,
if applicable, in the latter event.
"REPURCHASE DILUTION AMOUNT" means the aggregate consideration paid by the
Company in connection with a Repurchase in excess of the Fair Market Value of
the securities repurchased plus, in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for securities
of the Company, the additional consideration required to be received by the
Company upon the exercise, exchange or conversion of such securities.
An adjustment made pursuant to this Section 9(g) shall become effective
immediately on the Determination Date.
Notwithstanding the foregoing provisions of this Section 9(g), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Repurchase Dilution Amount by
having been paid such amount so as to put such Holder in the same economic
position he would have been in had the foregoing adjustment been made.
17
<PAGE>
(h) NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions
of this Section 9 and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder against
impairment. Without limiting the generality of the foregoing, the Company
will not increase the par value of any shares of Common Stock or Junior
Preferred Stock or other securities receivable on the exercise of the
Warrants above the amount payable therefor on such exercise.
(i) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Common Stock Amount or Junior Preferred Stock
Amount pursuant to this Section 9, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of the Holder, furnish or cause to be furnished to Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the number of shares
of Common Stock and Junior Preferred Stock or other securities, if any, and the
amount, if any, of other property which at the time would be received upon the
exercise of this Warrant; and (iii) the adjusted Common Stock Exercise Price and
Junior Preferred Stock Exercise Price.
(j) NOTICES. (i) In the event that the Company shall propose at any
time to pay or make any dividend or other distribution or effect any transaction
of the type described in Sections 9(a) through 9(g) hereof or to take any
similar extraordinary corporate action affecting the Company's capital stock,
then, in connection with each such event, the Company shall send to the Holder
at least 10 days prior to (x) in the case of a dividend or other distribution,
the applicable record date, a notice specifying the record date for purposes of
such dividend or distribution and the date on which such dividend or other
distribution is to be made, and (y) in any other case, the date on which such
event is to become effective or the first date on which the Company intends to
effect any such transaction, as the case may be, in each case specifying in
reasonable detail what the transaction or event consists of and, 5 applicable,
the aggregate amount or value of any cash or property proposed to be
distributed, paid, purchased or received by the Company in connection therewith.
(ii) In the event of any voluntary or involuntary
dissolution, liquidation or winding up of the Company, the Company shall
send to the Holder written notice thereof at least (x) 30 days' prior to
the proposed consummation of such dissolution, winding up or liquidation or
(y) 15 days before the record date therefor, whichever is earlier.
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(iii) Unless notice is otherwise required pursuant to Section
9(j)(i) hereof, the Company shall send written notice to the Holder
immediately upon any public announcement with respect to an open market
repurchase program for, any self-tender offer for or any other repurchase
of shares of Common Stock or Junior Preferred Stock or options, rights,
warrants or other securities convertible into or exchangeable or
exercisable for shares of Common Stock or Junior Preferred Stock.
(k) MISCELLANEOUS. Notwithstanding anything to the contrary
contained herein, there shall be no adjustment to the Common Stock Amount or the
Junior Preferred Stock Amount as a result of the issuance or exercise of the
Bridge Loan Warrants on the terms contained therein on the date of the first
issuance of the Warrants. The computations of all amounts under this Section 9
shall be made assuming all other anti-dilution or similar adjustments to be made
to the terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 9 have previously been made so as to
maintain the relative economic interest of the Warrants VIS A VIS all other
securities issued by the Company.
SECTION 10. CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any
consolidation of the Company with, or merger of the Company into, any other
Person, any merger of another Person into the Company (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or Junior Preferred Stock) or any sale or
transfer of all or substantially all of the assets of the Company to the Person
formed by such consolidation or resulting from such merger or which acquires
such assets, as the case may be, the Holder shall have the right thereafter to
exercise this Warrant for the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock, Junior Preferred Stock or other
securities for which this Warrant may have been exercised immediately prior to
such consolidation, merger, sale or transfer. Adjustments for events subsequent
to the effective date of such a consolidation, merger, sale or transfer of
assets shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. In any such event, effective provisions shall be
made in the certificate or articles of incorporation of the resulting or
surviving corporation, in any contract of sale, conveyance, lease, transfer or
otherwise so that the provisions set forth herein for the protection of the
rights of the Holder shall thereafter continue to be applicable, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon exercise, such shares of stock, other securities, cash and
property. The provisions of this Section 10 shall similarly apply to successive
consolidations, mergers, sales, leases or transfers.
SECTION 11. NO FURTHER ISSUANCES OF WARRANTS. The Company will
issue no Warrants other than this Warrant, those issued concurrently
19
<PAGE>
with this Warrant and those issued upon registration of transfer, exchange or
exercise hereof and thereof.
SECTION 12. NOTICES. Any notice, demand or delivery authorized by
this Warrant shall be in writing and shall be given to the Holder or to the
Company, as the case may be, at its address (or telecopier number) set forth
below, or such other address (or telecopier number) as shall have been furnished
to the party giving or making such notice, demand or delivery:
If to the Company: Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: Larry Thomas
Telecopier: (818) 735-4923
With copies to: Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2200
Los Angeles, CA 90017
Attn: Mark A. Bonenfant
Telecopier: (213) 896-0400;
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Attention: Harvey M. Eisenberg
Telecopier: (212) 408-2420; and
Sidley & Austin
555 West 5th Street
Los Angeles, CA 90013
Attention: Moshe Kupietzky
Telecopier: (213) 896-6600
If to the Holder: DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Los Angeles, CA 90067-5014
Attn: David Wilson
Telecopier: (310) 282-6178
20
<PAGE>
With a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attn: George R. Bason, Jr.
Telecopier: (212) 450-4800
Each such notice, demand or delivery shall be effective (a) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answerback is received or (b) if given by mail,
three business days after such communication is deposited in the mails with
first class postage prepaid addressed as aforesaid or (c) if given by any other
means, when delivered at the address specified herein.
SECTION 13. APPLICABLE LAW. This Warrant and all rights arising
hereunder shall be construed and determined in accordance with the laws of the
State of New York and the performance thereof shall be governed and enforced in
accordance with such laws.
SECTION 14. AMENDMENTS; WAIVERS. Any provision of this Warrant may
be amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company and the Holder of this
Warrant and, in the case of a waiver, by the party against whom the waiver is to
be effective. No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
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IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
signed and attested by its duly authorized officers and to be dated as of
June 5, 1996.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Lawrence E. Thomas
-----------------------------------------
Name: LAWRENCE E. THOMAS
Title: PRESIDENT
ATTEST:
By: /s/ Marty Albertson
-------------------------------
Name: MARTY ALBERTSON
Title: EXECUTIVE VICE PRESIDENT
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
Warrant for the Purchase of Shares of Common Stock and
Junior Preferred Stock of Guitar Center Management Company. Inc.
----------------------------------------------------------------
No. *4*
THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE HOLDER OF SUCH
SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS
AND CONDITIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF JUNE 5, 1996,
AMONG GUITAR CENTER MANAGEMENT COMPANY, INC. AND CERTAIN HOLDERS OF
OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION. COPIES OF SUCH AGREEMENT MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE SECRETARY OF GUITAR CENTER MANAGEMENT COMPANY, INC.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). 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 (SUBJECT TO CERTAIN EXCEPTIONS)
AN OPINION OF COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
FOR VALUE RECEIVED, GUITAR CENTER MANAGEMENT COMPANY, INC., a
California corporation (the "COMPANY"), hereby certifies that DLJ Merchant
Banking Funding Inc., Delaware corporation, its successors or permitted assigns
(the "HOLDER"), is entitled, subject to the provisions of this Warrant, to
purchase from the Company, at the times specified herein, (x) a number of shares
of Common Stock (as hereinafter defined) of the Company, equal to the Common
Stock Amount (as hereinafter defined) at a purchase price per share equal to
<PAGE>
the Common Stock Exercise Price (as hereinafter defined) and (y) a number of
shares of Junior Preferred Stock (as hereinafter defined) of the Company,
equal to the Junior Preferred Stock Amount (as hereinafter defined) at a
purchase price per share equal to the Junior Preferred Stock Exercise Price
(as hereinafter defined). The Common Stock Amount, Common Stock Exercise
Price. Junior Preferred Stock Amount and Junior Preferred Stock Exercise
Price are subject to adjustment from time to time as hereinafter set forth.
SECTION 1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement dated
June 5, 1996, among the Company, GCMC Funding, Inc. and Chemical Bank, as such
agreement is in effect on the date the Warrants are first issued.
"BRIDGE LOAN WARRANTS" means the warrants for the purchase of shares of
Common Stock, issued on June 5, 1996, to be held in escrow as provided in the
Bridge Financing Agreement.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which the New York Stock Exchange is closed.
"COMMON SHARE EQUIVALENT" means, with respect to any security of the
Company and as of a given date, a number which is, (i) in the case of a share of
Common Stock, one, (ii) in the case of all or a portion of any right, warrant or
other security which may be exercised for a share or shares of Common Stock, the
number of shares of Common Stock receivable upon exercise of such security (or
such portion of such security) and (iii) in the case of any security convertible
or exchangeable into a share or shares of Common Stock, the number of shares of
Common Stock that would be received if such security were converted or exchanged
on such date.
"COMMON STOCK" means the Common Stock of the Company, without par
value.
"COMMON STOCK AMOUNT" means 22,033 fully paid and non-assessable shares
of Common Stock, as adjusted pursuant to Sections 9 and 10.
"COMMON STOCK EXERCISE PRICE" means $.01 per share of Common Stock,
such amount to be adjusted from time to time upon the adjustment of the Common
Stock Amount pursuant to Section 9 below.
"COMMON STOCK PORTION" means 1%; PROVIDED that (A) if any of the shares
of Junior Preferred Stock are converted, from time to time in part only (but
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not in whole), into shares of Common Stock or redeemed from time to time in part
only (but not in whole), the Common Stock Portion after any such conversion or
redemption shall mean the percentage obtained by dividing (x) the Fair Market
Value of all shares of Common Stock and Common Share Equivalents outstanding
after such conversion or redemption (the "COMMON AMOUNT") by (y) the sum of the
Common Amount and the Fair Market Value of all shares of Junior Preferred Stock
and Junior Preferred Share Equivalents outstanding after such conversion or
redemption and (B) if all shares of Junior Preferred Stock are converted into
shares of Common Stock and/or redeemed, the Common Stock Portion shall mean
100%.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the sum of the Common Stock Exercise Price and
the Junior Preferred Stock Exercise Price.
"EXPIRATION DATE" means June 5, 2006.
"FAIR MARKET VALUE" means on any date:
(a) for any security,
(i) if such security is of a class then listed or admitted to
trading on any national securities exchange or traded on any national
market system, the average of the daily closing prices for the thirty (30)
trading days before such date, excluding any trades which are not bona
fide, arm's length transactions. The closing price for each day shall be
the last sale price on such date or, if no such sale takes place on such
date, the average of the closing bid and asked prices on such date, in each
case as officially reported on the principal national securities exchange
or national market system on which such shares are then listed, admitted to
trading or traded;
(ii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market system, the average of the reported closing bid and asked prices
thereof on such date in the over-the-counter market as shown by the
National Association of Securities Dealers automated quotation system or,
if such securities are not then quoted in such system, as published by the
National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by any member firm of the New
York Stock Exchange selected by the Holder seeking a determination of Fair
Market Value; and
(iii) if such security is not of a class then listed or admitted
to trading on any national securities exchange or traded on any national
market
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system, and if no closing bid and asked prices thereof are then so quoted
or published in the over-the-counter market, the Fair Market Value of such
security shall be as mutually agreed by the Company and the Majority
Holders; PROVIDED that if the Company and the Majority Holders are unable
to mutually agree upon the Fair Market Value, the Company and the Majority
Holders shall, within five (5) days from the date that either party
determines that they cannot agree and so notifies the other party in
writing, jointly retain an investment banking firm. nationally recognized
accounting firm or other firm providing similar valuation services (any of
the foregoing, a "VALUATION FIRM"), satisfactory to each of them. Within 3
days of selection of the Valuation Firm, the Company shall provide the
Valuation Firm and the Holders with a certificate setting forth its opinion
as to the fair market value of the security (the "COMPANY'S ESTIMATE"). The
Majority Holders shall have 3 days to accept, or disagree with, the
Company's Estimate. If the Majority Holders disagree with the Company's
Estimate, the Majority Holders shall so indicate in writing to the Company
and the Valuation Firm and provide them with their opinion as to the fair
market value of the security (the "MAJORITY HOLDERS' ESTIMATE"), in each
case within 3 days of receipt of the Company's Estimate. If the Majority
Holders do not indicate their disagreement with the Company's Estimate in
writing (and provide their opinion referred to in the immediately preceding
sentence) within such 3-day period, the Fair Market Value of the security
shall be equal to the Company's Estimate. If the Majority Holders indicate
their disagreement with the Company's Estimate (and provide such opinion)
within such 3-day period, the Valuation Firm shall select either the
Company's Estimate or the Majority Holders' Estimate as the estimate that
more closely reflects the fair market value of the security, and the
estimate thus selected shall be the Fair Market Value of the security. All
fees and expenses of the Valuation Firm shall be paid by the party
(treating all Holders as one party) whose estimate was not selected as the
Fair Market Value.
(b) notwithstanding paragraph (a), in the event of any repurchase or
redemption of preferred stock, the Fair Market Value shall not be less than the
stated value thereof plus any accrued and unpaid dividends as of the date of
such repurchase or redemption plus any premium payable in such repurchase or
redemption pursuant to the terms of such preferred stock in effect on the date
such shares of preferred stock are first issued; and
(c) for each Warrant, the Fair Market Value of the Warrant shall be
the aggregate Fair Market Value of the Warrant Shares obtainable on exercise of
such Warrant minus the aggregate Common Stock Exercise Price and Junior
Preferred Stock Exercise Price therefor.
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"HOLDERS" means, collectively, the Holder of this Warrant and the
holders of all other Warrants.
"JUNIOR PREFERRED PORTION" means 99%; PROVIDED that (A) if any of the
shares of Junior Preferred Stock are converted, from time to time in part only
(but not in whole), into shares of Common Stock or redeemed from time to re in
part only (but not in whole), the Junior Preferred Portion after any such
conversion or redemption shall mean the percentage obtained by dividing (x) the
Fair Market Value of all shares of Junior Preferred Stock and Junior Preferred
Share Equivalents outstanding after such conversion or redemption (the "JUNIOR
PREFERRED AMOUNT") by (y) the sum of the Junior Preferred Amount and the Fair
Market Value of all shares of Common Stock and Common Share Equivalents
outstanding after such conversion or redemption and (B) if all shares of Junior
Preferred Stock are converted into shares of Common Stock and/or redeemed, the
Junior Preferred Portion shall mean 0%.
"JUNIOR PREFERRED STOCK" means the 8% Junior Preferred Stock of the
Company, without par value.
"JUNIOR PREFERRED STOCK AMOUNT" means 21,812.98 fully paid and non-
assessable shares of Junior Preferred Stock, plus (x) any additional shares of
Junior Preferred Stock that would have been declared as dividends on the Junior
Preferred Stock Amount had such shares been outstanding, compounded on each date
such dividends would have been declared and (y) a number of shares of Junior
Preferred Stock equal to the amount of any accrued and unpaid dividends
(compounded on each scheduled dividend payment date) that would have been
applicable to the Junior Preferred Stock Amount had such shares been
outstanding, up to but not including the relevant Exercise Date divided by
$100.00, as adjusted pursuant to Sections 9 and 10.
"JUNIOR PREFERRED STOCK EXERCISE PRICE" means $.01 per share of
Junior Preferred Stock, such amount to be adjusted from time to time upon the
adjustment of the Junior Preferred Stock Amount pursuant to Section 9 below.
"JUNIOR PREFERRED SHARE EQUIVALENT" means, with respect to any
security of the Company and as of a given date, a number which is, (i) in the
case of a share of Junior Preferred Stock, one, (ii) in the case of all or a
portion of any right, warrant or other security which may be exercised for a
share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock receivable upon exercise of such security (or such portion of
such security) and (iii) in the case of any security convertible or exchangeable
into a share or shares of Junior Preferred Stock, the number of shares of Junior
Preferred Stock that would be received if such security were converted or
exchanged on such date.
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"MAJORITY HOLDERS" means those Holders holding Warrants representing
the right to purchase the majority of the shares of Common Stock and Junior
Preferred Stock issuable upon the exercise of all Warrants held by all Holders.
"PERSON" means an individual, general partnership, limited
partnership, corporation, trust, joint stock company, association, joint venture
or any other entity or organization, whether or not legal entities, including a
government or political subdivision or an agency or instrumentality thereof.
"REGISTRATION AGREEMENT" means the Registration Agreement dated June
5, 1996 among the DLJMB Entities and the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase
Agreement dated as of June 5, 1996 by and 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 "DLJMB ENTITIES"), and the
Company.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of
June 5, 1996 among the Company, the DLJMB Entities and the other stockholders of
the Company party thereto.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
"WARRANT SHARES" means the shares of Common Stock and Junior
Preferred Stock issued or to be issued to the Holder upon exercise of this
Warrant, as adjusted from time to time.
"WARRANTS" means this Warrant and all other warrants to purchase
shares of Common Stock and Junior Preferred Stock issued pursuant to the
Securities Purchase Agreement
SECTION 2. EXERCISE OF WARRANT. (a) The Holder is entitled to exercise
this Warrant, in whole or in part, at any time, or from time to time, until 5:00
p.m. New York City time on the Expiration Date or, if such day is not a Business
Day, then on the next succeeding day that shall be a Business Day, by
presentation and surrender hereof to the Company with the Exercise Subscription
Form annexed hereto duly executed and accompanied by proper payment of the
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Exercise Price for the Warrant Shares that the Holder wishes to purchase as
specified such form, all subject to the terms and conditions hereof. The Holder
will exercise a pro rata portion of the Common Stock Amount and the Junior
Preferred Stock Amount (based on the relative number of shares comprising each)
each time this Warrant is exercised, to the extent that each such amount has not
been exercised.
(b) At the option of the Holder, the Exercise Price may be paid in
cash or by official bank check or bank cashier's check payable to the order of
the Company or by any combination of such cash or check. At the option of the
Holder, the Exercise Price may in the alternative be paid by reducing the number
of Warrant Shares that would otherwise have been issued upon such exercise by
the number of Warrant Shares that have a Fair Market Value equal to the Exercise
Price which otherwise would have been paid (ratably based on the amounts of
Common Stock and Junior Preferred Stock that would otherwise have been
exercisable). Upon the date (the "EXERCISE DATE") of receipt by the Company of
this Warrant and the Exercise Subscription Form, together with payment of the
applicable Exercise Price, at the Company's office designated for such purpose
(which office initially shall be that set forth in Section 12 herein), in proper
form for exercise, the Holder shall, to the extent permitted by applicable law,
be deemed to be the holder of record of the number of shares of Common Stock and
Junior Preferred Stock constituting the Common Stock Amount and Junior Preferred
Stock Amount, respectively (or, in the case of a partial exercise of this
Warrant, a ratable number of such shares) and any other securities or property
(including any money) to which the Holder is entitled, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock, Junior Preferred Stock or other
securities shall not then be actually delivered to the Holder. The Company shall
pay any and all documentary, stamp or similar issue or transfer taxes of the
United States or any state thereof payable in respect of the issue or delivery
of the shares of Common Stock and Junior Preferred Stock. The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common
Stock, Junior Preferred Stock or other securities, including any Warrant issued
pursuant to Section 2(c), and in such case the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
(c) If the Holder exercises this Warrant in part, this Warrant shall
be surrendered by the Holder to the Company and a new Warrant in substantially
the same form and for the unexercised Common Stock Amount and Preferred Stock
Amount remaining shall be executed by the Company. The Company shall register
the new Warrant in the name of the Holder and deliver the new Warrant to the
Holder without charge.
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(d) Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any shares of Common Stock, Junior Preferred Stock or
other securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in, or payable to the order of, such
name or names as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the person or persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share as provided in Section 5
below.
(e) Certificates representing securities issued pursuant to this
Warrant shall bear legends substantially in the form of the legends set forth on
the first page of this Warrant to the extent that and for so long as such
legends are required pursuant to the Stockholders Agreement.
SECTION 3. RESERVATION OF SHARES. The Company hereby agrees at all
times to keep reserved for issuance and delivery upon exercise of the Warrants
such number of its authorized but unissued shares (or treasury shares) of Common
Stock, Junior Preferred Stock, or other securities of the Company from time to
time issuable upon exercise of the Warrants as will be sufficient to permit the
exercise in full of the Warrants. All such shares shall be duly authorized and,
when issued upon such exercise, shall be validly issued, fully paid and non-
assessable, free and clear of all liens, security interests, charges and other
encumbrances or restrictions on sale (except to the extent set forth in the
Stockholders Agreement, Securities Purchase Agreement or Registration Agreement)
and free and clear of all preemptive or similar rights.
SECTION 4. SECURITIES LAW COMPLIANCE. If the issuance of any shares of
Common Stock or Junior Preferred Stock or other securities required to be
reserved for purposes of the exercise of any Warrants requires the registration
with, or approval of, any governmental authority or requires listing on any
national securities exchange or national market system before such shares or
other securities may be so issued, the Company shall at its expense use its best
efforts to cause such shares to be duly registered, approved or lied, as the
case may be, so that such shares or other securities may be issued in accordance
with the terms hereof; PROVIDED that this Section 4 shall not obligate the
Company to register such securities under the Securities Act or qualify them
under state securities or blue sky laws.
SECTION 5. FRACTIONAL SHARES. No fractional shares of Common Stock or
Junior Preferred Stock or fractional interests in other securities or scrip
representing fractional shares or interests shall be issued upon the exercise of
this Warrant. With respect to any fraction of a share of Common Stock or Junior
Preferred Stock or fractional interests in other securities called for upon any
exercise hereof (and any other Warrants then held by the Holder hereof which are
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contemporaneously exercised), the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the Fair Market Value thereof at the
date of such exercise; PROVIDED, HOWEVER, that in the event that the Company
undertakes a reduction in the number of shares of Common Stock or Junior
Preferred Stock or other securities outstanding, it shall be required to issue
fractional shares or fractional interests in other securities to the Holder if
the Holder exercises all or any part of this Warrant, unless the Holder has
consented in writing to such reduction and provided the Company with a written
waiver of its right to receive fractional shares or interests in accordance with
this Section 5.
SECTION 6. TRANSFER, EXCHANGE OR ASSIGNMENT OF WARRANT. (a) This
Warrant and all rights hereunder are not transferable by the registered holder
hereof except to any Person who, prior to such transfer, agrees in writing, in
form and substance reasonably satisfactory to the Company, to be bound by the
terms of the Stockholders Agreement to the extent required thereby in accordance
with the provisions thereof. Each taker and holder of this Warrant by taking or
holding the same, consents and agrees that the registered holder hereof may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented hereby.
(b) Subject to compliance with the Stockholders Agreement, the
Registration Agreement and Securities Purchase Agreement, in each case, to the
extent applicable, the Holder of this Warrant shall be entitled, without
obtaining the consent of the Company, to assign and transfer this Warrant, at
any time in whole or from time to time in part, to any Person or Persons.
Subject to the preceding sentence, upon surrender of this Warrant to the
Company, together with the attached Warrant Assignment Form duly executed, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder and
this Warrant shall promptly be canceled.
(c) The Holder shall be deemed to have assigned a pro rata portion
of the Common Stock Amount and the Junior Preferred Stock Amount (based on the
relative number of shares comprising each) each time this Warrant is assigned in
part, to the extent that each such amount has not been exercised.
SECTION 7. LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the Company
of evidence satisfactory to it (in the exercise of its reasonable discretion) of
the loss, theft, destruction or mutilation of this Warrant and (in the case of
loss, theft or destruction), if requested by the Company, of reasonably
satisfactory indemnification, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company shall, without charge, execute and
deliver a new Warrant of like date and having substantially the same form;
PROVIDED that (in the case of loss, theft or destruction) no indemnity bond
shall be required unless the Company has a
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class of securities registered pursuant to the Exchange Act and the Company's
transfer agent requires such indemnity bond as a condition to the issuance of a
new Warrant.
SECTION 8. RIGHTS OF THE HOLDER. Prior to the exercise of this
Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a
shareholder of the Company including, without limitation, the right to receive
dividends or other distributions or to receive any notice of meetings of
shareholders or any notice of any proceedings of the Company.
SECTION 9. ANTI-DILUTION PROVISIONS. So long as any Warrants are
outstanding, the Common Stock Amount and Junior Preferred Stock Amount shall be
subject to change or adjustment as follows:
(a) DIVIDENDS, SUBDIVISIONS, COMBINATIONS. In case the Company
shall (i) pay or make a dividend or other distribution to (x) all holders of its
Common Stock in shares of Common Stock or shares of Junior Preferred Stock or
(y) all holders of its Junior Preferred Stock in shares of Common Stock or
Junior Preferred Stock (other than ordinary dividends on the Junior Preferred
Stock contemplated by the definition of Junior Preferred Stock Amount), (ii)
subdivide, split or reclassify the outstanding shares of its Common Stock or
Junior Preferred Stock into a larger number of shares or (iii) combine or
reclassify the outstanding shares of its Common Stock or Junior Preferred Stock
into a smaller number of shares, then in each such case the Common Stock Amount
or Junior Preferred Stock Amount, respectively, shall be adjusted to equal the
number of such shares to which the holder of this Warrant would have been
entitled upon the occurrence of such event had this Warrant been exercised
immediately prior to the happening of such event or, in the case of a stock
dividend or other distribution, prior to the record date for determination of
shareholders entitled thereto. Adjustments for distributions of shares of Junior
Preferred Stock to holders of Common Stock shall be made to the Junior Preferred
Stock Amount, and adjustments for distributions of shares of Common Stock to
holders of Junior Preferred Stock shall be made to the Common Stock Amount. An
adjustment made pursuant to this Section 9(a) shall become effective immediately
after such record date in the case of a dividend or distribution and immediately
after the effective date in the case of a subdivision, split, combination or
reclassification.
(b) REORGANIZATION OR RECLASSIFICATION; CONVERSION OF JUNIOR PREFERRED
STOCK INTO COMMON STOCK; REDEMPTION OF JUNIOR PREFERRED STOCK. (i) In case of
any capital reorganization or any reclassification of the capital stock of the
Company (whether pursuant to a merger or consolidation or otherwise), this
Warrant shall thereafter be exercisable for the number of shares of stock or
other securities or property receivable upon such capital reorganization or
reclassification of capital stock, as the case may be, by a holder of the number
of shares of Common Stock and Junior Preferred Stock into which this Warrant was
exercisable immediately prior to such capital reorganization or reclassification
of capital stock; and, in any such case,
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appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(ii) If all or a portion of the shares of Junior Preferred Stock are
converted into shares of Common Stock pursuant to the terms of the Junior
Preferred Stock, then (x) the Common Stock Amount shall be increased by the
number of additional shares of Common Stock the Holder would have received had
this Warrant been exercised immediately prior to the conversion and (y) the
Junior Preferred Stock Amount shall be decreased by the number of shares of
Junior Preferred Stock issuable upon exercise of this Warrant which would have
been converted into Common Stock in such conversion had this Warrant been
exercised immediately prior to the conversion.
(iii) If all or a portion of the shares of Junior Preferred Stock are
redeemed pursuant to the terms of the Junior Preferred Stock (except any
repurchase pursuant to the Restricted Stock Agreements (as defined in the
Stockholders Agreement) or Stockholders Agreement), then (x) the Holder of this
Warrant shall be paid the amount he would have received (assuming a redemption
PRO RATA from all holders of Junior Preferred Stock) had this Warrant been
exercised immediately prior to the redemption and (y) the Junior Preferred Stock
Amount shall be decreased by the number of shares of Junior Preferred Stock
issuable upon exercise of this Warrant which would have been redeemed in such
redemption (assuming a redemption PRO RATA from all holders of Junior Preferred
Stock) had this Warrant been exercised immediately prior to the redemption.
(c) DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON STOCK OR
JUNIOR PREFERRED STOCK. In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock or Junior Preferred Stock shares
of any of its capital stock (other than a distribution of Common Stock or Junior
Preferred Stock referred to in Section 9(a) or in the definition of Junior
Preferred Stock Amount), rights or warrants to purchase any of its securities
(other than those referred to in Sections 9(d) and 9(e) below), cash, other
assets or evidences of its indebtedness, then, in each such case:
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to the date of such dividend or distribution
by a fraction, of which (x) the numerator shall be the Fair Market Value
per share of Common Stock (the "COMMON VALUE") at the record date (the
"RECORD DATE") for determining shareholders entitled to such dividend or
distribution, and of which (y) the denominator shall be (a) the Common
Value less (b) (i) the Common Stock Portion of the fair market value (the
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"DISTRIBUTION VALUE") of the securities, cash, assets or evidences of
indebtedness so distributed divided by (ii) the number of shares of Common
Stock outstanding immediately prior to the Record Date, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to the Record Date by a
fraction. of which (x) the numerator shall be the Fair Market Value per
share of Junior Preferred Stock (the "JUNIOR PREFERRED VALUE") at the
record date for determining shareholders entitled to such dividend or
distribution. and of which (y) the denominator shall be (a) the Junior
Preferred Value less (b) (i) the Junior Preferred Portion of the
Distribution Value divided by (ii) the number of shares of Junior Preferred
Stock outstanding immediately prior to the Record Date.
The Distribution Value shall be determined in good faith by the Board of
Directors of the Company; PROVIDED that if the Majority Holders in their
discretion do not agree with such determination, such fair market value shall be
determined in the same manner as the fair market value of a security is
determined pursue to clause (iii) of the definition of Fair Market Value. All
fees and expenses of the Valuation Firm shall be paid by the party whose
estimate was not selected as the fair market value.
Notwithstanding the foregoing provisions of this Section 9(c), no adjustment
shall be made as aforesaid if the Company distributes to the Holder an amount of
securities, cash, other assets or evidences of indebtedness, as the case may be,
equal to the amount thereof that would have been distributed to the Holder had
this Warrant been exercised immediately prior to the making of such
distribution, or if a record date has been set with respect to such
distribution, immediately prior to the record date for determination of
shareholders entitled thereto.
(d) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF COMMON STOCK. In
case the Company shall issue Common Stock (or options, rights, warrants or other
securities convertible into or exchangeable or exercisable for shares of Common
Stock) at a price per share (or having an effective exercise, exchange or
conversion price per share together with the purchase price thereof) less than
the Fair Market Value per share of Common Stock on the date such Common Stock
(or options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock) is sold or issued
(PROVIDED that no sale of securities pursuant to an underwritten public offering
shall be deemed to be for less than Fair Market Value), then in each such case,
the Common Stock Amount shall thereafter be adjusted by multiplying the Common
Stock Amount immediately prior to the date of issuance of such Common Stock (or
options, rights, warrants or other securities) by a fraction,
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(A) the numerator of which shall be (x) the sum of (i) the number of Common
Share Equivalents represented by all securities outstanding immediately
prior to such issuance and (ii) the number of additional Common Share
Equivalents represented by all securities so issued multiplied by (y) the
Fair Market Value of a share of Common Stock immediately prior to the date
of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Common Stock immediately prior to the date of
such issuance and (ii) the number of Common Share Equivalents represented
by all securities outstanding immediately prior to such issuance plus (y)
the aggregate consideration received by the Company for the total number of
securities so issued plus (z) in the case of options, rights. warrants or
other securities convertible into or exchangeable or exercisable for shares
of Common Stock, the additional consideration required to be received by
the Company upon the exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Common Stock to which the holders of such rights, options
or warrants are entitled, the Common Stock Amount shall again be adjusted to be
the Common Stock Amount which would then be in effect if such rights, options or
warrants had never been issued, in the former event, or the Common Stock Amount
which would then be in effect if such holder had initially been entitled to such
changed number of shares of Common Stock, if applicable, and at such changed
cost, if applicable, in the latter event. An adjustment made pursuant to this
Section 9(d) shall become effective immediately after the date such Common Stock
or other security is issued or sold.
Notwithstanding anything herein to the contrary, (1) no further adjustment to
the Common Stock Amount or Junior Preferred Stock Amount shall be made upon the
issuance or sale of Common Stock or Junior Preferred Stock pursuant to (x) the
exercise of any options, rights or warrants or (y) the conversion or exchange of
any convertible securities, if in each case the adjustment in the Common Stock
Amount or Junior Preferred Stock Amount was made as required hereby upon the
issuance or sale of such options, rights, warrants or securities or no
adjustment was required hereby at the time such option, right, warrant or
convertible security was issued, (2) no adjustment to the Common Stock Amount or
the Junior Preferred Stock Amount shall be made upon the issuance or sale of
Common Stock or Junior Preferred Stock upon the exercise of any warrants or
options existing on the date hereof, on the terms contained in such securities
on the date of original issuance of this Warrant and (3) no adjustment to the
Common Stock Amount or the Junior Preferred Stock Amount shall be made upon the
issuance of options under the Company's 1996 Performance Stock Option Plan as in
effect on the date of original issuance of this Warrant.
13
<PAGE>
(e) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF JUNIOR PREFERRED STOCK.
In case the Company shall issue Junior Preferred Stock (or options, rights,
warrants or other securities convertible into or exchangeable or exercisable
for shares of Junior Preferred Stock) at a price per share (or having an
effective exercise, exchange or conversion price per share together with the
purchase price thereof) less than the Fair Market Value per share of Junior
Preferred Stock on the date such Junior Preferred stock (or options, rights,
warrants or other securities convertible into or exchangeable or exercisable for
shares of Junior Preferred Stock) is sold or issued (PROVIDED that no sale of
securities pursuant to an underwritten public offering shall be deemed to be for
less than Fair Market Value), then in each such case the Junior Preferred Stock
Amount shall thereafter be adjusted by multiplying the Junior Preferred Stock
Amount immediately prior to the date of issuance of such Junior Preferred Stock
(or options, rights, warrants or other securities) by a fraction,
(A) the numerator of which shall be (x) the sum of (i) the number of Junior
Preferred Share Equivalents represented by all securities outstanding
immediately prior to such issuance and (ii) the number of additional Junior
Preferred Share Equivalents represented by all securities so issued
multiplied by (y) the Fair Market Value of a share of Junior Preferred
Stock immediately prior to the date of such issuance, and
(B) the denominator of which shall be (x) the product of (i) the Fair
Market Value of a share of Junior Preferred Stock immediately prior to the
date of such issuance and (ii) the number of Junior Preferred Share
Equivalents represented by all securities outstanding immediately prior to
such issuance plus (y) the aggregate consideration received by the Company
for the total number of securities so issued plus (z) in the case of
options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Junior Preferred Stock, the
additional consideration required to be received by the Company upon the
exercise, exchange or conversion of such securities;
PROVIDED, HOWEVER, that in the event that such rights, options or warrants are
not so issued or expire unexercised, or in the event of a change in the number
or cost of shares of Junior Preferred Stock to which the holders of such rights,
options or warrants are entitled, the Junior Preferred Stock Amount shall again
be adjusted to be the Junior Preferred Stock Amount which would then be in
effect if such rights, options or warrants had never been issued, in the former
event, or the Junior Preferred Stock Among which would then be in effect if such
holder had initially been entitled to such changed number of shares of Junior
Preferred Stock, if applicable, and at such changed cost, if applicable, in the
latter event. An adjustment made pursuant to this Section 9(e) shall become
effective immediately after the date such Junior Preferred Stock or other
security is issued or sold.
14
<PAGE>
(f) BELOW MARKET DISTRIBUTIONS OR ISSUANCES OF OTHER SECURITIES. In
the Company shall issue preferred stock or other securities of the Company
(other than Common Stock, Junior Preferred Stock or options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares of
Common Stock or Junior Preferred Stock) at a price per share (or other similar
unit) less than the Fair Market Value per share (or other similar unit) of such
preferred stock (or other security) on the date such preferred stock (or other
security) is sold or issued (provided that no sale of preferred stock or other
security pursuant to an underwritten public offering shall be deemed to be for
less than its fair market value), then in each such case:
(A) the Common Stock Amount shall thereafter be adjusted by multiplying the
Common Stock Amount immediately prior to the date of issuance of such
preferred stock (or other security) by a fraction. the numerator of which
shall be (X) the product of (a) the number of shares of Common Stock
outstanding immediately prior to such issuance and (b) the Fair Market
Value of a share of Common Stock immediately prior to the date of such
issuance (the "AGGREGATE COMMON VALUE"), and the denominator of which shall
be (x) the Aggregate Common Value minus (Y) the Common Stock Portion of the
difference (the "DILUTION AMOUNT") between (a) the aggregate Fair Market
Value of such preferred stock (or other security) and (b) the aggregate
consideration received by the Company for such preferred stock (or other
security), and
(B) the Junior Preferred Stock Amount shall thereafter be adjusted by
multiplying the Junior Preferred Stock Amount immediately prior to the date
of issuance of such preferred stock (or other security) by a fraction, the
numerator of which shall be (x) the product of (a) the number of shares of
Junior Preferred Stock outstanding immediately prior to such issuance and
(b) the Fair Market Value of a share of Junior Preferred Stock immediately
prior to the date of such issuance (the "AGGREGATE PREFERRED VALUE"), and
the denominator of which shall be (x) the Aggregate Preferred Value minus
(y) the Preferred Stock Portion of the Dilution Amount;
PROVIDED, HOWEVER, that in the event that any such rights, options, warrants or
other securities expire unexercised, or in the event of a change in the number
or cost of the securities to which the holders of such rights, options, warrants
or other securities are entitled, the Junior Preferred Stock Amount and Common
Stock Amount shall again be adjusted to be the Junior Preferred Stock Amount and
Common Stock Amount which would then be in effect if such rights, options,
warrants or other securities had never been issued, in the former event, or the
Junior Preferred Stock Amount and Common Stock Amount which would then be in
effect if such holder had initially been entitled to such changed number of
securities, if applicable, and at such changed cost, if applicable, in the
latter event.
15
<PAGE>
An adjustment made pursuant to this Section 9(f) shall become effective
immediately after the date such preferred stock (or other security) is sold or
issued.
Notwithstanding the foregoing provisions of this Section 9(f), no adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Dilution Amount by having been
issued any of such preferred stock (or other securities) so as to put such
Holder in the same economic position he would have been in had the foregoing
adjustment been made.
(g) ABOVE MARKET REPURCHASES OF SECURITIES. If at any time, or from
time to time. the Company or any Subsidiary thereof shall repurchase (a
"REPURCHASE"), by self-tender offer or otherwise, any securities of the Company
at a weighted average purchase price in excess of the Fair Market Value thereof
(PROVIDED that the repurchase of securities in accordance with their terms as
set forth therein (or pursuant to the terms of the Restricted Stock Agreements
(as defined in the Stockholders Agreement) at the time of issue thereof shall
not be deemed to be a purchase in excess of Fair Market Value), on the Business
Day immediately prior to the earliest of (i) the date of such Repurchase, (ii)
the commencement of an offer to repurchase or (iii) the public announcement of
either (such date being referred to as the "DETERMINATION DATE"),
(A) the Common Stock Amount shall be adjusted by multiplying the Common
Stock Amount immediately prior to such Determination Date by a fraction,
(x) the numerator of which shall be the Fair Market Value of a share of
Common Stock immediately prior to such Determination Date, and (y) the
denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Common Stock
outstanding immediately prior to such Determination Date and the Fair
Market Value of a share of Common Stock immediately prior to such date
less (b) the sum of (I) the product of the number of shares of Common
Stock, if any, repurchased or to be repurchased by the Company or any
Subsidiary thereof in such Repurchase and the Fair Market Value of a
share of Common Stock immediately prior to the Determination Date and
(II) the Common Stock Portion of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Common Stock outstanding immediately
prior to the Determination Date less (b) the number shares of Common
Stock, if any, repurchased or to be purchased by the Company or any
Subsidiary thereof in such Repurchase, and
(B) the Junior Preferred Stock Amount shall be adjusted by multiplying the
Junior Preferred Stock Amount immediately prior to such Determination Date
16
<PAGE>
by a fraction, (x) the numerator of which shall be the Fair Market Value of
a share of Junior Preferred Stock immediately prior to such Determination
Date, and (y) the denominator of which shall be the result of dividing:
(i) (a) the product of the number of shares of Junior Referred Stock
outstanding immediately prior to such Determination Date and the Fair
Market Value of a share of Junior Preferred Stock immediately prior to
such date less (b) the sum of (I) the product of the number of shares
of Junior Preferred Stock, if any, repurchased or to be repurchased in
such transaction and the Fair Market Value of a share of Junior
Preferred Stock immediately prior to the Determination Date and (II)
the Junior Preferred Portion of the Repurchase Dilution Amount; by
(ii) (a) the number of shares of Junior Preferred Stock outstanding
immediately prior to the Determination Date less (b) the number shares
of Junior Preferred Stock, if any, repurchased or to be purchased by
the Company or any Subsidiary thereof in such Repurchase;
PROVIDED, HOWEVER, that in the event that any proposed Repurchase is not
effected, or in the event of a change in the number or cost of securities
repurchased or the aggregate purchase price paid, the Common Stock Amount and
Preferred Stock Amount shall again be adjusted to be the Common Stock Amount and
Preferred Stock.
Amount which would then be in effect if proposed Repurchase never occurred, in
the former event, or the Common Stock Amount and Junior Preferred Stock Amount
which would then be in effect if the Repurchase had initially been for such
changed number of securities, if applicable, and at such changed purchase price,
if applicable, in the latter event.
"REPURCHASE DILUTION AMOUNT" means the aggregate consideration paid by the
Company in connection with a Repurchase in excess of the Fair Market Value of
the securities repurchased plus, in the case of options, rights, warrants or
other securities convertible into or exchangeable or exercisable for securities
of the Company, the additional consideration required to be received by the
Company upon the exercise, exchange or conversion of such securities.
An adjustment made pursuant to this Section 9(g) shall become effective
immediately on the Determination Date.
Notwithstanding the foregoing provisions of this Section 9(g), an adjustment
shall be made as aforesaid to the extent that the Holder shall have received a
pro rata portion of the economic benefit of the Repurchase Dilution Amount by
having been paid such amount so as to put such Holder in the same economic
position he would have been in had the foregoing adjustment been made.
17
<PAGE>
(h) NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 9 and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder against
impairment. Without limiting the generality of the foregoing, the Company will
not increase the par value of any shares of Common Stock or Junior Preferred
Stock or other securities receivable on the exercise of the Warrants above the
amount payable therefor on such exercise.
(i) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Common Stock Amount or Junior Preferred Stock
Amount pursuant to this Section 9, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of the Holder, furnish or cause to be furnished to Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the number of shares
of Common Stock and Junior Preferred Stock or other securities, if any, and the
amount, if any, of other property which at the time would be received upon the
exercise of this Warrant; and (iii) the adjusted Common Stock Exercise Price and
Junior Preferred Stock Exercise Price.
(j) NOTICES. (i) In the event that the Company shall propose at any
time to pay or make any dividend or other distribution or effect any transaction
of the type described in Sections 9(a) through 9(g) hereof or to take any
similar extraordinary corporate action affecting the Company's capital stock,
then, in connection with each such event, the Company shall send to the Holder
at least 10 days prior to (x) in the case of a dividend or other distribution,
the applicable record date, a notice specifying the record date for purposes of
such dividend or distribution and the date on which such dividend or other
distribution is to be made, and (y) in any other case, the date on which such
event is to become effective or the first date on which the Company intends to
effect any such transaction, as the case may be, in each case specifying in
reasonable detail what the transaction or event consists of and, if applicable,
the aggregate amount or value of any cash or property proposed to be
distributed, paid, purchased or received by the Company in connection therewith.
(ii) In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall send to the
Holder written notice thereof at least (x) 30 days' prior to the proposed
consummation of such dissolution, winding up or liquidation or (y) 15 days
before the record date therefor, whichever is earlier.
18
<PAGE>
(iii) Unless notice is otherwise required pursuant to Section
9(j)(i) hereof, the Company shall send written notice to the Holder
immediately upon any public announcement with respect to an open market
repurchase program for, any self-tender offer for or any other repurchase
of shares of Common Stock or Junior Preferred Stock or options, rights,
warrants or other securities convertible into or exchangeable or
exercisable for shares of Common Stock or Junior Preferred Stock.
(k) MISCELLANEOUS. Notwithstanding anything to the contrary
contained herein, there shall be no adjustment to the Common Stock Amount or the
Junior Preferred Stock Amount as a result of the issuance or exercise of the
Bridge Loan Warrants on the terms contained therein on the date of the first
issuance of the Warrants. The computations of all amounts under this Section 9
shall be made assuming all other anti-dilution or similar adjustments to be made
to the terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 9 have previously been made so as to
maintain the relative economic interest of the Warrants VIS A VIS all other
securities issued by the Company.
SECTION 10. CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any
consolidation of the Company with, or merger of the Company into, any other
Person, any merger of another Person into the Company (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or Junior Preferred Stock) or any sale or
transfer of all or substantially all of the assets of the Company to the Person
formed by such consolidation or resulting from such merger or which acquires
such assets, as the case may be, the Holder shall have the right thereafter to
exercise this Warrant for the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock, Junior Preferred Stock or other
securities for which this Warrant may have been exercised immediately prior to
such consolidation, merger, sale or transfer. Adjustments for events subsequent
to the effective date of such a consolidation, merger, sale or transfer of
assets shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. In any such event, effective provisions shall be
made in the certificate or articles of incorporation of the resulting or
surviving corporation, in any contract of sale, conveyance, lease, transfer or
otherwise so that the provisions set forth herein for the protection of the
rights of the Holder shall thereafter continue to be applicable, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon exercise, such shares of stock, other securities, cash and
property. The provisions of this Section 10 shall similarly apply to successive
consolidations, mergers, sales, leases or transfers.
SECTION 11. NO FURTHER ISSUANCES OF WARRANTS. The Company will issue
no Warrants other than this Warrant, those issued concurrently
19
<PAGE>
with this Warrant and those issued upon registration of transfer, exchange or
exercise hereof and thereof.
SECTION 12. NOTICES. Any notice, demand or delivery authorized by this
Warrant shall be in writing and shall be given to the Holder or to the Company,
as the case may be, at its address (or telecopier number) set forth below, or
such other address (or telecopier number) as shall have been furnished to the
party giving or making such notice, demand or delivery:
If to the Company: Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: Larry Thomas
Telecopier: (818) 735-4923
With copies to: Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2200
Los Angeles, CA 90017
Attn: Mark A. Bonenfant
Telecopier: (213) 896-0400;
O'Sullivan Graev &, Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Attention: Harvey M. Eisenberg
Telecopier: (212) 408-2420; and
Sidley & Austin
555 West 5th Street
Los Angeles, CA 90013
Attention: Moshe Kupietzky
Telecopier: (213) 896-6600
If to the Holder: DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Los Angeles, CA 90067-5014
Attn: David Wilson
Telecopier: (310) 282-6178
20
<PAGE>
With a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attn: George R. Bason, Jr.
Telecopier: (212) 450-4800
Each such notice, demand or delivery shall be effective (a) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answer back is received or (b) if given by mail,
three business days after such communication is deposited in the mails with
first class postage prepaid addressed as aforesaid or (c) if given by any other
means, when delivered at the address specified herein.
SECTION 13. APPLICABLE LAW. This Warrant and all rights arising
hereunder shall be construed and determined in accordance with the laws of the
State of New York and the performance thereof shall be governed and enforced in
accordance with such laws.
SECTION 14. AMENDMENTS; WAIVERS. Any provision of this Warrant may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company and the Holder of this
Warrant and, in the case of a waiver, by the party against whom the waiver is to
be effective. No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
21
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
signed and attested by its duly authorized officers and to be dated as of June
5, 1996.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Lawrence E. Thomas
--------------------------------
Name: LAWRENCE E. THOMAS
Title: PRESIDENT
ATTEST:
By: /s/ Marty Albertson
---------------------------
Name: MARTY ALBERTSON
Title: EXECUTIVE VICE PRESIDENT
<PAGE>
STOCKHOLDERS AGREEMENT
dated as of June 5, 1996, among GUITAR
CENTER MANAGEMENT COMPANY, INC., a
California corporation (the "Company"),
the investors listed on SCHEDULE I
hereto (the "Institutional
Stockholders"), the investors listed on
SCHEDULE II hereto (the "Scherr
Stockholders"), the investors listed on
SCHEDULE III hereto (the "Undesignated
Stockholders"), and the management
stockholders of the Company listed on
SCHEDULE IV hereto (the "Management
Stockholders").
The Company, the Institutional Stockholders, the Scherr Stockholders
and the Management Stockholders have entered into an Agreement dated May 1, 1996
(the "Purchase Agreement"). The Institutional Stockholders, the Scherr
Stockholders and the Undesignated Stockholders are collectively referred to
herein as the "Investors" and individually as an "Investor". The Investors and
the Management Stockholders are collectively referred to herein as the
"Stockholders" and individually as a "Stockholder." Capitalized terms used
herein are defined in Section 18.
The Company and the Stockholders desire to enter into this Agreement
for the purposes, among others, of (i) assuring continuity in the management and
ownership of the capital stock of the Company, and (ii) limiting the manner and
terms by which the Stockholder Shares may be transferred.
NOW, THEREFORE, 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 hereby agree as follows:
1. RESTRICTIONS ON TRANSFER OF STOCKHOLDER SHARES.
(a) RETENTION OF STOCKHOLDER SHARES. No Stockholder shall sell,
transfer, assign or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) (a "Transfer")
any interest in any Stockholder Shares, except pursuant to (i) the provisions of
Sections 4, 5 or 7(d) of this Agreement, a Public Sale or a Sale of the Company
(each of the foregoing, an "Exempt Transfer") or (ii) the provisions of this
Section 1 and Section 2; PROVIDED, HOWEVER, that in no event shall any Transfer
of Stockholder Shares (other than pursuant to a Sale of the Company or a Public
Sale) be made (x) to any Competitor without the prior written consent of the
Board, (y) in violation of Section 8.9 of the
<PAGE>
Purchase Agreement or (z) which would result in a "Change of Control" pursuant
to clause (a) of the definition thereof contained in the Bridge Financing
Agreement.
(b) PROCEDURE FOR TRANSFER OF STOCKHOLDER SHARES. Prior to making
any Transfer other than pursuant to an Exempt Transfer, a Stockholder (the
"Selling Stockholder") shall give written notice (the "Stockholder Sale Notice")
to the Company and the other Stockholders. The Stockholder Sale Notice shall
disclose in reasonable detail the number of shares proposed to be transferred,
the price per share and all other material terms and conditions of the proposed
Transfer (which terms must be a Transfer for cash, for indebtedness expressed in
dollars (which indebtedness must bear interest equal to or greater than the rate
the Company pays under its revolving credit facility and cannot be
subordinated), or the cancellation of indebtedness expressed in cash). The
Stockholder Sale Notice may be delivered by a Selling Stockholder prior to
identifying prospective transferees. The Stockholder Sale Notice shall also
state the type of security to be Transferred and, if more than one type of
security is being Transferred, whether the Selling Stockholder proposes to
Transfer the securities as a unit, PROVIDED THAT any proposed Transfer by a
Management Stockholder prior to a Qualified Public Offering of more than one
type of security shall be deemed a separate Transfer of each type of security
for purposes of this Section 1. The Selling Stockholder shall not consummate
any Transfer until 30 Business Days after the Stockholder Sale Notice has been
given to the Company and to the other Stockholders, unless the parties to the
Transfer have been finally determined pursuant to this Section 1 prior to the
expiration of such 30-Business Day period (the date of the first to occur of
such events is referred to herein as the "Stockholder Sale Authorization Date").
(c) RIGHT OF FIRST OFFER WITH RESPECT TO STOCKHOLDER SHARES. Subject to
the last sentence of this Section 1(c), the Company and the non-selling
Stockholders shall collectively have the right to purchase all, but not less
than all, of the Stockholder Shares proposed to be transferred by the Selling
Stockholder for cash. The Company may initially elect to purchase all, or any
portion, of the Stockholder Shares to be transferred by delivering a written
notice of such election to the Selling Stockholder and the other Stockholders
within five Business Days after the Stockholder Sale Notice has been given to
the Company. If the Company has not elected to purchase all of the Stockholder
Shares to be transferred, the non-selling Stockholders may elect to purchase, by
giving written notice to the Company and the Selling Stockholder within 20
Business Days after the Stockholder Sale Notice has been given to the
non-selling Stockholders, (i) the number or amount of such Stockholder Shares
proposed to be transferred which are not purchased by the Company up to its
Percentage Allotment of the total number or amount of such Stockholder Shares
and (ii) up to its ratable share of such Stockholder Shares not purchased by
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<PAGE>
other Stockholders determined by reference to the number of Partially-diluted
Common Shares owned by each Stockholder actually participating in such option to
purchase the Stockholder Shares to be transferred (for purposes of this Section
1(c) only, a "Ratable Share"), all as specified in their respective notices to
the Company and the Selling Stockholder. Any of such Stockholder Shares to be
transferred that are not elected for purchase by a Stockholder shall be deemed
to be re-offered to and accepted by the participating Stockholders exercising
their options specified in clause (ii) of the immediately preceding sentence
with respect to the lesser of (A) the amount specified in their respective
notices to the Company and the Selling Stockholder and (B) an amount equal to
their respective Ratable Shares with respect to such deemed offer. Such deemed
offer and acceptance procedures described in the immediately preceding sentence
shall be deemed to be repeated until either (x) all of the Stockholder Shares to
be transferred are accepted by the participating Stockholders or (y) no
participating Stockholder desires to subscribe for more of such Stockholder
Shares. The Company shall notify each such Stockholder within five days
following the expiration of such 20-Business Day period described above of the
amount of such Stockholder Shares to be transferred that each Stockholder has
elected to purchase. The purchase price to be paid by the Company and the
non-selling Stockholders for purchases made pursuant to this Section 1(c) shall
be as follows:
(i) if the Selling Stockholder is a Management Stockholder that
is either employed by the Company on the date of the Stockholder Sale
Notice or was previously terminated for Cause or resigned without
Reasonable Justification or is the member of a Group including any
such Person, and the purchase occurs prior to a Qualified Public
Offering, the purchase price for any shares of Common Stock or Common
Stock Equivalents shall equal the lesser of the purchase price set
forth in the Stockholder Sale Notice and the Calculated Purchase Price
multiplied by the number of shares of Common Stock or Common Stock
Equivalents being sold;
(ii) in all other events, the purchase price shall be as set
forth in the Stockholder Sale Notice.
The provisions of Sections 1(b), 1(c) and 1(d) shall not apply to (x) Exempt
Transfers, (y) Transfers within 6 months of the date hereof by each of Chase or
the Scherr Stockholders to one or more Persons reasonably acceptable to the
Board of up to 50,000 shares of Common Stock and 49,500 shares of Junior
Preferred Stock, respectively (in each case as equitably adjusted to give effect
to any stock split, stock dividend or recapitalization of the Company), and (z)
transfers of the DLJ Warrants originally issued to DLJ so long as the transferee
thereof also acquires a percentage of the outstanding shares of Senior Preferred
Stock
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<PAGE>
that equals or exceeds that percentage of the total DLJ Warrants issued acquired
by such transferee. Transfers pursuant to the preceding sentence are subject to
Section 12 of this Agreement.
(d) TRANSFERS TO THIRD PARTIES. If the Company and the non-selling
Stockholders do not elect to purchase, in the aggregate, all of the Stockholder
Shares specified in the Stockholder Sale Notice, then the Company and the
non-selling Stockholders shall have no right to purchase any such Stockholder
Shares and the Selling Stockholder may transfer all (but not less than all) of
the Stockholder Shares that were specified in the Stockholder Sale Notice,
subject to the provisions of Section 2, if applicable, at a price and on terms
no more favorable to the transferee(s) thereof than specified in the Stockholder
Sale Notice during the 90-day period immediately following the Stockholder Sale
Authorization Date. If the Stockholder Sale Notice specified that the proposed
Transfer was to consist of units, any Transfer pursuant to this subsection (d)
must be in like units. Any Stockholder Shares not transferred within such
90-day period shall be subject to the provisions of Section 1(c) upon subsequent
transfer. Any Stockholder who Transfers any Stockholder Shares pursuant to this
Section 1(d) shall also comply with the provisions of Section 2, if applicable.
2. CO-SALE RIGHTS WITH RESPECT TO STOCKHOLDER SHARES.
(a) Prior to making any Transfer of Stockholder Shares (other than an
Exempt Transfer, a Transfer to the Company and/or the non-selling Stockholders
pursuant to Section 1(c), or a Deminimis Transfer), any Selling Stockholder
shall give at least 10 Business Days prior written notice (a "Sale Notice") to
all other holders of Stockholder Shares (the "Other Stockholders"), which notice
shall include the terms and conditions of such proposed Transfer, including the
identity of each prospective transferee. Any such Other Stockholder may within
10 Business Days of the receipt of the Sale Notice give written notice (each, a
"Tag-Along Notice") to the Selling Stockholder that such Other Stockholder
wishes to participate in such proposed Transfer and specifying the number of
Stockholder Shares (which must be the same class of securities proposed to be
transferred or its non-voting equivalent and if more than one class is proposed
to be Transferred, must include all classes to be Transferred in like
proportions) such Other Stockholder desires to include in such proposed
Transfer.
(b) If none of the Other Stockholders gives the Selling Stockholder a
timely Tag-Along Notice with respect to the Transfer proposed in the Sale Notice
(subject to compliance by such Selling Stockholder with the provisions of
Section 1 hereof, including Section 1(d), if applicable), the Selling
Stockholder may transfer the Stockholder Shares specified in the Sale Notice
during that period specified in Section 1(d) above, on the terms and conditions
set forth in the Sale Notice. If one or more
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<PAGE>
Other Stockholders give the Selling Stockholder a timely Tag-Along Notice, then
the Selling Stockholder shall use all reasonable efforts to cause each
prospective transferee to agree to acquire all Stockholder Shares identified in
all Tag-Along Notices that are timely given to the Selling Stockholder, upon the
same terms and conditions (including, without limitation, the ability to receive
a ratable share of all consideration being paid, directly or indirectly, to the
Selling Stockholder and/or any member of its Group or Family Group) as set forth
in the Sale Notice. If such prospective transferee is unwilling or unable to
acquire all of such additional shares upon such terms, then the Selling
Stockholder may elect either to cancel such proposed Transfer or to allocate the
maximum number of shares of Stockholder Shares that each prospective transferee
is willing to purchase among the Selling Stockholder and the Other Stockholders
giving timely Tag-Along Notices in the proportion that each such Stockholder's
(including the Selling Stockholder's) ownership of Partially-diluted Common
Shares bears to the total ownership of Partially-diluted Common Shares by the
Selling Stockholder and all Other Stockholders giving a timely Tag-Along Notice
with respect to such Transfer.
FOR EXAMPLE, if the Sale Notice contemplated a sale of 100 shares of
Common Stock by the Selling Stockholder, and if the Selling Stockholder at such
time owns 30% of the Partially- diluted Common Shares and if one Other
Stockholder elects to participate and owns 20% of the Partially-diluted Common
Shares, then the Selling Stockholder would be entitled to sell 60 shares and the
Other Stockholder would be entitled to sell 40 shares.
3. LIMITED FIRST REFUSAL RIGHTS TO HOLDERS OF STOCKHOLDER SHARES.
(a) If the Company authorizes the issuance and sale of any shares of
Stock (the "Offered Securities"), the Company shall first offer to sell to each
of the Stockholders a portion of such Offered Securities equal to the percentage
determined by dividing (i) the number of Partially-diluted Common Shares held by
such Stockholder, by (ii) the number of Partially-diluted Common Shares
outstanding (the "Percentage Allotment"). Each Stockholder shall be entitled to
purchase such Stock at the same price and on the same terms and conditions as
such Stock is to be offered, including the purchase of units or strips of
securities of the Company which may include components that do not constitute
Stock.
(b) Each holder of Stockholder Shares must elect to exercise its
purchase rights hereunder, in whole or in part, within 15 Business Days after
receipt of written notice from the Company describing in reasonable detail the
Stock and other securities being offered, the purchase price thereof, the
payment terms, such Stockholder's Percentage Allotment and any other terms and
conditions of the offering. Each Stockholder shall
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have the right to subscribe for (i) the number or amount of such Offered
Securities up to its Percentage Allotment of the total number or amount of
Offered Securities proposed to be issued and (ii) up to its ratable share of the
Offered Securities not subscribed for by other Stockholders determined by
reference to the number of Partially-diluted Common Shares owned by each
Stockholder actually participating in such deemed offer (for purposes of this
Section 3(b) only, a "Ratable Share"), all as specified in their respective
notices to the Company. Any Offered Securities not subscribed for by a
Stockholder shall be deemed to be re-offered to and accepted by the
participating Stockholders exercising their options specified in clause (ii) of
the immediately preceding sentence with respect to the lesser of (A) the amount
specified in their respective notices to the Company and (B) an amount equal to
their respective Ratable Shares with respect to such deemed offer. Such deemed
offer and acceptance procedures described in the immediately preceding sentence
shall be deemed to be repeated until either (x) all of the Offered Securities
are accepted by the participating Stockholders or (y) no participating
Stockholder desires to subscribe for more Offered Securities. The Company shall
notify each such Stockholder within five days following the expiration of the
15-Business Day period described above of the amount of the Offered Securities
that each Stockholder has subscribed to purchase.
(c) Upon the expiration of the 15-Business Day offering period
described above, the Company shall be free to sell such Stock that the
Stockholders have not elected to purchase during the 120 days following such
expiration on terms and conditions no more favorable to the purchasers thereof
than those offered to such Stockholders. Any Stock offered or sold by the
Company after such 120-day period must be re-offered to the Stockholders
pursuant to the terms of this Section 3.
(d) The provisions of this Section 3 shall not apply to (i) capital
stock issued in connection with a PRO RATA stock dividend, stock split or
recapitalization, (ii) Common Stock or options to acquire Common Stock of the
Company issued to employees or directors of, or consultants to the Company,
pursuant to a plan or agreement approved by the Board, and Common Stock issued
upon exercise of any such options, (iii) Stock issued upon exercise of any
security convertible into, or exercisable for, Stock (provided the issuance of
such convertible security did not violate the requirements of this Section 3),
(iv) Stock issued in an initial Public Offering, (v) securities issued in
connection with a Sale of the Company, (vi) Stock issued to a Person who is not
an Affiliate of the Company or any Stockholder in exchange for assets or
property, and approved by the Board of Directors, (vii) Stock issued pursuant to
Section 4(c)(ii)(E) hereof, (viii) the issuance of the Bridge Warrants, (ix)
securities issued upon the exercise of the DLJ Warrants or the Bridge Warrants,
(x) pay-in-kind dividends or accretion of
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liquidation preference of shares of preferred stock, including the Senior
Preferred Stock and Junior Preferred Stock, or (xi) warrants or other equity
kickers issued to lenders who are not Affiliates of the Company and that are
providing debt financing to the Company that, in the sole judgment of the Board,
would otherwise not be available to the Company on substantially similar terms
in absence of such warrants and shares of Stock issued upon the exercise,
conversion or exchange of such warrants in accordance with their stated terms.
4. REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES.
(a) REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES IN THE EVENT OF
TERMINATION OF EMPLOYMENT. In the event a Management Stockholder is terminated
for Cause or if a Management Stockholder voluntarily terminates his employment
without Reasonable Justification (a "Repurchase Event"), the Company and the
other Stockholders collectively shall have the right to purchase for Fair Market
Value all or any portion of the Common Stock (the "Repurchase Shares") held by
such Management Stockholder and his transferees pursuant to Section 5 hereof
(collectively, the "Selling Group"). After the occurrence of a Repurchase
Event, the Company shall as promptly as practicable provide written notice to
the Selling Group and the other Stockholders of the determination of the Fair
Market Value of the Repurchase Shares, the date of determination thereof
pursuant to the terms of this Agreement being hereinafter referred to as the
"FMV Determination Date." Promptly after the occurrence of the FMV
Determination Date, the Company may initially elect to purchase all, or any
portion, of the Repurchase Shares by delivering a written notice thereof to the
Board and the other Stockholders, which notice shall include the number of
Repurchase Shares held by the Selling Group (the "Repurchase Notice"). If the
Company has not elected to purchase all of the Repurchase Shares, the other
Stockholders may elect to purchase, by giving written notice to the Company
within 5 Business Days after the Repurchase Notice has been given to the other
Stockholders, (i) the number or amount of such Repurchase Shares not repurchased
by the Company up to its Percentage Allotment of the total number or amount of
such Repurchase Shares and (ii) up to its ratable share of such Repurchase
Shares not purchased by other Stockholders determined by reference to the number
of Partially-diluted Common Shares owned by each Stockholder actually
participating in such repurchase (for purposes of this Section 4(a) only, a
"Ratable Share"), all as specified in their respective notices to the Company.
Any Repurchase Shares that are not elected for purchase by a Stockholder shall
be deemed to be re-offered to and accepted by the participating Stockholders
exercising their options specified in clause (ii) of the immediately preceding
sentence with respect to the lesser of (A) the amount specified in their
respective notices to the Company and (B) an amount equal to their respective
Ratable Shares with respect to such deemed offer. Such deemed offer and
acceptance procedures described in
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the immediately preceding sentence shall be deemed to be repeated until either
(x) all of the Repurchase Shares are accepted by the participating Stockholders
or (y) no participating Stockholder desires to subscribe for more of such
Repurchase Shares. The Company shall notify each such Stockholder within five
days following the expiration of such 5-Business Day period described above of
the amount of such Repurchase Shares to be transferred that each other
Stockholder has elected to purchase. The Company and the other Stockholders
shall purchase all, or any portion, of the Repurchase Shares at a price equal to
the Fair Market Value thereof by delivering a written notice of such election to
the selling Stockholder within 10 Business Days after the FMV Determination
Date.
The number of shares to be purchased by the Company and the other
Stockholders shall first be satisfied to the extent possible from the Repurchase
Shares held by the Management Stockholder. If the number of Repurchase Shares
then held by the Management Stockholder is less than the total number of
Repurchase Shares the Company and the other Stockholders have elected to
purchase, the Company and the other Stockholders shall purchase the remaining
shares elected to be purchased from the other members of the Selling Group PRO
RATA according to the number of Repurchase Shares held by such other members of
the Selling Group at the closing of such purchases and sales (determined as
nearly as practicable to the nearest share).
(b) REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES IN THE EVENT OF
DIVORCE. If (i) a Person (the "Selling Person") is the spouse of an individual
who is or was an employee of the Company (the "Employee Spouse") and (ii) such
Selling Person was not himself an employee of the Company when he first acquired
any Management Stockholder Shares and (iii) such Selling Person was at any time
the transferee of any Stockholder Shares pursuant to Section 5 hereof, and (iv)
the number of Fully-diluted Common Shares held by the Selling Group (as defined
below) exceeds 9.5% of the number of shares of Common Stock held by all
Management Stockholders, then in the event such Selling Person becomes divorced
or permanently separated from such Employee Spouse (a "Repurchase Event"), the
Company and the other Stockholders collectively shall have the right to purchase
for Fair Market Value all or any portion of the Stockholder Shares (the
"Repurchase Shares") held by such Selling Person and his transferees pursuant to
Section 5 hereof (collectively, the "Selling Group"). Such Selling Person shall
promptly advise the Company of the occurrence of a Repurchase Event. After the
Company receives the notice referred to in the preceding sentence, the Company
shall as promptly as practicable provide written notice to the Selling Group and
the other Stockholders of the determination of the Fair Market Value of the
Repurchase Shares, the date of determination thereof pursuant to the terms of
this Agreement being hereinafter referred to as the "FMV Determination Date."
Promptly after the occurrence of the FMV
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Determination Date, the Company may initially elect to purchase all, or any
portion, of the Repurchase Shares by delivering a written notice thereof to the
Board and the other Stockholders, which notice shall include the number of
Repurchase Shares held by the Selling Group (the "Repurchase Notice"). If the
Company has not elected to purchase all of the Repurchase Shares, the other
Stockholders may elect to purchase, by giving written notice to the Company
within 5 Business Days after the Repurchase Notice has been given to the other
Stockholders, (i) the number or amount of such Repurchase Shares not repurchased
by the Company up to its Percentage Allotment of the total number or amount of
such Repurchase Shares and (ii) up to its ratable share of such Repurchase
Shares not purchased by other Stockholders determined by reference to the number
of Partially-diluted Common Shares owned by each Stockholder actually
participating in such repurchase (for purposes of this Section 4(b) only, a
"Ratable Share"), all as specified in their respective notices to the Company.
Any Repurchase Shares that are not elected for purchase by a Stockholder shall
be deemed to be re-offered to and accepted by the participating Stockholders
exercising their options specified in clause (ii) of the immediately preceding
sentence with respect to the lesser of (A) the amount specified in their
respective notices to the Company and (B) an amount equal to their respective
Ratable Shares with respect to such deemed offer. Such deemed offer and
acceptance procedures described in the immediately preceding sentence shall be
deemed to be repeated until either (x) all of the Repurchase Shares are accepted
by the participating Stockholders or (y) no participating Stockholder desires to
subscribe for more of such Repurchase Shares. The Company shall notify each
such Stockholder within five days following the expiration of such 5-Business
Day period described above of the amount of such Repurchase Shares to be
transferred that each other Stockholder has elected to purchase. The Company
and the other Stockholders shall purchase all, or any portion, of the Repurchase
Shares at a price equal to the Fair Market Value thereof by delivering a written
notice of such election to the selling Stockholder within 10 Business Days after
the FMV Determination Date.
The number of shares to be purchased by the Company and the other
Stockholders shall first be satisfied to the extent possible from the Repurchase
Shares held by the Selling Person initially referred to in this Section 4(b).
If the number of Repurchase Shares then held by such Selling Person is less than
the total number of Repurchase Shares the Company and the other Stockholders
have elected to purchase, the Company and the other Stockholders shall purchase
the remaining shares elected to be purchased from the other members of the
Selling Group PRO RATA according to the number of Repurchase Shares held by such
other members of the Selling Group at the closing of such purchases and sales
(determined as nearly as practicable to the nearest share).
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(c) PAYMENT OF PURCHASE PRICE. The purchase price (the "Purchase
Price") payable by any Stockholder pursuant to Sections 4(a) or 4(b) above or by
the Company pursuant to Section 4(b) above, shall be payable in cash at closing
pursuant to the terms of Section 6 below. The purchase price (the "Purchase
Price") payable by the Company pursuant to Section 4(a) above shall be payable
as follows:
(i) 20% of the Purchase Price in cash; and
(ii) the remaining portion of the Purchase Price in the form of a
negotiable promissory note payable to the order of the selling
Stockholder which note shall be (A) dated the date of closing pursuant
to Section 6 below, bearing interest at the reference rate in effect
from time to time as established by Chase Manhattan Bank, N.A.,
(B) payable in five equal annual installments of principal and
interest accrued thereon payable on an anniversary of the date of the
note, (C) prepayable at any time without premium, prepayments to be
applied to payments of principal and then interest next due, (D)
subject to acceleration as to the entire principal balance of the note
and interest accrued thereon by the holders of more than 50% of the
unpaid principal balance in the event of a default in payment which
has not been cured within five days after written notice of default
given by the holder(s) of the note, (E) secured by a contractual
agreement on behalf of the Company to issue shares of Common Stock to
the holder(s) of such note having a Fair Market Value equal to the
aggregate amount of principal and interest with respect to which the
Company has defaulted, PROVIDED THAT the Company shall not be
obligated to issue a greater number of shares than the number
repurchased by the Company from the original holder of such note
pursuant to Section 4(a) (as adjusted for stock splits, stock
dividends and similar transactions), it being understood and agreed
that nothing contained in this clause (E) shall be construed as a
limitation on all other rights and remedies available to any
Stockholder at law or in equity in the event that the collateral
securing such negotiable promissory note is insufficient, and (F)
exchangeable for a note or notes of like tenor and in aggregate
principal amount equal to the aggregate principal amount of the note
or notes so exchanged.
(d) RESTRICTIONS ON REPURCHASES. Anything contained in this
Agreement to the contrary notwithstanding, all repurchases of Stockholder Shares
by the Company pursuant to this Section 4 shall be subject to applicable
restrictions contained in federal law, the California General Corporation Law
and in the Company's debt and equity financing agreements.
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5. PERMITTED TRANSFERS OF STOCKHOLDER SHARES.
The restrictions contained in Sections 1 and 2 shall not apply with respect to
any Transfer of Stockholder Shares by any Stockholder (i) in the case of any
Stockholder who is an individual or The Raymond Scherr Living Trust, to any
member of such individual's (or with respect to The Raymond Scherr Living Trust,
Raymond Scherr's) Family Group if Transferred for (A) estate planning purposes
or any other reason, (B) pursuant to applicable laws of descent or by will or,
(C) subject to Section 4(b), pursuant to a dissolution of marriage or other
inter-family property separation or settlement agreement, (ii) in the case of
the Investors, to any other Investor or any member of a Group to which any
Investor belongs or (iii) in the case of any Management Stockholder or any
Scherr Stockholder, to any other Management Stockholder or to any member of a
Family Group of a Management Stockholder (collectively referred to herein as
"Permitted Transferees"); PROVIDED, HOWEVER, that (x) the restrictions and other
provisions contained in Sections 1 and 2 shall continue to be applicable to the
Stockholder Shares after any such Transfer and (y) the transferees of such
Stockholder Shares shall have executed and delivered to the Company a Management
Stockholder Joinder, an Undesignated Stockholder Joinder, a Scherr Stockholder
Joinder or an Institutional Stockholder Joinder, as applicable, pursuant to
Section 12.
6. CLOSING OF TRANSFERS.
(a) Sales of Stockholder Shares by any Stockholder to the Company or
any other Stockholder or Stockholders under the terms of Section 1, 2 or 4 shall
be made at the offices of the Company on a Business Day selected by the Company,
which Business Day shall, subject to Section 6(b), be within 10 Business Days
after the expiration of the later of (x) the FMV Determination Date (if
applicable) or (y) the last applicable period described in the relevant Section.
Delivery of certificates or other instruments evidencing such Stockholder Shares
duly endorsed for transfer, and free and clear of any liens, claims or
encumbrances other than this Agreement, and restrictions imposed by federal or
state securities laws, shall be made on such date against payment of the
purchase price therefor.
(b) CONSENTS AND APPROVALS. In the event that Stockholder Shares are
repurchased pursuant to this Agreement, the sellers and the purchasers thereof
and their respective successors, assigns and representatives shall take all
steps necessary or desirable to obtain all required third-party, governmental
and regulatory consents and approvals (including, without limitation, any
actions required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended) and shall take all other actions necessary or desirable to
facilitate consummation of such repurchase in a timely manner,
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including the postponement of any closing to such time as is necessary to obtain
the necessary consents and approvals.
7. ADDITIONAL RESTRICTIONS ON TRANSFER OF STOCKHOLDER SHARES; REMOVAL OF
LEGEND; LOST CERTIFICATES.
(a) LEGENDS.
(i) The certificates representing the Stockholder Shares
shall bear the following legends:
(A) "THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF
THE HOLDER OF SUCH SECURITIES IN RESPECT OF THE ELECTION OF
DIRECTORS ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE
STOCKHOLDERS AGREEMENT DATED AS OF JUNE 5, 1996, AMONG GUITAR
CENTER MANAGEMENT COMPANY, INC. AND CERTAIN HOLDERS OF
OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF
GUITAR CENTER MANAGEMENT COMPANY, INC."
(B) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"). 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 SAID ACT.
(ii) In the event any Stockholder Shares are Transferred in
a Public Sale, this Agreement is terminated pursuant to Section 17
hereof, or such Stockholder Shares are no longer subject to this
Agreement then the Company shall, or shall instruct its transfer
agents and registrars to, remove the legend referred to in Section
7(a)(i)(a) from the certificates evidencing such Stockholder Shares or
issue new certificates representing such Stockholder Shares without
such legend in lieu thereof.
(iii)In the event that a registration statement covering any
of the Stockholder Shares shall become effective under the Securities
Act and under any applicable state securities laws and the transfer of
such Stockholder Shares has been consummated, or in the event that the
Company shall receive an opinion of counsel reasonably satisfactory to
the Company that, in the opinion of such
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counsel, the legend in Section 7(a)(i)(b) is not, or is no longer,
necessary or required (including, without limitation, because of the
availability of any exemption afforded by Rule 144(k) promulgated
under the Securities Act), the Company shall, or shall instruct its
transfer agents and registrars to, remove such legend from the
certificates evidencing such Stockholder Shares or issue new
certificates representing such Stockholder Shares without such legend
in lieu thereof.
(b) OPINION OF COUNSEL. Unless waived by the Company, no holder of
Stockholder Shares may Transfer any Stockholder Shares that are represented by a
certificate or certificates bearing the legend in Section 7(a)(i)(A) above
(except to the Company, or in the case of the DLJ Entities, any member of their
Group, or pursuant to an effective registration statement under the Securities
Act) without first delivering to the Company an opinion of counsel (reasonably
acceptable in form and substance to the Company) that neither registration nor
qualification under the Securities Act and applicable state securities laws is
required in connection with such Transfer.
(c) TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted
Transfer of any Stockholder Shares in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Stockholder Shares as the owner
of such stock for any purpose.
(d) PLEDGES. Notwithstanding any other provision of this Agreement
to the contrary, no holder of Stockholder Shares may pledge any Stockholder
Shares except (x) as contemplated by the Restricted Stock Agreements or (y) in
compliance with the following provisions:
(i) the Stockholder notifies the Company of its intention
to pledge such Stockholder Shares and provides the Company with copies
of the relevant loan and pledge documentation;
(ii) the lender is a recognized financial institution that
regularly lends money and accepts securities as collateral and the
loan is bona-fide;
(iii) the lender agrees to be bound by this Agreement;
(iv) in the event the lender intends to foreclose upon the
pledged Stockholder Shares, the foreclosure shall be a Transfer
subject to the right of first offer set forth in Section 1(c) hereof;
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(v) in the event the lender acquires record or beneficial
ownership of the Stockholder Shares as a result of foreclosure, the
lender shall execute an appropriate joinder as required by Section 12
hereof if it would otherwise apply; and
(vi) the total amount of loans securing the Stockholder
Shares held by any Stockholder shall not exceed 50% of the fair market
value of such Stockholder Shares.
(e) LOSS OR THEFT OF CERTIFICATES. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
certificate representing Stockholder Shares, and in the case of any such loss,
theft or destruction upon delivery of a bond of indemnity in such form and
amount as shall be reasonably satisfactory to the Company, or in the event of
such mutilation upon surrender and cancellation of such mutilated certificate,
the Company will make and deliver without expense to the holder thereof, a new
certificate in lieu of such lost, stolen, destroyed or mutilated certificate.
8. FINANCIAL STATEMENTS AND REPORTS.
The Company shall furnish to each Qualified Holder:
(a) the same information and at the same times required to be
provided to the holders of the Company's indebtedness pursuant to the Bridge
Financing Agreement or (after its execution and in lieu of the foregoing) the
Permanent Financing (as such term is defined in the Bridge Financing Agreement)
whether or not such Permanent Financing Agreement is terminated; and
(b) promptly, from time to time, such other information (in writing
if so requested) regarding the assets and properties and operations, business
affairs and financial condition of the Company as any Qualified Holder may
reasonably request.
As used in this Section 8, the term "Company" shall include any
Subsidiaries of the Company that may exist from time to time. Unless required
by law, court order or similar compulsion, no Stockholder shall, directly or
indirectly, disclose any confidential or proprietary information relating to the
Company, including all information obtained pursuant to this Section 8, to any
Person, without the prior written consent of the Company, other than any of such
information that (i) is available to the public other than as a result of a
disclosure by such Stockholder or its Affiliates or representatives, (ii) is
obtained, after the date hereof, by any Stockholder from a Person that is not
known by such Stockholder after due inquiry to be in violation of any
confidentiality agreement with the Company regarding such information, (iii) to
any Stockholder's directors, officers, trustees, employees (PROVIDED THAT such
Stockholder
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shall cause such Persons to comply with this confidentiality agreement) and,
upon their agreement to be bound by the terms of this provision, such
Stockholder's agents and professional consultants, or (iv) upon their agreement
to be bound by the terms of this provision, to any Person (other than a
Competitor) to which any Stockholder sells or offers to sell any Stockholder
Shares in accordance with the terms of this Agreement. Each Stockholder who
receives information pursuant to this Section 8 acknowledges that, pursuant to
applicable Federal and state securities laws, his possession of such
information, if it is material, non-public information, may preclude him from
selling his Stockholder Shares or other securities of the Company until the
Company publicly disseminates such information.
9. SALE OF THE COMPANY.
(a) APPROVED SALE. In the event that the holders of the Requisite
Stockholder Shares approve a Sale of the Company (an "Approved Sale"), then each
Stockholder shall consent to and raise no objections against the Approved Sale,
and if the Approved Sale is structured as (A) a merger or consolidation of the
Company or a sale of all or substantially all of the Company's assets, each
Stockholder shall waive any dissenters rights, appraisal rights or similar
rights in connection with such merger, consolidation or asset sale, or (B) a
sale of outstanding Stock (other than the Senior Preferred Stock), each
Stockholder shall have the right and the obligation to sell its Stockholder
Shares ratably (assuming that the DLJ Warrants were exercised in full) with all
other Stockholders on the terms and conditions approved by the holders of the
Requisite Stockholder Shares. Subject to Section 9(b) below, the Company and
the Stockholders shall take all reasonably necessary and desirable actions to
facilitate the consummation of the Approved Sale on customary terms for
similarly situated businesses, including, but not limited to, the release of
information and documentation and the execution of such agreements and such
instruments and other actions reasonably necessary to provide the
representations, warranties, indemnities, covenants, conditions, escrow
agreements and other provisions and agreements relating to such Approved Sale,
PROVIDED THAT no Stockholder is required to undertake any obligation different
in nature than those which other Stockholders undertake. The Stockholders shall
be permitted to sell their Stockholder Shares pursuant to an Approved Sale
without complying with the provisions of Sections 1, 2 or 4 of this Agreement.
For the avoidance of doubt, this Section 9(a) does not create an obligation on
the part of any Person to sell or otherwise Transfer any shares of Senior
Preferred Stock.
(b) CONDITIONS TO OBLIGATIONS. The obligations of the Stockholders
pursuant to this Section 9 are subject to the satisfaction of the following
conditions:
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(i) upon the consummation of the Approved Sale, all of the
Stockholders shall receive with respect to their Stockholder Shares
the same proportion of the aggregate consideration from such Approved
Sale that such holder would have received if such aggregate
consideration had been distributed by the Company in complete
liquidation pursuant to the rights and preferences set forth in the
Articles of Incorporation with respect to such Stockholder Shares as
in effect immediately prior to such Approved Sale (giving effect to
applicable preferences and order of priority and assuming that the DLJ
Warrants were exercised in full);
(ii) all holders of then-currently exercisable Common Stock
Equivalents will be given an opportunity to either (A) exercise their
rights to acquire the Common Stock underlying such Common Stock
Equivalents prior to the consummation of the Approved Sale (but only
to the extent such Common Stock Equivalents are then vested or would
be vested on an accelerated basis pursuant to the applicable option
plan or agreement) and participate in such sale as holders of Common
Stock or (B) upon the consummation of the Approved Sale, receive in
exchange for such Common Stock Equivalents consideration equal to the
amount determined by multiplying (x) the same amount of consideration
per share of Common Stock received by the holders of Common Stock in
connection with the Approved Sale less the exercise price per Common
Stock Equivalent by (y) the number of Common Stock Equivalents (but
only to the extent such Common Stock Equivalents are then vested or
would be vested on an accelerated basis pursuant to the applicable
option plan or agreement);
(iii) no Stockholder shall be obligated to make any
out-of-pocket expenditure prior to the consummation of the Approved
Sale (excluding modest expenditures for its own postage, copies, etc.,
and the fees and expenses of its own counsel retained by it) and no
Stockholder shall be obligated to pay more than its or his PRO RATA
share (based upon the number of shares of Common Stock and vested
Common Stock Equivalents held) of reasonable expenses incurred in
connection with such Approved Sale to the extent such costs are
incurred for the benefit of all Stockholders and are not otherwise
paid by the Company or the acquiring party (including the reasonable
costs of one counsel chosen by the Company on behalf of all
Stockholders), it being understood that costs incurred by or on behalf
of a Stockholder for its or his sole benefit will not be considered
costs of the transaction hereunder, PROVIDED THAT a Stockholder's
liability for its or his PRO RATA share of such allocated expenses
shall be capped at the total purchase price received in cash by such
Stockholder for his Common Stock and Common Stock Equivalents (each
Stockholder being deemed to receive the exercise price of any Common
Stock
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Equivalents sold pursuant to Section 9(b)(ii)(B) above in addition to
any other amounts actually received); and
(iv) in the event that the Company or the Stockholders are
required to provide any representations or indemnities in connection
with the Approved Sale (other than representations and indemnities
concerning each Stockholder's title to its or his Stock to be
Transferred, and such Stockholder's authority, power, and right to
enter into and consummate such purchase or merger agreement without
violating any other agreement or legal requirement), then each
Stockholder shall not be liable for more than his PRO RATA share
(based upon the number of shares of Common Stock and vested Common
Stock Equivalents held) of any liability for misrepresentation or
indemnity and such liability shall not exceed the total purchase price
received by such Stockholder for his Common Stock and Common Stock
Equivalents (each Stockholder being deemed to receive the exercise
price of any Common Stock Equivalents sold pursuant to Section
9(b)(ii)(B) above in addition to any other amounts actually received),
PROVIDED THAT the portion of such Stockholder's liability attributable
to any non-cash purchase price received shall be satisfied solely out
of such non-cash property.
(c) PURCHASER REPRESENTATIVE. If the Company or the holders of the
Company's securities enter into any negotiation or transaction for which
Regulation D (or any similar rule or regulation thereunder) promulgated by the
Securities and Exchange Commission may be available with respect to such
negotiation or transaction (including a merger, consolidation or other
reorganization), each holder of Stockholder Shares shall, at the request of the
Company, appoint a purchaser representative (as such term is defined in Rule 501
promulgated under Regulation D) reasonably acceptable to the Company. If any
holder of Stockholder Shares appoints a purchaser representative designated by
the Company, the Company shall pay the fees of such purchaser representative,
but if any holder of Stockholder Shares declines to appoint the purchaser
representative designated by the Company such holder shall appoint another
purchaser representative (reasonably acceptable to the Company), and such holder
shall be responsible for the fees of the purchaser representative so appointed.
10. ELECTION OF DIRECTORS; VOTING.
(a) Subject to Section 10(b), the number of directors constituting
the Board shall be eleven. At each annual meeting of the holders of any class
of Stock, and at each special meeting of the holders of any class of Stock,
called for the purpose of electing directors of the Company, and at any time at
which holders of any class of Stock shall have the right to, or shall, vote for
or consent in writing to the election of directors of
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the Company, then, and in each such event, the Stockholders shall vote all of
the Stockholder Shares owned by them for, or consent in writing with respect to
such shares in favor of, the election of a Board constituted as follows:
(i) four directors shall be designated and approved by the
holders of at least a majority of the then outstanding Management
Stockholder Shares;
(ii) four directors shall be designated and approved by the
holders of at least a majority of the then outstanding Institutional
Stockholder Shares; PROVIDED, THAT, (A) so long as Chase is a
Qualified Holder, it shall be entitled to designate and approve one
such director, (B) so long as Wells Fargo is a Qualified Holder, it
shall be entitled to designate and approve one such director, and (C)
so long as Weston Presidio is a Qualified Holder, it shall be entitled
to designate and approve one such director;
(iii) one director shall be designated and approved by the
holders of at least a majority of the then outstanding Scherr
Stockholder Shares; and
(iv) two directors who are not Affiliates of any
Institutional Stockholder or Management Stockholder shall be
designated and approved by the holders of at least a majority of the
then outstanding Institutional Stockholder Shares; PROVIDED, HOWEVER,
that any designation under this subsection (iv) must be approved by
Larry Thomas for so long as he is Chief Executive Officer of the
Company and thereafter by a majority of the then outstanding
Management Stockholder Shares.
The parties hereby designate and approve the following
individuals to serve as the initial members of the Board effective as of the
first day after the Closing Date (as defined in the Agreement): (i) the
Management Stockholders hereby designate and approve Larry Thomas and Marty
Albertson as directors pursuant to Section 10(a)(i) hereof (the Management
Stockholders elect to leave their other two designated seats vacant until such
time as they determine to fill them), (ii) the Institutional Stockholders hereby
designate and approve Steve Burge, David L. Ferguson, Michael Lazarus and
Stephen Murray as directors pursuant to Section 10(a)(ii) hereof, (iii) the
Scherr Stockholders hereby designate and approve Raymond Scherr as director
pursuant to Section 10(a)(iii), and (iv) the Institutional Stockholders with the
approval of Thomas elect to leave the seats for the designees pursuant to
Section 10(a)(iv) hereof vacant until such time as they determine to fill them.
(b) Each Stockholder acknowledges the right of the holders of the
Senior Preferred Stock pursuant to the Company's Articles of Incorporation and
By-laws to appoint members of the
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Board in certain circumstances and each Stockholder agrees to take all actions
necessary to cause the number of directors on the Board to be increased to
accommodate such holders' rights therein. Each Stockholder also acknowledges
the right of GCMC Funding, Inc. to appoint a member of the Board in certain
circumstances pursuant to the Bridge Financing Agreement, and agrees to take all
actions necessary to cause the number of directors on the Board to be increased
to accommodate the rights of GCMC Funding, Inc. to elect a director and to elect
such director.
(c) The Institutional Stockholders shall be entitled to designate two
non-voting observers (the "Observers") to be admitted to each meeting of the
Board, including telephonic meetings. The Institutional Stockholders agree:
that one Observer shall be a representative of Wells Fargo so long as Wells
Fargo is a Qualified Holder, and that the other Observer shall be a
representative of Weston Presidio so long as Weston Presidio is a Qualified
Holder. The Company shall give the Observers written notice of each meeting of
the Board at the same time and in the same manner as it is required to notify
members of the Board. In addition, the Company shall deliver to the Observers
and DLJMB (so long as any DLJ Entity is a Qualified Holder) all written
materials and other information (including, without limitation, copies of the
minutes of all meetings and written consents in lieu of meetings, along with all
attachments thereto and written notice of the effectiveness of any such written
consent) provided to members of the Board in connection with meetings or written
consents at such time and in the same manner that such materials and information
are provided to the members of the Board.
(d) The holders of Stockholder Shares shall vote their shares (i) to
remove any director whose removal is required by the party or parties with the
power to designate such director and (ii) to fill any vacancy created by the
removal, resignation or death of a director, in each case for the election of a
new director designated and approved, if approval is required, in accordance
with the provisions of this Section 10. Vacancies of the Board shall be filled
within the earlier of 30 days of the date such vacancy is created or immediately
before the first action to be taken by the Board after the date such vacancy is
created.
(e) The Board shall have a 4-member Compensation Committee
(consisting of any two directors designated by the holders of a majority of the
Institutional Stockholders Shares and any two directors designated by the
holders of a majority of the Management Stockholders Shares); which shall make
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company and shall administer any bonus programs and stock
option plans of the Company other than the Company's 1996 Performance Stock
Option
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Plan (PROVIDED THAT any recommendation of the Committee that relates to a member
of the Committee must be made unanimously). The initial members of the
Compensation Committee shall be Mr. Thomas, Mr. Albertson, Mr. Ferguson and Mr.
Lazarus. The Board shall have a three-member Audit Committee (consisting of
those directors, other than the directors designated by the Management
Stockholders, selected by the Board), which shall review the results and scope
of the audit and other services provided by the Company's independent public
accountants. The initial members of the Audit Committee shall be Mr. Ferguson,
Mr. Burge and Mr. Murray. The Board shall have a two-member Indemnification
Committee, which shall institute and defend on behalf of the Company all actions
for indemnification pursuant to the Purchase Agreement and the Tax
Indemnification Agreement dated May 1, 1996. The members of the Indemnification
Committee shall at all times be the two directors designated by the
Institutional Stockholders. The initial members of the Indemnification
Committee shall be Mr. Ferguson and Mr. Murray. The Company and each
Stockholder shall take all actions necessary to ensure that all "Indemnification
Matters" are promptly referred to the Indemnification Committee.
(f) In the event that the Company acquires or creates any Subsidiary,
the Company shall cause the composition of the board of directors or equivalent
governing body of such Subsidiary to be identical, or as nearly identical as
possible, to the composition of the Board.
11. BOARD APPROVAL.
Consistent with the requirements of applicable law, the Board shall
act in a supervisory role with respect to the Company and shall be responsible
for strategic decisions relating to the Company, and in addition to the
foregoing the following transactions shall require the specific approval of
two-thirds of the members of the Board:
(a) current annual budget and operating plan customarily adopted by
similar businesses at the beginning of each year;
(b) capital expenditures in excess of $500,000 that were not included
in the budget contemplated by Section 11(a);
(c) the direct or indirect investment in, purchase or other
acquisition of, in one or a series of transactions, any business, assets,
securities or other property of another Person, other than in the ordinary
course of business;
(d) issue any Stock except pursuant to agreements in existence as of
the date hereof and the Certificates of Determination for the Junior Preferred
Stock and the Senior Preferred Stock;
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(e) enter into any Sale of the Company (other than an Approved Sale);
(f) make any change in its line of business to include anything other
than the retailing of musical instruments, pro-audio equipment and related
accessories;
(g) the adoption of any budget contemplated by Section 8(b);
(h) any incurrence of debt in excess of $500,000 other than any such
incurrence relating to working capital in the ordinary course and capital
expenditures not made in contravention of the terms of this Agreement;
(i) the consummation of an initial Public Offering;
(j) repurchase, retire, redeem or otherwise acquire any shares of the
Company's capital stock (including any redemption or acquisition pursuant to
this Agreement but excluding any redemption or acquisition required to be made
by the Company pursuant to this Agreement or the Amended and Restated Articles
of Incorporation, including the Certificates of Determination for the Junior
Preferred Stock and the Senior Preferred Stock); PROVIDED THAT any repurchase of
Stockholder Shares by the Company from Larry Thomas, Marty Albertson or their
respective Permitted Transferees shall only require the approval of a majority
of those members of the Board not appointed pursuant to Section 10(a)(i);
(k) any agreement or transaction between the Company and any
Affiliate of the Company involving the transfer of any consideration (whether
cash, securities, property or otherwise) between the Company and such Affiliate;
PROVIDED, HOWEVER, that the foregoing shall not restrict (A) transactions
between the Company and any of its Subsidiaries, if any, or among any of such
Subsidiaries, if any, (B) payments or advances to employees of the Company in
the ordinary course of business of the Company or any of its Subsidiaries, (C)
transactions pursuant to any stock option or other incentive-based plan for
employees of the Company that is approved by the Board, (D) transactions
contemplated by this Agreement or agreements entered into in connection with the
closing of the Purchase Agreement; (E) any transaction or series of related
transactions between the Company and any Affiliate (other than the President of
the Company, his Family Group and their respective Affiliates) which do not
involve an amount in excess of $50,000 and are approved by the President of the
Company, (F) transactions with Chemical Bank, and Chase Securities, Inc., in
their capacities as lenders under the Bridge Loan Agreements or as placement
agent or underwriter of the Permanent Financing (as defined by the Bridge Loan
Agreements), and (G) leases of real property in effect on the date hereof
between the Company and Affiliates of Raymond Scherr. For the
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avoidance of doubt, neither DLJMB or GCMC Funding, Inc. nor any of their
respective Affiliates shall be considered Affiliates of the Company for purposes
of this provision.
(l) sell, lease, exchange or otherwise dispose of any asset or assets
of the Company for aggregate consideration in excess of $500,000 (other than an
Approved Sale);
(m) declare or pay any dividend or distribution on or with respect to
any Stockholder Shares;
(n) except as otherwise contemplated by this Agreement, create or
establish any committee of the Board or of any board of directors of any
Subsidiary of the Company, or increase or decrease the number of members of any
such committee; and
(o) take any action to amend or repeal any provision of the Company's
Articles of Incorporation or By-laws.
12. JOINDERS; ADDITIONAL SHARES OF STOCK.
(a) Any transferee of Stockholder Shares of the Company from an
Institutional Stockholder (other than the Company, a Management Stockholder, a
Scherr Stockholder, an Undesignated Stockholder or a transferee in a Public
Sale) shall, as a condition to such Transfer, become an Institutional
Stockholder for purposes of this Agreement, and if such transferee is not
already bound hereby as an Institutional Stockholder, he shall execute and
deliver to the Company an Institutional Stockholder Joinder. Any transferee of
Stockholder Shares of the Company from a Management Stockholder (other than the
Company, an Institutional Stockholder, a Scherr Stockholder, an Undesignated
Stockholder or a transferee in a Public Sale) shall, as a condition to such
Transfer, become a Management Stockholder for purposes of this Agreement, and if
such transferee is not already bound hereby as a Management Stockholder, he
shall execute and deliver to the Company a Management Stockholder Joinder. Any
transferee of Stockholder Shares of the Company from an Undesignated Stockholder
(other than the Company, a Management Stockholder, an Institutional Stockholder,
a Scherr Stockholder or a transferee in a Public Sale) shall as a condition to
such Transfer, become an Undesignated Stockholder for purposes of this
Agreement, and if such transferee is not already bound hereby as an Undesignated
Stockholder, he shall execute and deliver to the Company an Undesignated
Stockholder Joinder. Any transferee of Stockholder Shares of the Company from a
Scherr Stockholder (other than the Company, an Institutional Stockholder, a
Management Stockholder, an Undesignated Stockholder or a transferee in a Public
Sale) shall as a condition to such Transfer, become a Scherr Stockholder for
purposes of this Agreement, and if such transferee is not already bound hereby
as a Scherr Stockholder, he shall execute and deliver to the Company a Scherr
Stockholder Joinder. Any recipient of Common Stock
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pursuant to the terms of Section 4(c)(ii)(E) shall, as a condition to the
issuance of such shares of Common Stock, become a Management Stockholder for
purposes of this Agreement, and if such transferee is not already bound hereby
as a Management Stockholder, he shall execute and deliver to the Company a
Management Stockholder Joinder.
(b) In the event additional shares of Stock (other than shares of
Senior Preferred Stock) are issued by the Company to a Stockholder at any time
during the term of this Agreement, either directly or upon the exercise or
exchange of securities of the Company exercisable for or exchangeable into
shares of Stock, such additional shares of Stock shall, as a condition to such
issuance, become subject to the terms and provisions of this Agreement.
(c) In the event shares of Stock are issued by the Company to any
employee of the Company (each, an "Employee Stockholder") or member of the
Family Group thereof (other than a Stockholder as to whom or which Section 12(b)
is applicable) at any time during the term of this Agreement, either directly or
upon the conversion, exercise or exchange of securities of the Company
convertible into or exercisable or exchangeable for shares of Stock, such
Employee Stockholder or member of the Family Group thereof, as a condition to
receiving such shares of Stock, shall agree to execute and deliver to the
Company a Management Stockholder Joinder and to be deemed a Management
Stockholder hereunder and agree that such additional shares will be subject to
the terms and provisions of this Agreement applicable to shares held by
Management Stockholders.
(d) In the event additional Shares of Stock (other than shares of
Senior Preferred Stock) are issued by the Company to any Person (other than to a
Stockholder or an employee or member of the Family Group thereof as to whom or
which either Section 12(b) or 12(c) is applicable, in a Public Sale or upon the
issuance or exercise of the Bridge Warrants) at any time during the term of this
Agreement, such additional shares of Stock shall, as a condition to such
issuance, become subject to the terms and provisions of this Agreement
applicable to shares held by Undesignated Stockholders.
(e) The Stockholders hereby acknowledge and agree that the Company
may enter into an agreement with the holders of the Bridge Warrants whereby such
holders shall be entitled to the benefits of Section 2 hereof and be bound by
the provisions of Section 9 hereof.
13. CONSENT OF SPOUSES.
If requested by the Company, each Stockholder who is an individual
shall cause his or her spouse, as applicable, to execute and deliver a separate
consent and agreement in
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substantially the form attached hereto as EXHIBIT E or otherwise reasonably
acceptable to the Company (a "Spousal Consent"). The signature of a spouse on a
Spousal Consent shall not be construed as making such spouse a stockholder of
the Company or a party to this Agreement except as may otherwise be set forth in
such consent. Each Stockholder who is an individual will certify his or her
marital status to the Company at the Company's request.
14. REGULATORY MATTERS.
(a) COOPERATION OF OTHER STOCKHOLDERS. Each Stockholder agrees to
cooperate with the Company in all reasonable respects in complying with the
terms and provisions of the letter agreements between the Company and CVCA and
Wells Fargo, respectively, copies of which are attached hereto as EXHIBIT F,
regarding small business matters (the "Small Business Sideletters"), including,
without limitation, voting to approve amending the Company's Articles of
Incorporation, the Company's by-laws, or this Agreement in a manner reasonably
requested by any Regulated Holder (as defined in the Small Business Sideletters)
entitled to make such request pursuant to the Small Business Sideletters.
Notwithstanding the foregoing, the provisions of the final sentence of Section
2(a)(i) of the Small Business Sideletters shall not be interpreted to permit
actions that would adversely affect the rights of the holders of the Senior
Preferred Stock or Junior Preferred Stock as they exist today.
(b) COVENANT NOT TO AMEND. The Company and each Stockholder agree
not to amend or waive the voting or other provisions of the Company's Articles
of Incorporation, the Company's by-laws or this Agreement if such amendment or
waiver would cause any Regulated Holder to have a Regulatory Problem (as defined
in the Small Business Sideletters), provided that any such Stockholder notifies
the Company that it would have a Regulatory Problem promptly after it has notice
of such amendment or waiver.
(c) LIMITATIONS. Anything contained in Sections 14(a) or (b) to the
contrary notwithstanding, no Stockholder shall be required under this Section 14
to take any action that would adversely affect in any material respect such
Stockholder's rights under this Agreement or as a stockholder of the Company.
(d) NOTICE OF REDEMPTION. Notwithstanding anything herein to the
contrary, the Company shall not convert or directly or indirectly redeem,
purchase or otherwise acquire any of its Stock or take any other action
affecting the voting rights of such Stock, if such action will cause the
percentage of any class of outstanding voting securities owned or controlled by
CVCA to equal or exceed 25%, unless the Company gives 10 days prior written
notice of such action to CVCA and allows CVCA during such
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10 day period an opportunity to reduce its ownership of such class to below 25%.
(e) IRREVOCABLE PROXY. CVCA hereby irrevocably gives to CBCI its
proxy to vote all Stockholder Shares owned by CVCA with respect to situations
where Stockholders are entitled to vote or take any other action by law or
pursuant to this Agreement. This proxy and all authority conferred hereby shall
be irrevocable and shall not be terminable by CVCA or by operation of law. CBCI
may relinquish this proxy at any time by notifying CVCA and the Company of such
relinquishment.
15. ADDITIONAL COVENANTS.
(a) AMENDMENTS TO CHARTER AND BYLAWS. Anything contained herein to
the contrary notwithstanding, (i) in no event shall the Company and/or the
Stockholders effect any amendment to the Company's Articles of Incorporation or
By-Laws that would treat any Stockholder in a non-ratable, discriminatory manner
without the prior written consent of such Stockholder and (ii) in no event shall
the Company declare or pay any dividend or distribution with respect to any
class of capital stock of the Company that would treat any Stockholder in a
non-ratable, discriminatory manner without the prior written consent of such
Stockholder.
(b) NO CONFLICTING AGREEMENTS. No Stockholder shall enter into any
stockholder agreements or arrangements of any kind with any Person with respect
to any Stock (other than the Senior Preferred Stock) on terms inconsistent with
the provisions of this Agreement (whether or not such agreements or arrangements
are with other Stockholders or with Persons that are not parties to this
Agreement), including, but not limited to, agreements or arrangements with
respect to the acquisition or disposition of Stock (other than the Senior
Preferred Stock) in a manner that is inconsistent with this Agreement.
(c) Immediately prior to the Company's initial Public Offering, the
Board of Directors shall adopt a ten (10) year Incentive Stock Option Plan for
the benefit of key employees, to be administered by the Compensation Committee,
covering a number of shares of Common Stock not less than the number of shares
covered by the Company's 1996 Performance Stock Option Plan that were not Shares
Available for Award (as defined in such Plan). All Stockholders agree to vote
in favor of approval of the adoption of such Incentive Stock Option Plan when
submitted to the Stockholders for vote.
16. FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done and
performed all such further acts and things and shall execute and deliver all
such other agreements, certificates,
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instruments and documents as any other party hereto reasonably may request in
order to carry out the provisions of this Agreement and the consummation of the
transactions contemplated hereby.
17. TERMINATION.
(a) This Agreement shall terminate and, except as otherwise expressly
provided herein, shall be of no further force or effect and shall not be binding
upon any party hereto upon the first to occur of (A) a Sale of the Company, (B)
a Qualified Public Offering, (C) the dissolution, liquidation or winding-up of
the Company and (D) the approval of such termination by the Company, and the
holders of the Requisite Stockholder Shares; PROVIDED, HOWEVER, that the
provisions of Section 14 shall not be terminated pursuant to clause (D) above
without the written consent of CVCA and Wells Fargo; and PROVIDED, FURTHER, that
Sections 7(a) (other than 7(a)(i)(A)), 7(b) and 7(c) shall survive a Sale of the
Company and a Qualified Public Offering with respect to shares of Stock not
registered under the Securities Act, and shall terminate upon the first to occur
of (C) or (D) above and PROVIDED, FURTHER, the provisions of Section 2 shall not
be terminated pursuant to clause (D) above without the written consent of the
holders of the majority of Undesignated Stockholder Shares.
(b) This Agreement shall no longer be binding or of further force or
effect as to any particular Stockholder, except as noted below or otherwise
expressly provided herein, as of the date any particular Stockholder has
Transferred all such Stockholder's interest in the Company's securities and the
transferee(s) of such securities, if required by this Agreement, shall have
become a party hereto; PROVIDED, HOWEVER, that no such termination shall be
effective if such Stockholder is in breach of this Agreement; and PROVIDED
FURTHER, HOWEVER, that in the event that the Company transfers to any
Stockholder or members of such Stockholders Group any shares of Common Stock
pursuant to Section 4(c)(ii)(E), the transferees of such Common Stock shall
remain or become parties hereto with respect to such Common Stock pursuant to
the terms of Section 12.
18. DEFINITIONS.
"AFFILIATE" means, with respect to any Person, (a) a director,
officer, or partner of such Person or any Person identified in clause (c) below,
(b) a spouse, parent, sibling or descendant of such Person (or a spouse, parent,
sibling or descendant of any director or executive officer, of such Person) and
(c) any other Person that, directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such Person. The term "control" includes, without limitation, the possession,
directly or indirectly, of the power to direct or cause the direction of the
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management or policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"AGREEMENT" shall have the meaning set forth in the Preamble.
"APPROVED SALE" shall have the meaning set forth in Section 9(a).
"BOARD" means the board of directors of the Company.
"BRIDGE FINANCING AGREEMENT" means that certain Bridge Financing
Agreement, dated as of the date hereof, among the Company, GCMC Funding, Inc.
and Chemical Bank.
"BRIDGE WARRANTS" means the warrants to purchase shares of Common
Stock issued pursuant to the Bridge Financing Agreement which are initially to
be held in escrow pursuant to the terms thereof, including any additional
warrants or underlying securities issuable pursuant to the anti-dilution
provisions thereof.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or a day
on which banking institutions in New York, New York are not required to be open.
"CALCULATED PURCHASE PRICE" means (x) with respect to any shares of
Common Stock, the quotient of (a) Cash Flow Value and (b) the aggregate number
of Fully-diluted Common Shares outstanding and (y) with respect to any Common
Stock Equivalents, the amount determined by clause (x) above less any additional
consideration payable by the holder of such Common Stock Equivalent upon the
exchange, exercise or conversion thereof.
"CAPITALIZED LEASE" shall mean any lease the obligation for Rentals
with respect to which is required to be capitalized on a consolidated balance
sheet of the lessee and its subsidiaries in accordance with GAAP.
"CASH FLOW VALUE" means, as at any date of determination, 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 TIMES (y) six, MINUS
(b) the sum of (x) all Debt (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.
"CAUSE" with respect to any Management Stockholder, shall have the
meaning of "Cause" in such Management Stockholder's employment agreement with
the Company or if none, it shall mean (i) the repeated failure by such
Management Stockholder to perform such lawful duties consistent with Executive's
position
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as are reasonably requested by the Board as documented in writing to such
Management Stockholder, (ii) such Management Stockholder'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 or the
Company's President and expiration of a thirty day cure period, (iii) the
commission by such Management Stockholder 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 such Management Stockholder 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 or (v) a material breach by such Management
Stockholder of any confidentiality or non-compete provisions contained in any
agreement with the Company, PROVIDED THAT if such breach is unintentional, such
Management Stockholder shall have 30 days to cure such breach after written
notice from the Company.
"CBCI" means CB Capital Investors, Inc., a Delaware corporation.
"CHASE" means CBCI and CVCA.
"COMMON STOCK" means the Common Stock, no par value, of the Company.
"COMMON STOCK EQUIVALENT" means the right to acquire, whether or not
immediately exercisable, one share of Common Stock, whether evidenced by an
option, warrant, convertible security or other instrument or agreement.
"COMPANY" shall have the meaning set forth in the Caption.
"COMPETITOR" means any Person (other than a Stockholder) that manages
or operates any line of business that, or owns greater than 10 percent of the
outstanding voting capital stock or equity interests of any Person that, is a
retailer of musical instruments, pro-audio equipment or related accessories,
other than any Person whose retail sales of such products do not exceed $10
million per annum. Any member of any Person's Family Group or Group shall be
deemed to be a Competitor if such Person is a Competitor.
"CONSOLIDATED INTEREST EXPENSE" shall mean for any period on a
consolidated basis all interest (including capitalized interest) and all
amortization of debt discount and expense on any particular Debt (including,
without limitation, payment-in-kind, zero coupon and other like Securities and
the interest component of Rentals on Capitalized Leases applicable to such
period) of the Company and its Subsidiaries.
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"CONSOLIDATED NET INCOME" for any period shall mean the gross revenues
of the Company and its Subsidiaries for such period less all expenses and other
proper charges (including taxes or income), determined on a consolidated basis
in accordance with GAAP, but excluding (or adjusting for in the case of clause
(k) below) in any event:
(a) any gains or losses on the sale or other disposition of
Investments or fixed or capital assets or from any transaction classified
as extraordinary under GAAP, and any taxes on such excluded gains and any
tax deductions or credits on account of any such excluded losses;
(b) the proceeds of any life insurance policy;
(c) net earnings and losses of any Subsidiary accrued prior to the
date it became a Subsidiary;
(d) net earnings and losses of any corporation (other than a
Subsidiary), substantially all the assets of which have been acquired in
any manner by the Company or any Subsidiary, realized by such corporation
prior to the date of such acquisition;
(e) net earnings and losses of any corporation (other than a
Subsidiary) with which the Company or a Subsidiary shall have consolidated
or which shall have merged into or with the Company or a Subsidiary prior
to the date of such consolidation or merger;
(f) net earnings of any business entity (other than a Subsidiary) in
which the Company or any Subsidiary has an ownership interest unless such
net earnings shall have actually been received by the Company or such
Subsidiary in the form of cash distributions:
(g) any portion of the net earnings of any Subsidiary which for any
reason is unavailable for payment of dividends to the Company or any other
Subsidiary;
(h) earnings resulting from an reappraisal, revaluation or write-up
of assets;
(i) any charge to net earnings resulting from the amortization of the
value of stock options given to employees to the extent required by APB 25;
(j) any gains resulting from the retirement of Debt at a discount;
(k) any gain arising from the acquisition of any Securities of the
Company or any Subsidiary; and
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(1) any reversal of any contingency reserve, except to the extent
that provision for such contingency reserve shall have been made from
income arising during such period.
"CVCA" means Chase Venture Capital Associates, L.P., a California
limited partnership.
"DEBT" means, for the Company and its Subsidiaries on a consolidated
basis, without duplication the aggregate amount (including the current portions
thereof) of all (i) indebtedness for money borrowed from others, purchase money
indebtedness, and capitalized lease obligations (other than accounts payable in
the ordinary course); (ii) indebtedness of the type described in clause (i)
above guaranteed, directly or indirectly, in any manner by the Company or any
Subsidiary or in effect guaranteed, directly or indirectly, in any manner by the
Company or any Subsidiary through an agreement, contingent or otherwise, to
supply funds to, or in any other manner invest in, the debtor, or to purchase
indebtedness, or to purchase and pay for property if not delivered or pay for
services if not performed, primarily for the purpose of enabling the debtor to
make payment of the indebtedness or to assure the owners of the indebtedness
against loss, but excluding endorsements of checks and other instruments in the
ordinary course; (iii) indebtedness of the type described in clause (i) above
secured by any Encumbrance upon property owned by the Company or any Subsidiary
even though the Company or such Subsidiary has not in any manner become liable
for the payment of such indebtedness; and (iv) interest expense accrued but
unpaid, all prepayment premiums, and all fees, expenses and other penalties
payable on or relating to any of such indebtedness;
"DEMINIMIS TRANSFER" means a Transfer by a Stockholder of any security
if the securities being Transferred (including in one or more related Transfers
by one or more Stockholders) do not exceed 15% of the outstanding shares of the
class of securities being Transferred; PROVIDED THAT for purposes of this
definition a transfer of the DLJ Warrants shall be deemed to be a transfer of
the Common Stock and Junior Preferred Stock issuable upon exercise of such DLJ
Warrants.
"DLJ ENTITIES" means DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V. and DLJ Merchant
Banking Funding, Inc.
"DLJ WARRANTS" means the warrants to purchase shares of Junior
Preferred Stock and Common Stock issued pursuant to the Securities Purchase
Agreement dated as of the date hereof among the DLJ Entities and the Company,
including any additional warrants or underlying securities issuable pursuant to
the anti-dilution provisions thereof.
"DLJMB" means DLJ Merchant Banking, Inc.
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"EBITDA" shall mean for any period of determination thereof
Consolidated Net Income of the Company and its Subsidiaries plus (a)
Consolidated Interest Expense, (b) income tax expense, refunds or credits for
such period, and (c) depreciation and amortization expense of the Company and
its Subsidiaries on a consolidated basis, all determined in accordance with
GAAP.
"EMPLOYEE STOCKHOLDER" shall have the meaning set forth in Section
12(c).
"ENCUMBRANCE" shall mean any claim lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right of way, encumbrance,
right of first refusal or other right of third parties.
"EXEMPT TRANSFERS" shall have the meaning set forth in Section 1(a).
"FAIR MARKET VALUE" of each Stockholder Share means the average of the
closing prices of the sales of each class of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any given day, the average of the last bid
and asked prices on all such exchanges at the end of such day, or, if on any
given day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq Stock Market National Market System
("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common
Stock is not quoted in Nasdaq, the average of the bid and asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive trading days
prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair
Market Value shall be that value determined by the Board in good faith, provided
that if the selling Stockholder or his representatives cannot agree with the
Board as to such value, such value shall be determined by a mutually acceptable
qualified appraisal firm of national or regional reputation, and all fees,
expenses and other charges of such appraisal firm incurred in connection with
such determination of Fair Market Value shall be borne by the Company; PROVIDED,
HOWEVER, that if such appraisal firm determines that the Fair Market Value is a
value that is less than 110% of the value determined by the Board, such expenses
shall be borne by the selling Stockholder. In determining the value of any
Stockholder Shares pursuant to the preceding sentence, no premium or discount
shall be applied for a controlling or minority interest, respectively.
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"FAMILY GROUP" means an individual's spouse, ancestors and/or
descendants (whether natural or adopted) and the estate of and any trust solely
for the benefit of such individual and/or the individual's spouse, ancestors
and/or descendants.
"FMV DETERMINATION DATE" shall have the meaning set forth in Section
4(a)(i).
"FULLY-DILUTED COMMON SHARES" means, with respect to any Person, such
Person's Common Stock plus Common Stock Equivalents.
"GAAP" means the United States generally accepted accounting
principles, consistently applied.
"GOVERNMENTAL AUTHORITY" means any domestic or foreign government or
political subdivision thereof, whether on a federal, state or local level and
whether executive, legislative or judicial in nature, including any agency,
authority, board, bureau, commission, court, department or other instrumentality
thereof.
"GROUP" means:
(a) in the case of any Person which is a partnership, (1) such
partnership and any of its limited or general partners, (2) any corporation or
other business organization to which such partnership shall sell all or
substantially all of its assets or with which it shall be merged, (3) any
Affiliate of such partnership and (4) with respect to any individual identified
in clauses 1-3 above, members of his Family Group;
(b) in the case of any Person which is a corporation, (1) such
corporation, (2) any corporation or other business organization to which such
corporation shall sell or transfer all or substantially all of its assets or
with which it shall be merged, (3) any Affiliate of such corporation and (4)
with respect to any individual identified in clauses 1-3 above, members of his
Family Group; and
(c) in the case of the DLJ Entities, (1) any other DLJ Entity, (2)
any general or limited partner of any DLJ Entity, and any corporation,
partnership or other entity that is an Affiliate of any DLJ Entity
(collectively, "DLJ Affiliates"), (3) any director, general partner, limited
partner, officer or director of any DLJ Entity or any DLJ Affiliate, or any
spouse, lineal descendant, sibling, parent, ancestor, heir, executor,
administrator, testamentary trustee, legatee or beneficiary of any of the
foregoing persons described in this clause (3) (collectively, "DLJ Associates"),
(4) any trust, the beneficiaries of which, or any corporation, limited liability
company or partnership, stockholders, members or general or limited partners of
which include only the DLJ Entities, such DLJ Affiliates or DLJ Associates, and
(5) a voting trustee for one or
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more DLJ Entities, DLJ Affiliates or DLJ Associates under the terms of a voting
trust designed to conform with the requirements of the Insurance Law of the
State of New York.
"INDEPENDENT THIRD PARTY" means any Person who, immediately prior to
the contemplated transaction, individually and with its Group or Family Group,
as the case may be, does not own in excess of 10% of the Common Stock on a
fully-diluted basis.
"INSTITUTIONAL STOCKHOLDER JOINDER" means a joinder agreement,
substantially in the form of EXHIBIT B hereto, by which a person becomes an
Investor after the date hereof.
"INSTITUTIONAL STOCKHOLDER SHARES" means any Stockholder Shares held
by an Institutional Stockholder.
"INSTITUTIONAL STOCKHOLDERS" shall have the meaning set forth in the
Caption.
"INVESTMENTS" shall mean all investments, in cash or by delivery of
property made, directly or indirectly in any Person, whether by acquisition of
shares of capital stock, indebtedness or other obligations or Securities or by
loan, advance, capital contribution or otherwise; provided, however, that
"Investments" shall not mean or include routine investments in property to be
used or consumed in the ordinary course of business and accounts receivable
arising in the ordinary course of business.
"JUNIOR PREFERRED STOCK" means the Junior Preferred Stock, no par
value, of the Company.
"MANAGEMENT STOCKHOLDER" shall have the meaning set forth in the
Caption as modified by Section 12 hereof.
"MANAGEMENT STOCKHOLDER JOINDER" means a joinder agreement,
substantially in the form of EXHIBIT A hereto, by which a person shall become a
Management Stockholder after the date hereof.
"MANAGEMENT STOCKHOLDER SHARES" means any Stockholder Shares held by a
Management Stockholder.
"OFFERED SECURITIES" shall have the meaning set forth in Section 3(a).
"OTHER STOCKHOLDERS" shall have the meaning set forth in Section 2(a).
"PARTIALLY-DILUTED COMMON SHARES" means, with respect to any Person,
such Person's Common Stock plus all Common Stock issuable upon the conversion,
exercise and/or exchange of any options, warrants or other securities that are,
at the time of
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determination, immediately convertible into, or exercisable or exchangeable for
such Person's Common Stock.
"PERCENTAGE ALLOTMENT" shall have the meaning set forth in Section
3(a).
"PERMITTED TRANSFEREES" shall have the meaning set forth in Section 5.
"PERSON" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"PUBLIC OFFERING" means the sale, in an underwritten public offering
registered under the Securities Act, of shares of equity Securities, other than
any offering made in connection with a business acquisition or an employee
benefit plan, with such shares being listed on a national securities exchange or
the Nasdaq National Market System.
"PUBLIC SALE" means any sale of Stockholder Shares to the public
pursuant to an offering registered under the Securities Act or subsequent to the
Company registering any Common Stock under the Securities Act to the public
through a broker, dealer or market maker (pursuant to the provisions of Rule 144
promulgated under the Securities Act or otherwise).
"QUALIFIED HOLDER" means each Stockholder so long as such party,
together with its respective Group, owns at least 50,000 shares of Common Stock
plus Common Stock Equivalents (excluding Junior Preferred Stock) at the time of
determination (as adjusted for stock dividends, stock splits, recapitalization
and other similar events).
"QUALIFIED PUBLIC OFFERING" means a Public Offering of shares of
Common Stock having an aggregate offering value (before underwriters discount)
of at least $35 million.
"REASONABLE JUSTIFICATION" with respect to any Management Stockholder
who is employed by the Company, shall mean any voluntary termination by such
Management Stockholder of his employment with the Company within 90 days after
the occurrence of any of the following events:
(a) such Management Stockholder is directed to perform an act
that such Management Stockholder reasonably believes to be
in contravention of law, or which such Employee reasonably
believes would subject the Company and himself to material
liability, despite his
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express written objection addressed to the Board with
respect to such action;
(b) there has been any change (on other than a temporary basis)
without Employee's consent in such Management Stockholder's
title or any material reduction in the nature or scope of
his responsibilities, or such Management Stockholder is
assigned duties that are materially inconsistent with his
position (other than on a temporary basis);
(c) there is any material reduction in such Management
Stockholder's compensation or benefits (other than
reductions in benefits that generally effect all employees
entitled to such benefits ratably);
(d) such Management Stockholder is required by the Company,
after written objection by such Management Stockholder, to
relocate his principal place of employment outside a radius
of fifty miles from his place of employment immediately
prior to such relocation; or
(e) there is a material failure, after notice and an opportunity
to cure, by the Company to perform any of its obligations to
such Management Stockholder under his employment agreement
with the Company (if any); or
(f) a Sale of the Company.
"RENTALS" shall mean and include as of the date of any determination
thereof all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of the lease or surrender of the
property) payable by the Company, as lessee or sublessee under a lease of real
or personal property, but shall be exclusive of any amounts required to be paid
by the Company (whether or not designated as rents or additional rents) on
account of maintenance, repairs, insurance, taxes and similar charges.
"REPURCHASE EVENT" shall have the meaning set forth in Section 4(a).
"REPURCHASE NOTICE" shall have the meaning set forth in Section
4(a)(i).
"REPURCHASE SHARES" shall have the meaning set forth in Section
4(a)(i).
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"REQUISITE STOCKHOLDER SHARES" means at least sixty percent of the
number of outstanding shares of Common Stock other than any Common Stock issued
upon the exercise of any Bridge Warrants or options granted pursuant to the
Company's 1996 Performance Stock Option Plan or the Option Agreements dated the
date hereof between the Company and each of Larry Thomas and Marty Albertson.
In determining whether the approval of the holders of the Requisite Stockholder
Shares has been obtained, (i) all Management Stockholder Shares shall be deemed
to have voted in the same manner as that of the holders of a majority of the
Management Stockholder Shares, (ii) all Scherr Stockholder Shares shall be
deemed to have voted in the same manner as that of the holders of a majority of
the Scherr Stockholder Shares and (iii) all Institutional Stockholder Shares
shall be deemed to have voted in the same manner as that of the holders of a
majority of the Institutional Stockholder Shares.
"RESTRICTED STOCK AGREEMENTS" means those several Restricted Stock
Agreements, each dated as of the date hereof, each between the Company on the
one hand and a Management Stockholder on the other hand. Pursuant to the
Restricted Stock Agreements, each Management Stockholder that was a party to the
Purchase Agreement is acquiring shares of Junior Preferred Stock that is subject
to a substantial risk of forfeiture.
"SALE NOTICE" shall have the meaning set forth in Section 2(a).
"SALE OF THE COMPANY" means a transaction involving an Independent
Third Party or group of Independent Third Parties acting in concert pursuant to
which such party or parties acquire (i) capital stock of the Company possessing
the voting power to elect a majority of the entire Board (whether by merger,
consolidation or issuance of the Company's capital stock) or (ii) all or
substantially all of the Company's assets determined on a consolidated basis, or
(iii) 60% or more of all of the Company's Fully-diluted Common Shares.
"SCHERR STOCKHOLDER" shall have the meaning set forth in the Caption.
"SCHERR STOCKHOLDER JOINDER" means a joinder agreement, substantially
in the form of EXHIBIT D hereto, by which a Person shall become a Scherr
Stockholder after the date hereof.
"SCHERR STOCKHOLDER SHARES" means any Stockholder Shares held by a
Scherr Stockholder.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time.
"SECURITY" shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
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"SELLING GROUP" shall have the meaning set forth in Section 4(a).
"SELLING STOCKHOLDER" shall have the meaning set forth in Section
1(b).
"SENIOR PREFERRED STOCK" means the 14% Senior Preferred Stock, no par
value, of the Company.
"SMALL BUSINESS SIDELETTERS" shall have the meaning set forth in
Section 16(a).
"SPOUSAL CONSENT" shall have the meaning set forth in Section 13.
"STOCK" means, with respect to any Person, such Person's capital stock
or any options, warrants or other securities (including debt securities) that
are directly or indirectly convertible into, or exercisable or exchangeable for,
such Person's capital stock. Whenever a reference herein to Stock refers to any
derivative security, such term shall include such derivative security and all
underlying Stock directly or indirectly issuable upon conversion, exchange or
exercise of such derivative security.
"STOCKHOLDER(S)" shall have the meaning set forth in the Caption.
"STOCKHOLDER SALE AUTHORIZATION DATE" shall have the meaning set forth
in Section 1(b).
"STOCKHOLDER SALE NOTICE" shall have the meaning set forth in Section
1(b).
"STOCKHOLDER SHARES" means (i) any Common Stock or Common Stock
Equivalents purchased or otherwise acquired by any Stockholder, (ii) any Junior
Preferred Stock or warrants to acquire Junior Preferred Stock purchased or
otherwise acquired by a Stockholder, (iii) any Stock issued or issuable directly
or indirectly with respect to the Securities referred to in clauses (i) or (ii)
above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, and (iv) any other Stock of the Company held by a Stockholder;
provided that Stockholder Shares shall specifically exclude the Senior Preferred
Stock. As to any particular shares constituting Stockholder Shares, such shares
will cease to be Stockholder Shares when they have (A) been transferred in a
Public Sale, (B) ceased to be outstanding, or (C) is otherwise transferred to a
Person who is not required to become a party to this Agreement.
"SUBSIDIARY" means, with respect to any Person, any other Person of
which the securities having a majority of the ordinary
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voting power in electing the board of directors (or other governing body), at
the time as of which any determination is being made, are owned by such first
Person either directly or through one or more of its Subsidiaries.
"TAG-ALONG NOTICE" shall have the meaning set forth in Section 2(a).
"TRANSFER" shall have the meaning set forth in Section 1(a).
"UNDESIGNATED STOCKHOLDER" shall have the meaning set forth in the
caption.
"UNDESIGNATED STOCKHOLDER JOINDER" means a joinder agreement,
substantially in the form of EXHIBIT C hereto, by which a person shall become an
Undesignated Stockholder after the date hereof.
"WELLS FARGO" means Wells Fargo Small Business Investment Company,
Inc.
"WESTON PRESIDIO" means Weston Presidio Capital II, L.P.
19. GENERAL PROVISIONS.
(a) AMENDMENT; WAIVER AND RELEASE. Except as otherwise provided
herein, no modification, amendment or waiver of any provision of this Agreement
shall be effective unless such modification, amendment or waiver is approved in
writing by the Company and the holders of the Requisite Stockholder Shares;
PROVIDED, HOWEVER, that no such modification, amendment or waiver that would (x)
treat any Stockholder in a non-ratable, discriminatory manner or cause a
provision of this Agreement to become applicable to a Stockholder when such
provision was not theretofore applicable or (y) create additional obligations
(including, without limitation, the obligation to invest or contribute any
additional amounts to the Company) on the part of any Stockholder which may
adversely affect such Stockholder in any manner other than with respect to the
value of his Stockholder Shares, shall be made without the prior written consent
of such Stockholder; and PROVIDED FURTHER, HOWEVER, that no modification or
amendment shall be made to Sections 16 without the prior written approval of
CVCA and Wells Fargo. The failure of any party to enforce any of the provisions
of this Agreement shall in no way be construed as a waiver of such provisions
and shall not affect the right of such party thereafter to enforce each and
every provision of this Agreement in accordance with its terms. The
Stockholders, to the fullest extent permitted by applicable laws, release the
members of the Board from any and all claims for breach of fiduciary duty
arising out of the application of this Section 19(a).
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(b) SEVERABILITY. 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 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.
(c) ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this document and the other documents referred to herein constitute the
complete agreement and understanding among the parties hereto with respect to
the subject matter hereof and thereof 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. For
the avoidance of doubt, the parties hereby agree that the provisions of this
Agreement do not in any way affect the rights of holders of Senior Preferred
Stock as holders of Senior Preferred Stock and that the shares of Senior
Preferred Stock are not subject to this Agreement.
(d) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Stockholders and any subsequent
holders of Stockholder Shares and the respective successors and assigns of each
of them, so long as they hold Stockholder Shares. None of the provisions hereof
shall create, or be construed or deemed to create, any right of employment in
favor of any Person by the Company or any of its Subsidiaries. This Agreement
is not intended to create any third party beneficiaries.
(e) COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
(f) REMEDIES. The Company and the Stockholders shall be entitled to
enforce their rights under this Agreement specifically to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in their favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for
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any breach of the provisions of this Agreement and that the Company and any
Stockholder may in its sole discretion apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive relief
(without posting a bond or other security) in order to enforce or prevent any
violation of the provisions of this Agreement.
(g) NOTICES. All notices or other communications pursuant to this
Agreement shall be in writing and shall be deemed to be sufficient if delivered
personally, telecopied, sent by nationally-recognized, overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
if to the Company, to:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telecopier: (818) 735-4923;
with copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017
Attention: Mark Bonenfant, Esq.
Telecopier: (213) 896-0400; and
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Harvey M. Eisenberg, Esq.
Telecopier: (212) 408-2420;
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: 213-896-6600;
if to the Investors, to them at their respective addresses set
forth on Schedule I attached hereto;
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with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Harvey M. Eisenberg, Esq.
Telecopier: (212) 408-2420;
if to the Management Stockholders, to them at their respective
addresses set forth on Schedule III attached hereto;
with a copy to:
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: (213) 896-6600; and
if to the Scherr Living Trust, to it at its address on Schedule
II attached hereto;
with a copy to:
Soosman & Associates
5743 Corsa Avenue, Suite 116
Westlake Village, CA 91362
Attention: Barry Soosman, Esq.
Telecopier: (818) 597-0897
if to any DLJ Entity, to it at its address on Schedule III
attached hereto;
with a copy to:
Davis, Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr.
Telecopier: (212) 450-4800.
All such notices and other communications shall be deemed to have
been given and received (i) in the case of personal delivery, on the date of
such delivery, (ii) in the case of delivery by telecopy, on the date of such
delivery, (iii) in the case of delivery by nationally-recognized, overnight
courier, on the Business Day following dispatch, and (iv) in the case of
mailing, on the fifth Business Day following such mailing.
(h) CONSTRUCTION. Where specific language is used to clarify by
example a general statement contained herein, such specific language shall not
be deemed to modify, limit or
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restrict in any manner the construction of the general statement to which it
relates. The language used in this Agreement shall be deemed to be the language
chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party.
(i) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(j) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE 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.
(k) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(l) NOUNS AND PRONOUNS. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural and vice-versa.
(m) STOCK SPLIT. This Agreement 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 Purchase Agreement.
(n) FEES AND EXPENSES. The Company shall pay all of the reasonable
legal fees and disbursements of Sidley & Austin, and O'Sullivan Graev & Karabell
LLP invoiced in connection with the negotiation and execution of the Purchase
Agreement, this Stockholders Agreement and each of the agreements and
instruments contemplated by the Purchase Agreement and this Stockholders
Agreement. The Company shall pay all of the reasonable legal fees and
disbursements of Bucholter, Nemer, Fields and Younger invoiced in connection
with the negotiation and execution of any agreements or offering documents to be
entered into by the Company to finance the transactions contemplated by the
Purchase Agreement.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement on the day and year first above written.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ LARRY E. THOMAS
_____________________________
Name: Lawrence Thomas
Title: President
CHASE VENTURE CAPITAL
ASSOCIATES, L.P.
By: Chase Capital Partners
Its General Partners
By: /s/ DAVID FERGUSON
_____________________________
A General Partner
CB CAPITAL INVESTORS, INC.
By: /s/ DAVID FERGUSON
_____________________________
Name: David Ferguson
Title: Authorized Signatory
WELLS FARGO SMALL BUSINESS
INVESTMENT COMPANY, INC.
By: /s/ STEVEN BURGE
_____________________________
Steven Burge
Managing Director
WESTON PRESIDIO CAPITAL II, L.P.
By: Weston Presidio Capital
Management II, L.P.,
Its General Partner
By: /s/ MICHAEL LAZARUS
_____________________________
Michael P. Lazarus
General Partner
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DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ MERCHANT BANKING, INC.
Managing General Partner
By: /s/ DAVID B. WILSON
_____________________________
Name: David B. Wilson
Title: Senior Vice President
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/ DAVID B. WILSON
_____________________________
Name: David B. Wilson
Title: Senior Vice President
DLJ INTERNATIONAL PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ DAVID B. WILSON
_____________________________
Name: David B. Wilson
Title: Senior Vice President
DLJ OFFSHORE PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ DAVID B. WILSON
_____________________________
Name: David B. Wilson
Title: Senior Vice President
SCHERR LIVING TRUST
/s/ RAY SCHERR
________________________________
By: Ray Scherr, Trustee
/s/ RICH PIDANICK
________________________________
Rich Pidanick
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/s/ LARRY THOMAS
________________________________
Larry Thomas
/s/ DON KELSEY
________________________________
Don Kelsey
/s/ MARTY ALBERTSON
________________________________
Marty Albertson
/s/ GEORGE LAMPOS
________________________________
George Lampos
/s/ DAVE DIMARTINO
________________________________
Dave DiMartino
/s/ BILL MCGARRY
________________________________
Bill McGarry
/s/ ROD BARGER
________________________________
Rod Barger
/s/ ANDY HENEMAN
________________________________
Andy Heyneman
<PAGE>
AGREEMENT
BY AND AMONG
THE STOCKHOLDERS NAMED HEREIN,
THE GUITAR CENTER MANAGEMENT COMPANY, INC.
AS THE COMPANY
AND
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
WESTON PRESIDIO CAPITAL II, L.P.
WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.
AS BUYERS
DATED: MAY 1, 1996
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TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Interpretation. . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE II THE RECAPITALIZATION. . . . . . . . . . . . . . . . . . . . 10
2.1 Generally . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2 Transactions. . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.4 Certain Other Actions . . . . . . . . . . . . . . . . . . . 12
2.5 Further Assurances. . . . . . . . . . . . . . . . . . . . . 12
ARTICLE III CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.1 The Closing . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Documents to be Delivered . . . . . . . . . . . . . . . . . 13
3.3 Cancellation of Redeemed Stock. . . . . . . . . . . . . . . 13
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY TO BUYER. . . 14
4.1 Organization of the Company . . . . . . . . . . . . . . . . 14
4.2 Authorization; Enforceability . . . . . . . . . . . . . . . 14
4.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . 15
4.4 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 15
4.5 Absence of Certain Changes or Events. . . . . . . . . . . . 15
4.6 Real Property . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Owned Real Property. . . . . . . . . . . . . . . . . . 17
(b) Leased Real Property . . . . . . . . . . . . . . . . . 17
(c) Subleases. . . . . . . . . . . . . . . . . . . . . . . 17
4.7 Title to Assets . . . . . . . . . . . . . . . . . . . . . . 17
4.8 Contracts and Commitments . . . . . . . . . . . . . . . . . 17
4.9 No Conflict or Violation. . . . . . . . . . . . . . . . . . 19
4.10 Governmental Consents and Approvals . . . . . . . . . . . . 20
4.11 Financial Statements. . . . . . . . . . . . . . . . . . . . 20
4.12 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 20
4.13 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 20
4.14 Compliance with Law . . . . . . . . . . . . . . . . . . . . 21
4.15 No Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 21
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4.16 Proprietary Rights. . . . . . . . . . . . . . . . . . . . . 21
4.17 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . 22
(a) Disclosure, Delivery of Copies of Relevant Documents
and Other Information. . . . . . . . . . . . . . . . . 22
4.18 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Filing of Tax Returns. . . . . . . . . . . . . . . . . 24
(b) Payment of Taxes.. . . . . . . . . . . . . . . . . . . 24
(c) Audit History. . . . . . . . . . . . . . . . . . . . . 24
(d) S Corporation Status . . . . . . . . . . . . . . . . . 24
(e) Golden Parachutes. . . . . . . . . . . . . . . . . . . 24
(f) Elections. . . . . . . . . . . . . . . . . . . . . . . 24
4.19 Severance Arrangements. . . . . . . . . . . . . . . . . . . 25
4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.21 Compliance With Environmental Laws. . . . . . . . . . . . . 25
4.22 Transactions with Affiliates. . . . . . . . . . . . . . . . 26
4.23 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 26
4.24 Licenses and Permits. . . . . . . . . . . . . . . . . . . . 27
4.25 Banking Relationships; Powers of Attorney . . . . . . . . . 27
4.26 Conflicts of Interest . . . . . . . . . . . . . . . . . . . 28
4.27 Intentional Misinformation. . . . . . . . . . . . . . . . . 28
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYERS TO THE COMPANY . . 28
5.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . 28
5.2 Authorization: Enforceability . . . . . . . . . . . . . . . 28
5.3 No Conflict or Violation. . . . . . . . . . . . . . . . . . 29
5.4 Governmental Consents and Approvals . . . . . . . . . . . . 29
5.5 No Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 29
5.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 29
5.7 Purchase Entirely for Own Account . . . . . . . . . . . . . 29
5.8 Disclosure of Information . . . . . . . . . . . . . . . . . 30
5.9 Investment Experience . . . . . . . . . . . . . . . . . . . 30
5.10 Understanding of Risks. . . . . . . . . . . . . . . . . . . 30
5.11 Accredited Investor . . . . . . . . . . . . . . . . . . . . 30
5.12 Restricted Securities . . . . . . . . . . . . . . . . . . . 30
5.13 Funds Available . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VI INTENTIONALLY LEFT BLANK. . . . . . . . . . . . . . . . . . 31
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS TO THE
COMPANY AND THE BUYERS. . . . . . . . . . . . . . . . . . . 31
7.1 Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . 31
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7.2 Ownership of Securities . . . . . . . . . . . . . . . . . . 31
7.3 Governmental Consents and Approvals . . . . . . . . . . . . 32
7.4 No Conflict or Violation. . . . . . . . . . . . . . . . . . 32
7.5 No Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 32
7.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 32
7.7 Purchase Entirely for Own Account . . . . . . . . . . . . . 32
7.8 Disclosure of Information . . . . . . . . . . . . . . . . . 33
7.9 Investment Experience . . . . . . . . . . . . . . . . . . . 33
7.10 Understanding of Risks. . . . . . . . . . . . . . . . . . . 33
7.11 Restricted Securities . . . . . . . . . . . . . . . . . . . 33
ARTICLE VIII ACTIONS BY STOCKHOLDERS, THE COMPANY AND BUYER. . . . . . . 33
8.1 Maintenance of Business Prior to Closing. . . . . . . . . . 33
8.2 Access to Properties and Records. . . . . . . . . . . . . . 35
8.3 Consents, Etc.. . . . . . . . . . . . . . . . . . . . . . . 35
8.4 Notification of Certain Matters . . . . . . . . . . . . . . 35
8.5 Access by Stockholders to Information . . . . . . . . . . . 35
8.6 Legend. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.7 Negotiation with Others . . . . . . . . . . . . . . . . . . 36
8.8 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.9 Recapitalization Accounting . . . . . . . . . . . . . . . . 36
8.10 Tax-Related Matters . . . . . . . . . . . . . . . . . . . . 37
8.11 Termination of Affiliate Transactions . . . . . . . . . . . 37
8.12 Non-Compete and Non-Solicitation. . . . . . . . . . . . . . 37
8.13 Confidential Information. . . . . . . . . . . . . . . . . . 38
8.14 Other Actions Prior to Closing. . . . . . . . . . . . . . . 39
ARTICLE IX CONDITIONS TO THE CLOSING . . . . . . . . . . . . . . . . . 40
9.1 Conditions to the Purchase. . . . . . . . . . . . . . . . . 40
(a) Conditions to the Company's Obligations. . . . . . . . 40
(b) Conditions to Buyer's Obligations. . . . . . . . . . . 41
9.2 Conditions to the Redemption. . . . . . . . . . . . . . . . 44
(a) Conditions to the Company's Obligations. . . . . . . . 44
(b) Conditions to Stockholders' Obligations. . . . . . . . 45
ARTICLE X INDEMNIFICATION AND RELATED MATTERS . . . . . . . . . . . . 46
10.1 Survival of Representations, Etc. . . . . . . . . . . . . . 46
10.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . 46
(a) Indemnification Related to the Purchase. . . . . . . . 46
(b) Indemnification Related to the Redemption. . . . . . . 48
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10.3 Procedures. . . . . . . . . . . . . . . . . . . . . . . . . 49
10.4 Exclusive Rights and Remedies . . . . . . . . . . . . . . . 51
10.5 No Contribution From Company. . . . . . . . . . . . . . . . 51
10.6 Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 52
11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . 52
11.2 Effect of Termination . . . . . . . . . . . . . . . . . . . 52
11.3 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . 53
11.4 Notices, Transfer of Funds. . . . . . . . . . . . . . . . . 54
11.5 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . 55
11.6 Entire Agreement, Amendments and Waivers. . . . . . . . . . 56
11.7 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 56
11.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . 56
11.9 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 57
11.10 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 57
11.11 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . 57
11.12 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . 57
11.13 Parties in Interest . . . . . . . . . . . . . . . . . . . . 58
11.14 WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . 58
11.15 Independence of Covenants and Representations and
Warranties. . . . . . . . . . . . . . . . . . . . . . . . . 58
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<PAGE>
AGREEMENT
This Agreement (this "Agreement"), dated as of May 1, 1996,
is by and among Chase Venture Capital Associates, L.P., Weston Presidio
Capital II, L.P. and Wells Fargo Small Business Investment Company, Inc.
(each as "Buyer" and collectively, the "Buyers"), The Guitar Center
Management Company, Inc., a California corporation (the "Company"), and each
of the stockholders and/or holders of options set forth on the signature
pages hereof (collectively, "Stockholders").
RECITALS
A. Buyers desires to purchase from the Company certain shares of
Common Stock, no par value (the "Common Stock") and Preferred Stock, and the
Company desires to issue and sell such Purchased Stock to Buyers, subject to the
terms and conditions set forth in this Agreement.
B. Upon the consummation of the Purchase, the Company desires to
redeem from a certain Stockholder shares of Common Stock in exchange for cash,
and from other Stockholders the Company desires to settle outstanding options
for a cash payment, and Stockholders desire redemption of the Redeemed Stock
subject to the terms and the conditions set forth in this Agreement.
C. The parties desire that the Purchase and Redemption be treated as
a recapitalization for purposes of financial accounting.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
ARTICLE I
DEFINITIONS
1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings:
"Affiliate" means, with respect to any Person, (i) a director, officer
or stockholder of such Person or any Person identified in clause (iii) below,
(ii) a spouse, parent, sibling or descendant of such Person (or spouse, parent,
sibling or descendant of any director or executive officer of such Person), and
(iii) any other Person that, directly or
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indirectly through one or more intermediaries, Controls, or is Controlled by, or
is under common Control with, such Person.
"Ancillary Documents" means Amendment to the Company's Articles of
Incorporation creating the Preferred Stock, the Restricted Stock Plan, the
Shareholders' Agreement, Registration Rights Agreement, Employment Agreements,
Stock Option Plan, Senior Management Stock Option Plan, and Cash Bonus Plan
described on Exhibit B hereto.
"Assets" shall mean all assets of the Company reflected on the Interim
Balance Sheet plus (i) all additions thereto and replacements thereof after the
Interim Balance Sheet Date less (ii) all deletions therefrom in the ordinary
course of business consistent with past practices, all of which deletions have
been set forth on Schedule 1.1.
"Business" means the retail sale of guitars, keyboards, percussions,
pro-audio equipment and related accessories.
"Cancelled Securities" shall have the meaning ascribed to it in
Section 2.2.
"Capital Expenditure Plan" shall have the meaning ascribed to it in
Section 4.5.
"Cash-on-Hand" shall mean on the close of business on the business day
immediately preceding the day of Closing (i) cash less the sum of all insurance,
condemnation or other proceeds received by the Company subsequent to the date of
the Interim Balance Sheet in connection with the casualty, loss, theft, damage
or condemnation of any of the Company's Assets, (ii) the aggregate amount of all
checks payable to the Company that are in the Company's possession, less the
aggregate amount of all checks payable by the Company that are outstanding on
the Closing Date, and (iii) whether held directly or through mutual funds or
managed asset accounts: (A) securities of the United States Treasury, (B)
securities issued or guaranteed by a United States government corporation or
agency, (C) certificates of deposit with any banking institution which is
insured by the Federal Deposit Insurance Corporation, and (D) obligations of
states and of local political subdivisions, the interest on which is exempt from
federal income taxation.
"Closings" shall mean the Recapitalization Closing, Purchase Closing
and Redemption Closing.
"Closing Date" shall mean the close of business on June 10, 1996, or
such other date as may be mutually agreed upon in writing by majority in
interest of Stockholders, the Company and Buyer.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
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"Common Stock" shall have the meaning ascribed to it in the Recitals
hereto.
"Confidentiality Agreement" shall mean that certain confidentiality
agreement, dated March 15, 1996, between Chase Capital Partners and Smith Barney
Inc., as agent for Stockholders and the Company.
"Contracts" shall have the meaning ascribed to it in Section 4.8.
"Control" means, with respect to any Person, the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Debt Instruments" shall have the meaning ascribed to it in Section
9.1(b)(ix).
"Disclosure Schedule" shall mean a schedule executed and delivered by
the Company to Buyer on or prior to the date hereof that sets forth exceptions
to certain representations and warranties contained in Article IV and certain
other information called for by the provisions of this Agreement. Inclusion of
information on such Disclosure Schedule shall not be construed as an admission
that such information is material in respect of the Company except as and to the
extent provided in this Agreement. Unless otherwise specified, each reference
in the Agreement to any numbered schedule is a reference to that numbered
schedule that is included in the Disclosure Schedule. Any disclosure made in
any particular numbered schedule of the Disclosure Schedule shall be deemed made
in any other numbered schedule of the Disclosure Schedule, if on the face of
such disclosure it would be reasonably presumed to apply to both such numbered
schedules.
"Employee Plan" means any "employee benefit plan" (as defined in
Section 3(3) of ERISA) as well as any other plan, program or arrangement
involving direct and indirect compensation, under which the Company or any ERISA
Affiliate of the Company has any present or future obligations or liability on
behalf of its employees or former employees, contractual employees or their
dependents or beneficiaries.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right of way, encumbrance,
right of first refusal or other right of third parties.
"Environmental Claims" shall mean all written notices of violations,
Encumbrances, written claims, written demands, suits, or causes of action for
any damage arising directly or indirectly out of Environmental Conditions or
Environmental Laws.
"Environmental Conditions" shall mean the state of the environment,
including natural resources, soil, surface water, ground water, any present or
potential
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drinking water supply, subsurface strata or ambient air, relating to or arising
out of the direct use, handling, storage, treatment, recycling, generation,
transportation or release of Hazardous Substances by the Company.
"Environmental Laws" shall mean all Laws, all common law concerning,
and all orders, consent orders, judgments, notices, permits or demand letters
issued, promulgated or entered pursuant thereto, relating to pollution or
protection of the environment including, without limitation, all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, including, but not
limited to, the Solid Waste Disposal Act, as amended, 42 U.S.C. Sections 6901,
ET SEQ. ("SWDA"), the Clean Air Act, as amended, 42 U.S.C. Sections 7401 ET
SEQ., the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sections
1251 ET SEQ., the Emergency Planing and Community Right-to-Know Act, 42 U.S.C.
Sections 11001 ET SEQ., the Comprehensive Environmental Response, Compensation,
and Liability Act, as amended, 42 U.S.C. Sections 9601 ET SEQ. ("CERCLA"), the
Hazardous Materials Transportation Uniform Safety Act, as amended, 49 U.S.C.
Section 1804 ET SEQ., the Occupational Safety and Health Act of 1970, and the
regulations promulgated thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" means, with respect to any Person, any entity that
is a member of a "controlled group of corporations" with, or is under "common
control" with, or is a member of the same "affiliated service group" with such
Person as defined in Section 414(b), 414(c) or 414(m) of the Code.
"Financial Statements" shall mean the audited financial statements of
the Company at, and for the fiscal periods ended, December 31, 1995, 1994 and
1993, together with the notes thereto, and the related report of Ernst & Young,
LLP, the Company's certified public accountants, previously delivered to Buyers.
"Funded Indebtedness" means, without duplication the aggregate amount
(including the current portions thereof) of all (i) indebtedness for money
borrowed from others, purchase money indebtedness, and capitalized lease
obligations (other than accounts payable in the ordinary course); (ii)
indebtedness of the type described in clause (i) above guaranteed, directly or
indirectly, in any manner by the Company or in effect guaranteed, directly or
indirectly, in any manner by the Company through an agreement, contingent or
otherwise, to supply funds to, or in any other manner invest in, the debtor, or
to purchase indebtedness, or to purchase and pay for property if not delivered
or pay for services if not performed, primarily for the purpose of enabling the
debtor to make payment of the indebtedness or to assure the owners of the
indebtedness against loss, but excluding
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endorsements of checks and other instruments in the ordinary course; (iii)
indebtedness of the type described in clause (i) above secured by any
Encumbrance upon property owned by the Company even though the Company has not
in any manner become liable for the payment of such indebtedness; (iv) interest
expense accrued but unpaid, all prepayment premiums, and all fees, expenses and
other penalties payable on or relating to any of such indebtedness; and (v)
other amounts payable pursuant to the Debt Instruments.
"GAAP" shall mean generally accepted accounting principles in the
United States, as in effect from time to time, consistently applied.
"Governmental Authority" shall mean any federal, state, local or
foreign government, authority, instrumentality, department, commission, board,
bureau, agency or court.
"Hazardous Substances" shall mean all petroleum products and
by-products, pollutants, contaminants, chemicals, wastes and any other hazardous
substances or materials (including, without limitation, asbestos-containing
material in any form or condition and materials or equipment containing
polychlorinated biphenyls) subject to regulation, control or remediation under
Environmental Laws.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Indemnification Claim" shall have the meaning ascribed to it in
Section 10.3(a).
"Interim Balance Sheet" shall have the meaning ascribed to it in
Section 4.11.
"Interim Balance Sheet Date" shall have the meaning ascribed to it in
Section 4.11.
"Interim Financial Statements" shall have the meaning ascribed to it
in Section 4.11.
"IRS" shall mean the Internal Revenue Service.
"Leased Real Property" shall have the meaning ascribed to it in
Section 4.6(b).
"Liability" shall have the meaning ascribed to it in Section 4.13.
"Losses" means any and all losses, claims, shortages, damages,
Liabilities, expenses (including reasonable attorneys' and accountants' and
other professionals' fees),
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assessments, and Taxes arising from or in connection with any such matter that
is the subject of indemnification under Article X. The parties acknowledge that
in certain events a representation, warranty or covenant of the Company or a
Stockholder may be breached hereunder that may not entail an actual "Loss" (as
defined in the previous sentence) suffered by the Company. Accordingly, for
purposes of the indemnification obligations of the Stockholders under Article X,
"Losses" suffered, sustained or incurred by either any Buyer or the Company
shall be deemed to include the amount that could be recovered by a hypothetical
purchaser of all of the outstanding capital stock of the Company that had
purchased such stock in reliance on such representations, warranties and
covenants (which Losses would include a diminution in value of the Company from
that which it otherwise would be if no such breach of a representation, warranty
or covenant had occurred.)
"Material Adverse Effect" shall mean (i) with respect to an
occurrence, event or circumstance which has or would reasonably be likely to
have a material adverse effect on the Company's business, operations, assets,
liabilities, results of operation and financial condition when taken as a whole
(other than as a result of changes in Laws of general applicability or general
economic conditions) or (ii) the Company losing Larry Thomas, or Marty Albertson
as full-time employees for any reason.
"Option Holders" shall have the meaning ascribed to it in Section 2.1.
"Owned Real Property" shall have the meaning ascribed to it in Section
4.6(a).
"Person" shall be construed broadly and shall include any individual,
corporation, association, partnership, joint venture or other entity,
organization or Governmental Authority.
"Permitted Encumbrances" shall mean (i) liens for Taxes or assessments
and similar charges either (a) not yet due and payable or (b) contested in good
faith by appropriate proceedings and as to which the Company shall have set
aside on its books adequate reserves and which have been disclosed in writing to
Buyers or are set forth on the Financial Statements or the Interim Balance
Sheet, (ii) statutory liens of landlords, (iii) liens imposed by law, such as
liens of mechanics, carriers, warehousemen, materialmen and vendors, incurred in
the ordinary course of business for sums that are either (a) not yet delinquent
or (b) that are being contested in good faith by appropriate proceedings or with
respect to which arrangements for payment and/or release have been made and
which have been disclosed in writing to Buyers or are set forth on the Financial
Statements or the Interim Balance Sheet; (iv) liens incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, performance and return-of-money bonds and other similar obligations, (v)
any interest or title of a lessor under any lease, (vi) easements,
rights-of-way, encroachments or other restrictions with respect to Real
Property, in each case, that do not
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materially prevent or interfere with the Assets from being used for the purpose
for which they are currently being used or materially impair their value, and
(vii) Encumbrances that secure the payment of any Funded Indebtedness of the
Company.
"Personnel" shall mean all officers, employees and agents (i) of the
Company, or (ii) employed or retained by the Company.
"Per Share Value" means the value of each share of Common Stock of the
Company as of the Closing, which value shall equal the result of the quotient of
(a) (x) $251 million LESS (y) the sum of all Funded Indebtedness as of the
Closing PLUS the amount by which Cash-On-Hand as of the Closing is less than
zero PLUS all Transaction Expenses, DIVIDED BY (b) 2,214,074.
"Preferred Stock" means the new class of 8% Junior Preferred Stock to
be issued by the Company at Closing, with the terms, preferences and other
rights summarized on Exhibit B hereto.
"Prior Property" shall have the meaning ascribed to it in Section
4.21.
"Proprietary Rights" means all industrial and intellectual property
rights, including, without limitation, patents, patent applications, patent
rights, trademarks, trademark applications, trade names, service marks, service
mark applications, copyrights, copyright applications, know-how, trade secrets,
proprietary processes and formulae, confidential information, franchises,
licenses, inventions, instructions, marketing materials, trade dress, logos and
designs and all documentation and media constituting, describing or relating to
the foregoing, including, without limitation, manuals, memoranda and records.
"Pro Rata Portion" shall have the meaning ascribed to it in Section
10.2(a)(i)(B).
"Purchase" shall have the meaning ascribed to it in the Section 2.2
hereto.
"Purchase Closing" shall mean the closing of the Purchase.
"Purchased Stock" shall have the meaning ascribed to it in Section 2.2
hereto.
"Recapitalization" shall have the meaning ascribed to it in Section
2.2 hereof.
"Recapitalization Closing" shall mean the closing of the
Recapitalization.
"Recapitalization Securities" shall have the meaning ascribed to it in
Section 2.1.
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"Redeemed Stock" shall have the meaning ascribed to it in Section 2.2
hereto.
"Redemption" shall have the meaning ascribed to it in Section 2.2
hereto.
"Redemption Closing" shall mean the closing of the Redemption.
"Representations and Warranties" shall have the meaning ascribed to it
in Section 10.1.
"Representative" shall mean any officer, director, partner, principal,
attorney, agent, employee or other representative of any Person acting as such.
"SBA Letters" means the letter agreements between Company and each of
Chase Venture Capital Partners, L.P., and Wells Fargo Small Business Investment
Company, Inc., dated as of the date hereof, and attached hereto as Exhibits A-1
and A-2.
"Securities Act" shall have the meaning ascribed to it in Section 5.7.
"Smith Barney Engagement Letter" shall have the meaning ascribed to it
in Section 4.15.
"Stock Option Plan" shall mean that certain Amended and Restated 1987
Stock Option Plan, dated October 31, 1992.
"Stock Purchase Agreements" means the several stock purchase
agreements between the Company on the one hand and each holder of Company
options on the other hand relating to the disposition of such options and the
Common Stock issuable upon the exercise of such options.
"Subsidiary" of any Person shall mean a corporation of which a
majority of the outstanding voting securities is owned by such Person, by one or
more Subsidiaries of such Person or by such Person and/or one or more of its
Subsidiaries.
"Tax" or "Taxes" shall mean with respect to any Person (a) all
federal, state, local, foreign and other taxes, assessments and other government
charges, including, without limitation, income (whether gross or net), estimated
income, business, occupation, franchise, property, sales, transfer, use,
employment, commercial rent, gross receipts, ad valorem, license, excise,
severance, stamp, pay-roll, premium, windfall or withholding taxes, including
interest, penalties and additions in connection therewith for which such Person
may be liable and (b) any liability for the payment of any amount of the type
described in the immediately preceding clause (a) as a result of being a
"transferee" (within the meaning of the Section 6901 of the Code or any other
applicable law) of another entity or a member of an affiliated or combined
group.
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"Third Party Claim" shall have the meaning ascribed to it in
Section 10.3(b).
"Transaction Expenses" means all out-of-pocket fees and expenses
incurred or otherwise payable by the Company as a result of the transactions
contemplated hereby (other than fees and expenses of the Buyers or Option
Holders payable by the Company pursuant to Section 11.10 and the fees and
expenses incurred in connection with any financing necessary to complete the
Redemption), including investment banking, legal and accounting. Transaction
Expenses shall not include any salary expenses of the Company's officers or
employees.
"Trust" shall have the meaning ascribed to it in Section 2.1.
1.2 INTERPRETATION. Accounting terms used but not otherwise defined
herein shall have the meanings given to them under GAAP. As used in this
Agreement (including all exhibits, schedules and amendments hereto), the
masculine, feminine or neuter gender and the singular or plural number shall be
deemed to include the others whenever the context so requires. References to
Sections and Articles refer to sections and articles of this Agreement, unless
the context otherwise requires. Words such as "herein," "hereinafter,"
"hereof," "hereto," "hereby" and "hereunder," and words of like import, unless
the context requires otherwise, refer to this Agreement. The captions contained
herein are for convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement. The words "include,"
"includes" and "including" are deemed to be followed by the phrase "without
limitation." Unless expressly provided otherwise, the measure of a period of
one month or year for purposes of this Agreement shall be that date of the
following month or year corresponding to the starting date, provided that if no
corresponding date exists, the measure shall be that date of the following month
or year corresponding to the next day following the starting date. For example,
one month following February 18th is March 18th, and one month following March
31 is May 1.
ARTICLE II
THE RECAPITALIZATION
2.1 GENERALLY. The Buyers, the Raymond Scherr Living Trust (the
"Trust") and the Stockholders of the Company other than the Trust (the "Option
Holders") desire to recapitalize the Company to redeem certain shares of Common
Stock owned by the Trust, authorize and issue certain additional classes and
shares of capital stock and cancel and settle options for Common Stock, such
that immediately after Closings the outstanding capital stock of the Company to
be held by the Buyers and the Stockholders (the "Recapitalization Securities")
shall consist solely of (x) 1,386,000 shares of Preferred Stock with an
aggregate liquidation preference of $138,600,000 ($100/share) and (y) 14,000
shares of Common Stock with an aggregate value of $1,400,000 ($100.00/share).
Immediately following the Closings, the Recapitalization Securities will be (a)
the only outstanding
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capital stock, or securities convertible or exercisable for shares of capital
stock, other than the senior preferred stock and warrants to be issued in
connection with the financing of the transaction contemplated herein and the
management stock options described on Exhibit B hereof and (b) held solely by
the Buyers, the Trust and Option Holders in the amounts reflected on Schedule
2.1 hereof.
2.2 TRANSACTIONS. At the Closings, the following transactions shall
occur in the following order:
(a) At the Recapitalization Closing, each of the Option Holders
shall purchase from the Company that number of shares of Common Stock set forth
opposite its name on Schedule 2.1 hereof for a purchase price in cash of $100.00
per share.
(b) At the Recapitalization Closing, each of the Option Holders
shall acquire that number of shares of Preferred Stock listed opposite his name
on Schedule 2.1 hereof in exchange for the cancellation of options exercisable
for an equal number of shares of Common Stock. Such shares of Preferred Stock
at all times from and after the Recapitalization Closing will be subject to the
Restricted Stock Agreement described on Exhibit B. The aggregate number of
shares of Preferred Stock to be acquired, and options to be exchanged, pursuant
to this Section 2.2(b) is 495,000.
(c) At the Recapitalization Closing, the Trust shall exchange
198,000 shares of Common Stock currently held by it for 198,000 shares of
Preferred Stock.
(d) At the Purchase Closing, each Buyer shall purchase from the
Company that number of shares of Common Stock and Preferred Stock listed
opposite its name on Schedule 2.1 for a purchase price in cash per share of
$100.00 for Preferred Stock and $100.00 for Common Stock.
(e) At the Redemption Closing, the Company shall redeem from the
Trust 1,200,000 shares of Common Stock for cash. The cash consideration payable
to the Trust for such redeemed Common Stock shall equal (x) 1,400,000 multiplied
by the Per Share Value, MINUS (y) $20,000,000.
(f) At the Redemption Closing the Company and each of the Option
Holders shall cancel the balance of the options (i.e. 319,074) to acquire Common
Stock held by the Option Holders in consideration of a payment in cash to such
Option Holders equal to (x) the product of the number of shares of all Common
Stock issuable upon the exercise of all options held by such Option Holder on
the date hereof (before giving effect to subdivision (b) hereof) multiplied by
the Per Share Value (it being understood that the aggregate number of option
shares for all Option Holders pursuant to this clause (x) will be equal to
814,074), MINUS (y) the value of the Preferred Stock (valued at $100.00/share)
acquired by such Option Holder pursuant to Section 2.2(b) above.
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(g) The transactions contemplated by Sections 2.2(a), (b) and
(c) above are sometimes referred to herein as the "Recapitalization." The
transactions contemplated in Section 2.2(d) above are sometimes referred to
herein as the "Purchase" and the shares of Common Stock and Preferred Stock
being acquired by the Buyers and the Option Holders are sometimes referred to
herein as the "Purchased Stock." The transactions contemplated in Sections
2.2(e) and (f) are sometimes referred to herein as the "Redemption". The shares
of Common Stock being acquired by the Company pursuant to Sections 2.2(c) and
(e), and the options being exchanged or settled pursuant to Sections 2.2(b) or
(f) are referred to herein as the "Cancelled Securities." The shares of Common
Stock being acquired by the Company pursuant to Section 2.2(e) and the options
being settled pursuant to Section 2.2(f) are referred to herein as the "Redeemed
Stock."
2.3 PAYMENTS.
(a) Each Buyer shall pay to the Company, in consideration for
the Purchased Stock being acquired by it in the Purchase, the aggregate amount
set forth opposite such Buyer's name on Schedule 2.1 hereof.
(b) Each Option Holder shall pay to the Company, in
consideration of the Common Stock being acquired by such Option Holder pursuant
to Section 2.1(d), an aggregate amount equal to the number of shares of Common
Stock acquired by such Option Holder multiplied by $100.00.
(c) The Company shall pay to each Stockholder the amounts
determined by reference to Sections 2.2(e) and 2.2(f) in consideration for the
Redeemed Stock being transferred to the Company by such Stockholder. The
Company shall withhold the minimum amount of all Taxes required to be withheld
by the Company from the amounts payable to any Option Holder with respect to his
Redeemed Stock.
(d) All payments pursuant to this Section 2.3 shall be payable
by wire transfer of immediately available funds to an account of the recipient
within the United States designated in writing by such recipient at least 5 days
prior to the Closing.
2.4 CERTAIN OTHER ACTIONS.
(a) Prior to Closings, the Company shall amend its articles of
organization to increase its authorized shares of Common Stock to 5,000,000 and
create 2,000,000 authorized shares of Preferred Stock plus such additional
classes of stock required to complete the financing contemplated by this
Agreement. The Trust shall take all actions reasonably requested by the Company
to permit the Company to authorize such amendment to its articles of
organization.
(b) Subject only to receipt of the payments specified in
Sections 2.3(a) and 2.3(b) above, the Company shall cause all of the Common
Stock and
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Preferred Stock to be acquired by the Buyers and the Stockholders pursuant to
the Recapitalization and Purchase to be duly authorized, validly issued, fully
paid and non-assessable, and free of all Encumbrances (other than transfer
restrictions pursuant to the Securities Act and applicable blue-sky laws and
Encumbrances pursuant to the Ancillary Documents).
(c) Prior to Closings, each Stockholder shall not sell, assign,
exercise, transfer, or Encumber the Common Stock or options to acquire Common
Stock held by such Stockholder.
2.5 FURTHER ASSURANCES.
(i) The Company shall, at any time after the Closings, upon the
request of any Buyer and at such Buyer's expense, do, execute, acknowledge and
deliver, and cause to be done, executed, acknowledged and delivered, all such
further acts, deeds, assignments, transfers, conveyances, powers of attorney or
assurances as may be reasonably required to transfer, covey, grant and confirm
to and vest in such Buyer good title to all of the Purchase Stock, free and
clear of all Encumbrances (other than transfer restrictions imposed by the
Securities Act and comparable state blue sky laws).
(ii) The Stockholders shall, at any time after the Closings, upon
the request of the Company and at the Company's expense, do, execute,
acknowledge and deliver, and cause to be done, executed, acknowledged and
delivered, all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney or assurances as may be reasonably required to transfer,
convey, grant and confirm to and vest in the Company good title to all of the
Cancelled Securities, free and clear of all Encumbrances (other than transfer
restrictions imposed by the Securities Act and comparable state blue sky laws).
ARTICLE III
CLOSING
3.1 THE CLOSING. The Closings shall be held at 9:00 a.m. local time
on the Closing Date at the offices of Buchalter, Nemer, Fields & Younger, a
Professional Corporation, 601 South Figueroa Street, Suite 2400, Los Angeles, CA
90017-5704, unless the parties hereto otherwise mutually agree in writing.
3.2 DOCUMENTS TO BE DELIVERED. To effect the transactions referred
to in Article II and the delivery of the consideration described in Section 2.2,
Stockholders, the Company and the Buyers shall, at the Closings, cause the
following to occur:
(a) Each Stockholder shall deliver or cause to be delivered to
the Company certificates (or acknowledgements of option cancellations)
evidencing the number
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of shares of Cancelled Securities to be sold, exchanged or cancelled by such
Stockholder with appropriate stock powers duly executed.
(b) Each Buyer and Option Holder shall transfer to the Company
the consideration payable by such Person in immediately available funds as
provided in Section 2.3.
(c) The Company shall issue and deliver to each of the Buyers
and Stockholders certificates evidencing the shares of Recapitalization
Securities acquired by such Person.
(d) The Company shall transfer to each Stockholder by wire
transfer of immediately available funds the consideration payable to such
Stockholder for his Redeemed Stock as provided in Section 2.3.
(e) The Buyers, the Company and Stockholders shall each deliver
all other documents and instruments required to be delivered pursuant to
Article IX.
All documents and instruments executed and delivered to any party
pursuant hereto shall be in form and substance, and shall be executed in a
manner, reasonably satisfactory to such party and its counsel.
3.3 CANCELLATION OF REDEEMED STOCK. Upon the consummation of the
Recapitalization and Redemption by the Company, the Cancelled Securities shall,
at the option of the Company, be treated as treasury stock or retired.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY TO BUYER
Except as set forth in the Disclosure Schedule previously delivered to
Buyers, a copy of which is attached hereto, the Company represents and warrants
to Buyers as follows:
4.1 ORGANIZATION OF THE COMPANY. The Company is a corporation duly
organized, validly existing and, in good standing under the laws of the State of
California and has the corporate power to conduct its business as it is
presently being conducted and to own and lease the Assets. The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction set forth on Schedule 4.1, such jurisdictions being all
jurisdictions in which such qualification is necessary because of the nature of
the business conducted, and assets owned or leased, by the Company, except where
failure to qualify would have a Material Adverse Effect. The Company has
delivered to each of the Buyers true and correct copies of the certificate of
incorporation and by-laws of the
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Company (in each case, as amended to date). The Company is currently engaged
solely in the Business. Except as described on Schedule 4.1, in the prior ten
(10) years the Company has never engaged in any Business except the Business.
The only trade names, assumed names or other names under which Encumbrances upon
the Company's Assets could have been properly recorded within the last six years
are set forth on Schedule 4.1.
4.2 AUTHORIZATION; ENFORCEABILITY.
(a) The Company has the corporate power to execute and deliver
this Agreement, and to perform its obligations hereunder.
(b) The Company has duly authorized the execution, delivery and
performance of this Agreement. This Agreement has been duly executed and
delivered by the Company and (assuming the due authorization, execution and
delivery hereof by the other parties hereto) is a legally valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as limited by the effect of bankruptcy, insolvency,
reorganization, fraudulent obligation or transfer, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights or remedies
of creditors or by the effect of general principles of equity (whether
considered in an action at law or in equity) and the equitable discretion of the
court before which any proceeding therefor may be brought.
(c) The issuance and delivery of the Purchased Stock has been
duly authorized by the Company. When the Purchased Stock is issued and
delivered to and paid for by each Buyer in accordance with the terms hereof, the
Purchased Stock issued to such Buyer will be validly issued, fully paid and
non-assessable and free of any preemptive rights or Encumbrances (other than
transfer restrictions imposed by the Securities Act and comparable state blue
sky laws).
4.3 CAPITALIZATION. As of the date of this Agreement, the authorized
capital stock of the Company consists of two million five hundred thousand
(2,500,000) shares of Common Stock, one million four hundred thousand
(1,400,000) shares of which are issued and outstanding. All of the outstanding
shares of Common Stock have been duly authorized and validly issued and are
fully paid and non-assessable and held of record by the Scherr Living Trust.
Except for the options to acquire 814,074 shares of Common Stock granted
pursuant to the Stock Option Plan and all rights thereunder, upon the
consummation of the transactions contemplated hereby there will be no
outstanding subscriptions, options, warrants, rights (including any preemptive
rights), calls or commitments of any character relating to, or entitling any
Person to purchase or otherwise acquire, any capital stock or other equity
securities of the Company or any securities or rights convertible into or
exchangeable or exercisable for shares of capital stock or other equity
securities of the Company, and there are no other contracts, commitments,
understandings or arrangements calling for the issuance of additional shares of
capital stock or other equity securities of the Company or securities
convertible into or exchangeable or exercisable for such shares. The
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Company has previously delivered the Buyers a true and complete copy of the
Stock Option Plan. Except for this Agreement and the Ancillary Documents to be
entered into at Closing and except as disclosed on Schedule 4.3, there are no
agreements to which the Company or any Stockholder is a party or to which any of
them are bound relating to the voting, registration, dividend or other
distribution rights, redemption, or disposition of the Company's Common Stock or
options. The Company has previously delivered to the Buyers true and complete
copies of each of the agreements listed on Schedule 4.3.
4.4 SUBSIDIARIES. The Company has no Subsidiaries nor does it own
any equity or other proprietary interest in any other Person.
4.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Interim Balance
Sheet Date, there has been no event, condition or occurrence, which individually
in the aggregate, would constitute a Material Adverse Effect. In addition,
except as set forth on Schedule 4.5, since the Interim Balance Sheet Date the
Company has not:
(a) taken any action other than in the ordinary course of
business consistent with past practices;
(b) except for salary increases in the ordinary course of
business consistent with past practices or the distribution of S Corp earnings
and/or C Corp earnings, adopted or amended any bonus, profit sharing,
compensation, severance, termination pay, stock option, pension, retirement,
deferred compensation, employment or other employee benefit plan, agreement,
trust, fund or other arrangement for the benefit or welfare of any employee or
increased in any manner the compensation or fringe benefits or any employee or
pay any benefit material in amount not required by any existing plan,
arrangement or agreement;
(c) amended its articles of incorporation (other than to
increase the number of shares of Common Stock authorized thereunder) or by-laws
or entered into any merger or consolidation agreement;
(d) incurred, assumed or guaranteed any Funded Indebtedness or
entered into any commitment with respect to Funded Indebtedness, other than (i)
indebtedness to trade creditors incurred in the ordinary course of business or
(ii) indebtedness pursuant to the Company's revolving credit facility for
general working capital purposes in the ordinary course of business or for
capital expenditures in accordance with the Company's capital expenditure plan
for fiscal year 1996 (the "Capital Expenditure Plan"), a true and complete copy
of which has been delivered to the Buyers, or (iii) indebtedness to pay S Corp
and/or C Corp earnings;
(e) sold, assigned, leased or transferred any of the Assets
(other than cash) that are material individually or in the aggregate, other than
in the ordinary course of business consistent with past practices;
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(f) Encumbered any of the Assets that are material in amount
individually or in the aggregate, except for Permitted Encumbrances;
(g) changed its accounting methods, principles or practices,
including any material change in any assumption underlying, or method of
calculating, any bad debt, contingency or other reserve, except as may be
required by changes in GAAP;
(h) issued or sold any shares of its capital stock or other
equity securities, or any securities convertible into or exchangeable or
exercisable for such shares, except for any shares issued pursuant to the Stock
Option Plan, or entered into any agreement obligating it to do the foregoing
(other than transactions contemplated by this Agreement);
(i) except for any dividends with respect to the distribution of
S Corp and/or C Corp earnings, paid or declared any dividend, liquidation
payment or other distribution of any kind in respect of any shares of its
capital stock, or incurred any obligation to make any, such dividend or
distribution;
(j) combined, split, subdivided or redeemed or otherwise
repurchased any capital stock of the Company;
(k) discharged or satisfied any material claims or Liabilities,
other than the payment, discharge or satisfaction of Liabilities in the ordinary
course of business consistent with past practice and payment of the Funded
Indebtedness of the Company;
(l) suffered any material casualty, loss, damage, theft or
condemnation (whether or nor covered by insurance); or
(m) entered any agreement or understanding to do any of the
foregoing.
4.6 REAL PROPERTY.
(a) OWNED REAL PROPERTY. Schedule 4.6(a) sets forth all of the
real property owned by the Company (the "Owned Real Property"). The Company has
good and marketable title to the Owned Real Property, free and clear of all
Encumbrances other than Permitted Encumbrances. There are no outstanding
options or rights of first refusal in favor of any other party to purchase any
parcel of Owned Real Property or any portion thereof.
(b) LEASED REAL PROPERTY. Schedule 4.6(b) sets forth a complete
list of all real property leased or subleased by the Company (the "Leased Real
Property" and together with the Owned Real Property, the "Real Property")
pursuant to certain agreements (including any amendments thereto) (the
"Leases"). With respect to the Leased Real Property, the Company is the owner
and holder of all the leasehold estates purported to be
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granted by the applicable Lease and each Lease is in full force and effect and
constitutes a valid and binding obligation of the Company.
(c) SUBLEASES. Except as set forth on Schedule 4.6(c), there
are no leases, subleases, licenses, concessions or other agreements, granting to
any party or parties the right of use or occupancy of any portion of the parcels
of the Real Property.
4.7 TITLE TO ASSETS. The Company owns or leases all tangible
personal property necessary for the conduct of its business as presently
conducted. The Company has good and marketable title to all of the assets and
properties reflected on the Interim Balance Sheet or acquired subsequent thereto
(except for assets and properties sold, consumed or otherwise disposed of in the
ordinary course of business and consistent with past practices since the date of
the Interim Balance Sheet) free and clear of any Encumbrances except for
Permitted Encumbrances.
4.8 CONTRACTS AND COMMITMENTS. Schedule 4.8 contains a true and
complete list of each of the following (whether written or oral, and including
all amendments thereto) agreements to which the Company is a party or by which
the Company or any of the Assets are bound as of the date hereof (collectively
with the Leases, the "Contracts"):
(a) each contract or agreement (or group of related contracts or
agreements) under which the Company has created, incurred, assumed, guaranteed
or secured any Funded Indebtedness;
(b) each lease of personal property pursuant to which the
Company is required to expend more than $50,000 in any twelve-month period or
$50,000 over its remaining term, except for any lease that is cancelable upon 90
or less days' notice without any liability on the part of the Company;
(c) each agency, distribution, sales representative, franchise
or advertising agreements, except for any agreement that is cancelable on 90 or
less days' notice without liability on the part of the Company and which
involves annual revenues to the Company below $50,000;
(d) each joint venture, partnership or similar agreement to
which the Company is a party;
(e) each employment contract, consulting contract and other
contract with any officer, director, employee or consultant of the Company that
is not by its terms terminable at will by the Company without penalty, other
than any such contract pursuant to which the Company is required to expend less
than $50,000 in any twelve-month period;
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(f) each contract containing a covenant not to compete on the
part of the Company (other than pursuant to any radius restriction contained in
any lease) or otherwise restricts the Company's ability to engage in any lawful
business (other than customary restrictions in Leases with respect to the
activities on the leased premises) or obligates the Company to deal exclusively
with only certain parties;
(g) each contract or agreement made in other than the ordinary
course of business, except for any contracts or agreements that require the
Company to expend less than $50,000 in any twelve-month period or $100,000 over
its remaining term;
(h) each contract for capital expenditures or the acquisition or
construction of fixed assets for or in respect of any Real Property involving
payments in excess of $50,000;
(i) each contract under which the Company has granted or
received a license or sublicense or under which the Company is obligated to pay
or has the right to receive a royalty, license fee or similar payment (other
than software licenses for purchased software);
(j) each contract for storage, transportation or similar
services with carriers or warehousemen (excluding any such contract entered into
in the ordinary course and involving aggregate annual expenditures not exceeding
$50,000);
(k) any contract settling any action, suit, claim or proceeding
entered into within the last ten years involving expenditures by the Company in
excess of $50,000 or otherwise imposing at the time material restrictions or
limitations on the Company;
(l) any contract involving the purchase or sale of a Subsidiary
or business division entered into within the last six years; or
(m) any other contract which is material to the Company taken as
a whole.
Except as set forth on Schedule 4.8, (x) all of the Contracts are
enforceable in all material respects by the Company in accordance with their
terms except to the extent that such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights generally, and the equitable discretion of any
court before which a proceeding therefore may be brought, (y) neither the
Company nor, to the Company's knowledge, any other party, is in material breach
or default under (and no event has occurred which with notice or the passage of
time or both would constitute a material breach or default under) any Contract
and (z) none of the counterparties to any of the Contracts has indicated in
writing that it intends to terminate any such Contract
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(or refuse to renew any Lease) to which it is a party or that it otherwise has a
material dispute concerning such Contract.
True and complete copies of each of the foregoing written
Contracts have previously been made available to Buyers for their review.
4.9 NO CONFLICT OR VIOLATION. Neither the execution and delivery of
this Agreement by the Company nor the consummation by the Company of the
transactions contemplated hereby will (whether or not with the passage of time,
giving notice or both) result in (a) a violation or breach of, or a default or
event of default under, give rise to any right of termination, amendment,
cancellation or acceleration of any obligation contained in, or give rise to the
loss by the Company of any material benefit under, any of the terms, conditions
or provisions of (i) the articles of incorporation or by-laws of the Company or
(ii) except as set forth on Schedule 4.9, any material contract (including all
Contracts), agreement, indebtedness, lease, commitment, license, franchise,
permit or authorization to which the Company is a party or by which the Company
or any of the Assets are bound, or (b) a violation or breach of any statute,
rule or regulation or any order, judgment, writ, injunction or decree applicable
to the Company except, in the case of clauses (a)(ii) and (b) above, for such
violations, breaches, defaults and events of default that, individually or in
the aggregate, would not have a Material Adverse Effect or (c) result in the
creation of any Encumbrance (other than Permitted Encumbrances).
4.10 GOVERNMENTAL CONSENTS AND APPROVALS. No consent, approval or
authorization of, or declaration, report, filing or registration with, any
Governmental Authority is required to be made or obtained by the Company in
connection with the execution, delivery and performance of this Agreement, the
issuance and delivery of Purchased Stock, and the consummation by the Company of
the transactions contemplated hereby, other than (i) filings, if any, required
under the HSR Act and (ii) those consents, approvals or authorizations,
declarations, filings or registrations that have been, or prior to the Closing
Date will be, obtained or made, as set forth on Schedule 4.10.
4.11 FINANCIAL STATEMENTS. The Company has heretofore delivered to
Buyers (a) the Financial Statements and (b) the unaudited balance sheet (the
"Interim Balance Sheet") and statement of operations (together with the Interim
Balance Sheet, the "Interim Financial Statements") of the Company at, and for
the three month period ended, March 31, 1996. Except as otherwise set forth
therein, the Financial Statements and the Interim Financial Statements have been
prepared in accordance with the books and records of the Company and in
accordance with GAAP (except, in the case of the Interim Financial Statements,
for (i) year-end audit adjustments consisting of normally recurring items, (ii)
the lack of a cash flow statement and notes to such Interim Financial
Statements, and (iii) any other adjustments described therein). The Financial
Statements and the Interim Financial Statements fairly present in all material
respects, as of the dates and for the periods thereof, the financial condition,
the results of operations and cash flows of the Company at and for
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the periods indicated (subject, in the case of the Interim Financial Statements,
to year-end audit adjustments consisting of normally recurring items and a
statement of cash flows).
4.12 LITIGATION. Except as set forth on Schedule 4.12, there is no
(a) claim, action, suit, litigation, labor dispute or arbitration pending or
filed or, to the Company's knowledge, threatened against the Company, (b) to the
Company's knowledge, investigation pending or threatened against the Company, or
(c) order, writ, injunction, judgment or decree outstanding whether at law or in
equity, whether civil or criminal in nature or whether before or by any
Governmental Authority. The Company has not received written notice of any
material dispute or alleged violation of Law which is likely to form a
reasonable basis for any such action, suit, claim or investigation. The Company
is not in default under or with respect to any judgment, order, writ, injunction
or decree of any Governmental Authority applicable to it. This Section 4.12
shall not apply to Section 4.17.
4.13 LIABILITIES. The Company does not have any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) ("Liabilities")
other than (i) Liabilities reflected on the Interim Balance Sheet or disclosed
on the Schedules hereto, (ii) Liabilities incurred in the ordinary course of
business since the Interim Balance Sheet Date, (iii) Liabilities under this
Agreement or, under other contracts, which Liabilities are not required to be
shown on the Interim Balance Sheet (none of which relate to breach of contract
except to the extent disclosed on Schedule 4.8), and (iv) other immaterial
liabilities and obligations that arose in the ordinary course of business
consistent with past practices. The Company has not, either expressly or by
operation of Law, assumed or undertaken or become responsible for any Liability
of any other Person, including, without limitation, any obligation for
corrective or remedial action relating to Environmental Law.
4.14 COMPLIANCE WITH LAW. To the Company's knowledge, the Company is
and has at all times for which Liability may still exist been in compliance in
all material respects with all applicable federal, foreign, state and local
laws, statutes, ordinances, rules, regulations, orders and decrees
(collectively, "Laws"). No representation or warranty is made in this Section
4.14 with respect to compliance with Laws, relating to the matters covered in
Sections 4.17, 4.18 and 4.21. For purposes of the provisions of Article X, the
phrase "To the Company's knowledge" shall not be applicable.
4.15 NO BROKERS. Other than Smith Barney Inc., no broker, agent,
investment banker, or finder has acted for the Company in connection with this
Agreement and the transactions contemplated hereby and, except as set forth in
that certain agreement (the "Smith Barney Engagement Letter"), dated as of
January 22, 1996 (a true and complete copy of which has been previously
delivered by the Company to Buyers), between the Company and Smith Barney Inc.
(the fees, costs and expenses pursuant to which shall be the sole responsibility
of, and shall be paid by, the Stockholders as set forth in Section 11.10), no
broker or finder or other Person is or will be entitled to any broker's or
finder's fee or other commissions in respect of such transactions based upon
agreements, arrangements or understandings made by or on behalf of the Company.
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4.16 PROPRIETARY RIGHTS.
(a) Schedule 4.16 contains a list of all material trademarks,
trade names, service marks, registered copyrights, patents and applications
therefor in which the Company has any interest, or that are being used in
connection with, or relate to, the business of the Company.
(b) The Company owns or licenses, or otherwise has the valid
right to use, all of the Proprietary Rights, and such Proprietary Rights are not
subject to any Encumbrances, except for Permitted Encumbrances.
(c) The Proprietary Rights owned or licensed by the Company
constitute all such intellectual property rights necessary or required for the
conduct of the business of the Company as currently conducted.
(d) There are no royalties, honoraria, fees or other payments
payable by the Company to any Person by reason of the ownership, use, license,
sale or disposition of the Proprietary Rights.
(e) No activity, service or procedure currently conducted by and
material to the business of the Company violates or will violate any contract of
the Company with any third party or, to the Company's knowledge, infringe any
Proprietary Right of any other party.
(f) The Company has not received from any third party in the
past five years any notice, charge, claim or other assertion that the Company is
infringing any Proprietary Right material to the Company of any third party or
committed any acts of unfair competition, and no such claim is impliedly
threatened by an offer to license from a third party under a claim of use (and
to the Company's knowledge, no basis for any such claim exists).
(g) The Company has not sent to any third party in the past five
years nor otherwise communicated to another Person any notice, charge, claim or
other assertion of infringement by or misappropriation of any Proprietary Right
material to the business of the Company by such other Person or any acts of
unfair competition by such other Person, nor, to the Company's knowledge, is any
such infringement, misappropriation or unfair competition occurring or
threatened.
4.17 EMPLOYEE BENEFIT PLANS.
(a) DISCLOSURE, DELIVERY OF COPIES OF RELEVANT DOCUMENTS AND
OTHER INFORMATION. Schedule 4.17 contains a complete list of Employee Plans
that currently cover, or that within the last two years has covered, employees,
former employees, retired employees or contractual employees of the Company or
any of their dependents or
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beneficiaries. The Company has provided the Buyers with true and complete
copies of all documents pursuant to which each Employee Plan is maintained and
administered, the two most recent annual reports (Form 5500 and attachments) and
financial statements therefore, all governmental rulings, determinations, and
opinions (and pending requests therefor), and the most recent valuation of the
present and future obligations under each Employee Plan that provides
postretirement or postemployment health and life insurance, accident, or other
"welfare-type" benefits.
(b) Except as set forth in Schedule 4.17:
(i) all Employee Plans have been operated and
administered in compliance in all material respects with ERISA, the Code and
other applicable Laws;
(ii) each Employee Plan, if intended to be "qualified"
within the meaning of Section 401(a) of the Code, has been determined by the
Internal Revenue Service to be so qualified and the related trusts are exempt
from tax under Section 501(a) of the Code, and to the Company's knowledge,
nothing has occurred that has or could reasonably be expected to affect
adversely such qualification or exemption;
(iii) neither the Company nor any of its ERISA Affiliates,
nor to the Company's knowledge and its ERISA Affiliates, any other "disqualified
person" or "party in interest" (as such terms are defined in Section 4975 of the
Code and Section 3(14) of ERISA, respectively) with respect to an Employee Plan
has breached the fiduciary rules of ERISA or engaged in a prohibited transaction
that could subject the Company or any of its ERISA Affiliates to any tax or
penalty imposed under Section 4975 of the Code or Section 502(i), (j) or (l) of
ERISA;
(iv) all required or declared Company contributions (or
premium payments) to (or in respect of) all Employee Plans have been properly
made when due, and the Company has timely deposited all amounts withheld from
employees for pension, welfare or other benefits into the appropriate trusts or
accounts;
(v) except as may be required under Laws of general
application, none of the Employee Plans obligate the Company to provide any
employee or former employee, or their spouses, family members or beneficiaries,
any postemployment or postretirement health or life insurance, accident or other
"welfare-type" benefits;
(vi) each Employee Plan that is a "group health plan"
within the meaning of Section 5000 of the Code has been maintained in compliance
with Section 4980B of the Code and Title I, Subtitle B, Part 6 of ERISA and no
tax payable on account on Section 4980B of the Code has been or is expected to
be incurred;
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(vii) neither the Company nor any of its ERISA Affiliates
is or has ever maintained or been obligated to contribute to a "multiple
employer plan" (as defined in Section 413 of the Code), a "multiemployer plan"
(as defined in Section 3(37) of ERISA) or a "defined benefit pension plan" (as
defined in Section 3(35) of ERISA); and
(viii) there is no (a) order, writ, injunction, judgment or
decree outstanding, (b) claim, action, suit, litigation or arbitration pending
or, to the Company's knowledge, threatened, or (c) to the Company's knowledge,
governmental audit or investigation pending or threatened, in each case against,
the Company, any Employee Plan or any fiduciary thereof relating to or seeking
benefits under or otherwise relating to in any way any Employee Plan, other than
routine claims for benefits.
4.18 TAX MATTERS. As used in Section 4.18, the term "Company"
includes any other Person included in any consolidated or combined tax return
and part of an affiliated group, within the meaning of Code Section 1504, of
which the Company is or has been a member.
(a) FILING OF TAX RETURNS. The Company has timely filed with
the appropriate taxing or other Governmental Authorities all returns (including,
without limitation, information returns) in respect of Taxes required to be
filed, taking into account any appropriate extension of time, through the date
hereof. The returns and other information filed are complete and correct in all
material respects. The Company has made available to Buyers complete and
accurate copies of all federal, state and local income tax returns filed by the
Company for the last three (3) years.
(b) PAYMENT OF TAXES. All Taxes shown on the returns filed by
the Company have been paid, or an adequate reserve has been established therefor
in accordance with GAAP. The Company has paid, or withheld from others, all
Taxes required to be paid, or withheld, by it through the date hereof; all
withholding Taxes have been remitted to appropriate Governmental Authorities on
a timely basis. The Company has established, in accordance with generally
accepted accounting principles, reserves that are adequate on the Interim
Financial Statements, for all Taxes not yet due and payable, and the Company has
not incurred any Tax liability from the Interim Balance Sheet Date through the
date hereof, other than Taxes incurred in the ordinary course of business.
(c) AUDIT HISTORY. There are no pending, unresolved or unpaid
audits, investigations, claims or deficiencies for or relating to any Liability
in respect of Taxes, no Tax liens have been filed and there are no matters under
discussion with any Governmental Authorities with respect to Taxes. No waivers
of statutes of limitation have been given or requested with respect to the
Company.
(d) S CORPORATION STATUS. The Company has been a "small
business corporation" (within the meaning of Section 1361 of the Code) and has
duly elected under Section 1362(a) of the Code to be taxed as an "S corporation"
for federal income tax
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purposes for each of such taxable years since November 1, 1988, and has made a
corresponding election under the tax laws of the states of California, Illinois,
Massachusetts, Michigan, Minnesota, and Texas for each of such taxable years
since November 1, 1988.
(e) GOLDEN PARACHUTES. There are no contracts or other
agreements covering any Person that individually or collectively could give rise
to the payment of any amount being non-deductible by the Company by reason of
Section 280(G) of the Code.
(f) ELECTIONS. The Company has not made an election to be
treated as a "consenting corporation" under Section 341(f) of the Code and the
Company is not, nor has it ever been, a "personal holding company" within the
meaning of Section 542 of the Code. The Company has not agreed to, nor is it
required to, make any adjustments pursuant to Section 481 of the code, and the
IRS has not proposed any such adjustments or changes in the Company's accounting
method. The Company is not currently, nor has it ever been during the five-year
period ending on the date hereof, a "United States real property holding
corporation" as such term is defined in Section 897 of the Code.
4.19 SEVERANCE ARRANGEMENTS. The Company is not a party to any
severance or similar agreement or arrangement in respect of any present or
former Personnel that will result in any obligation (absolute or contingent) of
Buyers or the Company after the Closing Date to make any payment to any such
Personnel following termination of employment.
4.20 INSURANCE. Schedule 4.20 contains a true and complete list of
all policies of fire, general liability, workers' compensation and all other
forms of insurance (showing as to each policy the carrier, policy number,
coverage limits, expiration date, annual premium and a general description of
the type of coverage provided) maintained by or on behalf of the Company on its
business, property and Personnel, copies of each of which policies have been
made available to Buyers. Such policies are in full force and effect on the
date hereof and will be kept in full force and effect by the Company through the
Closing. All premiums due on such insurance policies on or prior to the date
hereof have been paid and there is no default by the Company under any such
insurance policies and no notice of cancellation or termination or intent to
cancel has been received by the Company with respect to any such insurance
policy.
4.21 COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) The Company is in compliance in all material respects with
all Environmental Laws.
(b) The Company has not received any written notification from
any Governmental Authority regarding any actual, alleged or potential (x)
Environmental Claims or (y) responsibility for, or any inquiry or investigation
regarding, any disposal,
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release or threatened release at any location of any Hazardous Substance
generated or transported by the Company, nor, to the Company's knowledge, has
any investigation been commenced or is any proceeding threatened against the
Company under any Environmental Laws with regard to the business or Assets of
the Company.
(c) To the Company's knowledge, (i) no underground
storage tank or other underground storage receptacle for Hazardous Substances is
currently located on any of the Real Property and there have been no releases of
any Hazardous Substances from any such underground storage tank or receptacle or
related piping; (ii) no asbestos-containing material, in any form or condition,
materials or equipment containing polychlorinated biphenyls or landfills or
surface impoundments is currently located any of the Real Property, and (iii)
there have been no releases (i.e., any past or present releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, disposing, or dumping) of Hazardous Substances in quantities exceeding
the reportable quantities as defined under federal or state law by the Company
on, upon or into any of the Real Property or Prior Property other than those
authorized by Environmental Laws.
(d) There are no consent decrees, consent orders,
judgments, judicial or administrative orders, agreements with (other than
Permits) or Encumbrances by, any Governmental Authority or quasi-governmental
entity relating to any Environmental Law which regulate, obligate or bind the
Company.
(e) The Company has not treated, stored, disposed or,
arranged for or permitted the disposal of, transported, handled or released any
substance, or to the Company's knowledge, owned, leased or operated any real
property (and no such real property is contaminated by any such substance) in a
manner that has given or could reasonably be expected to give rise to any
liabilities pursuant to CERCLA, SWDA or any other Environmental Law, including
any liability for response costs, corrective action costs, personal injury,
property damage, natural resources damage or attorney fees, or any
investigative, corrective or remedial obligations.
(f) To the Company's knowledge, no facts, events or
conditions relating to any Owned Real Property, Leased Real Property, Prior
Property or operations of the Company will prevent continued compliance by the
Company with any Environmental Law, or give rise to any investigatory, remedial,
corrective or other Liabilities pursuant to any Environmental Law.
Schedule 4.21 sets forth a complete and accurate list of all real
property previously owned, leased or operated by the Company or any predecessor
of the Company (x) within the last ten (10) years or (y) which was used to
conduct any operations other than the Business ("Prior Property"). The Company
has provided the Buyers with correct and complete copies of all reports and
studies within the possession or control of the Company
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with respect to past or present environmental conditions or events at any of
the Real Property or Prior Property.
4.22 TRANSACTIONS WITH AFFILIATES. Except as set forth on
Schedule 4.22, no Affiliate of the Company is presently, or since January 1,
1994 has been, a party to any transaction, loan or contract with the Company,
including, without limitation, any contract (a) providing for the furnishing of
services by, (b) providing for the rental of real or personal property from, or
(c) otherwise requiring payments to (other than for dividends or distributions
to any stockholder in his capacity as such or for services as officers,
directors or employees of the Company) any such Person or any corporation,
partnership, trust or other entity in which any such Person has an interest as
an officer, director, trustee, partner or holder of greater than five percent of
such entity's capital stock.
4.23 LABOR MATTERS. The Company is not a party to or bound by
any labor agreement, collective bargaining agreement, union contract or
similar agreement with respect to its employees with any labor organization,
union, group or association and there are no employee unions (nor any other
similar labor or employee organizations) under local statutes, custom or
practice. In the past five years, the Company has not experienced any
attempt by organized labor or its representatives to make any of them conform
to demands of organized labor relating to its employees or to enter into a
binding agreement with organized labor that would cover the employees of the
Company. There is no labor strike, slow-down or other work stoppage or labor
disturbance pending or, to the Company's knowledge, threatened against the
Company. The Company is in compliance in all material respects with all
applicable Laws respecting employment practices, employee documentation,
terms and conditions of employment and wages and hours and is not and has not
engaged in any unfair labor practice. There is no unfair labor practice
charge or complaint against the Company pending or filed before the National
Labor Relations Board or any other Governmental Authority arising out of
conduct of its business. The Company is not delinquent in any material
respect in payments to any Personnel for any wages, salaries, commissions,
bonuses or other direct compensation for any services performed by them to
date or amounts required to be reimbursed to such employees. Schedule 4.23
describes all settlements involving payments in excess of $10,000 and all
judgments and orders, in each case involving the Company within the last
three years, involving claims of sexual harassment, discrimination or similar
matters.
4.24 LICENSES AND PERMITS. The Company has all material
governmental or regulatory licenses, permits and authorizations (collectively,
"Permits") (all of which were validly issued, are in full force and effect, and
none of which are currently the subject of any proceedings for the limitation or
repeal thereof) necessary to conduct its business as presently conducted. The
Company is in compliance in all material respects with all such Permits. The
Company has not received any written notice to the effect that it is not in
compliance with any such Permits. To the Company's knowledge, no loss or
expiration of any such Permit is threatened, pending or reasonably foreseeable
(other than expiration upon the end of the term thereof).
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4.25 BANKING RELATIONSHIPS; POWERS OF ATTORNEY.
(a) Schedule 4.25 sets forth a complete and accurate
description of all arrangements that the Company has with any banks, savings and
loan associations or other financial institutions providing for any accounts,
including, without limitation, checking accounts, cash contribution accounts,
safe deposit boxes, borrowing arrangements, certificates of deposit or
otherwise, indicating in each case account numbers, if applicable, and the
person or persons authorized to act or sign on behalf of the Company in respect
of any of the foregoing.
(b) No person holds any power of attorney or similar
authority from the Company (x) with respect to such banking arrangements or (y)
which is irrevocable.
4.26 CONFLICTS OF INTEREST. Neither the Company nor any other
Person acting on behalf of the Company has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, Representative of a customer or supplier, or official or employee of
any Governmental Authority or other Person who was, in or may be in a position
to help or hinder the business of the Company (or assist in connection with any
actual or proposed transaction) that (a) might subject the Company to any damage
or penalty in any civil, criminal or governmental litigation or proceeding, (b)
that if not given in the past, might have had a Material Adverse Effect, or (c)
if not continued in the future, might have a Material Adverse Effect.
4.27 INTENTIONAL MISINFORMATION. No representation or warranty
made by the Company in this Agreement, nor in any written certificate, schedule
or exhibit prepared and furnished, or to be prepared and furnished, by the
Company to the Buyers pursuant hereto intentionally contains any untrue
statement of a material fact or intentionally omits to state a material fact
necessary in order to make the statements contained herein and therein not
misleading in light of the circumstances under which they were furnished.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYERS TO THE COMPANY
Each Buyer hereby severally (and not jointly) represents and
warrants to the Company, with respect only to such Buyer, as follows:
5.1 ORGANIZATION. Such Buyer is a corporation or partnership
duly organized, validly existing and in good standing under the laws of the
State of its incorporation or formation, and has the corporate power to conduct
its business as it is presently being conducted and to own, operate and lease
its properties and assets. Such Buyer is duly qualified to do business as a
foreign corporation or partnership and is in good
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standing in each jurisdiction in which such qualification is necessary under
applicable law as a result of the conduct of its business or the ownership of
its properties and where the failure to be so qualified would have a material
adverse effect on the ability of such Buyer to consummate the transactions
herein.
5.2 AUTHORIZATION: ENFORCEABILITY.
(a) Such Buyer has all necessary corporate or
partnership power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(b) Such Buyer has duly authorized the execution,
delivery and performance of this Agreement. This Agreement has been duly
executed and delivered by such Buyer and (assuming the due authorization,
execution and delivery hereof by the other parties hereto) is a legally valid
and binding obligation of such Buyer, enforceable against it in accordance with
its terms, except as limited by the effect of bankruptcy, insolvency,
reorganization, fraudulent obligation or transfer, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights or remedies
of creditors or by the effect of general principles of equity (whether
enforcement is considered in an action at law or in equity) and the equitable
discretion of the court before which any proceeding therefor may be brought.
5.3 NO CONFLICT OR VIOLATION. Neither the execution and
delivery of this Agreement by such Buyer nor the consummation by such Buyer of
the transactions contemplated hereby will result in (a) a violation or breach
of, or a default or event of default under, any of the terms, conditions or
provisions of (i) the certificate of incorporation or by-laws or partnership
agreement of such Buyer or (ii) any material contract, agreement, indebtedness,
lease, commitment, license, franchise, permit or authorization to which such
Buyer is a party or by which such Buyer or any of its assets are bound or (b) a
violation or breach of any statute, rule or regulation or any material order,
judgment, writ, injunction or decree applicable to such Buyer or to the business
or operations of such Buyer except, in the case of clauses a(ii) and (b) above,
for such violations and breaches that, individually or in the aggregate, would
not have a material adverse effect on the ability of such Buyer to consummate
the transactions contemplated hereby.
5.4 GOVERNMENTAL CONSENTS AND APPROVALS. No consent, approval
or authorization of, or declaration, filing or registration with, any
Governmental Authority is required to be made or obtained by such Buyer in
connection with the execution and delivery by such Buyer of this Agreement and
the consummation by such Buyer of the transactions contemplated hereby, other
than (i) filings required under the HSR Act, if any, (ii) state blue sky
filings, and (iii) those consents, approvals or authorizations, declarations,
filings or registrations that have been, or prior to the Closing Date will be,
obtained or made, as set forth on Schedule 5.4.
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5.5 NO BROKERS. No broker or finder has acted for such Buyer or
any of its affiliates in connection with this Agreement and the transactions
contemplated hereby and no broker or finder or other Person is entitled to any
broker's or finder's fee or other commissions in respect of such transactions
based upon agreements, arrangements or understandings made by or on behalf of
such Buyer or such affiliate.
5.6 LITIGATION. There is no (a) action, suit, litigation,
dispute or arbitration pending or, to such Buyer's knowledge, threatened against
such Buyer, (b) to Buyer's knowledge, investigation, pending or threatened
against Buyer, or (c) any order, writ, injunction, judgment or decree to which
such Buyer is subject, in each case which seeks to enjoin, prohibit or challenge
the transactions contemplated by this Agreement.
5.7 PURCHASE ENTIRELY FOR OWN ACCOUNT. The Purchased Stock
being purchased by such Buyer is being acquired for investment for such Buyer's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and such Buyer has no present intention
of selling, granting any participation in, or otherwise distributing the same,
except in compliance with all applicable securities laws. Such Buyer is not a
party to any contract, undertaking, agreement or arrangement with any Person to
sell, transfer or grant participation to such Person or to any third person with
respect to any of the Purchased Stock, other than Persons who are Affiliates or
Representatives of such Buyer and except in compliance with all applicable
securities laws.
5.8 DISCLOSURE OF INFORMATION. Such Buyer has requested all the
information it considers necessary or appropriate for deciding whether to
acquire the Purchased Stock and has had an opportunity to ask questions and
receive answers from Stockholders and the Company regarding the terms and
conditions of the sale of the Purchased Stock and the business, properties,
prospects, assets, liabilities and financial condition of the Company that such
Buyer reasonably considers important in making the decision to acquire the
Purchased Stock. The foregoing, however, does not limit or modify the
representations and warranties of the Company or the Stockholders in Section IV
or VII of this Agreement.
5.9 INVESTMENT EXPERIENCE. Such Buyer acknowledges that it is
able to evaluate for itself, and has such knowledge and experience in financial
or business matters that it is capable of evaluating the merits and risks of the
investment in the Purchased Stock, has the ability to protect its own interests
in this transaction, and is financially capable of bearing a total loss of this
investment. Such Buyer has not been organized for the purpose of acquiring the
Purchased Stock.
5.10 UNDERSTANDING OF RISKS. Such Buyer is fully aware of: (i)
the highly speculative nature of the investment in the Purchased Stock; (ii) the
financial hazards involved; (iii) the lack of liquidity of the Purchased Stock
and the restrictions on transferability of the Purchased Stock; (iv) the
qualifications and backgrounds of
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management of the Company; and (v) the tax consequences of investment in the
Purchased Stock.
5.11 ACCREDITED INVESTOR. Such Buyer is an "accredited investor"
within the meaning of Rule 501 promulgated under the Securities Act, as
presently in effect.
5.12 RESTRICTED SECURITIES. Such Buyer understands that the
Purchased Stock is characterized as "restricted securities" under the federal
securities laws since they are being acquired in a transaction not involving a
public offering and, that under such laws and applicable regulations, the
Purchased Stock may be resold without registration under the Securities Act only
in certain limited circumstances. In this connection, such Buyer represents
that it is familiar with Rule 144 promulgated under the Securities Act, as
presently in effect, and understands the resale limitations imposed thereby and
by the Securities Act.
5.13 FUNDS AVAILABLE. Such Buyer has, and through and including
the Closing shall continue to have, available funds, in the form of cash and/or
availability under one or more enforceable revolving credit facilities (the
terms of which would permit borrowing thereunder to be used to acquire the
Purchased Stock hereunder) to consummate the purchase of the Purchased Stock, as
described herein.
ARTICLE VI
INTENTIONALLY LEFT BLANK
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF
STOCKHOLDERS TO THE COMPANY AND THE BUYERS
Each Stockholder hereby severally (and not jointly) represents
and warrants to the Company and the Buyers, with respect only to such
Stockholder, as follows:
7.1 CAPACITY. Such Stockholder has the right, power and
authority to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to convey, transfer and deliver to the Company the
Cancelled Securities to be sold, transferred, exchanged or settled by such
Stockholder pursuant to provisions Section 2.2. This Agreement (assuming the
due authorization, execution and delivery hereof by the other parties hereto)
constitutes the legally valid and binding obligation of such Stockholder,
enforceable against him in accordance with its terms, except as limited by the
effect of bankruptcy, insolvency, reorganization, fraudulent obligation or
transfer, moratorium or other similar laws now or hereafter in effect relating
to or affecting the rights or remedies of creditors or by the effect of general
principles of equity (whether considered in an action at
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law or in equity) and the equitable discretion of the court before which any
proceeding therefor may be brought.
7.2 OWNERSHIP OF SECURITIES. Such Stockholder owns of record
and beneficially the shares of Common Stock or options to acquire Common Stock
set forth opposite such Stockholder's name on Schedule 7.2, free and clear of
any Encumbrance. Such securities are not, and will not be on the Closing Date,
subject to any proxy or voting trust agreement or other contract, agreement,
arrangement, commitment or understanding restricting or otherwise relating to
the voting, dividend rights or disposition of such shares of securities, other
than the Stock Option Plan (and stock option agreements relating thereto), the
Stock Purchase Agreements, this Agreement and the Ancillary Documents.
7.3 GOVERNMENTAL CONSENTS AND APPROVALS. No consent, approval
or authorization of, or declaration, filing or registration with, any
Governmental Authority is required to be made or obtained by such Stockholder in
connection with the execution, delivery and performance by such Stockholder of
this Agreement and the consummation by such Stockholder of the transactions
contemplated hereby, other than (i) filings required by the HSR Act, if any,
(ii) state blue sky filings and (iii) those consents, approvals or
authorizations, declarations, filings or registrations that have been, or will
prior to the Closing Date be, obtained or made, as set forth on Schedule 7.3.
7.4 NO CONFLICT OR VIOLATION. Neither the execution and
delivery of this Agreement by such Stockholder nor the consummation by such
Stockholder of the transactions contemplated hereby will result in (a) a
violation or breach of, or a default or event of default under, any of the
terms, conditions or provisions of any material contract, lease or other
agreement to which such Stockholder is a party or by which the Cancelled
Securities is bound or (b) a violation or breach of any statute, rule or
regulation or any order, judgment, writ, injunction or decree applicable to such
Stockholder except for such violations and breaches that, individually or in the
aggregate, would not have a material adverse effect on the ability of such
Stockholder to consummate the transactions contemplated hereby.
7.5 NO BROKERS. No broker or finder has acted for such
Stockholder or any of its affiliates in connection with this Agreement and the
transactions contemplated hereby and no broker or finder or other Person is
entitled to any broker's or finder's fee or other commissions in respect of such
transactions based upon agreements, arrangements or understandings made by or on
behalf of such Stockholder or such affiliate.
7.6 LITIGATION. There is no (a) action, suit, litigation,
dispute or arbitration pending or, to such Stockholder's knowledge, threatened
against such Stockholder, (b) to such Stockholder's knowledge, investigation,
pending or threatened against such Stockholder, or (c) order, writ, injunction,
judgment or decree to which such Stockholder is subject, in each case which
seeks to enjoin, prohibit or challenge the transactions contemplated by this
Agreement.
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7.7 PURCHASE ENTIRELY FOR OWN ACCOUNT. The Recapitalization
Securities are being acquired by each Stockholder for such Stockholder's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof within the meaning of the Securities Act of
1933, and such Stockholder has no present intention of selling, granting any
participation in, or otherwise distributing the same, except in compliance with
all applicable securities laws. Such Stockholder is not a party to any
contract, undertaking, agreement or arrangement with any Person to sell,
transfer or grant participation to such Person or to any third person with
respect to any of the Recapitalization Securities, except in compliance with all
applicable securities laws.
7.8 DISCLOSURE OF INFORMATION. Such Stockholder has requested
all the information it considers necessary or appropriate for deciding whether
to acquire the Recapitalization Securities and has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the sale of the Recapitalization Securities and the business,
properties, prospects, assets, liabilities and financial condition of the
Company that such Stockholder reasonably considers important in making the
decision to acquire the Recapitalization Securities.
7.9 INVESTMENT EXPERIENCE. Such Stockholder acknowledges that
it is able to evaluate for itself, and has such knowledge and experience in
financial or business matters that it is evaluating the merits and risks of the
investment in the Recapitalization Securities, has the ability to protect its
own interests in this transaction, and is financially capable of bearing a total
loss of this investment.
7.10 UNDERSTANDING OF RISKS. Such Stockholder is fully aware
of: (i) the highly speculative nature of the investment in the
Recapitalization Securities; (ii) the financial hazards involved; (iii) the
lack of liquidity of the Recapitalization Securities and the restrictions on
transferability of the Recapitalization Securities; (iv) the qualifications
and backgrounds of management of the Company; and (v) the tax consequences of
investment in the Recapitalization Securities.
7.11 RESTRICTED SECURITIES. Such Stockholder understands that
the Recapitalization Securities is characterized as "restricted securities"
under the federal securities laws since they are being acquired in a transaction
not involving a public offering and, that under such laws and applicable
regulations, the Recapitalization Securities may be resold without registration
under the Securities Act only in certain limited circumstances. In this
connection, such Stockholder represents that it is familiar with Rule 144
promulgated under the Securities Act, as presently in effect, and understands
resale limitations imposed thereby and by the Securities Act.
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ARTICLE VIII
ACTIONS BY STOCKHOLDERS, THE
COMPANY AND BUYER
8.1 MAINTENANCE OF BUSINESS PRIOR TO CLOSING. From and after
the Interim Balance Sheet Date and prior to the Closing, except as otherwise
contemplated by this Agreement, the Company shall operate its business in the
ordinary course and consistent with past practices and shall not, without the
prior written approval of Buyers (which approval shall not be unreasonably
withhold or delayed), do any of the following:
(a) incur, assume or guarantee any Funded Indebtedness
(other than indebtedness to trade creditors incurred in the ordinary course of
business and borrowing under the Company's revolving credit facility for general
working capital purposes in the ordinary course of business or for capital
expenditures in accordance with the Capital Expenditure Plan), or assume,
guaranty, endorse or otherwise become responsible for any material obligation of
any other Person, or make any material loan or advance to any Person, except in
the ordinary course of business and consistent with past practices;
(b) issue or sell any shares of its capital stock or any
other equity securities or any securities convertible into or exchangeable or
exercisable for such shares or equity securities, or enter into any agreement
obligating it to do the foregoing (other than this Agreement and/or the Stock
Option Plan), or split, combine or reclassify any shares of its capital stock;
(c) redeem, repurchase or otherwise acquire any shares
of its capital stock or pay or declare any dividend, liquidation payment or
other distribution of any kind in respect of its capital stock (other than
distributions of S Corp. and/or C Corp. earnings), or incur any obligation to
make any such redemption, repurchase or other acquisition or any such dividend
or distribution;
(d) amend its articles of incorporation or by-laws
(other than as contemplated herein);
(e) Encumber, or sell, transfer or otherwise dispose of,
any of the Assets (other than inventory in the ordinary course of business and
consistent with past practices) that are material individually or in the
aggregate, except for Permitted Encumbrances;
(f) other than trade payables incurred in the ordinary
course of business, make any investment in any Person, whether by loan or
advance, purchase of stock or other securities or contribution to capital;
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(g) enter into or terminate any material contract or
agreement, except in the ordinary course of business and consistent with past
practices;
(h) delay or postpone the incurrence or payment of
capital expenditures or the payment of accounts payable and other obligations
and Liabilities;
(i) enter into any transaction with any of the
Affiliates of the Company other than ordinary course employment arrangements
entered into in accordance with past custom or practice;
(j) in any manner take or cause to be taken any action
which is designed, intended or might reasonably be anticipated to have the
effect of discouraging customers, employees, suppliers, lessors, and other
associates of the Company from maintaining the same business relationships with
the Company after the date of this Agreement as were maintained with the Company
prior to the date of this Agreement; or
(k) intentionally take any action which would require
disclosure under Section 8.4.
8.2 ACCESS TO PROPERTIES AND RECORDS. The Company shall allow
Buyers and their respective Representatives, and the Buyers' financing sources
and their Representatives during regular business hours upon reasonable notice,
at Buyers' sole cost and expense, to make such investigation of the business,
properties, books and records of the Company (including access to the Company's
Representatives) and to conduct such examination of the condition of the Company
as each Buyer reasonably deems necessary or advisable to familiarize itself with
such business, properties, books, records, condition and other matters (it being
understood that such investigation shall in no way affect or otherwise obviate
or diminish any representations or warranties of the Company or the
Stockholders, or conditions to the obligations of the Buyers, in each case as
set forth herein). Each Buyer acknowledges and agrees that all information
obtained hereunder shall be subject to the Confidentiality Agreement.
8.3 CONSENTS, ETC.. As soon as practicable after execution and
delivery of this Agreement, Buyer and the Company shall, if necessary and with
all filing fees to be borne by Buyers, file the Notification and Report Form
required under the HSR Act and, prior to the Closing Date, use commercially
reasonable efforts to make all other filings required under the HSR Act. Each
Stockholder, each Buyer and the Company covenants to use its respective
commercially reasonable efforts to (i) obtain all consents, approvals and
agreements of, and to give all notices and make all other filings with, any
third parties, including Governmental Authorities, necessary to authorize,
approve or permit the consummation of the transactions contemplated hereby by
such Person, and (ii) to cooperate with one another with respect thereto,
including providing any additional information or other documents requested in
connection with obtaining any necessary approval under the HSR Act. In
addition, subject to the terms and conditions herein provided, each of the
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parties hereto covenants and agrees to use his or its commercially reasonable
efforts to take, or cause to be taken, all action or do, or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to satisfy the conditions under the control of such party set forth in
Article IX.
8.4 NOTIFICATION OF CERTAIN MATTERS. Each party shall give
prompt notice in writing to each other party hereto of (a) the occurrence, or
failure to occur, of any event that would render any representation or warranty
of such party contained in this Agreement untrue or inaccurate in any material
respect any time from the date hereof to the Closing Date and (b) any material
failure of such party to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder, and each party shall
use all reasonable efforts to remedy the same.
8.5 ACCESS BY STOCKHOLDERS TO INFORMATION. The Company and
Buyer shall retain after the Closing such records relating to the Company as
they shall be required to retain by any law or governmental regulation. Each
Stockholder and any of his Representatives may at any time during business
hours, upon reasonable notice and for proper purposes, inspect any of the
Company's books, records, properties, assets or operations relating to all
periods prior to Closing for tax purposes or for the purpose of complying with
any law or governmental regulation. Stockholders shall have the right to copy
(at their own expense) the documents described in this Section 8.5.
8.6 LEGEND. Each certificate representing Recapitalization
Securities shall bear such legends, as are required by the Ancillary Agreements,
including any legends required pursuant to federal and state securities laws.
8.7 NEGOTIATION WITH OTHERS. From and after the date hereof
until June 10, 1996 (the "Exclusive Period"), the Company and the Stockholders
shall deal exclusively with the Buyers regarding the recapitalization of the
Company or other acquisition of or investment in the Company, whether by way of
merger, purchase of capital stock, purchase of assets or otherwise (a "Potential
Transaction") and, without the prior written consent of the Buyers, neither the
Company nor any Stockholder shall, and the Stockholders shall cause the Company
not to, directly or indirectly, (i) solicit, initiate discussions with or engage
in negotiations with any Person (whether such negotiations are initiated by the
Company or any Stockholder or otherwise), other than the Buyers or a party
designated by the Buyers, relating to a Potential Transaction, (ii) provide
information or documentation with respect to the Company or the business of the
Company relating to a Potential Transaction to any Person, other than the Buyers
or a party designated by the Buyers or (iii) enter into an agreement with any
Person, other than the Buyers, providing for any Potential Transaction. If the
Company or any Stockholder receives an unsolicited inquiry, offer or proposal
relating to any of the above, the Company or such Stockholder shall immediately
notify the Buyers thereof. The Company and the Stockholders represent to the
Buyer that they are not bound to negotiate a Potential Transaction with any
other
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Person and that their execution of this Agreement does not violate any
agreement to which any of them are bound or to which any of the assets of the
Company are subject.
8.8 REMEDIES. The parties recognize and acknowledge that a
breach by the Company or any Stockholder of Section 8.7 will cause irreparable
and material loss and damage to the Buyers, as to which damaged party will not
have an adequate remedy at law or in damages. Accordingly, each party
acknowledges and agrees that the issuance of an injunction or other equitable
remedy is an appropriate remedy for any such breach.
8.9 RECAPITALIZATION ACCOUNTING. No Stockholder shall sell,
assign, transfer or Encumber his Recapitalization Securities, unless in the
opinion of the Company's accountants such transfer would not adversely affect
the ability of the Company to use recapitalization accounting with respect to
the transactions contemplated herein. This covenant shall survive the Closings
until the first anniversary of the Closings.
8.10 TAX-RELATED MATTERS. The parties agree that, for purposes
of determining the Taxes owed, and content of Tax Returns required to be filed,
by the Company for all taxable periods that include the Closing Date, income and
Taxes will be reflected by a closing of the books of the Company on the day
before the Closing Date. The parties agree to perform all actions (including
the filing of any consent required under Section 1362 of the Code, or under
similar provisions of state or local Law) necessary to accomplish such result.
8.11 TERMINATION OF AFFILIATE TRANSACTIONS. Each of the
Stockholders agrees that, effective immediately after the Closings and
without any further action by the Company or any Stockholder, the Company
shall be released from any and all Liabilities under (i) the Stock Purchase
Agreements, Stock Option Plan and any options issued pursuant to the Stock
Option Plan, (ii) the agreements set forth in Schedule 4.22 that are marked
with an asterisk (if any) and (iii) at the option of the Company, any and all
agreements that were not, but should have been, set forth in Schedule 4.22,
and all of such agreements shall have no further force or effect immediately
after the Closings. In addition, each Stockholder who Controls any third
party to any affiliate transaction that is the subject of this Section 8.11
(pursuant to which such transaction shall be terminated), shall cause such
third party to consent to the termination of such transaction, to the extent
such consent is required.
8.12 NON-COMPETE AND NON-SOLICITATION.
(a) Ray Scherr, (the "Principal Stockholder")
acknowledges and agrees with the Company that during the course of such
Principal Stockholder's involvement and/or employment with, or ownership of
options and/or Common Stock in, the Company, such Principal Stockholder 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 any such Principal Stockholder were to take
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actions that would damage or misappropriate such goodwill. Accordingly, each
Principal Stockholder agreed as follows:
(i) Such Principal Stockholder acknowledges that
the Company currently conducts its business throughout the United States (the
"Territory"). Accordingly, in consideration of the purchase by the Company
from such Principal Stockholder of the Redeemed Stock, during the period
commencing on the date hereof and ending on the earlier of (x) the third
anniversary of the date hereof and (y) the first anniversary of the date of
completion of an offering of Common Stock made pursuant to an effective
registration statement under the Securities Act (such period is referred
to herein as the "Non-Compete Period"), such Principal Stockholder 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 retail sales of musical
instruments, pro-audio equipment or related accessories within the Territory,
whether for or by himself or as a Representative for any other Person.
(ii) Notwithstanding the foregoing, the aggregate
ownership by a Principal Stockholder of no more than two percent (on a
fully-diluted basis) of the outstanding equity securities of any Person,
which securities are traded on a national or foreign securities exchange,
quoted on the NASDAQ Stock Market or other automated quotation system, and
which Person 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 Person in which a Principal Stockholder has any financial or
other interest directly or indirectly enters into a line of business during
the Non-Compete Period that competes with the Company within the Territory,
such Principal Stockholder shall divest all of his interest (other than any
amount permitted to be held pursuant to the first sentence of this Section
8.12) in such Person within 30 days after such Person enters into such line
of business that competes with the Company within the Territory.
(iii) Such Principal Stockholder covenants and
agrees that during the Non-Compete Period, such Principal Stockholder will
not, directly or indirectly, either for himself or for any other Person (a)
solicit any employee of the Company to terminate his or her employment with
the Company; or employ any such individual during his or her employment with
the Company and for a period of six months after such individual terminates
his or her employment with the Company, (B) solicit any customer of the
Company to purchase or distribute information, products or services of or on
behalf of such Principal Stockholder or such other Person that are
competitive with the information, products or services provided by the
Company, or (C) take any action that is reasonably likely to cause injury to
the relationships between the Company or any of its employees and any lessor,
lessee, vendor, supplier, customer, distributor, employee, consultant or
other business associate of the company as such relationship relates to the
Company's conduct of its business.
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(b) Such Principal Stockholder 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 acknowledges that he
has received and will receive sufficient consideration and other benefits as an
employee or holder of securities of the Company and as otherwise provided
hereunder to clearly justify such restrictions which, in any event (given his
education, skills and ability), such Principal Stockholder does not believe
would prevent him from otherwise earning a living.
8.13 CONFIDENTIAL INFORMATION.
(a) From and after the date hereof, none of the
Stockholders shall, directly or indirectly, disclose any information relating to
the Company to any Person, nor shall any Stockholder make use of any such
purpose or for the benefit of any Person except the Buyers, the Company or any
Affiliate thereof; PROVIDED THAT each Stockholder may disclose such information
to its and its Affiliates' officers, directors, employees, agents and attorneys
provided such Persons agree to comply with this Section 8.13. The Stockholders
hereby acknowledge that the Buyers, the Company and their respective Affiliates
would be irreparably damaged if such confidential knowledge were disclosed to or
utilized on behalf of others in competition in any respect with the Company.
Notwithstanding anything to the contrary contained herein, no party hereto shall
be required to maintain the confidentiality of any information that:
(i) is now, or hereafter becomes, through no act
or failure to act on the part of such party that constitutes a breach of this
Section 8.13, generally known or available to the public;
(ii) is hereafter furnished to such party by a
third party, who, to the knowledge of such party, is not under any obligation
of confidentiality to the Buyers or the Company, without restriction on
disclosure;
(iii) is disclosed with the written approval
of the Company's Board of Directors or in connection with such Stockholder
performing any duties on behalf of the Company in good faith and in a manner
believed to be in the best interests of the Company;
(iv) is required to be disclosed by law, court
order, or similar compulsion; PROVIDED, HOWEVER, that, such disclosure shall
be limited to the extent so required or compelled; and PROVIDED FURTHER,
HOWEVER, that the party required to disclose such confidential information
shall give the Company notice of such disclosure and cooperate with such
other parties in seeking suitable protections; or
(v) is required or is reasonably necessary to
be provided pursuant to or in connection with any legal proceeding involving
the parties hereto.
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(b) Each of the Buyers shall be subject to the terms of
the Confidentiality Agreement as if such Buyers were signatories thereto.
8.14 OTHER ACTIONS PRIOR TO CLOSING.
(a) Prior to Closing, the parties shall, in good faith,
use their respective best efforts to complete the following transactions:
(i) adopt an amendment to the Company's articles
of incorporation to create the Preferred Stock summarized on Exhibit B hereto;
(ii) approve all potential "parachute payments" in
a manner intended to satisfy the requirements of Section 280G(b)(5) of the
Code; and
(iii) negotiate the full terms and conditions
and enter into all of the Ancillary Documents summarized on Exhibit B hereto.
(b) At the option of the Company, the Company may
reincorporate in the State of Delaware prior to the Closing Date with the
consent of the Buyers (which consent will not be unreasonably withheld if such
reincorporation does not adversely affect the ability of the Company to use
recapitalization accounting or result in taxable income or gains to the
Company).
ARTICLE IX
CONDITIONS TO THE CLOSING
9.1 CONDITIONS TO THE PURCHASE.
(a) CONDITIONS TO THE COMPANY'S OBLIGATIONS. The
obligations of the Company to issue and sell the Purchased Stock to Buyers on
the Closing Date and to consummate the transactions contemplated by the Purchase
are subject to the satisfaction on or prior to the Closing Date of each of the
following conditions, any of which may be waived by the Company in accordance
with Section 11.6:
(i) REPRESENTATIONS, WARRANTIES AND COVENANTS.
Each of the representations and warranties of Buyers contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date as if such representations and warranties were made at and as of
the Closing Date, and Buyers shall have performed in all material respects
agreements and covenants required hereby to be performed by it on or prior to
the Closing Date.
(ii) NO LITIGATION. No action, suit, litigation,
investigation or other proceeding shall have been instituted by any
Governmental Authority or any other
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Person for the purpose of preventing, or that questions the validity or
legality of, the transactions contemplated by this Agreement. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any Governmental Authority of competent jurisdiction nor other legal
restraint or prohibition preventing the consummation of the transactions
contemplated hereby shall be in effect. No action shall have been taken, and
no statute, rule, regulation or order shall have been enacted, promulgated or
issued or deemed applicable to the transactions contemplated hereby by any
Governmental Authority that would make the consummation of the transactions
contemplated hereby illegal or substantially delay the consummation of any
material aspect of the transactions contemplated hereby.
(iii) CLOSING DELIVERIES. The Company shall
have received, at or prior to the Closing, the following:
(A) confirmation that the Company has
received the consideration for the Purchased Stock being acquired by the
Buyers by wire transfer to the account designated by it as provided in
Section 2.2;
(B) a cross-receipt with respect to the
purchase and sale of the Purchased Stock being acquired by the Buyers; and
(C) a certificate from the President or a
Vice President or partner of each Buyer certifying (1) as to the continuing
truth and accuracy as of the Closing Date (in all material respects) of the
representations and warranties of such Buyer contained herein, (2) that such
Buyer has performed and complied with all covenants and agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date, (3) that no action, suit, litigation,
investigation or other proceeding shall have been instituted by any
Governmental Authority or any other Person for the purpose of preventing, or
that questions the validity or legality of, the transactions contemplated by
the Purchase and (4) as to such other matters as the Company may reasonably
request.
(iv) SATISFACTION OF REDEMPTION CONDITIONS. The
Recapitalization shall have been consummated. All conditions to
Stockholders' obligations to the consummation of the Redemption set forth in
Section 9.2(b) shall have been satisfied or waived.
(v) HSR ACT. The applicable waiting period,
including any extension thereof, under the HSR Act shall have expired.
(vi) ANCILLARY DOCUMENTS. The Ancillary Documents
shall have been entered into by the parties thereto on terms and in forms
reasonably satisfactory to the Company.
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(b) CONDITIONS TO BUYER'S OBLIGATIONS. The obligations
of each Buyer to purchase the Purchased Stock on the Closing Date and to
consummate the transactions contemplated by the Purchase are subject to the
satisfaction on or prior to the Closing Date of each of the following
conditions, any of which may be waived by such Buyer in accordance with Section
11.6:
(i) REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations and warranties of the Company or the Stockholders to
Buyers contained in this Agreement shall be true and correct in all material
respects at and as of the Closing Date, as if such representations and
warranties were made at and as of the Closing Date, and the Company and each
Stockholder shall have performed all agreements and covenants with Buyer
required hereby to be performed by it pursuant to this Agreement prior to or
at the Closing Date. The phrase "all material respects" shall mean for this
Section that any untruth or inaccuracy of the Company's representations or
warranties in Sections 4.5, 4.6, 4.7, 4.8, and 4.11-4.26 must be considered
in relation to the Company's business, operations, assets, Liabilities,
results of operation and financial condition, taken as a whole.
(ii) NO LITIGATION. No action, suit, litigation
investigation or other proceeding shall have been instituted by any
Governmental Authority or any other Person for the purpose of preventing, or
that questions the validity or legality of, the transactions contemplated by
this Agreement. No temporary restraining order, preliminary or permanent
injunction or other order issued by any Governmental Authority of competent
jurisdiction nor other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect. No
action shall have been taken, and no statute, rule, regulation or order shall
have been enacted, promulgated or issued or deemed applicable to the
transactions contemplated hereby by any Governmental Authority that would (i)
make the consummation of the transactions contemplated hereby illegal or
substantially delay the consummation of any material aspect of the
transactions contemplated hereby, (ii) prohibit any Buyer's ownership of the
Purchased Stock, materially affect the right of any Buyer to exercise its
rights as a stockholder of the Company, or compel any Buyer or the Company to
dispose or hold separate all or a material portion of the business or assets
of any Buyer or the Company as a result of the consummation of the
transactions contemplated hereby or (iii) render any party unable to
consummate the transactions contemplated hereby.
(iii) CLOSING DELIVERIES. Each Buyer shall
have received at or prior to the Closing, the following:
(A) a certificate of the Secretary of the
Company, dated as of the Closing Date, attesting to the incumbency of its
officers, the authenticity of the resolutions authorizing the transactions
contemplated by this Agreement and the authenticity and continuing validity
of the certificate of incorporation and by-laws attached thereto.
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(B) certificates representing the Purchased
Stock acquired by such Buyer;
(C) the cross-receipt referred to in
Section 9.1(a)(iii)(B);
(D) a certificate from the President or a
Vice President of the Company certifying (1) as to the continuing truth and
accuracy as of the Closing Date (in all material respects) of the
representations and warranties of the Company to Buyers, (2) that the Company
has performed and complied with all covenants and agreements with Buyers and
satisfied all conditions on its part with respect to the Purchase to be
complied with or satisfied on prior to such Closing Date, (3) that no action,
suit, litigation, investigation or other proceeding shall have been
instituted by any Governmental Authority or any other Person for the purpose
of preventing, or that questions the validity or legality of, the
transactions contemplated by the Purchase, (4) as to the amount of Funded
Indebtedness, Transaction Expenses and Cash-On-Hand, and (5) as to such other
matters as any Buyers may reasonably request; and
(E) a certificate from each Stockholder
certifying (1) as to the continuing truth and accuracy as of the Closing Date
(in all material respects) of the representations and warranties of such
Stockholder to the Company and the Buyers, (2) that such Stockholder has
performed and complied with all covenants and agreements undertaken by such
Stockholder herein, (3) that no action, suit, litigation, investigation or
other proceeding shall have been instituted or by any Governmental Authority
or any other Person for the purpose of preventing, or that questions the
validity or legality of, the transactions contemplated by the Purchase and
(4) as to such other matters as Buyers may reasonably request.
(iv) CORPORATE DOCUMENTS. Each Buyer shall have
received from the Company (i) its articles of incorporation certified by the
Secretary of State of the State of California as of a recent date and (ii) a
certificate, dated as of a recent date, from the Secretary of State of the
State of California and of each other relevant state, evidencing the good
standing of the Company in the State of California and each other state where
the Company has represented, pursuant to Schedule 4.1, that the ownership of
its property or the conduct of its business requires it to qualify to do
business.
(v) SATISFACTION OF REDEMPTION CONDITIONS. The
Recapitalization shall have been consummated. All conditions to the
consummation of the Redemption set forth in Section 9.2 shall have been
satisfied and the Redemption shall have been consummated upon the terms and
subject to the conditions set forth herein.
(vi) HSR ACT. The applicable waiting period,
including any extension thereof, under the HSR Act shall have expired.
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(vii) OPINION OF THE COMPANY'S COUNSEL. The
Buyers shall have received an opinion dated the Closing Date of Buchalter,
Nemer, Fields & Younger, a Professional Corporation, counsel to the Company,
addressing the matters set forth in Section 4.3 hereof and in form and
substance reasonably satisfactory to the Buyers and their counsel.
(viii) CONSENTS AND APPROVALS. The Buyers
shall have received duly executed copies of all consents and approvals, in
form and substance satisfactory to the Buyers and their counsel, that are (A)
required of the Company or the Stockholders for consummation of the
transactions contemplated hereby, (B) required in order to prevent a breach
of or a default under or a termination or other material modification of any
Lease or any Contract set forth in the Schedule 4.9 or (C) required in order
to terminate certain agreements between the Company and certain Affiliates
thereof pursuant to Section 8.11. All filings or registrations with, any
Governmental Authorities which are required for or in connection with the
execution and delivery by the Company and the Stockholders of this Agreement
and the consummation by the Company and the Stockholders of the transactions
hereby shall have been made.
(ix) PAYMENT OF CERTAIN INDEBTEDNESS. The
Company shall repay all Funded Indebtedness outstanding immediately prior to
the Closing (the documents creating, assuming, guaranteeing, or securing such
Funded Indebtedness being the "Debt Instruments"), and each lender thereunder
shall (A) cancel, terminate, extinguish and deliver to the Company all Debt
Instruments and shall release all guarantees and Encumbrances in connection
with the Debt Instruments (and shall, if required, reconvey all Assets that
are the subject of any such Encumbrances) and (B) deliver to the Company an
acknowledgment of payment and release and other evidence satisfactory to the
Buyers of such termination, cancellation and extinguishment of all Debt
Instruments, guarantees thereof and related Encumbrances.
(x) AMENDMENTS TO BY-LAWS. The by-laws of the
Company shall have been amended on terms reasonably satisfactory to the
Buyers and their counsel to, among other things, eliminate the prohibition on
the ownership of capital stock of the Company by Persons other than an
employee trust maintained by the Company or employees of the Company.
(xi) ANCILLARY DOCUMENTS. The Ancillary
Documents shall have been entered into by the parties thereto on terms and in
forms reasonably satisfactory to each Buyer.
9.2 CONDITIONS TO THE REDEMPTION.
(a) CONDITIONS TO THE COMPANY'S OBLIGATIONS. The
obligations of the Company to redeem the Redeemed Stock from Stockholders on the
Closing Date and to consummate the transactions contemplated by the Redemption
are subject to the satisfaction
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on or prior to the Closing Date of each of the following conditions, any of
which may be waived by the Company in accordance with Section 11.6:
(i) REPRESENTATIONS, WARRANTIES AND COVENANTS.
Each of the representations and warranties of Stockholders contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date as if such representations and warranties were made at and as of
the Closing Date, and Stockholders shall have performed all agreements and
covenants required hereby to be performed by them prior to or at the Closing
Date.
(ii) NO LITIGATION. No action, suit, litigation,
investigation or other proceeding shall have been instituted by any
Governmental Authority or any other Person for the purpose of preventing, or
that questions the validity or legality of, the transactions contemplated by
this Agreement. No temporary restraining order, preliminary or permanent
injunction or other order issued by any Governmental Authority of competent
jurisdiction nor other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect. No
action shall have been taken, and no statute, rule, regulation or order shall
have been enacted, promulgated or issued or deemed applicable to the
transactions contemplated hereby by any Governmental Authority that would
make the consummation of the transactions contemplated hereby illegal or
substantially delay the consummation of any material aspect of the
transactions contemplated hereby.
(iii) CONSUMMATION OF PURCHASE. The Purchase
shall have been consummated upon the terms and subject to the conditions set
forth herein.
(iv) HSR ACT. The applicable waiting period,
including any extension thereof, under the HSR Act shall have expired.
(v) ANCILLARY DOCUMENTS. The Ancillary
Documents shall have been entered into by the parties thereto on terms and in
forms reasonably satisfactory to the Company.
(b) CONDITIONS TO STOCKHOLDERS' OBLIGATIONS. The
obligations of Stockholders to transfer the Redeemed Stock to the Company on the
Closing Date and to consummate the transactions contemplated by the Redemption
are subject to the satisfaction on or prior to the Closing Date of each of the
following conditions, any of which may be waived by Stockholders in accordance
with Section 11.6:
(i) NO LITIGATION. No action, suit, litigation,
investigation or other proceeding shall have been instituted or by any
Governmental Authority or any other Person for the purpose of preventing, or
that questions the validity or legality of, the transactions contemplated by
this Agreement. No temporary restraining order, preliminary or permanent
injunction or other order issued by any Governmental Authority of competent
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jurisdiction nor other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect. No
action shall have been taken, and no statute, rule, regulation or order shall
have been enacted, promulgated or issued or deemed applicable to the
transactions contemplated hereby by any Governmental Authority that would
make the consummation of the transactions contemplated hereby illegal or
substantially delay the consummation of any material aspect of the
transactions contemplated hereby.
(ii) CLOSING DELIVERIES. Stockholders shall have
received, at or prior to the Closing, confirmation that each Stockholder has
received his portion of the consideration payable to him pursuant to Section
2.3 hereof.
(iii) CONSUMMATION OF PURCHASE. The Purchase
shall have been consummated upon the terms and subject to the conditions set
forth herein.
(iv) HSR ACT. The applicable waiting period,
including any extension thereof, under the HSR Act shall have expired.
(v) ANCILLARY DOCUMENTS. The Ancillary
Documents shall have been entered into by the parties hereto on terms and in
forms reasonably satisfactory to the Stockholders.
ARTICLE X
INDEMNIFICATION AND RELATED MATTERS
10.1 SURVIVAL OF REPRESENTATIONS, ETC.. The representations and
warranties of Stockholders, the Company and the Buyers contained in this
Agreement or any Schedule, certificate or other document delivered pursuant to
this Agreement ("Representations and Warranties") shall survive the Closing
until the first anniversary of the actual date of Closing; PROVIDED, HOWEVER,
that the Representations and Warranties contained in Sections 4.18 and 4.22
shall survive until the expiration of the applicable statutes of limitations for
which any Third Party Claims may be asserted and PROVIDED FURTHER, that the
Representations and Warranties contained in Sections 4.3, 4.15, 4.18(f), 5.5,
7.2 and 7.5 shall survive the Closing indefinitely. The covenants and
agreements of the parties contained herein shall survive the Closing Date until
performed in accordance with their respective terms; provided that the covenants
contained in Sections 10.2, 10.3 and 10.4 shall survive until the expiration of
all of the provisions to which such indemnities relate.
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10.2 INDEMNIFICATION.
(a) INDEMNIFICATION RELATED TO THE PURCHASE.
(i) BY STOCKHOLDERS.
(A) From and after the Closing Date, each
Stockholder shall severally (as and to the extent set forth in Section
10.2(a)(i)(B)), but not jointly, indemnify and hold Buyers and the Company
harmless from all Losses, incurred by Buyers or the Company arising out of or
related to (1) any untruth or inaccuracy of any Representation or Warranty of
or by the Company to Buyers, (2) any breach of any covenant or agreement made
by the Company or Stockholders with Buyers in this Agreement to be performed
at or prior to Closing and (3) any Taxes payable by the Company with respect
to, or attributable to, any and all periods ending, on or prior to the
Closing Date and based upon or measured with respect to, income; the amount
by which Cash-On-Hand at Closing is less than zero; and the amount of Funded
Indebtedness of the Company which was not repaid in full as contemplated in
Section 9.1(b)(ix) hereof; PROVIDED, HOWEVER, that no Stockholder shall have
any obligation to so indemnify Buyer or the Company with respect to any
untruth or inaccuracy of any such Representation or Warranty pursuant to
Section 10.2(a)(i)(A)(1) (other than those specified in the second proviso of
Section 10.1) or any breach of any such covenant or agreement pursuant to
Section 10.2(a)(i)(A)(2) unless and until (and only to the extent that) the
aggregate amount of all Losses arising out of or related to such untruths,
inaccuracies or breaches incurred by Buyers and the Company exceed $2.5
million; PROVIDED, FURTHER, that any Losses from the untruth or inaccuracy of
the Representations or Warranties specified in the second proviso of Section
10.1 hereof or covered by Section 10.2(a)(i)(A)(3) shall not be subject to
this limitation nor included in calculating this limitation.
(B) Upon the determination (in accordance
with Section 10.3(e)) of an Indemnification Claim (as defined in Section
10.3(a)) each Stockholder shall be liable to Buyers or the Company, as the
case may be, for only such Stockholder's Pro Rata Portion (as defined below)
of such Indemnification Claim (provided that the Trust shall be solely
responsible for 100% of the indemnity for the specified Taxes in Section
10.2(a)(i)(A)(3) above or Losses arising from any untruth or inaccuracy of
the representations and warranties in Section 4.18(f) hereof). Each
Stockholder's "Pro Rata Portion" shall be determined by multiplying (1) the
quotient of (a) the number of shares of Common Stock plus shares issuable
upon exercise of stock options held by such Stockholder as determined by
reference to Schedule 4.3 divided by (b) 2,214,074 by (2) the amount of the
Indemnification Claim as so determined; PROVIDED, HOWEVER, that the maximum
liability of each Stockholder under this Section 10.2(a)(i)(B) shall not
exceed the lesser of (x) his or her Pro Rata Portion of all such
Indemnification Claims payable under this Section 10.2(a)(i), and (y) $5
million multiplied by such Stockholder's Pro Rata Portion; PROVIDED, FURTHER,
that any Losses from the untruth or inaccuracy of the Representations or
Warranties specified in
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the second proviso of Section 10.1 hereof or covered by Section
10.2(a)(i)(A)(3) shall not be subject to this limitation nor included in
calculating this limitation.
(ii) BY BUYERS.
(A) From and after the Closing Date, each
Buyer shall severally (but not jointly) indemnify and hold the Company
harmless from all Losses arising out of or related to (1) any untruth or
inaccuracy of any Representation or Warranty of or by such Buyer set forth in
Article V, or (2) any breach of any covenant or agreement made by such Buyer
in this Agreement; provided, however, that each Buyer shall not have any
obligation to indemnify pursuant to this paragraph with respect to any
untruth or inaccuracy of any such Representation or Warranty (other than
those specified in the second proviso of Section 10.1) or any breach of any
such covenant or agreement to be performed by such Buyer prior to the Closing
unless and until (and only to the extent that) the aggregate amount of Losses
arising out of or relating to such untruths, inaccuracies of breaches
incurred by the Company exceeds $2.5 million.
(B) Upon the determination (in accordance
with Section 10.3(e)) of an Indemnification Claim (as defined in Section
10.3(a)) resulting from the untruth or inaccuracy of any such Representation
or Warranty by such Buyer (other than those specified in the second proviso
of Section 10.1), or any breach of any such covenant or agreement to be
performed by such Buyer prior to the Closing, then such Buyers' maximum
liability hereunder shall not exceed the product of $5 million multiplied by
a fraction, the numerator being the number of shares of Purchased Stock to be
acquired by such Buyer and the denominator being the total number of
Purchased Shares being acquired by all Buyers; provided, however, that any
Losses from the untruth or inaccuracy of the Representations or Warranties
specified in the second proviso of Section 10.1 hereof shall not be subject
to this limitation nor included in calculating this limitation.
(b) INDEMNIFICATION RELATED TO THE REDEMPTION.
(i) BY STOCKHOLDERS.
(A) From and after the Closing Date, each
Stockholder shall severally (but not jointly) indemnify and hold the Company
harmless from all Losses arising out of or related to (A) any untruth or
inaccuracy of any Representation or Warranty of or by such Stockholder to the
Company and the Buyers set forth in Article VII and (B) any breach of any
covenant or agreement made by such Stockholder with the Company or the Buyers
in this Agreement; provided, however, that each Stockholder shall not have
any obligation to indemnify pursuant to this paragraph with respect to any
untruth or inaccuracy of any such Representation or Warranty (other than
those specified in the second proviso of Section 10.1) or any breach of any
such covenant or agreement to be performed by such Stockholder prior to the
Closing unless and until (and only to the extent
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that) the aggregate amount of Losses arising out of or relating to such
untruths, inaccuracies of breaches incurred by the Company exceeds $2.5
million.
(B) Upon the determination (in accordance
with Section 10.3(e)) of an Indemnification Claim (as defined in Section
10.3(a)) resulting from the untruth or inaccuracy of any such Representation
or Warranty by such Stockholder (other than those specified in the second
proviso of Section 10.1), or any breach of any such covenant or agreement to
be performed by such Stockholder prior to the Closing, then such
Stockholders' maximum liability hereunder shall not exceed the product of $5
million multiplied by such Stockholder's Pro Rata Portion; provided, however,
that any Losses from the untruth or inaccuracy of the Representations or
Warranties specified in the second proviso of Section 10.1 hereof shall not
be subject to this limitation nor included in calculating this limitation.
(ii) BY THE COMPANY. From and after the Closing
Date, the Company shall indemnify and hold each Stockholder harmless from all
Losses arising out of or related to (A) any failure of the Company duly to
perform or observe any covenant or agreement made by the Company with
Stockholders in this Agreement to be performed after the Closing Date and (B)
any liabilities set forth on the Interim Balance Sheet and any Liability
incurred by the Company after the Closing Date unless such Liability arose
from or in connection with the untruth or inaccuracy of any Representation or
Warranty of the Company or such Stockholder, the breach of any pre-closing
covenant of the Company contained herein, the breach of any covenant of such
Stockholder contained herein or any improper action or inaction by such
Stockholder after the Closing Date.
10.3 PROCEDURES.
(a) Each party claiming a right to indemnification
hereunder from the other party shall observe the procedures set forth below in
this Section 10.3. The indemnified party shall give prompt written notice to
the indemnifying party of any state of facts giving rise to a claim for
indemnification under this agreement (an "Indemnification Claim"), stating in
reasonable detail the nature and basis of the claims and the amount thereof, to
the extent known. No failure to give such notice shall affect the right to
indemnification hereunder except to the extent that such failure prejudiced the
indemnified party's ability to successfully defend the matter giving rise to the
Indemnification Claim.
(b) In case any Indemnification Claim involves an
action, suit or proceeding by a third party (a "Third Party Claim"), the
indemnifying party may assume the defense of such Indemnification Claim
(including all proceedings on appeal or for review that counsel for the
indemnified party shall deem appropriate), provided that counsel selected by the
indemnifying party shall be reasonably satisfactory to the indemnified party;
PROVIDED, HOWEVER, that the indemnifying party shall not have the right to
assume the defense of any Third-Party Claim, if (i) the indemnifying party
contests his obligation to fully indemnify the indemnified party with respect to
such Third-Party Claim, (ii) the indemnified
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party shall have been advised by counsel that there are one or more legal or
equitable defenses available to them which are different from or in addition
to those available to the indemnifying party, and, in the reasonable opinion
of the indemnified party, counsel for the indemnifying party could not
adequately represent the interests of the indemnified party because such
interests could be in conflict with those of the indemnifying party, (iii)
such action or Proceeding is reasonably likely to have an effect on any
material matter beyond the scope of the indemnification obligation of the
indemnifying party or (iv) the indemnifying party shall not have assumed the
defense of the Third-Party Claim in a timely fashion. If the indemnified
party assumes the defense of any Indemnification Claim in compliance with the
preceding sentence, the indemnified party shall have the right to employ its
own counsel in any such case, but the fees and expenses of that counsel shall
be at the indemnified party's own expense.
(c) The indemnified party shall be kept reasonably
informed by the indemnifying party of the action, suit or proceeding at all
stages thereof, whether or not the indemnified party is represented by counsel.
The indemnifying party shall make available to the indemnified party and its
attorneys and accountants all books and records of the indemnifying party
relating to those proceedings or litigation, and the parties hereto agree to
render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of all of those
actions, suits or proceedings.
(d) The indemnifying party shall make no settlement of,
or consent to the entry of a final judgment with respect to, any Third Party
Claim it has undertaken to defend without the indemnified party's consent (which
consent shall not be unreasonably withheld or delayed) unless such settlement or
judgment contains an unconditional release of the indemnified party with respect
to the subject matter thereof. No indemnified party shall consent to the entry
of any judgment or enter into any settlement of any Third Party Claim the
defense of which has been assumed by an indemnifying party without the consent
of such indemnifying party (which consent will not be unreasonably withheld or
delayed).
(e) An Indemnification Claim (other than a Third Party
Claim) shall be "determined" and payable under Section 10.2 when (i) there is
mutual agreement between the indemnified party and the indemnifying party as to
the indemnifying party's liability for such Indemnification Claim and the amount
of such liability or (ii) a final judgment (not subject to further appeal or
review) is rendered by a court of competent jurisdiction (and such judgment is
not stayed for a period of 60 days) with respect to the indemnifying party's
liability for the Indemnification Claim and the amount of such liability. A
Third Party Claim shall be "determined" for purposes of Section 10.2 pursuant to
Section 10.3(b). The indemnifying party shall also be responsible for all
Losses arising as a result of the Indemnification Claim being paid after the
time it was first asserted.
(f) After the Closing Date, an indemnified party shall
not be entitled to indemnification hereunder for any untruth or inaccuracy of
any Representation or
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Warranty or any breach of any covenant or agreement made in this Agreement if
such untruth, inaccuracy or breach was made known to such party by appearing
either on the Disclosure Schedule or in any certificate delivered to such
party at or prior to the Closing pursuant to this Agreement. An indemnified
party shall be deemed to have waived all claims for indemnification hereunder
with respect to such a breach if such indemnified party consummated the
transactions contemplated hereby.
(g) In computing the amount to be paid by the
indemnifying party under its indemnity obligations, there shall be deducted an
amount equal to (i) the tax benefits actually received by the indemnified party
taking into account the income tax treatment of the receipts of these payments,
and (ii) any insurance proceeds received under any insurance policy which
provides coverage for the liability to which such amount relates.
10.4 EXCLUSIVE RIGHTS AND REMEDIES. From and after the Closing
Date, the rights and remedies provided in this Article X shall be the exclusive
rights and remedies, contractual or otherwise, of the indemnified persons with
respect to untruths or inaccuracies of the Representations and Warranties and
breaches of the covenants and agreements contained in this Agreement; PROVIDED,
HOWEVER, that nothing in this Section 10.4 shall be construed to limit in any
way the rights and benefits of, or the remedies available to, any party to this
Agreement under or in respect of any other instrument or agreement to which such
Person may be a party or for actual and knowing fraud.
10.5 NO CONTRIBUTION FROM COMPANY. The obligations of the
Stockholders to indemnify pursuant to Section 10 are primary obligations of the
Stockholders, subject to the limitations set forth herein. Each Stockholder
hereby waives any rights to seek or obtain indemnification or contribution from
the Company for Losses payable by such Stockholder pursuant to Section 10 as a
result of any breach by the Company of any representation, warranty or covenant.
10.6 GUARANTY. Without limiting any obligation or liability of
the Trust hereunder, in order to induce Buyers to enter into this Agreement upon
the terms and conditions set forth herein, and in consideration thereof, Raymond
Scherr individually ("Scherr") hereby unconditionally and irrevocably guarantees
to each of the Buyers and the Company the prompt and complete performance and
payment, in any case when due in accordance with, and subject to, the terms and
conditions hereof, of all obligations of the Trust hereunder, including, without
limitation, indemnification obligations pursuant to Article 10 (collectively,
the "Guaranteed Obligations"). Scherr further agrees that if the Trust shall
fail to perform or pay, in any case when due in accordance with, and subject to,
the terms and conditions hereof, any of the Guaranteed Obligations, Scherr will
promptly perform the same for, or pay the same to, as applicable, the Company or
the Buyer to whom such performance or payment is owed, and that in the case of
any extension of time of performance or payment of any of the Guaranteed
Obligations given by the Company or any Buyer, as the case may be, the same will
be promptly performed or paid to the Company such Buyer by Scherr in accordance
with the terms of such extension. Subject to the terms
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and conditions hereof, the guaranty by Scherr hereunder is a guaranty of
payment and not merely of collectibility. It is understood and agreed by the
parties hereto that this Section 10.6 shall automatically terminate upon
payment in full to the Company and/or the Buyers, as the case may be, of the
aggregate amount of all Guaranteed Obligations and/or the expiration or
termination of any and all rights of the Company and the Buyers to bring any
claim for payment against the Trust in respect of the Guaranteed Obligations.
ARTICLE XI
MISCELLANEOUS
11.1 TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Closing Date:
(a) by mutual written consent of the Buyers and the
Stockholders holding a majority in interest of the Purchased Stock;
(b) by the Company in writing, without liability solely
as a result of such termination, (i) if any Buyer shall fail to perform in any
material respect its agreements, contained herein required to be performed by it
on or prior to the Closing Date, which failure is not cured within twenty (20)
days after Company has notified such Buyer of its intent to terminate this
Agreement pursuant to this Section 11.1(b)(i), or (ii) notwithstanding Section
11.1(b)(i), if any of the conditions set forth in Section 9.1(a), to which the
obligations of the Company are subject, have not been fulfilled or waived on or
prior to June 10, 1996, unless such fulfillment has been frustrated or made
impossible by any act or failure to act of the Company;
(c) by Stockholders holding a majority in interest of
the Redeemed Stock in writing, without liability solely as a result of such
termination, (i) if any Buyer shall fail to perform in any material respect its
agreements contained herein required to be performed by it on or prior to the
Closing Date, which failure is not cured within twenty (20) days after such
Stockholders have notified such Buyer of their intent to terminate this
Agreement pursuant to this Section 11.1(c)(i), or (ii) notwithstanding Section
11.1(c)(i) if any of the conditions set forth in Section 9.2(b), to which the
obligations of the Stockholders are subject, have not been fulfilled or waived
on or prior to June 10, 1996, unless such fulfillment has been frustrated or
make impossible by any act or failure to act of such Stockholders holding a
majority in interest of the Purchase Stock; or
(d) by the Buyers in writing, without liability solely
as a result of such termination, (i) if the Company or the Stockholders (as
applicable) shall fail to perform in any material respect their respective
agreements contained herein required to be performed by any of them on or prior
to the Closing Date, which failure is not cured within twenty (20) days after
the Buyers have notified the Company or the Stockholders (as applicable) of its
intent to terminate this Agreement pursuant to this Section 11.1(d)(i), or
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(ii) notwithstanding Section 11(d)(i) if any of the conditions set forth in
Section 9.1(b), to which the obligations of the Buyers are subject, have not
been fulfilled or waived on or prior to June 10, 1996, unless such
fulfillment has been frustrated or made impossible by any act or failure to
act of the Buyers.
11.2 EFFECT OF TERMINATION. If this Agreement shall be
terminated pursuant to Section 11.1, all further obligations of the Company, the
Buyers and the Stockholders under this Agreement shall terminate without further
liability of any party hereto or its Representatives, except for the obligations
set forth in Article 10 and Sections 8.13, 11.2, 11.10 and 11.11; provided that
no such termination shall relieve Buyer, the Company or Stockholders from
liability for actual damages caused by any breach by such Person of this
Agreement occurring prior to such termination.
(a) Determination of actual damages pursuant to this
Section 11.2 shall be resolved by final and binding arbitration at the request
of either party. Such arbitration shall be conducted by three (3) arbitrators
in Los Angeles, California, in accordance with the rules of the American
Arbitration Association, as modified herein ("AAA"). The arbitrators shall be
selected by mutual agreement of the parties or, failing such agreement, in
accordance with the aforesaid AAA rules. At least one (1) of the arbitration
panel shall be reasonably familiar with the retail industry; and all will be
attorneys with at least 7 years of professional experience. The parties shall
bear the costs of the arbitrators equally. Subject to the reasonable discretion
of the arbitrators and upon good cause shown, the parties shall have the right
of limited prehearing discovery, including (i) exchange of witness lists, (ii)
exchange of documentary evidence and reasonably related documents, (iii) written
interrogatories, and (iv) depositions under oath of any witnesses who are to be
called to testify at the arbitration hearing. As soon as the discovery is
concluded, the arbitrators shall hold a hearing in accordance with the aforesaid
AAA rules. Thereafter the arbitrators shall promptly render a written award,
together with a written opinion setting forth in reasonable detail the grounds
for such award. The award shall also provide that the prevailing party shall
recover its reasonable attorneys' fees and other costs incurred in the
proceedings, in addition to any other relief which may be granted. Judgment may
be entered in any court of competent jurisdiction to enforce the arbitral award.
(b) At any time during the procedures specified in this
Section 11.2, a party may seek a preliminary injunction or other provisional
judicial relief if in its judgment such action is necessary to avoid irreparable
damage or to preserve the status quo. Despite such action, the parties will
continue to participate in good faith in the procedures specified in Section
11.2(a). All applicable statutes of limitation and defenses based upon the
passage of time shall be tolled while the arbitration proceedings specified in
Section 11.2(a) are pending. The parties will take such action, if any, as is
required to effectuate such tolling.
11.3 ASSIGNMENT. Prior to the Closings, neither this Agreement
nor any of the rights or obligations hereunder may be assigned by the Company or
any Stockholder
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without the prior written consent of Buyers, or by Buyers without the prior
written consent of Stockholders who hold a majority in interest of the
Redeemed Stock (provided that a Buyer may assign his rights hereunder to any
other Buyer or any Affiliate of any Buyer). Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors, heirs and assigns, and no other
person shall have any right, benefit or obligation hereunder.
11.4 NOTICES, TRANSFER OF FUNDS. Unless otherwise provided
herein, any notice, request, instruction or other document to be given hereunder
by any party to the others shall be in writing and delivered in person or by
courier, telecopied by facsimile transmission (provided that confirmation is
received by the sender) or mailed by certified mail, postage prepaid, return
receipt requested (such mailed notice to be effective on the date such receipt
is acknowledged), as follows:
If to Stockholders: Marty Albertson
24351 Rolling View Road
Hidden Hills, CA 91302
Dave DiMartino
19641 Hiawatha Street
Chatsworth, CA 91311
Larry Thomas
5521 Fairview Road
Agoura Hills, CA 91301
Bill McGarry
316 South Huntington Avenue
San Dimas, CA 91773
Rod Barger
23247 Canzonet Street
Woodland Hills, CA 91367
Andy Heyneman
22125 Sun Ranch Road
Chatsworth, CA 91311
George Lampos
19552 Superior Street
Northridge, CA 91324
53
<PAGE>
Don Kelsey
23719 Country Fair
Hockley, Texas 77447
With copies to: Sidley & Austin
555 West Fifth Street
40th Floor
Los Angeles, CA 90013
Attn: Moshe Kupietzky, Esq.
If to the Company: The Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: Ray Scherr
With copies to: Soosman & Associates
5743 Corsa Avenue, Suite 116
Westlake Village, CA 91362
Attn: Barry F. Soosman, Esq.
Buchalter, Nemer, Fields & Younger
a Professional Corporation
601 S. Figueroa Street, Suite 2400
Los Angeles, CA 90017
Attn: Mark A. Bonenfant, Esq.
If to Buyers: Chase Capital Partners
840 Apollo Street, Suite 223
El Segundo, CA 90245
Attn: David L. Ferguson, C.A.
Wells Fargo Small Business
Investment Company, Inc.
333 South Grand Avenue
Suite 1200
Los Angeles, CA 90071
Attn: Steven Burge
Weston Presidio Capital II, Inc.
400 Sansome Street
San Francisco, CA 94111
Attn: Michael Lazarus
54
<PAGE>
With a copy to: O'Sullivan, Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, NY 10112
Attn: Harvey M. Eisenberg, Esq.
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
11.5 CHOICE OF LAW. This Agreement shall be construed and
interpreted and the rights of the parties determined in accordance with the laws
of the State of California without reference to its principles of conflicts of
law. Each party hereto irrevocably consents to the service of any and all
process in any action or proceeding arising out of or relating to this Agreement
by the mailing of copies of such process to such party at his or her address
specified in Section 11.4. Subject to the arbitration provisions of Section
11.2, the parties hereto irrevocably submit to the non-exclusive jurisdiction of
the Superior Court of Los Angeles, over any dispute arising out of or relating
to this Agreement or any agreement or instrument contemplated hereby or entered
into in connection herewith or any of the transactions contemplated hereby or
thereby; and subject to Section 11.2, each party hereby irrevocably agrees that
all claims in respect of such dispute or proceeding may be heard and determined
in such courts. The parties hereby irrevocably waive, to the fullest extent
permitted by applicable law, any objection that they may now or hereafter have
to the laying of venue of any such dispute brought in such court or any defense
of inconvenient forum in connection therewith.
11.6 ENTIRE AGREEMENT, AMENDMENTS AND WAIVERS. This Agreement,
together with all exhibits and schedules hereto (including the Disclosure
Schedule) and the Confidentiality Agreement, constitute the entire agreement
among the parties pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, of the parties with respect to that subject matter. No amendment,
supplement or modification of this Agreement shall be binding unless executed in
writing by the Company, the Buyers and the Stockholders holding a majority
interest in the Redeemed Stock. No waiver shall be binding unless executed in
writing by the party whose granting such waiver. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
11.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.8 SEVERABILITY. It is the desire and intent of the parties
that the provisions of this Agreement be enforced to the fullest extent
permissible under the Law and
55
<PAGE>
public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, in the event that any provision of this Agreement would be held
in any 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 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 (and the parties request
that a court of competent jurisdiction considering such issue "blue pencil"
any such provision to that which is enforceable but comes as close as
possible to carrying out the intent of the parties), 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
Section 8.12 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.
11.9 HEADINGS. The headings of the sections herein are inserted
for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
11.10 EXPENSES. Except as set forth in Section 11.2(a),
if the transactions contemplated hereby are not consummated, all costs and
expenses (including, without limitation, the fees, costs, disbursements and
expenses of attorneys, accountants and advisors and the fees, costs,
disbursements and expenses payable pursuant to the Smith Barney Engagement
Letter) (i) incurred by Buyers in connection with the negotiation, preparation,
execution and performance of this Agreement shall be paid by Buyers and (ii)
incurred by Stockholders and the Company in connection with the negotiation,
preparation, execution and performance of this Agreement shall be the sole
obligation and responsibility of, and shall be paid by, the Company. If the
transactions contemplated hereby are consummated (i) all costs and expenses
(excluding Taxes based upon income) of the Buyers and Option Holders will be
paid by the Company, including, without limitation, all stamp taxes, stock and
documentary transfer taxes and other similar taxes (other than income or
withholding Taxes) arising as a result of the Purchase and/or the Redemption.
11.11 PUBLICITY. Until the Closing Date, no party shall
issue any press release or make any public statement regarding the transactions
contemplated hereby, without the prior approval of each other party, and the
parties hereto shall issue a mutually acceptable press release; PROVIDED,
HOWEVER, that nothing herein shall be deemed to prohibit any party from making
any disclosure that its counsel deems necessary in order to fulfill such party's
disclosure obligations imposed by law; and PROVIDED, FURTHER, that each such
party shall, to the extent reasonably practicable, afford the other parties the
opportunity to review and comment on the proposed disclosure. The parties
acknowledge that the transaction described herein is of a confidential nature
and shall not be disclosed except to
56
<PAGE>
consultants, advisors and Affiliates, or as required by law, until such time
as the parties make a public announcement regarding the transaction. After
the Closing Date, no party shall issue any press release or make any public
statement which discloses the amount of the transaction.
11.12 KNOWLEDGE. As used in this Agreement, the phrase
"to the Company's knowledge" shall refer to all facts of which Ray Scherr, Larry
Thomas and Marty Albertson shall have actual knowledge without conducting any
inquiry or investigation of any kind, nature, or description, expressly
excluding any constructive knowledge of such Person and any knowledge which is
or could be imputed to him.
11.13 PARTIES IN INTEREST. Except as otherwise expressly
provided herein, nothing in this Agreement is intended to confer any rights or
remedies under or by reason of this Agreement on any Persons other than the
parties to it and their respective successors and assigns, nor is anything in
this Agreement intended to relieve or discharge the obligation or liability of
any third Persons to any party to this Agreement, nor shall any provision give
any third Persons any right of subrogation or action over against any party to
this Agreement.
11.14 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.
11.15 INDEPENDENCE OF COVENANTS AND REPRESENTATIONS AND
WARRANTIES. All covenants hereunder shall be given independent effect so that
if a certain action or condition constitutes a default under a certain covenant,
the fact that such action or condition is permitted by another covenant shall
not affect the occurrence of such default, unless expressly permitted under an
exception to such initial covenant. In addition, all representations and
warranties hereunder shall be given independent effect so that if a particular
representation or warranty proves to be incorrect or is breached, the fact that
another representation or warranty concerning the same or similar subject
57
<PAGE>
matter is correct or is not breached will not affect the incorrectness of or a
breach of a representation and warranty hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or have caused this Agreement to be duty executed on their respective
behalf by their respective officers hereunto duly authorized, as of the day and
year first above written.
BUYERS: COMPANY:
CHASE VENTURE CAPITAL GUITAR CENTER MANAGEMENT
ASSOCIATES, L.P. COMPANY, INC.
By: Chase Capital Partners By: /s/ RAYMOND SCHERR
Its General Partner -------------------------------------
Name: Raymond Scherr
-----------------------------------
Title: Chairman of the Board
----------------------------
By: /s/ DAVID L. FERGUSON
-------------------------------
A General Partner
WESTON PRESIDIO CAPITAL II, L.P.
By: Weston Presidio Capital
Management II, L.P.,
Its General Partner
By: /s/ MICHAEL P. LAZARUS
-------------------------------
Michael P. Lazarus,
General Partner
WELLS FARGO SMALL BUSINESS
INVESTMENT COMPANY, INC.
/s/ STEVEN BURGE
- ----------------------------------
By: Steven Burge
Managing Director
<PAGE>
STOCKHOLDERS:
RAY SCHERR LIVING TRUST
/s/ RAY SCHERR /s/ RICH PIDANICK
- ----------------------------------- ----------------------------------------
By: Ray Scherr, Trustee Rich Pidanick
/s/ LARRY THOMAS /s/ DON KELSEY
- ----------------------------------- ----------------------------------------
Larry Thomas Don Kelsey
/s/ MARTY ALBERTSON /s/ GEORGE LAMPOS
- ----------------------------------- ----------------------------------------
Marty Albertson George Lampos
/s/ DAVE DIMARTINO /s/ BILL MCGARRY
- ----------------------------------- ----------------------------------------
Dave DiMartino Bill McGarry
/s/ ROD BARGER /s/ ANDY HEYNEMAN
- ----------------------------------- ----------------------------------------
Rod Barger Andy Heyneman
The undersigned, by executing this Agreement, agrees to be bound by
Sections 8.11-8.14 and 10.6 herein.
/s/ RAY SCHERR
- -----------------------------------
Ray Scherr, individually
<PAGE>
SCHEDULE 1.1
DELETIONS FROM THE BALANCE SHEET IN
ORDINARY COURSE OF BUSINESS
1. S Corp earnings in the amount of $13,200,000 were distributed to the
sole stockholder of the Company.
2. Store No. 332 (No. Chicago, Illinois) and Store No. 441 (Arlington,
Texas) were transferred out of the Company, aggregate value $1,755,000.00
<PAGE>
SCHEDULE 2.1
BUYERS
<TABLE>
<CAPTION>
TOTAL VALUE OF
COMMON PREFERRED RECAPITALIZATION
SHARES SHARES SECURITIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chase Venture Capital Associates, L.P. 5,250 519,750 $52,500,000
- ---------------------------------------------------------------------------------------------------
Weston Presidio Capital II, L.P. 750 74,250 7,500,000
- ---------------------------------------------------------------------------------------------------
Wells Fargo Small Business Investment
Company, Inc. 1,000 99,000 10,000,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Total 7,000 693,000 $70,000,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
SCHERR TRUST
<TABLE>
<CAPTION>
TOTAL VALUE OF
COMMON PREFERRED RECAPITALIZATION
NAME SHARES SHARES SECURITIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raymond Scherr Living Trust 2,000 198,000.00 $20,000,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
OPTION HOLDERS
<TABLE>
<CAPTION>
TOTAL VALUE OF
COMMON PREFERRED RECAPITALIZATION
NAME SHARES SHARES SECURITIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Larry Thomas 1,910.83 189,171.92 $19,108,275
- ---------------------------------------------------------------------------------------------------
Marty Albertson 1,273.88 126,114.41 12,738,829
- ---------------------------------------------------------------------------------------------------
Dave DiMartino 955.42 94,586.27 9,554,168
- ---------------------------------------------------------------------------------------------------
Rod Barger 168.90 16,721.45 1,689,036
- ---------------------------------------------------------------------------------------------------
Rich Pidanick 168.90 16,721.45 1,689,036
- ---------------------------------------------------------------------------------------------------
Don Kelsey 61.42 6,080.53 614,195
- ---------------------------------------------------------------------------------------------------
George Lampos 92.13 9,120.79 921,292
- ---------------------------------------------------------------------------------------------------
Bill McGarry 245.68 24,322.11 2,456,779
- ---------------------------------------------------------------------------------------------------
Andy Heyneman 122.84 12,161.06 1,228,390
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Total 5,000.00 495,000.00 $50,000,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 4.1
JURISDICTION QUALIFIED TO DO BUSINESS AS A FOREIGN CORPORATION:
1. Colorado
2. Florida
3. Illinois
4. Massachusetts
5. Minnesota
6. Texas
7. Michigan
OTHER BUSINESS: None.
OTHER NAMES: None.
<PAGE>
SCHEDULE 4.3
EXISTING STOCKHOLDER AGREEMENTS
See Schedule 7.2.
<PAGE>
SCHEDULE 4.5
CERTAIN CHANGES OR EVENTS
Since the Interim Balance Sheet Date:
1. The Company drew on its revolving line of credit in the amount of
approximately $30,785,000; and
2. S Corp earnings in the amount of $13,200,000 were distributed to the
sole stockholder of the Company.
3. Store No. 332 (No. Chicago, Illinois) and Store No. 441 (Arlington,
Texas) were transferred out of the Company, aggregate value $1,755,000.00
<PAGE>
SCHEDULE 4.6(C)
SUBLEASES
1. Sublease between Guitar Management Company, Inc. (the "Owner") and Roger
Griffin and Brett Allen individually and collectively as partners of
R&B Instrument Services (the "Tenant"): 7425 Sunset Boulevard,
Hollywood, California 90046.
<PAGE>
SCHEDULE 4.8
CONTRACTS
- Addendum -
5. The Guitar Center Management Company, Inc. Amended and Restated 1987
Stock Option Plan.
6. For certain Funded Indebtedness obligations, see Schedule 4.25 -
Banking Relationships.
<PAGE>
SCHEDULE 4.10
GOVERNMENTAL CONSENTS AND APPROVALS (COMPANY)
None.
<PAGE>
SCHEDULE 4.16
PROPRIETARY RIGHTS
1. Service Mark, Registration No. 1,290,481. Registered August 14, 1984 -
"Guitar Center" (Logo).
2. Service Mark, Registration No. 1,576,899. Registered January 9, 1990 -
"Rock Walk".
<PAGE>
SCHEDULE 4.21
PRIOR PROPERTY
The property located at 2215 West 95th Street, Chicago, Illinois. This property
was used in connection with the Business.
<PAGE>
SCHEDULE 4.23
LABOR MATTERS
None.
<PAGE>
SCHEDULE 5.4
GOVERNMENTAL CONSENTS AND APPROVALS (BUYERS)
None.
<PAGE>
SCHEDULE 7.2
OWNERSHIP OF SECURITIES
1. The Raymond Scherr Living Trust - 1,400,000 shares of Common Stock.
2. List of all option holders is attached.
<PAGE>
SCHEDULE 7.3
GOVERNMENTAL CONSENTS AND APPROVALS (STOCKHOLDERS)
None.
<PAGE>
Exhibit B
SUMMARY OF ANCILLARY DOCUMENTS
A. TERMS OF THE PREFERRED STOCK
1. Non-voting
2. Liquidation Preference = $138,600,000 ($100/share) +
accumulated but unpaid dividends
3. 8% dividend cumulative, compounding quarterly
4. Redeemable at Company's option at any time at Liquidation
Preference
5. Mandatory redeemable as follows:
a. 25% if IPO results in a market cap of $500,000,000 or more
b. 50% if IPO results in a market cap of $750,000,000
c. 100% if IPO results in a market cap of $1 Billion or more
6. Customary protective covenants
B. TERMS OF RESTRICTED STOCK AGREEMENT
1. Prior to completion of the deal, all optionholders will
settle a percentage of the outstanding options through issuance of $49,500,000
Liquidation Preference of Preferred Stock, subject to the following
restrictions:
a. No transfer of the shares to any person (other than
estate planning transfers) until restrictions lapse.
b. In the event during the restriction period, the employee is
terminated for "cause" (per employment agreement) or quits
voluntarily without justification AND competes with the Company,
the stock is forfeited.
B-1
<PAGE>
c. Restricted Period is five (5) years, completion of IPO, or sale
of Company, whichever first occurs. Restrictions also lapse upon
death or termination of employment by Company WITHOUT cause.
Upon termination of restrictions, the Company will at its option (i)
lend the employee an amount equal to the tax due with respect to
lapse of restrictions, or (ii) repurchase sufficient preferred to
permit the employee to pay such taxes due, in each case reduced by
the amount, if any, of cash realized on a concurrent sale of
preferred or common to third parties. The loan will be full
recourse, bear interest at the rate paid on the Company's revolving
credit facility and will be payable in 5 equal annual installments,
subject to prepayment with the net proceeds from the sale of
any Company shares being sold or redeemed. The Company will take
tax withholding as required. At Company's election, Company can
take all Company shares held by such borrower as security.
2. All other options will be settled for cash immediately subsequent to
the redemption, with the exercise price waived, subject to tax withholding
as required.
3. All of Management's legal fees in the transactions shall be paid by
Company.
C. SHAREHOLDER AGREEMENT
1. There will be no mandatory buy/sell in case of death, permanent
disability, retirement at normal retirement age or other termination of
employment except as set forth below.
2. The Company will have a "call" on the common stock of an employee
who is terminated by Company for "cause" or who voluntarily terminates
without justification. The price is "fair market value," as determined
initially by the Board and subject to binding valuation by an independent
investment banker (with no minority discount imposed) in case of disagreement by
employee.
3. All holders will enter into a voting agreement providing for
election of seven (7) directors: Larry Thomas, Marty Albertson, Ray Scherr, two
(2) nominees of the institutional investors and two (2) independents mutually
satisfactory to CCP and Larry Thomas. The investors will also have the right to
up to two (2) additional observer seats at all Board meetings.
4. There will be a Right of First Refusal ("ROFR") on sale of
all shares by any party, subject to the following: (i) institutions can transfer
to affiliates, (ii) institutions
B-2
<PAGE>
can sell to other institutional investors, (iii) individuals can make estate
planning transfers and (iv) members of management may sell shares to other
members of management who are or become a party to the Shareholders
Agreement. ROFR is in favor of the Company, and secondarily in favor of all
other parties, pro rata. No transfer of shares to competitors.
5. Management shareholders will give Company a right to purchase COMMON
shares, in case that individual desires to sell shares to a third party for
cash at a price based on the following formula valuing the entire Company:
(Trailing 12 months EBITDA X 6) - Debt and preferred stock liquidation
preferences.
6. There will be a (i) "drag along" provision that requires minority to
sell shares if majority want to sell Company AND (ii) "come along" provision
that requires majority to include minority in sale of shares proposed by
majority. Majority to be 60%.
7. Customary preemptive rights and SBIC regulatory cooperation
provisions.
8. This Agreement terminates on qualifying IPO or the sale or merger of
the Company.
D. REGISTRATION RIGHTS AGREEMENT
1. Each management shareholder, Scherr and each investor will have
equivalent registration rights. Demand rights are exercisable only by
holders of 60% or more of the outstanding registrable shares. Underwriter
cutbacks will be pro rata on a pari passu basis.
2. All holders will agree to a four (4) month lock up on their shares,
on a pari passu basis, in case of IPO.
E. EMPLOYMENT AGREEMENTS
1. Larry Thomas and Marty Albertson will each have a five (5) year
written employment agreement. Bruce Ross will have a three (3) year written
employment agreement.
2. Compensation, perqs and benefits to be not less favorable then as
current.
3. Cash Bonus plan per E.3 below.
4. Termination for "cause":
B-3
<PAGE>
- Limited to fraud against Company, embezzlement,
repeated neglect of duties or conviction of a
felony, and other causes to be negotiated
5. The following items will be deemed a termination without cause:
- Material changes in duties and responsibilities
- Relocation from Southern California
6. Upon change in control, Management can elect to terminate employment
agreement and give up future compensation.
7. Remedy in case of Company breach or termination without cause:
- 100% vesting of stock options granted and performance
targets (No vesting of options if termination is approved
by 70% of authorized number of directors).
- Payment of full compensation, benefits, perqs to end of term.
- Payment of bonuses for balance of the term based on last
year's bonus.
- Non-compete continues so long as compensation is paid.
8. Broad indemnification agreement
9. Other customary terms.
F. MANAGEMENT INCENTIVE PLANS
1. Stock Option Plan
This plan will cover an aggregate of 10% of the number of common
stock equivalents following completion of the transaction (including lender
warrants). Participants will obtain options to purchase common stock at fair
market value on date of grant. The options will be ten (10) year options,
with 20% annual vesting (similar to a standard option plan). Options are
"earned" and will be granted under the plan in accordance with the following
formula, but the allocation of earned units will be recommended by Larry
Thomas and Marty Albertson and approved by a majority of the Board. Thomas
and Albertson are not eligible to participate in this plan.
B-4
<PAGE>
DATE NO. OF SHARES CVT
06/30/96 2% of CSE $ to be determined
12/31/96 1% of CSE
12/31/97 2% of CSE
12/31/98 2% of CSE
12/31/99 2% of CSE
12/31/00 1% of CSE
CVT will be an amount calculated by multiplying trailing 12 months EBITDA by
12.1 and subtracting all debt (net of cash) and preferred stock liquidation
preferences. CVT targets to be determined from existing 5 year projections.
The number of shares and CVT columns are also cumulative so that any annual
shortfall can be made up in a following year.
Upon an IPO, all unawarded options will be rolled into a straight ISO Plan.
2. Senior Management Stock Option Plan.
Larry Thomas and Marty Albertson will each receive options on 2 1/2%
of the fully diluted number of CSE at closing (same base as that on which
the E.1 plan is based). These provide for vesting 1/3 on the 7th anniversary,
1/3 on the 8th anniversary and 1/3 on the 9th anniversary. This option will be
a 10 year option. There will be accelerated vesting upon successful completion
of an IPO or a sale of the Company, or other later achievement of, a minimum
market cap of a to be negotiated $ number. There are no performance tests for
vesting.
3. Cash Bonus Program
A cash bonus program for the senior management group
(including top three (3) officers and others as determined by Larry Thomas and
Marty Albertson with the approval of the Board) will provide for annual bonuses
ranging from a minimum of 50%, if any, of base compensation, to a maximum of
100% of base compensation, based on a achievement of certain formula goal. The
formula will be based on 12 months trailing EBITDA, less actual capital
expenditures, and subject to any adjustment for average working capital levels,
all as measured against the approved annual plan for these items. The matrix
for earning between 50% and 100% will be determined by CCP and Larry Thomas.
G. RAYMOND SCHERR EMPLOYMENT AGREEMENT TERMS.
1. A three (3) year employment agreement;
2. Position of Chairman of and operator of Rock Walk;
B-5
<PAGE>
3. Compensation and expenses of $100,000.00 per year in the aggregate
(including, for example, a separate office, a secretary, telephone, car
allowance);
4. Termination for "cause", which shall be limited to fraud against the
Company and embezzlement;
5. Remedy in case of Company breach or termination without cause will
be payment of full compensation and/or expenses;
6. Broad indemnification agreement; and
7. To remain as an employee of the Company until age 63 1/2 for
purposes of receiving medical insurance benefits until reaching such age
consistent with past practices.
B-6
<PAGE>
EXHIBIT 10.2
REGISTRATION RIGHTS
AGREEMENT dated as of June 5, 1996,
among GUITAR CENTER MANAGEMENT
COMPANY, INC., a California
Corporation (the "Company"), and
the SHAREHOLDERS (as defined
below).
The Shareholders own or have the right to purchase or otherwise
acquire shares of the Common Stock (as defined below) of the Company. The
Company and the Shareholders deem it to be in their respective best interests to
enter into this Agreement to set forth the rights of the Shareholders in
connection with public offerings and sales of the Common Stock.
NOW THEREFORE, in consideration of the premises and mutual covenants
and obligations hereinafter set forth, the Company and the Shareholders hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms have the following meanings:
"BOARD" means the Board of Directors of the Company.
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement, dated as
of June 5, 1996, among the Company, GCMC Funding, Inc. and Chemical Bank.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or a day on
which banking institutions in New York, New York are not required to be open.
"COMMISSION" means the Securities and Exchange Commission or any other
governmental body or agency succeeding to the functions thereof.
"COMMON STOCK" means the common stock, no par value, of the Company.
"DEMAND REGISTRATION" means a registration requested by a Shareholder or
group of Shareholders pursuant to Section 2 or Section 4.
"DLJ ENTITIES" means DLJ Merchant Banking Partners, L.P., DLJ International
Partners, C.V., DLJ Offshore Partners, C.V., and DLJ Merchant Banking Fund, Inc.
"DLJ REGISTRATION AGREEMENT" means collectively (i) the Registration
Agreement dated as of June 5, 1996 among the
<PAGE>
Company, the DLJ Entities and the other persons, if any, who become parties
thereto, as in effect on the date hereof, (ii) the registration rights attached
as Exhibit B to the Bridge Financing Agreement, and (iii) if entered into by the
Company, the registration rights for the holders of the Permanent Financing (as
defined in the Bridge Financing Agreement).
"EXCHANGE ACT" means the Securities Exchange Act of 1934 or any successor
Federal statute, and the rules and regulations of the Commission promulgated
thereunder, all as the same shall be in effect from time to time.
"MAJORITY OF REGISTERING SHAREHOLDERS" means, with respect to a
registration that includes Registrable Shares, those Shareholders who, at the
time in question, hold at least a majority of the Registrable Shares included or
proposed to be included in such registration.
"MAJORITY OF SHAREHOLDERS" means those Shareholders who at the time in
question hold at least 60% of the Registrable Shares then held by all
Shareholders.
"MATERIAL TRANSACTION" means any material transaction in which the Company
or any of its Subsidiaries proposes to engage or is engaged, including a
purchase or sale of assets or securities, financing, merger, consolidation,
tender offer, and with respect to which the Board reasonably has determined in
good faith that compliance with this Agreement may reasonably be expected to
either materially interfere with the Company's or such Subsidiary's ability to
consummate such transaction in a timely fashion or require the Company to
disclose material, non-public information prior to such time as it would
otherwise be required to be disclosed.
"OTHER SECURITIES" means at any time those shares of Common Stock or other
securities convertible into, or exchangeable for, shares of Common Stock and
which do not constitute Primary Shares or Registrable Shares.
"PERSON" shall be construed broadly and shall include an individual, a
partnership, a corporation, an association, a joint stock company, a limited
liability company, a trust, a joint venture, an unincorporated organization and
a governmental entity or any department, agency or political subdivision
thereof.
"PRIMARY SHARES" means at any time the authorized but unissued shares of
Common Stock and shares of Common Stock held by the Company in its treasury or
any security convertible into or exchangeable for unissued shares of Common
Stock.
"PROSPECTUS" means the prospectus included in a Registration Statement,
including any prospectus subject to completion, and any such prospectus as
amended or supplemented by
-2-
<PAGE>
any prospectus supplement with respect to the terms of the offering of any
portion of the Registrable Shares and, in each case, by all other amendments and
supplements to such prospectus, including post-effective amendments, and in each
case including all material incorporated by reference therein.
"PUBLIC OFFERING" means the closing of a public offering of Common Stock
pursuant to a Registration Statement declared effective under the Securities
Act, except that a Public Offering shall not include an offering of securities
to be issued as consideration in connection with a business acquisition or an
offering of securities issuable pursuant to an employee benefit plan.
"REGISTRABLE SHARES" means Restricted Shares that constitute Common Stock.
"REGISTRATION DATE" means the date upon which the Registration Statement
pursuant to which the Company shall have initially registered shares of Common
Stock under the Securities Act for sale in a Public Offering shall have been
declared effective by the Commission.
"REGISTRATION STATEMENT" shall mean any registration statement of the
Company which covers any of the Registrable Shares and all amendments and
supplements to any such Registration Statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"RESTRICTED SHARES" means shares of Common Stock, and includes (i) shares
of Common Stock which may be issued as a dividend or distribution, (ii) any
other securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock, and (iii) any securities received in respect of
the foregoing (including securities described in Section 13), in each case in
clauses (i) through (iii) which at any time are held by the Shareholders. As to
any particular Restricted Shares, such Restricted Shares shall cease to be
Restricted Shares when (A) they have been registered under the Securities Act,
the Registration Statement in connection therewith has been declared effective
and they have been disposed of pursuant to and in the manner described in such
effective Registration Statement, (B) they are sold or distributed pursuant to
Rule 144 or may be sold or distributed by the holder thereof pursuant to Rule
144(k), (C) they, along with all Restricted Shares of a Shareholder, may be sold
or distributed pursuant to Rule 144 by such Stockholder within a three-month
period, (D) they have been otherwise transferred and new certificates or other
evidences of ownership for them not bearing a restrictive legend and not subject
to any stop transfer order or other restriction on transfer have been delivered
by the Company or the issuer of
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other securities issued in exchange for the Restricted Shares, or (E) they have
ceased to be outstanding.
"RULE 144" means Rule 144 promulgated under the Securities Act or any
successor rule thereto or any complementary rule thereto.
"SECURITIES ACT" means the Securities Act of 1933 or any successor Federal
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect from time to time.
"SHAREHOLDERS" means, collectively, each of the Shareholders listed on the
signature pages hereto, and includes any successor to, of Restricted Shares or
transferee of Restricted Shares of, any such Person who or which agrees in
writing to be treated as a Shareholder hereunder and to be bound by the terms
and comply with all applicable provisions hereof.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of the
date hereof among the Company and the Shareholders named therein, as the same
may be amended, supplemented, modified or restated.
"SUBSIDIARY" means, with respect to any Person, any other Person of which
the securities having a majority of the ordinary voting power in electing the
board of directors (or other governing body), at the time as of which any
determination is being made, are owned by such first Person either directly or
through one or more of its Subsidiaries.
2. REQUIRED REGISTRATION.
(a) Subject to Section 2(b), if the Company shall be requested by a
Majority of Shareholders at any time to effect the registration under the
Securities Act of Registrable Shares, the Company shall use its best efforts
promptly to effect the registration under the Securities Act of the Registrable
Shares which the Company has been so requested to register.
(b) Promptly after receiving such request pursuant to Section 2(a) above,
the Company shall provide written notice thereof to all Shareholders (other than
the Shareholders that made the request pursuant to Section 2(a) above). Any
Shareholder may, within 20 Business Days of the receipt of the notice from the
Company, give written notice to the Company that such Shareholder wishes to
participate in the proposed registration and shall specify the number of
Registrable Shares such Shareholder desires to include in such registration.
(c) Anything contained in Section 2(a) to the contrary notwithstanding,
the Company shall not be obligated to effect any
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registration under the Securities Act pursuant to Section 2(a) except in
accordance with the following provisions:
(i) the Company shall not be obligated to use its best efforts to
file and cause to become effective any Registration Statement during any
period in which any other Registration Statement (other than on Form S-4 or
Form S-8 promulgated under the Securities Act or any successor forms
thereto) pursuant to which Primary Shares are to be or were sold has been
filed and not withdrawn or has been declared effective within the prior 90
days;
(ii) the Company may delay the filing or effectiveness of any
Registration Statement for a period of up to 90 days after the date of a
request for registration pursuant to this Section 2 if at the time of such
request (A) the Company is engaged, or has fixed plans to engage within 90
days of the time of such request, in a firm commitment underwritten public
offering of Primary Shares in which the holders of Registrable Shares may
include Registrable Shares pursuant to Section 3 or (B) a Material
Transaction exists at such time, provided that the Company may only so
delay the filing or effectiveness of a particular Registration Statement
once pursuant to this Section 2(c)(ii);
(iii) At any time prior to the effectiveness of a Registration
Statement, the Company may, in its sole discretion, convert a registration
pursuant to Section 2 into a registration pursuant to Section 3, in which
case the provisions (including those governing inclusion of shares) set
forth in Section 3 shall apply and such registration so converted will not
count as a registration pursuant to this Section 2;
(iv) with respect to any registration pursuant to this Section 2, the
Company may include in such registration any Primary Shares, Other
Securities and/or other securities; provided, however, that if the managing
underwriter advises the Company that the inclusion of all Registrable
Shares, Primary Shares, Other Securities and/or other securities proposed
to be included in such registration would interfere with the successful
marketing (including pricing) of the Registrable Shares proposed to be
included in such registration, then the number of Registrable Shares,
Primary Shares, Other Securities and/or other securities proposed to be
included in such registration shall be included in the following order:
(A) FIRST, all Registrable Shares requested to be included in
such registration by (1) the Majority of Shareholders who requested such
registration pursuant to Section 2(a) and (2) the other Shareholders who
requested
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the inclusion of their Registrable Shares in such registration pursuant to
Section 2(b), pro rata among all such Shareholders based on the number of
Registrable Shares owned by each such Shareholder;
(B) SECOND, shares of Common Stock requested to be registered
pursuant to the DLJ Registration Agreement;
(C) THIRD, the Primary Shares;
(D) FOURTH, the Other Securities (excluding any securities
registrable pursuant to clause (B) above);
(E) FIFTH, other securities requested to be registered pursuant
to the DLJ Registration Agreement; and
(F) SIXTH, other securities requested to be registered pursuant
to agreements providing registration rights to other Persons;
(v) at any time before the Registration Statement covering
Registrable Shares becomes effective, the Shareholder or group of
Shareholders which requested such registration pursuant to Section 2(a) may
request the Company to withdraw or not to file the Registration Statement;
and
(vi) the Company may, at its sole option, elect to satisfy a request
for a Demand Registration pursuant to Section 2(a) on Form S-2 or Form S-3
promulgated under the Securities Act (or any successor forms thereto), if
such forms are then available to the Company.
3. PIGGYBACK REGISTRATION.
If the Company at any time proposes for any reason to register (whether
for itself or others) any of its securities under the Securities Act (other than
on Form S-4 or Form S-8 promulgated under the Securities Act or any successor
forms thereto) other than pursuant to Section 2 hereof or by a registration
prior to (but not including) an initial public offering of the Company's Common
Stock or Junior Preferred Stock, it shall promptly give written notice to the
Shareholders of its intention to so register such shares and, upon the written
request, delivered to the Company within 20 Business Days after delivery of any
such notice by the Company, of the Shareholders to include in such registration
Registrable Shares (which request shall specify the number of Registrable Shares
proposed to be included in such registration), the Company shall use its best
efforts to cause all such Registrable Shares to be included in such registration
on the same terms and conditions as the securities otherwise being sold in such
registration; PROVIDED,
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HOWEVER, that if the managing underwriter advises the Company that the inclusion
of any or all Registrable Shares and other securities requested to be included
in such registration would materially interfere with the successful marketing
(including pricing) of the Primary Shares or other securities proposed to be
registered by the Company, then the number of Primary Shares, Registrable
Shares, Other Securities and other securities proposed to be included in such
registration shall be included in the following order:
(A) FIRST, in the case of a registration proposed by the Company for its
own account, all securities proposed by the Company to be sold for its own
account, or in the case of any securities initially proposed to be registered by
the Company for the accounts of other Persons pursuant to the exercise of demand
registration rights granted pursuant to an applicable registration rights
agreement between the Company and such other Person, the securities requested to
be registered by such Person but only in such amount and to the extent required
by such agreement;
(B) SECOND, such Registrable Shares requested to be included in such
registration pursuant to this Agreement and any securities required to be
included in such registration by other Persons who have incidental registration
rights, on a PRO RATA basis with respect to each type of security;
PROVIDED that, notwithstanding the foregoing provisions of this Section 3, in
the case of a Requested Registration pursuant to the DLJ Registration Agreement,
the priorities and exclusions set forth therein shall govern.
4. REGISTRATIONS ON FORM S-3.
(A) Anything contained in Section 2 to the contrary notwithstanding, at
such time as the Company shall have qualified for the use of Form S-3
promulgated under the Securities Act or any successor form thereto, each
Shareholder (acting alone or with other Shareholders) shall have the right to
request in writing registration of Registrable Shares on Form S-3 or such
successor form, which request or requests shall (i) specify the number of
Registrable Shares intended to be sold or disposed of and the holders thereof,
(ii) state the intended method of disposition of such Registrable Shares and
(iii) relate to Registrable Shares having an anticipated aggregate gross
offering price (before underwriting discounts and commissions) of at least
$10,000,000, and upon receipt of any such request, the Company shall use its
best efforts promptly to effect the registration under the Securities Act of the
Registrable Shares so requested to be registered; PROVIDED that the Company
shall not be obligated to effect more than two registrations under the
Securities Act pursuant to this Section 4(a) in any twelve month period.
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(b) Promptly after receiving such request pursuant to Section 4(a) above,
the Company shall provide written notice thereof to all shareholders (other than
the Shareholder(s) that made the request pursuant to Section 4(a) above). Any
Shareholder may, within 15 Business Days of the receipt of the notice from the
Company, give written notice to the Company that such Shareholders wishes to
participate in the proposed registration and shall specify the number of
Registrable Shares such Shareholder desires to include in such registration.
(c) The provisions of Section 2(c) are incorporated into this Section 4 by
reference, with each reference to Section 2(or any subsection or clause thereof)
being a reference to this Section 4 (or the corresponding subsection or clause
hereof).
5. HOLDBACK AGREEMENT.
(a) If the Company at any time shall register its securities under the
Securities Act (including any registration pursuant to the DLJ Registration
Agreement) for sale to the public pursuant to an underwritten offering
(excluding a registration initiated pursuant to Section 4 or pursuant to Section
2.1(i) of the DLJ Registration Agreement), to the extent the following
restrictions are legally permitted, the Shareholders shall not sell publicly,
make any short sale of, grant any option for the purchase of, or otherwise
dispose publicly of, any securities of the Company similar to those being
registered (other than securities included in such registration) without the
prior written consent of the Company, for a period designated by the Company in
writing to the Shareholders, which period shall not begin earlier than 10 days
prior to the effectiveness of the Registration Statement pursuant to which such
public offering shall be made and shall not last more than (i) 180 days, if such
public offering is an initial public offering, or (ii) 90 days in all other
circumstances, in each case after the closing of the sale of securities pursuant
to such Registration Statement. The Company shall obtain the agreement of any
Person permitted to sell securities in a registration to be bound by and to
comply with this Section 5 with respect to such registration as if such Person
was a Shareholder hereunder.
(b) If the Company at any time pursuant to Section 2 of this Agreement
shall register under the Securities Act Registrable Shares held by Shareholders
for sale to the public pursuant to an underwritten offering, the Company shall
not, without the prior written consent of a Majority of Shareholders, effect any
public sale or distribution of securities similar to those being registered, or
any securities convertible into or exercisable or exchangeable for such
securities (other than issuances the Company is obligated to make pursuant to
commitments made prior to such holdback period or securities included in such
registration), for such period as shall be determined by the managing
underwriters, which period shall not
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begin more than 10 days prior to the effectiveness of the Registration Statement
pursuant to which such public offering shall be made and shall not last more
than (i) 180 days, if such public offering is an initial public offering, or
(ii) 90 days in all other circumstances, in each case after the closing of the
sale of shares pursuant to such Registration Statement.
(c) The Company will, at the request of a Majority of Registering
Shareholders, enforce the provisions of Section 2.4(d) of the DLJ Registration
Agreement.
6. PREPARATION AND FILING.
(a) If and whenever the Company is under an obligation pursuant to the
provisions of this Agreement to use its best efforts to effect the registration
of, and keep effective a Registration Statement for, any Registrable Shares, the
Company shall, as expeditiously as practicable:
(i) use its best efforts to cause a Registration Statement that
registers such Registrable Shares to become and remain effective for a
period of 90 days (extended for such period of time as the Shareholders are
required to discontinue disposition of Registrable Shares pursuant to
Section 6(b) below) or until all of such Registrable Shares have been
disposed of (if earlier);
(ii) furnish, at least five Business Days before filing a
Registration Statement that relates to the registration of such Registrable
Shares, a Prospectus relating thereto or any amendments or supplements
relating to such a Registration Statement or Prospectus, to one counsel
(the "Shareholders' Counsel") selected by a Majority of Registering
Shareholders, copies of all such documents proposed to be filed (it being
understood that such five-business-day period need not apply to successive
drafts of the same document proposed to be filed so long as such successive
drafts are supplied to the Shareholders' Counsel in advance of the proposed
filing by a period of time that is customary and reasonable under the
circumstances);
(iii) notify the Shareholders whose Registrable Shares are included
therein of the effectiveness of such Registration Statement and prepare and
promptly file with the Commission such amendments and supplements to such
Registration Statement and the Prospectus used in connection therewith as
may be necessary to (A) keep such Registration Statement effective for at
least a period of 90 days (extended for such period of time as Shareholders
are required to discontinue disposition of Registrable Shares pursuant to
Section 6(b) below) or until all of such Registrable Shares have been
disposed of (if earlier), (B) correct any statements or omissions if any
event with
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respect to the Company shall have occurred as a result of which any such
Registration Statement or Prospectus as then in effect would include an
untrue statement of material fact or omit to state any material fact
necessary to make the statements therein not misleading, and (C) comply
with the provisions of the Securities Act with respect to the sale or other
disposition of such Registrable Shares;
(iv) notify in writing the Shareholders' Counsel, and the
Shareholders whose Registrable Shares may be included in such Registration
Statement, promptly of (A) the receipt by the Company of any notification
with respect to any comments by the Commission with respect to such
Registration Statement or Prospectus or any amendment or supplement thereto
or any request by the Commission for the amending or supplementing thereof
or for additional information with respect thereto, (B) the receipt by the
Company of any notification or written information with respect to the
issuance or threatened issuance by the Commission of any stop order
suspending the effectiveness of such Registration Statement or Prospectus
or any amendment or supplement thereto or the initiation or threatening of
any proceeding for that purpose (and the Company shall use its best efforts
to prevent the issuance thereof or, if issued, to obtain its withdrawal)
and (C) the receipt by the Company of any notification with respect to the
suspension of the qualification of such Registrable Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purposes;
(v) use its best efforts to register or qualify such Registrable
Shares under such other securities or blue sky laws of such jurisdictions
as the Shareholders reasonably request and do any and all other acts and
things which may be reasonably necessary or advisable to enable the
Shareholders to consummate the disposition in such jurisdictions of the
Registrable Shares owned by the Shareholders; PROVIDED, HOWEVER, that the
Company will not be required to qualify generally to do business, subject
itself to general taxation or consent to general service of process in any
jurisdiction where it would not otherwise be required to do so but for this
clause (v) or to provide any material undertaking or make any changes in
its By-laws or Certificate of Incorporation which the Board determines to
be contrary to the best interests of the Company;
(vi) furnish to the Shareholders holding such Registrable Shares
such number of copies of a summary Prospectus, if any, or other Prospectus,
including a preliminary Prospectus, in conformity with the requirements of
the Securities Act, and such other documents as such Shareholders may
legally require and may reasonably request
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in order to facilitate the public sale or other disposition of such
Registrable Shares;
(vii) use its best efforts to cause such Registrable Shares to be
registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of
the Company to enable the Shareholders holding such Registrable Shares to
consummate the disposition of such Registrable Shares;
(viii) notify the Shareholders holding such Registrable Shares on a
timely basis at any time when a Prospectus relating to such Registrable
Shares is required to be delivered under the Securities Act within the
appropriate period mentioned in clause (i) of this Section 6(a), of the
happening of any event as a result of which the Prospectus included in such
Registration Statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and prepare and
furnish to such Shareholders a reasonable number of copies of, and file
with the Commission, a supplement to or an amendment of such Prospectus as
may be necessary so that, as thereafter delivered to the offerees of such
shares, such Prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(ix) subject to the execution of confidentiality agreements in form
and substance satisfactory to the Company, make available upon reasonable
notice and during normal business hours, for inspection by the Shareholders
holding Registrable Shares requested to be included in such registration,
any underwriter participating in any disposition pursuant to such
Registration Statement and any attorney, accountant or other agent retained
by the Shareholders or underwriter (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent corporate documents and
properties of the Company (collectively, the "Records"), and cause the
Company's officers, directors and employees to supply all information
(together with the Records, the "Information") reasonably requested by any
such Inspector, in each case as shall be reasonably necessary to enable
them to exercise their due diligence responsibility in connection with such
Registration Statement; PROVIDED, HOWEVER, that any of the Information that
the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, shall not be disclosed by the
Inspectors unless (A) the disclosure of such Information is necessary to
avoid
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or correct a misstatement or omission in the Registration Statement or
Prospectus, (B) the release of such Information is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction or, upon the
written advice of counsel, is otherwise required by law, or (C) such
Information has been made generally available to the public, and the
Shareholders agree that they will, upon learning that disclosure of such
Information is sought in a court of competent jurisdiction, give notice to
the Company and allow the Company, at the Company's expense, to undertake
appropriate action to prevent disclosure of the Information deemed
confidential;
(x) use its best efforts to obtain from its independent certified
public accountants "cold comfort" letters in customary form and at
customary times and covering matters of the type customarily covered by
cold comfort letters;
(xi) use its best efforts to obtain from its counsel an opinion or
opinions in customary form naming the Shareholders as additional addressees
or parties who may rely thereon;
(xii) provide a transfer agent and registrar (which may be the same
entity and which may be the Company) for such Registrable Shares;
(xiii) issue to any underwriter to which the Shareholders holding such
Registrable Shares may sell shares in such offering certificates evidencing
such Registrable Shares;
(xiv) list such Registrable Shares on any national securities exchange
on which any shares of the Common Stock are listed or, if the Common Stock
is not listed on a national securities exchange, use its best efforts to
qualify such Registrable Shares for inclusion on the Nasdaq Stock Market;
(xv) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make available to its
securityholders, as soon as reasonably practicable, earnings statements
(which need not be audited) covering a period of 12 months beginning within
three months after the effective date of the Registration Statement, which
earnings statements shall satisfy the provisions of Section 11(a) of the
Securities Act; and
(xvi) use its best efforts to take all other steps necessary to effect
the registration of, and maintain an
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effective Registration Statement with respect to, such Registrable Shares
contemplated hereby.
(b) Each holder of the Registrable Shares, upon receipt of any notice from
the Company of any event of the kind described in Section 6(a)(viii) or Section
7 hereof, shall forthwith discontinue disposition of the Registrable Shares
pursuant to the Registration Statement covering such Registrable Shares until
such holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(a)(viii) hereof, and, if so directed by the Company,
such holder shall deliver to the Company all copies, other than permanent file
copies then in such holder's possession, of the most recent Prospectus covering
such Registrable Shares at the time of receipt of such notice.
7. SUSPENSION.
Anything contained in this Agreement to the contrary notwithstanding, the
Company may, by notice in writing to each holder of Registrable Shares to which
a Prospectus relates, require such holder to suspend, for up to 90 days (the
"Suspension Period"), the use of any Prospectus included in a Registration
Statement filed under Section 2, 3 or 4 hereof if a Material Transaction exists
that would require an amendment to such Registration Statement or supplement to
such Prospectus (including any such amendment or supplement made through
incorporation by reference to a report filed under Section 13 of the Exchange
Act). The Company may (but shall not be obligated to) withdraw the
effectiveness of any Registration Statement subject to this provision.
8. EXPENSES.
All expenses (other than underwriting discounts and commissions relating to
the Registrable Shares, as provided in the last sentence of this Section 8)
incurred by the Company in complying with Section 6, including, without
limitation, all registration and filing fees (including all expenses incident to
filings with the National Association of Securities Dealers, Inc.), fees and
expenses of complying with securities and blue sky laws, printing expenses, fees
and expenses of the Company's counsel and accountants and fees and expenses of
the Shareholders' Counsel, shall be paid by the Company; PROVIDED, HOWEVER, that
all underwriting discounts and selling commissions applicable to the Registrable
Shares and Other Shares shall be borne by the holders selling such Registrable
Shares and Other Shares, in proportion to the number of Registrable Shares and
Other Shares sold by each such holder.
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9. INDEMNIFICATION.
(a) In connection with any registration of any Registrable Shares under
the Securities Act pursuant to this Agreement, the Company shall indemnify and
hold harmless, to the fullest extent permitted by law, each holder of
Registrable Shares, each underwriter, broker or any other Person acting on
behalf of the holders of Registrable Shares and each other Person, if any, who
controls any of the foregoing Persons within the meaning of the Securities Act
(each such indemnified Person being referred to herein as an "Indemnified
Person") against any losses, claims, damages or liabilities, joint or several
(or actions in respect thereof), to which any of the foregoing Persons may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or allegedly untrue statement of a material
fact contained in or incorporated by reference in the Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary Prospectus or final Prospectus contained therein or otherwise
filed with the Commission, any amendment or supplement thereto or any document
incident to registration or qualification of any Registrable Shares, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or, with respect to any Prospectus, necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or any violation by the Company of the Securities Act or state
securities or blue sky laws applicable to the Company and relating to action or
inaction required of the Company in connection with such registration or
qualification under such state securities or blue sky laws; and shall promptly
reimburse the Indemnified Persons for any legal or other expenses reasonably
incurred by any of them in connection with investigating or defending any such
loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company
shall not be liable in any such case to any such Indemnified Person to the
extent that any such loss, claim, damage, liability or action (including any
legal or other expenses incurred) arises out of or is based upon an untrue
statement or allegedly untrue statement or omission or alleged omission made in
said Registration Statement, preliminary Prospectus, final Prospectus,
amendment, supplement or document incident to registration or qualification of
any Registrable Shares in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Indemnified Person
specifically for use in the preparation thereof; PROVIDED FURTHER, HOWEVER, that
the foregoing indemnity agreement is subject to the condition that, insofar as
it relates to any untrue statement, allegedly untrue statement, omission or
alleged omission made in any preliminary Prospectus but eliminated or remedied
in the final Prospectus (filed pursuant to Rule 424 of the Securities Act), such
indemnity agreement shall
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not inure to the benefit of any Indemnified Person from whom the Person
asserting any loss, claim, damage, liability or expense purchased the Restricted
Shares which are the subject thereof, if a copy of such final Prospectus had
been made available to such Indemnified Person and such final Prospectus was not
delivered to such Person with or prior to the written confirmation of the sale
of such Registrable Shares to such Person.
(b) In connection with any registration of Registrable Shares under the
Securities Act pursuant to this Agreement, each holder of Registrable Shares
being registered shall, severally and not jointly, to the fullest extent
permitted by law, indemnify and hold harmless (in the same manner and to the
same extent as set forth in Section 9(a) above) the Company, each director of
the Company, each officer of the Company who shall have signed such Registration
Statement, each agent, underwriter, broker or other Person acting on behalf of
the Company, each other holder of Registrable Shares or Other Shares and each
Person who controls any of the foregoing Persons within the meaning of the
Securities Act with respect to any statement or omission from such Registration
Statement, any preliminary Prospectus or final Prospectus contained therein or
otherwise filed with the Commission, any amendment or supplement thereto or any
document incident to registration or qualification of any Registrable Shares, if
such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company or such underwriter by or on behalf
of such holder specifically for use in connection with the preparation of such
Registration Statement, preliminary Prospectus, final Prospectus, amendment,
supplement or document; PROVIDED, HOWEVER, that the maximum amount of liability
in respect of such indemnification shall be limited, in the case of each holder
of Registrable Shares, to an amount equal to the net proceeds actually received
by such holder from the sale of Registrable Shares effected pursuant to such
registration.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in Section 9(a) or (b),
such indemnified party will, if a claim in respect thereof is made against an
indemnifying party, give written notice to the latter of the commencement of
such action; PROVIDED, HOWEVER, that the indemnified party's failure to give
such notice shall not release, relieve or in any way affect the indemnifying
party's obligation hereunder to indemnify the indemnified party unless and to
the extent that the rights of the indemnifying party are prejudiced thereby. In
case any such action is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified to the extent that
it may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the
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indemnifying party shall not be responsible for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof; PROVIDED, HOWEVER, that if any indemnified party shall have reasonably
concluded (based on the written advice of counsel) that there may be one or more
legal or equitable defenses available to such indemnified party which are
additional to or conflict with those available to the indemnifying party, or
that such claim or litigation involves or could have an effect upon matters
beyond the scope of the indemnity agreement provided in this Section 9, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party and such indemnifying party shall reimburse
such indemnified party and any Person controlling such indemnified party for
that portion of the fees and expenses of any counsel retained by the indemnified
party which is reasonably related to the matters covered by the indemnity
agreement provided in this Section 9.
(d) If the indemnification provided for in this Section 9 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, claim, damage, liability or action referred to herein
(other than as a result of the applicability of the two provisos in Section
9(a)), then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amounts paid or payable by such
indemnified party as a result of such loss, claim, damage, liability or action
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions which resulted in such loss, claim,
damage, liability or action as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
10. UNDERWRITING AGREEMENT.
(a) Notwithstanding the provisions of Sections 5, 6, 8 and 9, to the
extent that the Company and at least the Majority of Registering Shareholders
shall enter into an underwriting or similar agreement that contains provisions
which conflict with any provision of any such Sections, the provisions contained
in such agreement shall control with respect to such underwritten offering.
(b) If any registration pursuant to Section 2 is requested to be an
underwritten offering, the Company shall negotiate in good faith to enter into a
reasonable and customary
-16-
<PAGE>
underwriting agreement with the underwriters thereof. The Company shall be
entitled to receive indemnities from lead institutions, underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above with
respect to information so furnished in writing by such Persons specifically for
inclusion in any Prospectus or Registration Statement and to the extent
customarily given their role in such distribution.
(c) No Shareholder may participate in any registration hereunder that is
underwritten unless such Shareholder agrees to (i) sell such Shareholder's
Registrable Shares proposed to be included therein on the basis provided in any
underwriting arrangements approved by the Company and the Majority of
Registering Shareholders (which approval shall not be unreasonably withheld by
such Shareholders) and (ii) as expeditiously as possible, notify the Company of
the occurrence of any event concerning such Shareholder as a result of which the
Prospectus relating to such registration contains an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
11. NOMINEES FOR BENEFICIAL OWNERS.
In the event that any Registrable Shares are held by a nominee for the
beneficial owner thereof, the beneficial owner thereof may, at its election by
written notice to the Company effective upon receipt by the Company, be treated
as a Shareholder for purposes of any request or other action by any Shareholder
pursuant to this Agreement or any determination of any number or percentage of
shares of Registrable Shares held by any Shareholder contemplated by this
Agreement. If the beneficial owner of any Registrable Shares so elects, the
Company may require assurances reasonably satisfactory to it of such owner's
beneficial ownership of such Registrable Shares. Prior to receipt by the
Company of written notice contemplated hereby, any action taken by any nominee
shall be binding upon any such beneficial owner.
12. INFORMATION BY HOLDER.
The Shareholders shall furnish to the Company such written information
regarding the Shareholders and the distribution proposed by the Shareholders as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
-17-
<PAGE>
13. EXCHANGE ACT COMPLIANCE.
From the Registration Date or such earlier date as a Registration Statement
filed by the Company pursuant to the Exchange Act relating to any class of the
Company's securities shall have become effective, the Company shall comply with
all of the reporting requirements of the Exchange Act applicable to it and shall
comply with all other public information reporting requirements of the
Commission which are conditions to the availability of Rule 144 for the sale of
the Common Stock. The Company shall cooperate with the Shareholders in
supplying such information as may be necessary for the Shareholders to complete
and file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of Rule 144.
14. MERGERS, ETC.
The Company shall not, directly or indirectly, enter into any merger,
consolidation or reorganization in which the Company shall not be the surviving
corporation unless the surviving corporation shall, prior to such merger,
consolidation or reorganization, agree in writing to assume the obligations of
the Company under this Agreement, and for that purpose references hereunder to
"Registrable Shares" shall be deemed to include the shares of common stock, if
any, that the Shareholders would be entitled to receive in exchange for Common
Stock under any such merger, consolidation or reorganization; PROVIDED, HOWEVER,
that, to the extent the Shareholders receive securities that are by their terms
convertible into shares of common stock of the issuer thereof, then only such
shares of common stock as are issued or issuable upon conversion of said
convertible securities shall be included within the definition of "Registrable
Securities."
15. NEW CERTIFICATES.
As expeditiously as possible after the effectiveness of any Registration
Statement filed pursuant to this Agreement, the Company will deliver in exchange
for any legended certificate evidencing Restricted Shares so registered, new
stock certificates not bearing any restrictive legends, provided that in the
event less than all of the Restricted Shares evidenced by such legended
certificate are registered, the holder thereof agrees that a new certificate
evidencing such unregistered shares will be issued bearing the appropriate
restrictive legend.
16. NO CONFLICT OF RIGHTS; SELECTION OF UNDERWRITER.
Except for the DLJ Registration Agreement, the Company shall not, at any
time after the date hereof, grant any registration rights that conflict with, or
have any priority over, the registration rights granted hereby. In any Public
-18-
<PAGE>
Offering, the managing underwriter shall be a nationally recognized investment
banking firm chosen by the Board.
17. TERMINATION.
This Agreement shall terminate and be of no further force or effect when
there shall no longer be any Registrable Shares outstanding.
18. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the Company and the Shareholders and, subject to Section 18(b), the
respective successors and assigns of the Company and the Shareholders. Except
as otherwise expressly provided in Sections 2, 3 and 5, this Agreement is not
intended to create any third party beneficiaries.
(b) ASSIGNMENT. Each Shareholder may assign its rights hereunder to any
purchaser or transferee of Registrable Shares; PROVIDED, HOWEVER, that such
purchaser or transferee shall, as a condition to the effectiveness of such
assignment, be required to execute a counterpart to this Agreement agreeing to
be treated as an Shareholder, whereupon such purchaser or transferee shall have
the benefits of and shall be subject to the restrictions contained in this
Agreement as if such purchaser or transferee was originally included in the
definition of a Shareholder and had originally been a party hereto.
(c) SEVERABILITY. 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.
(d) ENTIRE AGREEMENT. This Agreement and the other writings referred to
herein or delivered pursuant hereto contain the entire agreement among the
parties with respect to the subject matter hereof and thereof and supersede all
prior and
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<PAGE>
contemporaneous arrangements or understandings with respect hereto and thereto.
(e) NOTICES. All communications hereunder to any party shall be deemed to
be sufficient if contained in a written instrument delivered in person or sent
by telecopy, nationally-recognized overnight courier guaranteeing next day
delivery or first class registered or certified mail, return receipt requested,
postage prepaid, addressed to such party at its address below or such other
address as such party may hereafter designate in writing:
if to the Company, to:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
Attention: Chief Executive Officer
Telecopier: (818) 735-4923;
with copies to:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: General Counsel
Telecopier: 818-735-8833
Sidley & Austin
555 W. Fifth Street
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: 213-896-6600
Buchalter, Nemer, Fields & Young
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017
Attention: Mark Bonenfant, Esq.
Telecopier: (213) 896-0400
O'Sullivan, Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Harvey M. Eisenberg, Esq.
Telecopier: (212) 408-2420; and
if to any Shareholder, to such Shareholder at the
address indicated on SCHEDULE I hereto.
-20-
<PAGE>
All such notices, requests, consents and other communications shall be
deemed to have been given and received (i) in the case of personal delivery or
delivery by telecopy, on the date of such delivery, (ii) in the case of dispatch
by nationally-recognized overnight courier, on the next Business Day following
such dispatch and (iii) in the case of mailing, on the fifth Business Day after
the posting thereof.
(f) MODIFICATIONS; AMENDMENTS; WAIVERS. The terms and provisions of this
Agreement may not be modified or amended, nor may any provision be waived,
except pursuant to a writing signed by the Company and the Majority of
Shareholders; PROVIDED, HOWEVER, that no such modification, amendment or waiver
that would treat any Shareholder in a non-ratable, discriminatory manner shall
be made without the prior written consent of such Shareholder. The failure of
any party to enforce any of the provisions of this Agreement shall in no way be
construed as a waiver of such provisions and shall not affect the right of such
party thereafter to enforce each and every provision of this Agreement in
accordance with its terms. The Shareholders, to the fullest extent permitted by
applicable laws, release the members of the Board from any and all claims for
breach of fiduciary duty arising out of the application of this Section 18(f).
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(h) HEADINGS. The headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed to be a
part of this Agreement.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE STATE OF NEW
YORK 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 LAWS 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.
(j) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(k) NOUNS AND PRONOUNS. Whenever the context may require, any pronouns
used herein shall include the corresponding
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<PAGE>
masculine, feminine or neuter forms, and the singular form of nouns and pronouns
shall include the plural and vice-versa.
(1) CONSTRUCTION. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement on the date first written above.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By: /s/ Larry E. Thomas
-----------------------------
Name: Larry Thomas
Title: President
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: Chase Capital Partners
Its General Partner
By: /s/ David L. Ferguson
-----------------------------
A General Partner
CB CAPITAL INVESTORS, INC.
By: /s/ David L. Ferguson
-----------------------------
Name: David L. Ferguson
Title: Authorized Signatory
WESTON PRESIDIO CAPITAL II, L.P.
By: Weston Presidio Capital
Management II, L.P.,
Its General Partner
By: /s/ Michael P. Lazarus
-----------------------------
Michael P. Lazarus,
General Partner
WELLS FARGO SMALL BUSINESS INVESTMENT
COMPANY, INC.
By: /s/ Steven Burge
-----------------------------
Steven Burge
Managing Director
<PAGE>
RAY SCHERR LIVING TRUST
/s/ Ray Scherr
--------------------------------
By: Ray Scherr, Trustee
/s/ Larry Thomas
--------------------------------
Larry Thomas
/s/ Marty Albertson
--------------------------------
Marty Albertson
/s/ Dave DiMartino
--------------------------------
Dave DiMartino
/s/ Rod Barger
--------------------------------
Rod Barger
/s/ Rich Pidanick
--------------------------------
Rich Pidanick
/s/ Don Kelsey
--------------------------------
Don Kelsey
/s/ George Lampos
--------------------------------
George Lampos
/s/ Bill McGarry
--------------------------------
Bill McGarry
/s/ Andy Heyneman
--------------------------------
Andy Heyneman
<PAGE>
TAX INDEMNIFICATION AGREEMENT
This Tax Indemnification Agreement ("Agreement") dated as of May 1, 1996 by
and among The Guitar Center Management Company, Inc., a California corporation
(the "Company"), Ray Scherr ("Scherr"), an individual resident of Los Angeles
County, California, and the individuals identified on the signature pages hereto
under the caption "Management" (collectively "Management").
RECITALS
WHEREAS, the Company, The Raymond Scherr Living Trust ("Trust"), Management
and certain other parties are parties to an Agreement dated as of May 1, 1996
(the "Transaction Agreement");
WHEREAS, pursuant to the provisions of the Transaction Agreement, several
transactions will occur, including the recapitalization of the Company in which
Trust will exchange certain shares of Common Stock in the Company for shares of
Preferred Stock therein ("Recapitalization"), all as described in the
Transaction Agreement;
WHEREAS, the Company and Management has represented to Scherr that the
Recapitalization will be a tax free reorganization pursuant to
Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended ("Code");
WHEREAS, subsequent to the Recapitalization, the Company will redeem
certain shares of Common Stock in the Company owned by the Trust ("Redemption"),
all as described in the Transaction Agreement;
WHEREAS, the parties hereto acknowledge that the transactions contemplated
by the Transaction Agreement will provide valuable economic benefits (including
tax benefits) to Management; and
WHEREAS, the parties hereto desire to provide for the manner in which
certain federal, state and local tax matters will be determined and resolved
with respect to the transactions contemplated by the Transaction Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows.
<PAGE>
1. PREPARATION AND FILING OF TAX RETURNS. (a) For the taxable year
ending December 31, 1996, Scherr shall timely file all federal, state and local
tax returns or reports required to be filed by him as an individual.
(b) The returns and reports described in Section 1(a) hereof shall reflect
the tax treatment of (i) the Recapitalization as a "recapitalization"
reorganization as that term is defined in Section 368(a)(1)(E) of the Code,
resulting in tax free treatment to Scherr and the Company upon the conversion of
shares of Common Stock of the Company into shares of Preferred Stock and (ii)
the Redemption as a sale or exchange under Section 302(b) of the Code. Scherr
shall not make any filing of a Form 8275 (or any state equivalent) with respect
to the Recapitalization or the Redemption without the prior written consent of
the Company.
2. TAX AUDITS. In the event that there shall be any audit or examination
of any tax return or report of Scherr which questions the reporting by Scherr of
the Recapitalization as described in Section 1(b) (the "Tax Issue"), the
reasonable costs and expenses of resolving or responding to any audit or
examination or any request for documents or information made by any taxing
authority of Scherr, in each case relating to the Tax Issue, and of any
protests, litigation and other proceedings commenced by or against Scherr with
respect to the Tax Issue, shall be borne by the Company. Such costs will be
reimbursed to Scherr as incurred.
3. INDEMNIFICATION. (a) The Company shall indemnify and defend Scherr
and his successors and assigns against, and hold Scherr and his successors and
assigns harmless from, at all times after the date hereof, any and all loss,
damage or liability, and all expenses incurred, suffered, sustained or required
to be paid by Scherr (other than actual taxes payable) resulting from, related
to or arising out of any claim, action, suit or proceeding by any taxing
authority which modifies or seeks to modify in any way adverse to Scherr, the
tax treatment of the Recapitalization from the tax treatment described in
Section 1(b) (i) hereof (the "Recapitalization Tax Claim"), including any loss,
damage or liability arising from any attempt to treat, as a result of the Tax
Issue, the Redemption as other than a sale or exchange by the Trust under
Section 302(b) of the Code. Notwithstanding the foregoing, the maximum
liability of Company under this Section 3(a) shall be an amount equal to all
interest, penalties or additions to tax resulting from such modified or
attempted modification of the tax treatment as described in Section 1(b). If
requested by Company, Scherr will contest, defend or litigate, using counsel of
Scherr's choice in connection therewith, the Tax Issue and the Tax Claim
(insofar as the Tax Claim relates to interest, penalties or additions to tax
2
<PAGE>
resulting from the modified or attempted modification of the foregoing tax
treatment), and may, but shall not be obligated to, contest, defend or litigate
the amount of tax due with respect to the Tax Claim. The Company shall have the
right to participate in any examination, audit, or tax controversy relating to
the Tax Issue, using counsel of its choice and at Company's expense. Scherr
will not settle or compromise the Tax Claim if such settlement or compromise
will obligate Scherr to pay other than DE MINIMIS interest, penalties or
additions to tax without Company's written consent, not to be unreasonably
withheld.
If at any time subsequent to April 15, 1997 there has been a taxable
disposition of all or part of the Preferred Stock received by the Trust in the
Recapitalization, the obligation for indemnification with respect to interest
arising under Section 3(a) shall be limited to the sum of (i) interest imposed
by any taxing authority or court which accrues between April 15, 1997 and the
due date(s) (before extensions) of the income tax return(s) reporting the
taxable disposition(s) of such Preferred Stock and (ii) the difference, if any,
between interest imposed on underpayments of tax and interest paid on
overpayments of tax after the due dates (before extensions) of the tax returns
reporting such dispositions (calculated as if a refund claim were timely filed)
in the event the Company continues to defend against the Recapitalization Tax
Claim.
(b) Scherr shall provide the Company with written notice of the Tax Claim
and/or the assertion of the Tax Issue which is, or may be, subject to the
indemnification provisions of this Section 3, or any investigation or request
for information which could reasonably be expected to result in such a Tax Claim
and shall also make available to the Company all relevant documents and other
information pertaining to such Tax Claim or investigation or request for
information, including copies of all relevant tax forms and correspondence.
Scherr's failure to give such notice or to provide copies of documents or to
furnish relevant data or information in connection with any Tax Claim shall not
constitute a defense (in part or in whole) to any claim for indemnification by
Scherr, except and only to the extent that such failure shall result in any
prejudice to the indemnifying parties.
(c) Claims by Scherr for reimbursement under Section 2 or indemnification
under this Section 3 may be made by Scherr at any time and from time to time
after the date hereof. Any such claims must be made in writing and must be sent
to the Company at its principal executive office prior to the expiration of the
relevant statute of limitations during which a governmental authority can assert
a claim for any tax liability.
3
<PAGE>
(d) The obligation of the Company under Sections 2 or 3 shall not be
subject to the performance by any other party hereto of its obligations under
this Agreement.
(e) The parties recognize that the provisions of Section 3 hereof are
intended to constitute an adjustment of the terms of the Recapitalization such
that the Trust will be economically in the same position as if the
Recapitalization constituted a tax free reorganization (subject to the
limitations set forth in Section 3(a) on the extent and amount of the
indemnification). Notwithstanding the foregoing, in the event that any amount
received or to be received by Scherr pursuant to Section 3(a) of this Agreement
would result in Scherr incurring further and additional liability for federal,
state, or local taxes, then the amount required to be paid by Company pursuant
to Section 3(a) shall be "grossed up" to take into account any and all such
liability on all amounts received or to be received by Scherr under this
Agreement.
4. ALLOCATION. (a) The Company shall be responsible for making any
payments owed to Scherr pursuant to Section 2 or Section 3 above.
(b) Subject to Section 4(b) below, each member of Management shall
reimburse the Company (severally and not jointly and in the proportions set
forth on the signature pages attached hereto) all amounts paid by the Company
pursuant to Section 4(a) above. Such payment shall be deemed a contribution to
the capital of the Company. Notwithstanding the foregoing, in the event that
any amount received or to be received by the Company pursuant to Section 4(a) of
this Agreement would result in the Company incurring any liability for federal,
state, or local taxes as a result of such contributions, then the amount
required to be paid by Management pursuant to this Section 4(b) shall be
"grossed up" to take into account any and all such liability on all amounts
received or to be received by the Company from the Management pursuant to this
Section 4.
(c) Notwithstanding the foregoing, the total aggregate amounts payable by
any member of Management pursuant to Section 4(b) shall not exceed such
Manager's proportionate share of $5 million.
(d) The obligations of Management to make the contributions to the Company
pursuant to this Section 4 shall be payable upon the written demand of the
Company sent to each member of Management by certified mail, return receipt
requested to the address specified beneath such person's signature. Such
obligations shall be absolute and unconditional and not subject to any rights of
counterclaim or set-off (and, to the greatest extent permitted by law, each
member of Management waives any
4
<PAGE>
such rights). In the event any member of Management fails to pay any amount
owing to the Company when due, such amount shall bear interest at a rate 2%
higher than the interest rate payable by Company on its revolving debt
facility (or the highest rate permitted by law, if less), compounded
annually, until such amounts and interest are paid in full. In addition to
all other remedies available to the Company, to the greatest extent permitted
by law, each member of Management grants to the Company the right to set-off
against any amounts owing to such member of Management the amounts payable by
such person to the Company hereunder.
5. ARBITRATION. (a) Each of the parties hereto hereby agrees between
and among themselves that any dispute, controversy or claim arising out of or
relating to this Agreement or the subject matter of this Agreement or the
breach, termination or invalidity thereof shall be resolved by binding
arbitration set forth in Title 9 of the California Code of Civil Procedure
(section 1280 et seq., "Arbitration") then in effect. Except as otherwise
provided by Title 9, the arbitration shall be the sole and exclusive forum for
resolution of the dispute or controversy, and the award shall be final, binding
and enforceable, and may be confirmed by the judgment of a competent court.
(b) The arbitrator shall be an independently operating retired judge of
the Los Angeles Superior Court who is disinterested in the dispute or
controversy and has no business or personal relationship with any of the parties
to this Agreement. Should the parties to the dispute be unable to select an
arbitrator, each shall select one such retired judge. The judges so selected
shall select an additional judge, and the parties' respective judges and the
selected judge shall form a panel of arbitrators. In the event of both
inability to choose a single retired judge as arbitrator and a dispute involving
an odd number of parties with non-parallel claims, the parties' respective
judges shall select two such retired judges and the parties' respective judges
and the selected judges shall form a panel of arbitrators.
(c) The place of arbitration shall be Los Angeles, California. With
respect to all issues not governed by the procedural rules of Title 9, the
arbitrator or panel of arbitrators shall apply the law of the State of
California as in effect on the date of this Agreement.
(d) The prevailing party in any such arbitration shall be entitled to
recover its costs and legal fees from the other party or parties.
6. MISCELLANEOUS. (a) This Agreement contains the entire agreement
between the parties hereto with respect to the
5
<PAGE>
transactions and matters which are the subject hereof, and supersedes all
prior agreements, arrangements or understandings with respect thereto. This
Agreement shall be binding upon the respective parties hereto and their
respective successors-in- interest and assigns.
(b) The descriptive headings of this Agreement are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
(c) This Agreement shall be governed by and construed in accordance with
the laws of the State of California (other than the choice of law principles
thereof). Any action, suit or other proceeding initiated by any party hereto
against any other party hereto under or in connection with this Agreement may be
brought in any Federal or state court in the State of California, as the party
bringing such action, suit or proceeding shall elect, having jurisdiction over
the subject matter thereof. The parties hereto submit themselves to the
jurisdiction of any such court and agree that service of process on them in any
such action, suit or proceeding may be effected by the means by which notices
are to be given to it under this Agreement.
(d) Any waiver of any term or condition of this Agreement, or any
amendment or supplementation of this Agreement, shall be effective only if in
writing. A waiver of any breach or failure to enforce any of the terms or
conditions of this Agreement shall not in any way affect, limit or waive a
party's rights hereunder at any time to enforce strict compliance thereafter
with every term or condition of this Agreement. This Agreement may be signed in
counterparts.
(e) In the event that any provision contained in this Agreement shall be
determined to be invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and the remaining provisions of this Agreement shall not,
6
<PAGE>
at the election of the party for whose benefit the provision exists, be in
any way impaired.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
/s/ RAY SCHERR
- ----------------------------------
RAY SCHERR
THE GUITAR CENTER MANAGEMENT COMPANY, INC.
By /s/ RAY SCHERR
--------------------------------
Its Chairman of the Board
-----------------------------
The Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91362
7
<PAGE>
MANAGEMENT:
/s/ LARRY THOMAS
- ------------------------- (38.22%)
LARRY THOMAS
5521 Fairview Road
Agoura Hills, CA 91301
/s/ MARTY ALBERTSON
- ------------------------- (25.48%)
MARTY ALBERTSON
24351 Rolling View Road
Hidden Hills, CA 91302
/s/ DAVE DiMARTINO
- ------------------------- (19.10%)
DAVE DiMARTINO
19641 Hiawatha Street
Chatsworth, CA 91311
/s/ ROD BARGER
- ------------------------- (3.38%)
ROD BARGER
23247 Canzonet Street
Woodland Hills, CA 91367
/s/ RICH PIDANICK
- ------------------------- (3.38%)
RICH PIDANICK
/s/ DON KELSEY
- ------------------------- (1.23%)
DON KELSEY
23719 Country Fair
Hockley, Texas 77447
/s/ GEORGE LAMPOS
- ------------------------- (1.84%)
GEORGE LAMPOS
19552 Superior Street
Northridge, CA 91324
8
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/s/ BILL McGARRY
- ------------------------- (4.91%)
BILL McGARRY
316 South Huntington Avenue
San Dimas, CA 91733
/s/ ANDY HEYNEMAN
- ------------------------- (2.46%)
ANDY HEYNEMAN
22125 Sun Ranch Road
Chatsworth, CA 91311
9
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GUITAR CENTER MANAGEMENT COMPANY, INC.
1996 PERFORMANCE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the GUITAR CENTER MANAGEMENT COMPANY, INC. 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 shares
of the Common Stock, without par value (together with any securities issued in
respect thereof or in substitution therefor, the "Common Stock"), of the
Company, 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 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."
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 (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 and Junior Preferred
Stock of the Company, the value of the consideration
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paid by the purchaser in the Sale of the Company attributed to the Company's
Common Stock, Common Stock Equivalents and Junior Preferred Stock; and (ii) if
such Sale of the Company involves a Sale of less than all of the Common Stock
and Junior Preferred Stock 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 and Junior Preferred Stock
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.
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.
"COMMITTEE" has the meaning set forth in Section 3(a) hereof.
"COMMON STOCK" has the meaning set forth in Section 1 hereof.
"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.
"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
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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" has the meaning set forth in Section 13 hereof.
"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.
"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.
"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 SHARES" 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.
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"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 SHARES" means, at any time, an aggregate of 173,375 shares
of Common Stock (constituting 10% of the outstanding Common Stock on a fully-
diluted basis on the Effective Date).
"RULE 16b-3" has the meaning set forth in Section 3(a) hereof.
"SALE OF THE COMPANY" has the meaning ascribed thereto in the
Stockholders Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES AVAILABLE FOR AWARD" means the Reserved Shares, if any, which
vest in accordance with Section 7 of this Plan.
"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.
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"UNAVAILABLE SHARES" has the meaning set forth in Section 7(f).
"VESTING DATES" means the dates specified as such in Section 7(c)
hereof.
3. ADMINISTRATION OF THE PLAN
(a) STOCK 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 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 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.
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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,
HOWEVER, that all Options granted after a Public Offering shall be ISOs.
(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 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
Subject to Section 5(f), 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");
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(ii) the time or times at which Options shall be granted;
and
(iii) the number of Shares Available for Award subject to
each Option.
(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. The Committee shall not issue
any ISOs without the prior approval of the Board. Each Option shall specify the
number of Shares Available for Award for which such Option shall be exercisable
and the exercise price for each such Share 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 Shares Available for Award are also
subject to time vesting based upon the Optionee's continued service to the
Company and its Subsidiaries; provided that without the prior approval of the
Board all Option Agreements will contain time vesting provisions that are no
more favorable to the Optionee than pro-rata time vesting over a five-year
period based upon Optionee's years of service subsequent to the date such
Options were actually granted to such Optionee, subject to acceleration of time
vesting upon a Qualified Public Offering or 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.
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(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.
(f) SHARES
Options shall be granted to purchase a specified number of the
Reserved Shares which become Shares Available for Award. No Option shall be
granted for Reserved Shares that are not Shares Available for Award. All Options
shall be exercisable for Common Stock.
6. OPTION PRICE
(a) GENERAL
The price (the "Option Price") at which each Share Available for Award
may be purchased shall be the Fair Market Value (or such lesser amount approved
by the Board) of a share of Common Stock 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 a share of Common Stock.
(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 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
the Common Stock is 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 date of grant, on
the principal national securities exchange on which it is so traded;
or
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(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 the Common Stock in private
transactions negotiated at arms' length.
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 SHARES
(a) Each Option granted pursuant to the Plan shall be exercisable for
a specified number of the Reserved Shares which become Shares Available for
Award in accordance with this Section 7.
(b) On the Effective Date, 20% of the Reserved Shares shall
automatically become Shares 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 Shares shall
immediately become Shares Available for Award pursuant to the following table:
Number of Reserved Shares
Corporate Value that Become Shares
Vesting Date Target Available for Award
- ------------ --------------- -------------------------
12/31/96 $152,108,000* 10% of Reserved Shares
12/31/97 $249,530,000* 20% of Reserved Shares
- -----------------------
* In each case, the Corporate Value Target shall be increased (or decreased)
by the positive (or negative) amount equal to the Cumulative Adjustment
Amount as of such Vesting Date.
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Number of Reserved Shares
Corporate Value that Become Shares
Vesting Date Target Available for Award
- ------------ --------------- -------------------------
12/31/98 $362,023,000* 20% of Reserved Shares
12/31/99 $498,643,000* 20% of Reserved Shares
12/31/2000 $660,230,000* 10% of Reserved Shares
(d) If on any Vesting Date the Calculated Corporate Value is less
than the Corporate Value Target no shares shall then vest, but the number of
shares which were available for vesting at such time shall be included in the
number of shares 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 Shares shall become shares
Available for Award: such number of Reserved Shares that would have become
Shares 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 Shares previously
designated Shares 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 Shares would have become Shares 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 Shares had previously become
Shares Available for Award, an additional 40% of the Reserved Shares become
Shares Available for Award.
(f) Immediately prior to the occurrence of a Sale of the Company,
each Share 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 Shares that are not then Shares
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 Shares are not Shares Available for Award (the "Unavailable
Shares"), then none of the Unavailable Shares shall be available under this Plan
(I.E., they will never become Shares Available for Award) and all of the
Unavailable Shares shall be included in a successor stock option plan pursuant
to Section 15(c) of the Stockholders' Agreement.
(h) In the event the Company or its Subsidiaries makes any capital
expenditures, or consummates any merger or
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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.
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) immediately 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 Shares Available for Award.
(b) The Committee shall have the power to determine
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what constitutes a Termination For Cause for purposes of the Plan, and the date
upon which such Termination For Cause shall occur. All such determination shall
be final and conclusive and binding upon the Optionee.
(c) Any Shares 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;
(iii) vested Options to purchase Shares Available for
Award, valued for such purposes at the
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Fair Market Value per share of Common Stock 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).
Notwithstanding the foregoing, after the Company's initial Public
Offering is consummated, the payment of the exercise price for an Option shall
only be made in the manner provided in clause (i) above.
(b) NOTICE
An Optionee (or other person, as provided in Section 12(b)) may
exercise an Option (for the Shares Available for Award represented thereby)
granted under the Plan in whole or in part (but for the purchase of whole shares
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 shares with respect to which the
Option is being exercised (the "Optioned Shares");
(iii) the method of payment for the Optioned Shares (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 Shares 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 a stock certificate 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 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. 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 a
stock certificate pursuant to this Section 10(c).
11. ADJUSTMENTS
(a) CHANGES IN CAPITAL STRUCTURE
If the Common 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, the Board shall make such
adjustments in the number and class of shares of stock available under the Plan
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),
including, without limitation, a corresponding adjustment changing the number
and class of shares allocated to, and the Option Price of, each Option or
portion thereof outstanding at the time of such change. 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 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 fractional shares shall be issued as a result of
any such adjustment, and any fractional shares resulting from the
computations pursuant to
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Section 12(a) shall be eliminated without consideration from the respective
Options;
(ii) no adjustment shall be made for cash dividends or
the issuance to stockholders of rights to subscribe for additional
shares of Common Stock or other securities; and
(iii) 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.
12. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES
(a) COMPLIANCE WITH SECURITIES LAWS
No Options shall be granted under the Plan, and no shares of Common
Stock 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 shares of Common Stock 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 shares of Common Stock 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").
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 SAID 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
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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 person unless a Qualified Public Offering 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 ISO 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. The date on which the Plan becomes effective is called the
"Effective Date" herein.
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.
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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 Optioned Shares 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 Optioned Shares to the Optionee (a
"Disqualifying Disposition"), the holder of the Optioned Shares shall,
immediately prior to such 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 shares of Common Stock 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.
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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 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.
As adopted by the Board of Directors
of GUITAR CENTER MANAGEMENT COMPANY, INC. on June 3, 1996.
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Exhibit 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement"), between GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "Company"), and Lawrence Thomas (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to (i) 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 Chief Executive Officer of the Company and shall have the normal duties,
responsibilities and authority of the Chief Executive Officer, 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, 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 the Company acknowledges that the Executive may devote
such time that the Executive deems appropriate for managing his own investment
portfolio so long as the Executive shall at all times adequately fulfill his
obligations pursuant to this Section 2(b).
<PAGE>
(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 $500,000 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 paid an annual bonus
following the end of such fiscal year equal to 57.14% of the Bonus Pool,
determined and payable as provided in this subsection (b) (the "Annual Bonus").
The Annual Bonus shall be determined in good faith by the Board as soon as
practicable after the end of the fiscal year with respect to which it is
payable, and shall be paid to Executive in a lump sum promptly thereafter,
subject to all withholding with respect thereto as is required by applicable
law. The amount of the Bonus Pool with respect to any fiscal year shall be a
percentage of the Company's Excess Cash Flow for such year, as follows:
----------------------------- ---------------------------------
IF EXCESS CASH FLOW IS: BONUS POOL IS:
----------------------------- ---------------------------------
Zero to $1,000,000 10% of Excess Cash Flow
----------------------------- ---------------------------------
$1,000,000.01 to $2,000,000 $100,000 plus 20% of Excess
Cash Flow in excess of
$1,000,000
----------------------------- ---------------------------------
$2,000,000.01 to $4,000,000 $300,000 plus 30% of Excess
Cash Flow in excess of
$2,000,000
----------------------------- ---------------------------------
Over $4,000,000 $900,000
----------------------------- ---------------------------------
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"Excess Cash Flow" with respect to any year means the Company's Actual EBITDA
for such year minus the Company's Target EBITDA for such year. Actual EBITDA
means the Company's EBITDA (as defined in the Stockholders Agreement) plus any
accrued amounts with respect to Annual Bonuses payable to Messrs. Thomas and
Albertson or to other senior management personnel pursuant to any
non-discretionary performance cash bonus plans hereafter adopted minus, all
capitalized pre-opening costs with respect to new or relocated stores. Target
EBITDA shall mean, with respect to the 1996 determination, $23,016,000, and
with respect to all other years, an amount determined by the Board in good faith
within one month after the beginning of such year.
(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.
(d) During the Employment Period, the Executive shall be entitled to
5 weeks paid vacation during each 12-month period worked, commencing on the date
hereof.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and the
Executive, the Employment Period shall end on the fifth anniversary of the date
of this Agreement; 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 he received prior to termination (such bonus to be
pro-rated for any partial year), and continuation of his
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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 the fifth
anniversary of this Agreement, 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 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
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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.
(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.
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(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 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
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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
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.
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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 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 A 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, the fifth anniversary of the date of this Agreement (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.
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(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.
(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
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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 (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:
Larry Thomas
6390 Chesebro Road
Agoura Hills, CA 91301
Telephone: (818) 706-1873
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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.
(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
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<PAGE>
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 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.
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<PAGE>
(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 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
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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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<PAGE>
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
/s/ LARRY THOMAS
----------------------------------------
Larry Thomas
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement"), between GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "Company"), and Marty Albertson (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to (i) 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 Executive Vice President of the Company and shall have the normal duties,
responsibilities and authority of the Executive Vice President, 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 the Company acknowledges that the
Executive may devote such time that the Executive deems appropriate for managing
his own investment portfolio so long as the Executive shall at all times
adequately fulfill his obligations pursuant to this Section 2(b).
<PAGE>
(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 $375,000 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 paid an annual bonus
following the end of such fiscal year equal to 42.86% of the Bonus Pool,
determined and payable as provided in this subsection (b) (the "Annual Bonus").
The Annual Bonus shall be determined in good faith by the Board as soon as
practicable after the end of the fiscal year with respect to which it is
payable, and shall be paid to Executive in a lump sum promptly thereafter,
subject to all withholding with respect thereto as is required by applicable
law. The amount of the Bonus Pool with respect to any fiscal year shall be a
percentage of the Company's Excess Cash Flow for such year, as follows:
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IF EXCESS CASH FLOW IS: BONUS POOL IS:
- --------------------------------------------------------------------------------
Zero to $1,000,000 10% of Excess Cash Flow
- --------------------------------------------------------------------------------
$1,000,000.01 to $2,000,000 $100,000 plus 20% of Excess
Cash Flow in excess of
$1,000,000
- --------------------------------------------------------------------------------
$2,000,000.01 to $4,000,000 $300,000 plus 30% of Excess
Cash Flow in excess of
$2,000,000
- --------------------------------------------------------------------------------
Over $4,000,000 $900,000
- --------------------------------------------------------------------------------
"Excess Cash Flow" with respect to any year means the Company's Actual EBITDA
for such year minus the Company's Target EBITDA for such year. Actual EBITDA
means the Company's EBITDA (as defined in the Stockholders Agreement) plus any
accrued amounts with respect to Annual Bonuses payable to Messrs. Thomas and
Albertson or to other senior management personnel pursuant to any
non-discretionary performance cash bonus plans hereafter adopted minus, all
capitalized pre-opening costs with respect to new or relocated stores. Target
EBITDA shall mean, with respect to the 1996 determination, $23,016,000, and
with respect to all other years, an amount determined by the Board in good faith
within one month after the beginning of such year.
(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.
(d) During the Employment Period, the Executive shall be
entitled to 5 weeks paid vacation during each 12-month period worked, commencing
on the date hereof.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and
the Executive, the Employment Period shall end on the fifth anniversary of the
date of this Agreement; 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
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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 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 the fifth anniversary of
this Agreement, 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 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
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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.
(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);
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(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 6, 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 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)
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<PAGE>
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
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.
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<PAGE>
(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 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 A 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, the fifth anniversary of the date of this Agreement (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
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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.
(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
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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 (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
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Sidley & Austin
555 W. Fifth St.
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: (213) 896-6600
If to the Executive, to:
Marty Albertson
24351 Rolling View Road
Hidden Hills, CA 91302
Telephone:(818) 735-8800
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.
(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
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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 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
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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 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
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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:
--------------------------------
Name:
Title:
-----------------------------------
Marty Albertson
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement"), between GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "Company"), and Bruce Ross (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to (i) 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 Chief Financial Officer of the Company and shall have the normal duties,
responsibilities and authority of the Chief Financial Officer, 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 the Company acknowledges that the
Executive may devote such time that the Executive deems appropriate for managing
his own investment portfolio so long as the Executive shall at all times
adequately fulfill his obligations pursuant to this Section 2(b).
<PAGE>
(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 $180,000 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.
(d) During the Employment Period, the Executive shall be
entitled to three weeks paid vacation during each 12-month period worked,
commencing on the date hereof.
(e) The Company shall issue Executive options to acquire shares
of Common Stock in the amounts and on the dates set forth on Exhibit A hereto.
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4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and
the Executive, the Employment Period shall end on the third anniversary of the
date of this Agreement; 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 the third anniversary of this Agreement, 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 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
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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.
(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
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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 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
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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
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,
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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 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
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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, the third anniversary of the date of this
Agreement (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.
(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
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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 (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
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<PAGE>
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:
Bruce Ross
[address]
[city, state, zip]
Telephone:
Telecopier:
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.
(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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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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<PAGE>
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/ LARRY E. THOMAS
----------------------------------
Name: Larry Thomas
Title: President
/s/ BRUCE ROSS
--------------------------------------
Bruce Ross
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<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement"), between GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "COMPANY"), and Raymond Scherr (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to (i) 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 as
the Chairman and operator of Rock Walk, a division of the Company. The Company
recognizes that Executive's duties hereof are of a part-time nature, and
Executive shall be permitted to engage in other business activities, subject
only to the limitations set forth in the Purchase Agreement. Executive shall
devote only such time to his duties hereunder that he determines in his sole
discretion are required.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's salary and
total expense allowance (allocated among salary and expense allowance as
Executive determines) shall be $100,000 per annum (the "Compensation Package"),
which salary shall be payable in such installments as is the policy of the
Company with respect to its senior executive employees. The Compensation Package
shall be subject to Federal, state and local withholding and other payroll
taxes. The cash amount of salary actually paid to Executive shall be reduced by
all expenses incurred by the Company in direct support of the Executive
(including expenses incurred in connection with his employment, such as a
separate office, secretarial support, telephone, car allowance, etc.).
<PAGE>
(b) In addition to the Compensation Package, the Executive shall
be entitled to participate in all employee medical benefit programs
available generally to employees of the Company until such time as the Executive
shall attain the age of 63 and 1/2 (or, if such continuation is not permitted by
the Company's insurers beyond the Employment Period, an annual cash payment
equal to the average premiums the Company pays to obtain health insurance for an
employee).
4. TERM.
(a) The Employment Period shall end on the third anniversary of
the date of this Agreement; PROVIDED, HOWEVER, that (i) the Employment Period
shall terminate prior to such date upon the death 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.
(b) If the Employment Period is terminated by the Company
without Cause, the Executive shall be entitled to receive as severance the cash
equivalent of the Compensation Package for the period beginning on the date of
such termination and ending on the third anniversary of this Agreement (which
amount shall not exceed $300,000 minus amounts previously paid as Compensation
Package to Executive) and continuation of his medical benefits until Executive
shall attain the age of 63 and 1/2 (or, if such continuation is not permitted by
the Company's insurers beyond the Employment Period, an annual cash payment
equal to the average premiums the Company pays to obtain health insurance for an
employee). Such severance payments will be made periodically in the same
amounts and at the same intervals as the salary was paid immediately prior to
termination of employment.
(c) If the Employment Period is terminated by the Company for
Cause or upon the Executive's death or Disability, the Executive shall be
entitled to receive the Compensation Package 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, medical benefits and any other amounts or benefits 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, 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
commission by the Executive of any act of fraud, theft or criminal dishonesty
with respect to the Company or any of its
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<PAGE>
Subsidiaries or affiliates, or the conviction of the Executive of any felony,
and (ii) material breach by the Executive of Sections 8.12 or 8.13 of the
Purchase Agreement.
5. 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.
6. 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) other than the Purchase Agreement, 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.
7. 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 (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
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<PAGE>
With copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017
Attention: Mark Bonenfant, Esq.
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
If to the Executive, to:
Ray Scherr
1096 Lakeview Canyon Road
Westlake Village, CA 91362
Telephone: (805) 371-9318
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.
8. GENERAL PROVISIONS.
(a) SEVERABILITY/ENFORCEMENT.
(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
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<PAGE>
Agreement or affecting the validity or enforceability of such provision in
any other jurisdiction.
(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 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.
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<PAGE>
(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 and the
Executive 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) 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.
(h) 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.
(i) 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.
* * * * *
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<PAGE>
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/ LARRY THOMAS
________________________________
Name: Larry Thomas
Title: President
/s/ RAY SCHERR
____________________________________
Ray Scherr
<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 contendere 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
vote of shareholders or disinterested directors, or, except as expressly
provided herein, under the laws of the State of California.
7. 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 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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<PAGE>
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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<PAGE>
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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<PAGE>
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>
SECURITIES PURCHASE AGREEMENT
dated as of
June 5, 1996
by and among
DLJ MERCHANT BANKING PARTNERS, L.P.,
DLJ INTERNATIONAL PARTNERS, C.V.,
DLJ OFFSHORE PARTNERS, C.V.,
DLJ MERCHANT BANKING FUNDING, INC.,
and
GUITAR CENTER MANAGEMENT COMPANY, INC.
<PAGE>
TABLE OF CONTENTS
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Page
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2
PURCHASE AND SALE
SECTION 2.1 Purchase and Sale. . . . . . . . . . . . . . . . . . . . 3
SECTION 2.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.1 Other Representations. . . . . . . . . . . . . . . . . . 4
SECTION 3.2 Corporate Authorization. . . . . . . . . . . . . . . . . 4
SECTION 3.3 Governmental and Court Authorization . . . . . . . . . . 5
SECTION 3.4 Non-Contravention. . . . . . . . . . . . . . . . . . . . 5
SECTION 3.5 Due Authorization and Validly of Securities. . . . . . . 5
SECTION 3.6 Private Offering . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.7 Governmental Regulations . . . . . . . . . . . . . . . . 6
SECTION 3.8 No Violation of Regulations of Board of Governors of
Federal Reserve System . . . . . . . . . . . . . . . . . 6
SECTION 3.9 No Listed Securities . . . . . . . . . . . . . . . . . . 6
SECTION 3.10 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.11 Capitalization . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.12 ERISA; Plan Assets . . . . . . . . . . . . . . . . . . . 7
SECTION 3.13 Small Business Compliance. . . . . . . . . . . . . . . . 7
i
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PAGE
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYERS
SECTION 4.1 Organization and Existence . . . . . . . . . . . . . . . 8
SECTION 4.2 Authorization. . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.3 Governmental Authorization . . . . . . . . . . . . . . . 8
SECTION 4.4 Non-Contravention. . . . . . . . . . . . . . . . . . . . 8
SECTION 4.5 Purchase for Investment; Legend. . . . . . . . . . . . . 8
SECTION 4.6 Disclosure of Information. . . . . . . . . . . . . . . . 9
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.1 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.2 Best Efforts . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.3 Furnishing of Information; Access. . . . . . . . . . . . 10
ARTICLE 6
COVENANTS OF BUYERS AND THE COMPANY
SECTION 6.1 Best Efforts . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 7
CONDITIONS TO CLOSING
SECTION 7.1 Conditions to Obligations of the Buyers and the
Company. . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 7.2 Conditions to Obligations of Buyers. . . . . . . . . . . 12
SECTION 7.3 Conditions to Obligations of the Company . . . . . . . . 15
ii
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PAGE
ARTICLE 8
SURVIVAL; INDEMNIFICATION
SECTION 8.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 8.2 Indemnification. . . . . . . . . . . . . . . . . . . . . 15
SECTION 8.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 8.4 Limitations. . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 9
TERMINATION
SECTION 9.1 Grounds for Termination. . . . . . . . . . . . . . . . . 17
SECTION 9.2 Effect of Termination. . . . . . . . . . . . . . . . . . 17
ARTICLE 10
MISCELLANEOUS
SECTION 10.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 10.2 Amendments; No Waivers . . . . . . . . . . . . . . . . . 19
SECTION 10.3 Expenses . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 10.4 Successors and Assigns . . . . . . . . . . . . . . . . . 19
SECTION 10.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . 19
SECTION 10.6 Counterparts; Effectiveness. . . . . . . . . . . . . . . 19
SECTION 10.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . 20
SECTION 10.8 Submission to Jurisdiction; Waiver of Jury Trial;
Service of Process . . . . . . . . . . . . . . . . . . . 20
SECTION 10.9 Captions . . . . . . . . . . . . . . . . . . . . . . . . 20
EXHIBIT A Form of Warrant
EXHIBIT B Form of Stockholders Agreement
EXHIBIT C Form of Buyer Registration Agreement
EXHIBIT D Form of Charter Amendment
EXHIBIT E Form of Company Counsel Opinion
EXHIBIT F Form of Senior Preferred Stock Amendment
iii
<PAGE>
SECURITIES PURCHASE AGREEMENT
AGREEMENT dated as of June 5, 1996 by and among DLJ MERCHANT BANKING
PARTNERS, L.P., a Delaware limited partnership, DLJ INTERNATIONAL PARTNERS,
C.V., a Netherlands Antilles limited partnership, DLJ OFFSHORE PARTNERS, C.V., a
Netherlands Antilles limited partnership and DLJ MERCHANT BANKING FUNDING, INC.,
a Delaware corporation (collectively, the "BUYERS"), and GUITAR CENTER
MANAGEMENT COMPANY, INC., a California corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, DLJ Merchant Banking, Inc., as Managing General Partner of
DLJ Merchant Banking Partners, L.P., and on behalf of the Buyers entered into a
letter agreement dated May 2, 1996 with Chase Venture Capital Associates, L.P.
("CHASE") (who subsequently assigned certain of its rights to CB Capital
Investors, Inc.), Weston Presidio Capital II, L.P. and Wells Fargo Small
Business Investment Company (collectively, the "INVESTORS") to make an
investment of $20,000,000 in the Company, consisting of 800,000 shares of 14%
Senior Preferred Stock, without par value ("SENIOR PREFERRED STOCK"), and
Warrants ("WARRANTS", and together with the Senior Preferred Stock, the
"PURCHASED SECURITIES") in the form attached hereto as Exhibit A to purchase
72,947.37 shares of 8% Junior Preferred Stock, without par value ("JUNIOR
PREFERRED STOCK"), and 73,684 shares of Common Stock, without par value ("COMMON
STOCK"), of the Company;
WHEREAS, pursuant to an Agreement (in the form executed on May 1,
1996, the "TRANSACTION AGREEMENT") dated May 1, 1996, among the Investors, the
Company and each of the stockholders and/or holders of options set forth on the
signature pages thereof (collectively, the "STOCKHOLDERS"), the parties thereto
have agreed to enter into the following transactions (collectively, the
"TRANSACTION"), which will be consummated substantially simultaneously, first,
(i) the Investors will invest in cash, a total of $70,000,000 in the Company, in
the form of shares of Common Stock and Junior Preferred Stock; (ii) certain
members of the Company's management (the "MANAGEMENT INVESTORS") will acquire
shares of Common Stock for $500,000; (iii) GCMC Funding, Inc. ("BRIDGE FINANCE")
and an affiliate of Chase will purchase senior unsecured increasing rate notes
(the "BRIDGE NOTES") or make loans to the Company in an aggregate principal
amount of $100,000,000 pursuant to the Bridge Financing Agreement dated as of
the date hereof (as in effect on the date hereof, the "BRIDGE FINANCING
AGREEMENT"); and (iv) the Buyers will purchase the Securities pursuant to this
Agreement for $20,000,000. Next, the Company will use the proceeds of the
foregoing transactions to exchange certain of the outstanding Common Stock and
options to purchase Common Stock of the Company held by the Raymond Scherr
Living Trust (the "TRUST") and the Management Investors immediately prior to the
first step, such exchange being made for a package
<PAGE>
consisting of shares of Junior Preferred Stock and Common Stock and cash. The
value of the package per share of Common Stock will equal the Per Share Value
(as defined in the Transaction Agreement) with the shares of Junior Preferred
Stock and Common Stock, being the same cost as the cost to the Investors;
WHEREAS, concurrently with the Closing, the Buyers, the Investors, the
Management Investors, the Trust and the Company will enter into the Stockholders
Agreement dated as of the date hereof in the form attached hereto as Exhibit B
(the "STOCKHOLDERS AGREEMENT");
WHEREAS, concurrently with the Closing, the Buyers and the Company
will enter into the Registration Agreement dated as of the date hereof in the
form attached hereto as Exhibit C (the "BUYER REGISTRATION AGREEMENT"); and
WHEREAS, each of the Buyers desires to purchase the Securities and the
Company desires to issue and sell the Securities on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. Capitalized terms used herein and not
defined herein have the meaning given them in the Transaction Agreement. The
following terms, as used herein, have the following meanings:
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which the New York Stock Exchange is closed.
"CHARTER AMENDMENT" means the Amendment and Restatement of the
Articles of Incorporation of the Company attached hereto as Exhibit D.
"CLOSING DATE" means the date of the Closing.
"DLJMB" means DLJ Merchant Banking, Inc., a Delaware corporation.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or other encumbrance in respect of such asset.
2
<PAGE>
"MATERIAL ADVERSE EFFECT" means (i) with respect to an occurrence,
event or circumstance, an occurrence, event or circumstance which has or would
reasonably be likely to have a material adverse effect on the Company's
business, operations, assets, liabilities, results of operations or financial
condition when taken as a whole (other than as a result of changes in laws of
general applicability or general economic conditions) or (ii) the Company losing
Larry Thomas or Marty Albertson as full-time employees for any reason.
"OTHER INVESTORS" means the Investors, the Trust and the Management
Investors.
"PERSON" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
ARTICLE 2
PURCHASE AND SALE
SECTION 2.1 PURCHASE AND SALE. Upon the terms and subject to the
conditions of this Agreement, the Company agrees to issue and sell to Buyers,
and Buyers, severally and not jointly, agree to purchase from the Company at the
Closing, the number of shares of Senior Preferred Stock and Warrants as set
forth opposite their names on Annex A hereto. The aggregate purchase price
payable by each Buyer is set forth opposite the name of such Buyer on Annex A.
The purchase price shall be paid as provided in Section 2.2(a).
SECTION 2.2 CLOSING. The closing (the "CLOSING") of the purchase
and sale of the Purchased Securities hereunder shall take place at the offices
of Buchalter, Nemer, Fields & Younger, a Professional Corporation, 601 South
Figueroa Street, Suite 2400, Los Angeles, CA 90017-5704 simultaneously with the
closings under the Transaction Agreement, or at such other time or place as
Buyers and the Company may agree. All transactions at the Closing shall be
deemed to take place simultaneously, except that the Investors shall purchase
the securities to be purchased by them pursuant to the Transaction Agreement
immediately prior to the Buyers purchasing the Purchased Securities. At the
Closing:
3
<PAGE>
(a) Each Buyer shall deliver to the Company the amounts set forth
opposite its name on Annex A hereto in immediately available funds by wire or
intrabank transfer to an account of the Company designated by the Company by
notice to each of the Buyers given not later than two Business Days prior to the
Closing Date.
(b) The Company shall deliver to each of the Buyers certificates for
the shares of Senior Preferred Stock and Warrants purchased, duly registered in
the names of Buyers in such denominations as each of the Buyers may designate to
the Company by notice given not less than two Business Days prior to the
Closing.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of the Buyers as of
the date hereof and as of the Closing Date:
SECTION 3.1 OTHER REPRESENTATIONS. The representations and
warranties set forth in Article IV, Article V and Article VII of the Transaction
Agreement, Exhibits A-1 and A-2 to the Transaction Agreement and any certificate
or other writing delivered pursuant to the Transaction Agreement are true and
correct and are hereby incorporated by reference and form a part hereof as if
set forth herein and are made hereby for the benefit of each of the Buyers.
SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and
performance by the Company of this Agreement, the Stockholders Agreement, the
Warrants and the Buyer Registration Agreement and the consummation by the
Company of the transactions contemplated hereby and thereby are within the
Company's corporate powers and have been duly authorized by all necessary
corporate action on the part of the Company. This Agreement constitutes, and
when executed, each of the Stockholders Agreement, the Warrants and Buyer
Registration Agreement will constitute, a valid and binding agreement of the
Company (except as to rights of indemnity or contribution contained in the Buyer
Registration Agreement which may be limited by applicable law), subject to
bankruptcy, insolvency, moratorium and other similar laws affecting creditors
rights and remedies generally and to general principles of equity (whether
considered in a proceeding at law or in equity).
SECTION 3.3 GOVERNMENTAL AND COURT AUTHORIZATION. The execution,
delivery and performance by the Company of this Agreement, the Stockholders
Agreement, the Warrants and the Buyer Registration Agreement require no consent,
approval or authorization of, or filing, registration or qualification with, any
governmental body, agency, official, court or other authority that has not been
obtained or made or will not have been obtained or made prior to the Closing
Date
4
<PAGE>
(other than filings under federal securities or state securities or blue sky
laws in connection with the Buyer Registration Agreement and filings under the
HSR Act in connection with the exercise of the Warrants), except such actions or
filings that, if not obtained, would not in the aggregate impose materially
adverse conditions upon the Transaction, this Agreement, the Stockholders
Agreement, the Buyer Registration Agreement or the Purchased Securities.
SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and
performance by the Company of this Agreement, the Stockholders Agreement, the
Warrants and the Buyer Registration Agreement, do not and will not (i)
contravene or conflict with the articles of incorporation or bylaws of the
Company or any Subsidiary, (ii) contravene or conflict with or constitute a
violation of any provision of any federal or state law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Company or any
Subsidiary, (iii) require any consent, approval or other action by any Person or
constitute a default under or give rise to any right of termination,
cancellation or acceleration of any right or obligation of the Company or any
Subsidiary or to a loss of any benefit to which the Company or any Subsidiary is
entitled under any provision of any agreement, contract, indenture, lease or
other instrument binding upon the Company or any Subsidiary or any license,
franchise, permit or other similar authorization held by the Company or any
Subsidiary, or (iv) result in the creation or imposition of any Lien on the
Purchased Securities, which in any such case referred to in clauses (ii) - (iv)
has or could reasonably be expected to have a Material Adverse Effect (or a
material adverse effect on the transactions contemplated hereby or on the rights
and obligations of the Buyers under this Agreement, the Stockholders Agreement,
the Warrants and the Buyer Registration Agreement).
SECTION 3.5 DUE AUTHORIZATION AND VALIDITY OF SECURITIES. The
shares of Senior Preferred Stock to be issued and sold by the Company hereunder
have been duly authorized and, when delivered against payment therefor as
contemplated hereby, will be validly issued, fully paid and non-assessable and
will not be subject to any preemptive or similar rights. The issuance and sale
of the Warrants have been duly authorized by the Company and all necessary
corporate action on the part of the Company for the issuance thereof has been
taken, and the Warrants, when delivered to and paid for by the Buyers in
accordance with this Agreement will be valid and binding obligations of the
Company, subject to bankruptcy, insolvency, moratorium and other similar laws
affecting creditors rights and remedies generally and to general principles of
equity (whether considered in a proceeding at law or in equity). The shares of
Common Stock and Junior Preferred Stock to be issued and sold by the Company
upon exercise of the Warrants have been duly authorized and reserved for
issuance and, when delivered against payment therefor as contemplated by the
terms of the Warrants, will be validly issued, fully paid and non-assessable and
will not be subject to any preemptive or similar rights.
SECTION 3.6 PRIVATE OFFERING. The sale of the Purchased Securities
hereunder is exempt from the registration and prospectus delivery
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requirements of the Securities Act. The foregoing representation is made in
reliance upon and subject to the accuracy of the representations contained in
Section 4.5. No securities of the same classes as the Purchased Securities have
been issued and sold by the Company within the six-month period immediately
prior to the date hereof. Each Purchased Security shall bear the legend set
forth in Section 4.5(c) below relating to restrictions on transferability and
sale.
SECTION 3.7 GOVERNMENTAL REGULATIONS. None of the Company nor any
of its Subsidiaries is, or will be upon issuance and sale of the Purchased
Securities and the use of the proceeds as described in the recitals hereto,
subject to regulation under the Investment Company Act of 1940, as amended, the
Public Utility Holding Company Act of 1935, as amended, the Federal Power Act,
the Interstate Commerce Act or to any federal or state statute or regulation
limiting its ability to incur indebtedness for borrowed money.
SECTION 3.8 NO VIOLATION OF REGULATIONS OF BOARD OF GOVERNORS OF
FEDERAL RESERVE SYSTEM. Neither the Company nor any agent thereof acting on the
behalf of the Company has taken, and none of them will take, any action that
might cause this Agreement or the issuance or sale of the Purchased Securities
or the application of proceeds thereof to violate Section 7 of the Exchange Act
or any regulation issued pursuant thereto, including, without limitation,
Regulation G, T, U or X of the Board of Governors of the Federal Reserve System,
in each case as in effect now or as the same may hereafter be in effect on the
Closing Date.
SECTION 3.9 NO LISTED SECURITIES. There are no securities of the
Company or any Subsidiary that are listed on a national securities exchange
registered under Section 6 of the Exchange Act or that are quoted in a United
States automated inter-dealer quotation system.
SECTION 3.10 BROKERS. Other than as set forth in Section 4.15 of the
Transaction Agreement, (a) the Company has dealt with no broker, finder,
commission agent or other Person (except Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC"), Bridge Finance and Chase and their respective affiliates)
in connection with the sale of the Purchased Securities and the transactions
contemplated by this Agreement and (b) the Company is under no obligation to pay
any broker's fee or commission in connection with such transactions (other than
to DLJSC, Bridge Finance or Chase or their respective affiliates, in each case,
to the extent set forth on the funds flow memorandum ("FUNDS FLOW MEMORANDUM")
delivered to the Buyer; prior to the date hereof)).
SECTION 3.11 CAPITALIZATION. Assuming the issuance and sale to the
Buyers of the Purchased Securities and the consummation of the other parts of
the Transaction as described in the recitals hereto, as of the Closing Date, (i)
the authorized capitalization of the Company will consist of 10,000,000 shares
of preferred stock (of which 4,250,000 are designated Senior Preferred Stock and
1,500,000 are designated Junior Preferred Stock) and 10,000,000 shares of Common
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Stock, of which 800,000 shares of Senior Preferred Stock, 1,386,000 shares of
Junior Preferred Stock and 1,400,000 shares of Common Stock will be issued and
outstanding, (ii) there will be Warrants issued and outstanding initially
exercisable for 73,684 shares of Common Stock and 72,947.37 shares of Junior
Preferred Stock, (iii) there will be Warrants to purchase Common Stock (the
"BRIDGE LOAN WARRANTS") issued and held in escrow in accordance with the terms
of the Bridge Financing Agreement, (iv) there will be 72,947.37 shares of Junior
Preferred Stock and 73,684 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (v) there will be 433,437 shares of Common Stock
reserved for issuance upon exercise of the Bridge Loan Warrants, (vi) there will
be outstanding 86,688 options to purchase Common Stock issued pursuant to the
terms of the Ancillary Documents, (vii) there will be 86,688 shares of Common
Stock reserved for issuance upon exercise of such options and (viii) there will
be 173,374 shares of Common Stock reserved for issuance pursuant to the
Company's 1996 Performance Stock Option Plan.
SECTION 3.12 ERISA; PLAN ASSETS. The execution and delivery of this
Agreement, the Stockholders Agreement, the Warrants and the Buyer Registration
Agreement and the sale of the Purchased Securities to be purchased by each Buyer
hereunder will not constitute or involve any "prohibited transaction" within the
meaning of ERISA or Section 4975 of the Code. The foregoing representation is
made in reliance upon and representations contained in Section 4.4(ii).
SECTION 3.13 SMALL BUSINESS COMPLIANCE. The execution and delivery
of this Agreement, the Stockholders Agreement, the Warrants, the Buyer
Registration Agreement and the Transaction Agreement and consummation of the
transactions contemplated by such agreements does not and will not cause a
Regulatory Problem (as defined in Exhibit A-1 or A-2 to the Transaction
Agreement).
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYERS
Each Buyer, severally and not jointly, hereby represents and warrants
to the Company as of the date hereof and as of the Closing Date that:
SECTION 4.1 ORGANIZATION AND EXISTENCE. Such Buyer is a corporation
or limited partnership duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization and has all necessary powers,
(corporate or otherwise) and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
SECTION 4.2 AUTHORIZATION. The execution, delivery and performance
by such Buyer of this Agreement, the Stockholders Agreement and the
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Buyer Registration Agreement and the consummation by such Buyer of the
transactions contemplated hereby and thereby are within the powers (corporate or
otherwise) of such Buyer and have been duly authorized by all necessary action
on the part of such Buyer. This Agreement constitutes, and the Stockholders
Agreement and the Buyer Registration Agreement when executed will constitute, a
valid and binding agreement of such Buyer (except as to rights of indemnity and
contribution contained in the Buyer Registration Agreement which may be limited
by applicable law).
SECTION 4.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by such Buyer of this Agreement, the Stockholders Agreement and the
Buyer Registration Agreement require no consent, approval or authorization of,
or filing, registration or qualification with, any governmental body, agency,
official or authority on the part of such Buyer other than such actions or
filings which have been taken or made or will have been taken or made prior to
the Closing Date (other than filings under federal securities or state
securities or blue sky laws in connection with the Buyer Registration Agreement
and filings under the HSR Act required in connection with the exercise of the
Warrants).
SECTION 4.4 NON-CONTRAVENTION. The execution, delivery and
performance by such Buyer of this Agreement, the Stockholders Agreement and the
Buyer Registration Agreement do not and will not (i) contravene or conflict with
the organizational documents of such Buyer or (ii) contravene or conflict with
or constitute a violation of any provision of any federal or state law,
regulation, judgment, injunction, order or decree binding upon or applicable to
such Buyer.
SECTION 4.5 PURCHASE FOR INVESTMENT; LEGEND. (a) The Securities to
be acquired by such Buyer pursuant to this Agreement are being acquired for
investment, and not with a view to the public distribution of such Securities in
violation of the Securities Act. Notwithstanding the foregoing, such Buyer shall
have, subject to applicable restrictions contained in other agreements entered
into on the date hereof, the right at all times to sell or otherwise dispose of
all or any part of the Securities pursuant to a registration, or exemption
therefrom, under the Securities Act. Such Buyer is an "accredited investor" as
defined in Rule 501 under the Securities Act.
(b) Such Buyer has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Purchased Securities and such Buyer is capable of bearing the
economic risks of such investment.
(c) The certificates for the Warrants shall bear the legends required
by the Stockholders Agreement to the extent required thereby. In addition to
any other legend that may be required, each certificate for the Senior Preferred
Stock shall bear a legend in substantially the following form:
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"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR
SOLD EXCEPT IN COMPLIANCE THEREWITH. THIS SECURITY IS ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE SECURITIES PURCHASE
AGREEMENT DATED AS OF JUNE 5, 1996. COPIES OF WHICH MAY BE OBTAINED UPON
REQUEST FROM THE ISSUER OR ANY SUCCESSOR THERETO."
If any shares of Senior Preferred Stock shall cease to be Registrable
Securities (as defined in the Buyer Registration Agreement), the Company shall,
upon the written request of the holder thereof, issue to such holder a new
certificate evidencing such Securities without the legend.
(d) OPINION OF COUNSEL. Unless this requirement is waived by the
Company, the Buyers may not transfer any shares of Senior Preferred Stock that
are represented by a certificate or certificates bearing the legend above
(except to the Company, a member of their Group (as defined in the Stockholders
Agreement) or pursuant to an effective registration statement under the
Securities Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that registration
under the Securities Act and applicable state securities laws is not required in
connection with such transfer.
SECTION 4.6 DISCLOSURE OF INFORMATION. Such Buyer has requested all
the information it considers necessary or appropriate for deciding whether to
acquire the Purchased Securities and has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the sale
of the Purchased Securities and the business, properties, prospects, assets,
liabilities and financial condition of the Company that such Buyer reasonably
considers important in making the decision to acquire the Purchased Securities.
The foregoing, however, does not limit or modify the representations and
warranties of the Company in Section 3 of this Agreement.
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.1 USE OF PROCEEDS. The proceeds from the issuance and
sale of the Securities by the Company pursuant to this Agreement will be used
solely to consummate the Transaction.
SECTION 5.2 BEST EFFORTS. The Company will use its best efforts to
complete the Transaction on the terms set forth in the Transaction Agreement.
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Without limiting the foregoing, the Company will execute and, when applicable
file with appropriate government officials, the Ancillary Documents.
SECTION 5.3 FURNISHING OF INFORMATION; ACCESS. (a) As long as any
Buyer (or Affiliate of any Buyer) owns any shares of Senior Preferred Stock, the
Company will furnish to such Buyer (x) as soon as available and in any event
within 45 days after the end of each month, a consolidated balance sheet of the
Company and its consolidated subsidiaries as of the end of such month and the
related consolidated statements of income and cash flows for such month, setting
forth, in each case, in comparative form, the figures for the corresponding
month in the previous fiscal year and the previous month, certified as to
accuracy, presentation and conformity with GAAP by the Company's chief financial
officer and (y) any documents filed by the Company pursuant to Sections 13, 14
or 15(d) of the Exchange Act and all annual, quarterly or other reports
furnished to the Company's public securityholders; PROVIDED that if the Company
is not subject to the requirements of Section 13, 14 or 15(d) of the Exchange
Act, the Company will furnish to such Buyer:
(i) As soon as available and in any event within 120 days after
the end of each fiscal year of the Company, a consolidated balance sheet of
the Company and its consolidated subsidiaries as of the end of such fiscal
year and the related consolidated statements of income and cash flows for
such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all reported on by independent public
accountants of nationally recognized standing.
(ii) As soon as available and in any event within 45 days after
the end of each of the first three quarters of each fiscal year of the
Company, a consolidated balance sheet of the Company and its consolidated
Subsidiaries as of the end of such quarter and the related consolidated
statements of income and cash flows and stockholders' equity (deficit) for
such quarter and for the portion of the Company's fiscal year ended at the
end of such quarter, setting forth in each case in comparative form the
figures for the corresponding quarter and the corresponding portion of the
Company's previous fiscal year, all certified (subject to footnote
presentation and normal year-end audit adjustments) as to fairness of
presentation, in accordance with generally accepted accounting principles
and consistency by the principal financial and accounting officers of the
Company.
(b) As long as a majority of the shares of Senior Preferred Stock
outstanding at the time of the Closing are owned by the Buyers, the Company
will provide DLJMB with reasonable access to the Company's management to
review the Company's operations; PROVIDED that DLJMB enters into a
confidentiality agreement in form and substance reasonably satisfactory to
the Company.
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(c) As long as all of the shares of Senior Preferred Stock are
held by the Buyers or any of their Affiliates the provisions of this
Section 5.3 shall supersede Section 9 of the Certificate of Determination
of Preferences of the Senior Preferred Stock (the "CERTIFICATE OF
DETERMINATION").
ARTICLE 6
COVENANTS OF BUYERS AND THE COMPANY
SECTION 6.1 BEST EFFORTS. Subject to the terms and conditions of
this Agreement, each of the Company and each of the Buyers will use its best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary or desirable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement. The Company and each
Buyer agrees to execute and deliver such other documents, certificates,
agreements and other writings and to take such other actions as may be necessary
or desirable in order to consummate or implement expeditiously the transactions
contemplated hereby and thereby.
SECTION 6.2 TRANSFER OF SENIOR PREFERRED STOCK. The Buyers will not
transfer the shares of Senior Preferred Stock without the consent of Bridge
Finance if the transfer would cause an Event of Default (as defined in Section
7.1 of the Bridge Financing Agreement).
SECTION 6.3 SENIOR PREFERRED STOCK AMENDMENT. As soon as
practicable after the Closing, the Company and the holders of the shares of
Senior Preferred Stock shall (a) negotiate the terms of an amendment to the
Certificate of Determination providing for the exchange, at the option of the
Company, of the shares of Senior Preferred Stock for 14% Junior Subordinated
Exchange Debentures due 2008 of the Company ("the EXCHANGE DEBENTURES")
substantially in the form attached hereto as Exhibit F (the "AMENDMENT") and
take all reasonable action to effect such an Amendment and (b) negotiate the
terms of an indenture (the "INDENTURE") governing the Exchange Debentures to be
issued pursuant to the Indenture, which terms shall be satisfactory to the
holders of the Senior Preferred Stock and the lenders under the Credit Agreement
(as defined in Certificate of Determination) in form and substance in all
respects and, prior to issuing the Exchange Debentures, the Company shall
appoint a trustee to serve in the capacity contemplated by the Indenture.
All references in the Transaction Documents (as defined in the
Certificate of Determination) to the Exchange Debentures and the exchange
feature of the Senior Preferred Stock shall be deemed to refer to the terms of
the Amendment once in effect.
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ARTICLE 7
CONDITIONS TO CLOSING
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF THE BUYERS AND THE
COMPANY. The obligations of the Buyers and the Company to consummate the Closing
are subject to the satisfaction of the following conditions:
(a) All actions by or in respect of or filings with any governmental
body, agency, official or authority required to permit the consummation of the
transactions contemplated by the Transaction Agreement, this Agreement, the
Stockholders Agreement and the Ancillary Documents, shall have been taken, made
or obtained; and
(b) No action, suit, litigation, investigation or other proceeding
shall have been instituted by any Governmental Authority (as defined in the
Transaction Agreement) or any other Person for the purpose of preventing, or
that questions the validity or legality of, the transactions contemplated by
this Agreement, the Stockholders Agreement, the Warrants or the Buyer
Registration Agreement. No temporary restraining order, preliminary or permanent
injunction or other order issued by any Governmental Authority of competent
jurisdiction nor other legal restraint or prohibition preventing the
consummation of the transactions contemplated by this Agreement, the
Stockholders Agreement, the Warrants or the Buyer Registration Agreement shall
be in effect. No action shall have been taken, and no rule, regulation or order
shall have been enacted, promulgated or issued or deemed applicable to the
transactions contemplated by this Agreement, the Stockholders Agreement, the
Warrants or the Buyer Registration Agreement by any Governmental Authority that
would make the consummation of the transactions contemplated by this Agreement,
the Stockholders Agreement, the Warrants or the Buyer Registration Agreement
illegal or substantially delay the consummation of any material aspect of the
transactions contemplated by this Agreement, the Stockholders Agreement, the
Warrants or the Buyer Registration Agreement.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF BUYERS. The obligation of
the Buyers to consummate the Closing is subject to the satisfaction of the
following further conditions:
(a) The Transaction shall have been consummated as contemplated
by the Transaction Agreement (including any sales of securities to the Other
Investors pursuant to the Transaction Agreement and the purchase of the Bridge
Notes pursuant to the Bridge Financing Agreement), with only such changes and
waivers as to which the Buyers shall have consented in writing, and the
Transaction Agreement and all other documentation (including the Charter
Amendment, the Ancillary Documents and the Bridge Financing Agreement) shall be
reasonably satisfactory in form and substance to Buyers, and in compliance in
all material respects with all applicable
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laws and regulations, without any amendment, modification or waiver of any of
the terms or conditions thereof without the prior written consent of Buyers;
(b) (i) The Investors shall have purchased for cash Common Stock,
Junior Preferred Stock or other equity securities of the Company reasonably
satisfactory to Buyers for not less than $70,000,000, (ii) Bridge Finance and an
affiliate of Chase shall have purchased Bridge Notes or made loans to the
Company aggregating not less than $100,000,000 in cash, (iii) upon consummation
of the Transaction, the Trust will hold Common Stock, Junior Preferred Stock or
other equity securities of the Company reasonably acceptable to the Buyers
valued at not less than $20,000,000, (iv) the Management Investors shall have
exchanged unexercised options with respect to Common Stock of the Company for
Junior Preferred Stock or other equity securities of the Company reasonably
satisfactory to the Buyers valued at not less than $49,500,000, (v) the
Management Investors shall have purchased $500,000 of Common Stock for cash and
(vi) the terms of the Junior Preferred Stock shall be satisfactory to the Buyers
in all respects;
(c) The Company shall have entered into a credit agreement for (i)
the Working Capital Facility described in that certain letter from an affiliate
of Bridge Finance to the Investors dated May 2, 1996 or (ii) a five-year
revolving credit facility of not less than $20,000,000 provided by Wells Fargo
Bank or another bank or other financial institution reasonably acceptable to the
Buyers (the "REVOLVING CREDIT FACILITY") the security, covenants and other terms
and conditions of which shall be reasonably satisfactory in all respects to the
Buyers, and the Company shall have no indebtedness for borrowed money
immediately after the Closing other than the Bridge Notes and amounts
outstanding under the Revolving Credit Facility to the extent set forth on the
Funds Flow Memorandum;
(d) Receipt by the Buyers of (i) consolidated financial statements of
the Company including balance sheets and income and cash flow statements as of
the end of and for each of the last three fiscal years (which shall not differ
materially from the information supplied prior to May 2, 1996), audited by
independent public accountants of recognized national standing and prepared in
conformity with generally accepted accounting principles, together with the
report thereon; (ii) unaudited selected financial information of the Company
meeting the requirements of Item 301(a) of Regulation S-K for the two fiscal
years immediately preceding the last three fiscal years; and (iii) unaudited
interim financial statements of the Company, prepared in each case in the same
manner as the historical audited statements for the most recently ended
quarterly period and for the same quarterly period during the most recently
ended fiscal year;
(e) The corporate, capital and ownership structure (including
articles of incorporation and by-laws) and shareholders agreements of the
Company after the Transaction shall be reasonably satisfactory to the Buyers in
all respects;
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(f) Receipt by the Buyers of a consolidating pro forma balance
sheet of the Company as of April 30, 1996, giving effect to the Transaction and
the transactions contemplated by the Transaction Agreement as if they had
occurred as of such date prepared by independent public accountants of
recognized national standing;
(g) Receipt by the Buyers of an opinion of Buchalter, Nemer, Fields
& Younger, counsel to the Company, substantially in the form of Exhibit E, and
such corporate resolutions, certificates and other documents as Buyers shall
reasonably request;
(h) (i) The representations and warranties of the Company
contained in this Agreement and in any certificate delivered by the Company
pursuant hereto shall be true and correct in all material respects at and as of
the Closing Date, after giving effect, as appropriate, to the Transaction and
the transactions contemplated by the Transaction Agreement, this Agreement, the
Stockholders Agreement and by any of the Ancillary Documents, as if made at and
as of such date, (ii) the Company shall have performed and complied with its
covenants and agreements contained in the Transaction Agreement, this Agreement,
the Stockholders Agreement and the Ancillary Documents or contemplated hereby or
thereby to be performed or complied with on or before the Closing Date and (iii)
the Company shall have delivered a certificate signed by its chief executive
officer to the effect that (x) the conditions set forth in (i) and (ii) above
and (y) the conditions set forth in Sections 7.2(a), 7.2(b) and 7.2(j) have been
satisfied (except insofar as the satisfaction of such conditions requires a
determination as to whether or not the Buyers are satisfied with respect
thereto);
(i) There shall be no action, suit, investigation or proceeding
pending or threatened in any court or before any arbitrator or governmental
instrumentality that purports to affect the Transaction or the purchase of the
Securities, or that could have a material adverse effect on DLJMB, or the
purchase of the Securities; and
(j) Each of the Buyers, the Company and the Other Investors shall
have entered into the Stockholders Agreement, each of the Buyers and the
Investors shall have entered into the indemnity side letter, each of the Buyers
and the Company shall have entered into the Buyer Registration Agreement, each
of the Company, Bridge Finance and an affiliate of Chase shall have entered into
the Bridge Financing Agreement and, where applicable, each of the parties to the
Ancillary Documents shall have entered into the same, and in each case, such
agreements or documents shall be in full force and effect.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligation of the Company to consummate the Closing is subject to the
satisfaction of the following further condition:
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(a) (i) The representations and warranties of each of the Buyers
contained in this Agreement and in any certificate delivered by such Buyer
pursuant hereto shall be true in all material respects at and as of the Closing
Date after giving effect, as appropriate, to the Transaction and the
transactions contemplated by the Transaction Agreement, this Agreement, the
Stockholders Agreement and by any of the Ancillary Documents, as if made at and
as of such date and (ii) each Buyer shall have performed and complied with its
covenants and agreements contained in this Agreement and the Stockholders
Agreement or contemplated hereby or thereby to be performed or complied with on
or before the Closing Date.
ARTICLE 8
SURVIVAL; INDEMNIFICATION
SECTION 8.1 SURVIVAL. The representations and warranties contained
in this Agreement and the Stockholders Agreement or in any certificate or other
writing delivered pursuant hereto or thereto or in connection herewith or
therewith, shall survive the Closing, any investigation by the Buyers and the
issuance of the Securities and shall expire on the third anniversary of the
Closing, except for representations and warranties referred to in Section 3.1
which shall survive for the periods as set forth in the Transaction Agreement.
SECTION 8.2 INDEMNIFICATION. (a) The Company hereby indemnifies
each Buyer and its Affiliates against and agrees to hold each of them harmless
from any and all damage, loss, liability and expense (including without
limitation reasonable expenses of investigation and reasonable attorneys' fees
and expenses in connection with any action, suit or proceeding) ("DAMAGES")
incurred or suffered by such Buyer or its Affiliates arising out of any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by the Company pursuant to this Agreement, the Stockholders Agreement,
the Warrants, the terms of the Senior Preferred Stock or any Ancillary Document.
The obligations of the Company under this Section 8.2(a) shall survive any
transfer of the Securities or exercise of the Warrants by any of the Buyers. The
parties acknowledge that in certain events a representation, warranty or
covenant of the Company, a Stockholder (as defined in the Transaction Agreement)
or a Buyer (as defined in the Transaction Agreement) set forth in the
Transaction Agreement may be breached that may not entail actual "Damages" (as
defined above) suffered by the Company. Accordingly, for purposes of the
indemnification obligations of the Company under this Article 8 with respect to
such representations, warranties or covenants. "Damages" suffered, sustained or
incurred by the Company may be (and for purposes of calculating the Dollar
Limit, shall be) deemed to include the amount that could be recovered by a
hypothetical purchaser of all of the outstanding capital stock of the Company
that had purchased such stock in reliance on such representations, warranties
and covenants (which Damages would include a diminution in value of the Company
from that
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which it otherwise would be if no such breach of a representation, warranty or
covenant had occurred.)
(b) Each Buyer, severally and not jointly, hereby indemnifies the
Company and its Affiliates against and agrees to hold them harmless from any and
all Damages incurred or suffered by the Company or its Affiliates arising out of
any misrepresentation or breach of warranty, covenant or agreement made or to be
performed by such Buyer pursuant to this Agreement or the Stockholders
Agreement.
SECTION 8.3 PROCEDURES. The party seeking indemnification under
Section 8.2, (the "INDEMNIFIED PARTY") shall promptly notify the party against
whom indemnity is sought (the "INDEMNIFYING PARTY") in writing of the assertion
of any claim or the commencement of any suit, action or proceeding in respect of
which indemnity may be sought under this Section. The Indemnifying Party may, at
its option, and shall, at the request of the Indemnified Party, assume the
defense of any such suit, action or proceeding. The Indemnified Party shall have
the right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the Indemnified Party unless (a) the Indemnifying Party has agreed to
pay such fees and expenses or (b) the named parties to any such action or
proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by its counsel that there may be one or more legal defenses available to such
Indemnified Party that are different from or additional to those available to
the Indemnifying Party. The Indemnifying Party shall not be liable for any
settlement of any such action or proceeding effected without its written
consent, but if settled with its written consent (which shall not be
unreasonably withheld), or if there be a final judgment against the Indemnified
Party in any such action or proceeding, the Indemnifying Party agrees to
indemnify and hold harmless such Indemnified Parties from and against any loss
or liability by reason of such settlement or judgment.
SECTION 8.4 LIMITATIONS. The Buyers will not be entitled to assert
rights to indemnification pursuant to Section 8.2(a) for representations and
warranties contained in Sections 4.5 through 4.14, 4.16, 4.17, 4.19, 4.20, 4.21,
4.22, 4.23, 4.24, 4.25 or 4.26 of the Transaction Agreement until the amount of
potential Damages to the Company and/or the Buyer for all potential claims
exceeds $2.5 million in the aggregate (the "DOLLAR LIMIT"). The foregoing
sentence does not limit the amount recoverable by Buyers pursuant to Section
8.2(a) in the event the aforesaid dollar limit is exceeded. In no event will the
Company be required pursuant to Section 8.2(a) to pay an amount that would cause
the aggregate amount of all such payments to be in excess of the aggregate
Liquidation Value (as defined in the Certificate of Determination of Preferences
of Senior Preferred Stock) of the Senior Preferred Stock at the time the payment
is made, plus defense costs.
16
<PAGE>
ARTICLE 9
TERMINATION
SECTION 9.1 GROUNDS FOR TERMINATION. This Agreement may be
terminated at any time prior to the Closing:
(a) by mutual written agreement of the Company and the Buyers;
(b) by either the Company or the Buyers if the Closing shall not
have been consummated on or before June 30, 1996; or
(c) by either the Company or the Buyers if consummation of the
transactions contemplated hereby would violate any order, decree or judgment of
any court or governmental body having competent jurisdiction.
The party desiring to terminate this Agreement shall give notice of
such termination to the other party.
SECTION 9.2 EFFECT OF TERMINATION. If this Agreement is terminated
as permitted by Section 9.1, termination shall be without liability of any party
(or any stockholder, director, officer, employee, agent, consultant or
representative of such party) to any other party to this Agreement; PROVIDED
that if such termination shall result from the willful failure of any party to
fulfill a condition to the performance of the obligations of the other parties,
failure to perform a covenant of this Agreement or breach by any party hereto of
any representation or warranty or agreement contained herein, such party shall
be fully liable for any and all Damages incurred or suffered by the other
parties as a result of such failure or breach. The provisions of Article 8 and
Section 10.3 shall survive any termination hereof pursuant to Section 9.1.
ARTICLE 10
MISCELLANEOUS
SECTION 10.1 NOTICES. All notices, requests, offers, acceptances,
consents, and other communications to be given pursuant hereto shall be in
writing and be effective upon receipt and may be given by overnight courier, by
hand delivery or facsimile transmission and shall be given at the addresses or
facsimile numbers set forth on the signature pages hereof, with copies provided
as follows:
17
<PAGE>
if notice is given to the Company, a copy to:
Buchalter, Nemer, Fields & Younger
a Professional Corporation
601 S. Figueroa Street, Suite 2400
Los Angeles, CA 90017
Attn: Mark A. Bonenfant
Chase Capital Partners
840 Apollo Street, Suite 223
El Segundo, CA 90245
Attn: David L. Ferguson, C.A.
O'Sullivan, Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, NY 10112
Attn: Harvey M. Eisenberg
Sidley & Austin
555 West 5th Street
Los Angeles, CA 90013
Attn: Moshe Kupietzky
Fax (213) 896-6600
if notice is given to any of the Buyers or DLJMB, a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attn: George R. Bason, Jr.
or to such other address or Person as such party may designate by written notice
hereunder and, in the case of any other person becoming a party hereto or bound
hereby, such address as such person shall specify.
SECTION 10.2 AMENDMENTS; NO WAIVERS. (a) Any provision of this
Agreement may be amended or waived if, and only if, such amendment or waiver is
in writing and signed, in the case of an amendment, by each of the Buyers and
the Company, or in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise
18
<PAGE>
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 10.3 EXPENSES. All reasonable costs and expenses incurred by
each Buyer, including reasonable expenses of Buyers' counsel, in connection with
this Agreement, the Registration Agreement, the Stockholders Agreement and the
other documents related thereto and the Transaction shall be paid by the Company
at the Closing or, if the Closing does not occur, upon termination of this
Agreement unless (i) the Investors do not purchase securities of the Company as
contemplated in the recitals hereto, (ii) the Buyers shall have failed to pursue
the transactions contemplated by this Agreement in good faith or (iii) this
Agreement is terminated prior to the Closing, as a result of the Buyers' breach
of this Agreement. The Company shall pay its own expenses incurred in connection
with this Agreement, the Registration Agreement, the Stockholders Agreement and
the other documents related thereto and the Transaction.
SECTION 10.4 SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; PROVIDED that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto except that any Buyer
may transfer or assign, in whole or from time to time in part, to one or more of
its Affiliates, the right to purchase all or a portion of the Securities, but no
such transfer or assignment will relieve such Buyer of its obligations
hereunder.
SECTION 10.5 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 10.6 COUNTERPARTS; EFFECTIVENESS. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other parties hereto.
SECTION 10.7 ENTIRE AGREEMENT. This Agreement, the Warrants, the
Certificate of Determination of Preferences of Senior Preferred Stock, the
Stockholders Agreement, the Buyer Registration Agreement and the Transaction
Agreement constitute the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all prior agreements,
understandings and negotiations, both written and oral, between the parties with
respect to the subject matter of this Agreement and the aforementioned
agreements.
SECTION 10.8 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL;
SERVICE OF PROCESS. ANY SUIT, ACTION OR PROCEEDING SEEKING TO ENFORCE ANY
PROVISION OF, OR BASED ON ANY MATTER ARISING OUT OF OR IN CONNECTION WITH, THIS
19
<PAGE>
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MAY BE BROUGHT AGAINST ANY OF
THE PARTIES IN THE COURTS OF THE STATE OF NEW YORK IN NEW YORK CITY, OR, IN THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND EACH OF
THE PARTIES HEREBY CONSENTS TO THE JURISDICTION OF SUCH COURTS (AND OF THE
APPROPRIATE APPELLATE COURTS) IN ANY SUCH SUIT, ACTION OR PROCEEDING AND WAIVES
ANY OBJECTION TO VENUE LAID THEREIN AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY
HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, PROCESS IN ANY
SUCH SUIT, ACTION OR PROCEEDING MAY BE SERVED ON ANY PARTY ANYWHERE IN THE
WORLD, WHETHER WITHIN OR WITHOUT THE STATE OF NEW YORK. WITHOUT LIMITING THE
FOREGOING, EACH PARTY AGREES THAT SERVICE OF PROCESS ON SUCH PARTY AS PROVIDED
IN SECTION 10.1 SHALL BE DEEMED EFFECTIVE SERVICE OF PROCESS ON SUCH PARTY.
SECTION 10.9 CAPTIONS. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized signatories as of the day and
year first above written.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/Larry E. Thomas
----------------------------------------
Name: LAWRENCE E. THOMAS
Title: PRESIDENT
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: President
Fax: (818) 735-4923
DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ MERCHANT BANKING, INC.
Managing General Partner
By:
----------------------------------------
Name:
Title:
DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Suite 3000
Los Angeles, CA 90067
Attention: David Wilson
Fax: (310) 282-6178
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized signatories as of the day and year
first above written.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By:
-------------------------------
Name:
Title:
5155 Clareton Drive
Agoura Hills, CA 91362
Attn: President
Fax: (818) 735-4923
DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ MERCHANT BANKING, INC.
Managing General Parmer
By: /s/David B. Wilson
-----------------------------------------
Name: David B. Wilson
Title: Senior Vice President
DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Suite 3000
Los Angeles, CA 90067
Attention: David Wilson
Fax: (310) 282-6178
<PAGE>
DLJ INTERNATIONAL PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/David B. Wilson
-------------------------------
Name: David B. Wilson
Title: Senior Vice President
c/o DLJ Offshore Management N.V.
John B. Gorsiraweg 6
Willemstad, Curacao
Netherlands Antilles
Attn: Germaine Sprock
MeesPierson Trust
(Curacao) N.V.
Fax: 011-559-9-614129
DLJ OFFSHORE PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/David B. Wilson
-------------------------------
Name: David B. Wilson
Title: Senior Vice President
c/o DLJ Offshore Management N.V.
John B. Gorsiraweg 6
Willemstad, Curacao
Netherlands Antilles
Attn: Germaine Sprock
MeesPierson Trust
(Curacao) N.V.
Fax: 011-559-9-614129
<PAGE>
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/David B. Wilson
--------------------------------
Name: David B. Wilson
Title: Senior Vice President
DLJ Merchant Banking, Inc.
2121 Avenue of the Stars
Suite 3000
Los Angeles, CA 90067
Attention: David Wilson
Fax: (310) 282-6178
<PAGE>
REGISTRATION AGREEMENT
dated as of June 5, 1996
among
DLJ MERCHANT BANKING PARTNERS, L.P.,
DLJ INTERNATIONAL PARTNERS, C.V.,
DLJ OFFSHORE PARTNERS, C.V.,
DLJ MERCHANT BANKING FUNDING, INC.
and
GUITAR CENTER MANAGEMENT COMPANY, INC.
<PAGE>
REGISTRATION AGREEMENT
AGREEMENT dated as of June 5, 1996, among DLJ MERCHANT BANKING
PARTNERS, L.P., a Delaware limited partnership, DLJ INTERNATIONAL PARTNERS,
C.V., a Netherlands Antilles limited partnership, DLJ OFFSHORE PARTNERS, C.V., a
Netherlands Antilles limited partnership, and DLJ MERCHANT BANKING FUND, INC., a
Delaware corporation (collectively, the "BUYERS"), AND GUITAR CENTER MANAGEMENT
COMPANY, INC., a California corporation (the "COMPANY").
WITNESSETH:
WHEREAS, pursuant to a Securities Purchase Agreement dated as of the
date hereof between the Buyers and the Company (the "SECURITIES PURCHASE
AGREEMENT"), the Buyers have agreed to purchase from the Company 800,000 shares
of the Senior Preferred Stock and Warrants to purchase an aggregate of 72,947.37
shares of Junior Preferred Stock and an aggregate of 73,684 shares of Common
Stock (collectively, the "SECURITIES"); and
WHEREAS, it is a condition of such purchase of the Securities by the
Buyer that the Company enter into this Registration Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which the New York Stock Exchange is closed.
"COMMISSION" means the Securities and Exchange Commission or any
federal agency at the time administering the Securities Act.
"COMMON STOCK" means the Common Stock of the Company, without par
value.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2
<PAGE>
"EXCHANGE DEBENTURES" means the 14% Junior Subordinated Exchange
Debentures due 2008 of the Company, issuable upon exchange of the shares of
Senior Preferred Stock, if the terms of such Senior Preferred Stock are amended
to permit such exchange.
"HOLDER" means the holder of any Registrable Security that is or
becomes a party to this Agreement pursuant to Section 7 hereof.
"JUNIOR PREFERRED STOCK" means the 8% Junior Preferred Stock of the
Company, without par value.
"MAJORITY HOLDERS" means Holders holding a majority of the Warrants
then held by all Holders.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.
"PERSON" shall mean a corporation, an association, a partnership, a
business, an individual, a governmental or political subdivision thereof or a
governmental agency.
"REGISTERING HOLDERS" means Holders whose Registrable Securities are
included in a registration statement under this Agreement.
"REGISTRABLE SECURITIES" means the Securities and any securities (a)
issued on registration of transfer of the Securities, (b) issued or issuable
upon any conversion, exchange or exercise of the Securities (including the
Exchange Debentures and the shares of Junior Preferred Stock and Common Stock
issuable upon exercise of the Warrants) or (c) issued or issuable with respect
to any such Securities by way of stock dividend or stock split or in connection
with a sale or issuance of securities, a combination of securities,
recapitalization, merger, consolidation or other reorganization or otherwise.
Registrable Securities shall cease to be Registrable Securities when (i) a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of pursuant to such registration statement, (ii) they shall have been
distributed to the public pursuant to Rule 144 under the Securities Act, (iii)
they may be sold pursuant to Rule 144(k) under the Securities Act, (iv) they
shall have been otherwise transferred and new certificates for them not bearing
a legend restricting further transfer shall have been delivered by the Company
and subsequent disposition of them shall not require registration or
qualification of them under the Securities Act or any similar state law then in
force, or (v) they shall have ceased to be outstanding.
3
<PAGE>
"REGISTRATION EXPENSES" means all expenses incident to the Company's
performance of or compliance with Section 2, including, without limitation, all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for the Company and of its independent public accountants, including the
expenses of any special audits or "cold comfort" letters required by or incident
to such performance and compliance, the reasonable fees and disbursements of one
counsel to represent all Holders but who shall be selected by the Holders of a
majority of the Registrable Securities in such registration, premiums and other
costs of policies of insurance obtained by the Company against liabilities
arising out of the public offering of the Registrable Securities being
registered (if the Company elects to obtain such insurance) and any fees and
disbursements of underwriters customarily paid by issuers or holders of
securities (including fees paid to a qualified independent underwriter), but
excluding underwriting discounts and commissions and transfer taxes, if any.
"REQUESTING HOLDERS" means the Holders requesting registration
pursuant to Sections 2.1(a)(i), 2.1(a)(ii), 2.1(a)(iii), 2.1(i) or 2.2, as the
case may be.
"RULE 144" has the meaning set forth in Section 3 hereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR PREFERRED STOCK" means the 14% Senior Preferred Stock of the
Company, without par value.
"WARRANTS" means the Warrants to purchase an aggregate of 72,947.37
shares of Junior Preferred Stock and an aggregate of 73,684 shares of Common
Stock.
2. REGISTRATION UNDER SECURITIES ACT.
2.1. REGISTRATION ON REQUEST. (a) REQUEST.
(i) At any time after the earlier of (x) June 5, 2001, or (y)
180 days after a public offering (an "INITIAL PUBLIC OFFERING") of any
equity securities of the Company (such earlier date, the "TRIGGER DATE"),
the Holders of a majority of the Senior Preferred Stock shall have the
right to request, in writing to the Company, that the Company effect a
registration with the Commission under the Securities Act of (A) all or any
portion of such Requesting Holders' Senior Preferred Stock and the Exchange
Debentures, if issuable upon exchange thereof, and (B) at the request of
such Requesting Holders, all or any portion of the Warrants held by such
Requesting Holders and any securities for which the Warrants are
exercisable (subject to the right of the Company to repurchase the Warrants
as provided in Section 2.1(h) below if an
4
<PAGE>
Initial Public Offering has not occurred); PROVIDED, HOWEVER, that, subject
to Section 2.1(c), the Company shall not be obligated to effect more than
one such registration.
(ii) Unless a registration of the Senior Preferred Stock has
been requested and effected under Section 2.1(a)(i), at any time after the
Trigger Date, the Holders of a majority of the Exchange Debentures shall
have the right to request, in a writing to the Company, that the Company
effect a registration with the Commission under the Securities Act of (A)
all or any portion of such Requesting Holders' Exchange Debentures and (B)
at the request of such Requesting Holders, all or any portion of the
Warrants held by such Requesting Holders and any securities for which the
Warrants are exercisable (subject to the right of the Company to repurchase
the Warrants as provided in Section 2.1(h) below if an Initial Public
Offering has not occurred); PROVIDED, HOWEVER, that, subject to Section
2.1(c), the Company shall not be obligated to effect more than one such
registration.
(iii) At any time after the Trigger Date, the Holders of a
majority of the Warrants shall have the right to request, in writing to the
Company, that the Company effect a registration with the Commission under
the Securities Act of all or any portion of the securities for which the
Warrants are exercisable; PROVIDED, HOWEVER, that (1) subject to Section
2.1(c), the Company shall not be obligated to effect more than one
registration of such securities pursuant to this Section 2.1(a)(iii),(2)
the Company shall have the right to postpone such registration for a period
not to exceed 90 days and use its best efforts to register its Common Stock
with the Commission in a primary offering, and (3) the Company may, in lieu
of registering such securities pursuant to this Section 2.1(a)(iii), elect
to repurchase the Warrants as provided in Section 2.1(h) if an Initial
Public Offering has not occurred.
(iv) In the event that the Company is requested to register any
Warrants pursuant to Sections 2.1(a)(i)(B) or 2.1(a)(ii)(B), the Company
shall contemporaneously effect a shelf registration with the Commission
under the Securities Act of the securities for which such Warrants are
exercisable.
(v) The right of the Holders to request a registration under
Sections 2.1(a)(i) or 2.1(a)(ii) on the one hand and Section 2.1(a)(iii)
and 2.1(i) on the other are independent obligations of the Company and the
request by the Holders to register Registrable Securities under Sections
2(a)(i) or 2(a)(ii) shall in no event exclude or impair the right of the
Holders to request registration of the same or different Registrable
Securities under Section 2(a)(iii) or 2.1(i) and VICE VERSA.
(vi) Anything contained in Section 2.1(a) to the contrary
notwithstanding, the Company may delay effecting any registration under the
Securities Act requested pursuant to Section 2.1(a) during any period of 90
days following the date on which any other registration statement (other
than on Form S-4
5
<PAGE>
or Form S-S promulgated under the Securities Act or any successor forms
thereto) pursuant to which Primary Shares (as defined in the Registration
Rights Agreement) are to be or were sold has been declared effective;
PROVIDED that the Company shall only be entitled to exercise its rights
under this paragraph (vi) once in any two year period.
(b) NOTICE; REGISTRATION. Upon receipt of the request for any such
registration under Section 2.1, the Company will promptly give written notice of
such request to all Holders. Thereupon, the Company will use its best efforts to
effect the registration under the Securities Act of:
(i) subject to Section 2.1(c), the Registrable Securities
which the Company has been so requested to register;
(ii) subject to Section 2.1(c), all other Registrable
Securities which the Company has been requested to register by the Holders
by written request given to the Company within 30 days after the giving of
such written notice by the Company; and
(iii) subject to Section 2.1(c), all other securities of the
Company owned by Persons having registration rights pursuant to other
agreements with the Company giving them the right to include securities in
such registration, in each case, to the extent requisite to permit the
disposition of the securities to be so registered.
If the Requesting Holders so elect, the offering of the Registrable
Securities pursuant to this Section 2.1 shall be in the form of an underwritten
offering. If the Requesting Holders request that the registration be in the form
of a non-underwritten offering, then neither the Company nor any other Person
(other than the Holders) shall be allowed to include any securities in such
registration without the prior written consent of the Holders, such consent not
to be unreasonably withheld.
(c) APPORTIONMENT IN REQUESTED REGISTRATIONS. In the case of an
underwritten offering, if the managing underwriter thereof shall advise the
Company and the Holders and other Persons requesting registration under Sections
2.1(b)(i), (ii) and (iii) in writing that, in its opinion, the number and/or
type of securities proposed to be included in such registration exceeds the
number which can be sold in such offering within a price range acceptable to a
majority of the Requesting Holders (by number of shares sought to be
registered), the Company will include in such registration the number and type
of Registrable Securities which in the opinion of such managing underwriter can
be sold within such acceptable price range, and such number and type of
securities shall be allocated FIRST to Registrable Securities requested to be
included in such registration pursuant to Sections 2.1(b)(i) and (ii) of this
Agreement PRO RATA among the Holders requesting registration under
6
<PAGE>
Sections 2.1(b)(i) and (ii) on the basis of the relative number of Registrable
Securities requested by each such Holder to be included in such registration,
SECOND to any securities required to be registered by other Persons (including
the Company) pursuant to agreements providing registration rights to other
Persons, in such order and with such priorities as may be required by such
agreements.
In the event that 50% or more of the Registrable Securities proposed
to be included by the Holders requesting registration in such underwritten
offering are excluded from the underwritten offering pursuant to the provisions
of this Section 2.1(c), such a registration shall not be deemed a registration
under Section 2.1(a) and the Holders shall have the right to request that the
Company effect a further registration pursuant to Section 2.1(a).
(d) REGISTRATION STATEMENT FORM. Registrations under this Section
2.1 shall be on such appropriate registration form of the Commission (x) as
shall be selected by the Company and as shall be reasonably acceptable to the
Requesting Holders owning a majority of the Registrable Securities in such
offering and (y) as shall permit the disposition of such Registrable Securities
in accordance with the intended method or methods of disposition intended on the
part of such Holders as advised to the Company in writing.
(e) EXPENSES. The Company will pay promptly all Registration
Expenses in connection with the registration requests made pursuant to this
Section 2.1.
(f) EFFECTIVE REGISTRATION STATEMENT. A registration requested
pursuant to this Section 2.1 shall not be deemed to have been effected until the
registration statement has been effective for a period of six months following
the date on which such registration statement was declared effective or such
shorter period which will terminate when all Registrable Securities covered by
such registration statement have been sold. A shelf registration must remain
effective until all securities covered thereby have been sold to be deemed
effected.
(g) UNDERWRITERS. The managing underwriter or underwriters of any
underwritten offering effected pursuant to this Section 2.1 shall be selected by
the Buyers if they are among the Requesting Holders owning Registrable
Securities to be included in such offering, subject to the approval of the
Company, which approval shall not be unreasonably withheld, and otherwise by the
Company, subject to the approval of the Requesting Holders owning a majority of
the Registrable Securities to be included in such offering, which approval shall
not be unreasonably withheld; and the price, terms and provisions of the
offering, shall be subject to the approval of such Holders. Any Affiliate of
Buyers may be selected as underwriter for an underwritten offering effected
pursuant to this Section 2.1.The Company will enter into customary agreements
(including an underwriting agreement in customary form) and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities, including, to the extent necessary,
7
<PAGE>
the engagement of a "qualified independent underwriter" in connection with the
qualification of the underwriting arrangements with the NASD.
(h) REPURCHASE OF WARRANTS. In the event that the Holders request a
registration of the Warrants pursuant to Section 2.1(a) prior to an Initial
Public Offering, to the extent the Company may have funds legally available for
such payment, within 15 days of receipt of the request by the Holders referred
to in Section 2.1(a), the Company may, at its option, deliver written notice
(the "REPURCHASE NOTICE") to such Requesting Holders of its election to
repurchase all of the Warrants then outstanding for cash at Fair Market Value on
a date set forth in such notice no later than 60 days after the date the
Repurchase Notice is delivered.
For the purpose of this Section 2.1(h), "FAIR MARKET VALUE" of the
Warrants shall be determined as follows:
(i) If there is a public market for the Warrants at the time
of such repurchase, the Fair Market Value of the Warrants shall be
determined based on (A)the last reported sales price of the Warrants on the
principal national securities exchange on which such Warrants are listed or
admitted to trading on the date immediately preceding the repurchase date
or, if no such reported sale takes place on such day, the average of the
closing bid and asked prices thereon, as reported in THE WALL STREET
JOURNAL, or (B) if the Warrants are not then listed or admitted to trading
on a national securities exchange, the last reported sales price on the
NASDAQ National Market System on the date immediately preceding the
repurchase date or, if no such reported sale takes place on such day, the
average of the closing bid and asked prices thereon, as reported in THE
WALL STREET JOURNAL, or (C) if the Warrants are not then quoted on such
National Market System or listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices, as
reported by THE WALL STREET JOURNAL for the over-the-counter market on the
date immediately preceding the repurchase date. If there is a public market
for any class of the securities issuable upon exercise of the Warrants (the
"UNDERLYING SECURITIES")at the time of such repurchase, and there is no
public market for the Warrants, the portion of the Fair Market Value of the
Warrants attributable to such publicly traded Underlying Securities shall
be determined based on the trading prices of such securities determined in
the same manner set forth above as that for the Warrants.
(ii) If any Warrants are to be repurchased pursuant to this
Section 2.1(h) and there is no public market for such Warrants and no
public market for each class of Underlying Securities, then within 20 days
of delivery of the Repurchase Notice, the Company shall provide the Holders
with a certificate setting forth its opinion as to the fair market value of
such Warrants (the "COMPANY'S ESTIMATE").The Majority Holders shall have 20
days to accept, or disagree with, the Company's Estimate. If the Majority
Holders disagree with the Company's Estimate, the Majority
8
<PAGE>
Holders shall so indicate in writing to the Company and provide their
opinion as to the fair market value of the Warrants (the "MAJORITY HOLDERS'
ESTIMATE"), in each case within 20 days of receipt of the Company's
Estimate. If the Majority Holders do not indicate their disagreement with
the Company's Estimate in writing (and provide their opinion referred to in
the immediately preceding sentence) within such 20-day period, the Fair
Market Value of the Warrants shall be equal to the Company's Estimate. If
the Majority Holders indicate their disagreement with the Company's
Estimate (and provide such opinion) within such 20-day period, an
investment banking firm of national standing chosen by mutual agreement of
the Company and the Majority Holders (the "INDEPENDENT INVESTMENT BANK")
shall select either the Company's Estimate or the Majority Holders'
Estimate as the estimate that more closely reflects the fair market value
of the Warrants, and the estimate thus selected shall be the Fair Market
Value of the Warrants. In preparing the Company's Estimate and the Majority
Holders' Estimate, the fair market value of any publicly traded Underlying
Securities shall be determined in accordance with paragraph (i) above. All
fees and expenses of the Independent Investment Bank shall be paid by the
party (treating all Holders as one party) whose estimate was not selected
as the Fair Market Value.
(iii) In the determination of the Fair Market Value of any
security, there shall not be taken into consideration any premium for
securities representing control of the Company or any discount related to
securities representing a minority interest therein or related to any
illiquidity or lack of marketability of securities arising from contractual
restrictions on the transfer of securities or restrictions on transfer
under federal and applicable state securities laws.
(i) Anything contained in this Section 2.1 to the contrary
notwithstanding, at such time as the Company shall have qualified for the
use of Form S-3 promulgated under the Securities Act or any successor form
thereto, each Holder shall have the right to request in writing an
unlimited number of registrations on such form of Registrable Securities
having an anticipated aggregate gross offering price (before underwriting
discounts and commissions) of at least $5,000,000. The written request or
requests of the Holders shall specify the number of Registrable Securities
intended to be sold or disposed of and the holders thereof and state the
intended method of disposition of such Registrable Securities. Upon
receipt of any such request, the Company shall use its best efforts
promptly to effect the registration under the Securities Act of the
Registrable Securities so requested to be registered. The provisions of
Section 2.1(b), (c), (e), (f) and (g) shall apply to a requested
registration on Form S-3 or any such successor form in compliance with this
Section 2.1(i).
2.2. INCIDENTAL REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company at any
time proposes to register any of its securities under the Securities Act (other
than by a registration
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on Form S-4, Form S-8 or any successor or similar form and other than pursuant
to a registration statement requested pursuant to Section 2.1 hereof or by a
registration prior to (but not including) an initial public offering of the
Company's Common Stock or Junior Preferred Stock), whether or not for sale for
its own account or as a result of a demand from a security holder, it will at
each such time give PROMPT WRITTEN NOTICE to all Holders of its intention to do
so and of such Holders' rights under this Section 2.2. Upon the written request
of any Holder made within 30 days after the receipt of any such notice (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder), the Company will use its best efforts to effect the registration
with the Commission under the Securities Act of all Registrable Securities which
the Company has been so requested to register, to the extent required to permit
the disposition of the Registrable Securities to be so registered, PROVIDED,
HOWEVER, that if, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not to register or to delay registration of such
securities, the Company shall give written notice of such determination to each
Holder and, thereupon, (i) in the case of a determination not to register, shall
be relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith), without prejudice, however, to
the rights of any Holder entitled to do so, to request that such registration be
effected as a registration under Section 2.1, and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any
Registrable Securities, for the same period as the delay in registering such
other securities. No registration effected under this Section 2.2 shall relieve
the Company of its obligation to effect any registration upon request under
Section 2.1. The Company will pay promptly all Registration Expenses in
connection with each registration of Registrable Securities requested pursuant
to this Section 2.2. The Requesting Holders shall not be entitled to request
registration of Warrants pursuant to this Section 2.2; however they may request
registration of the securities for which the Warrants are exercisable.
(b) APPORTIONMENT IN INCIDENTAL REGISTRATIONS. If (i) a registration
pursuant to this Section 2.2 involves an underwritten offering of the securities
being registered, whether or not for sale for the account of the Company, to be
distributed (on a firm commitment basis) by or through one or more underwriters,
and (ii) the managing underwriter of such underwritten offering shall inform the
Company in writing of its good faith belief that the number and/or type of
securities requested to be included in such underwritten offering exceeds the
number and/or type which can be sold in (or during the time of) such offering or
that the inclusion of such number and/or type of securities would adversely
affect the marketing of the securities to be sold by the Company or the
securityholder or securityholders who have requested such registration pursuant
to demand registration rights, then the Company shall include, to the extent of
the number and type which the Company is so advised can be sold in (or during
the time of) such offering, FIRST, in the case of a registration proposed by the
Company for its own account, all securities proposed by the Company to be sold
for its own account, or in the case of any securities
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initially proposed to be registered by the Company for the accounts of other
Persons pursuant to the exercise of demand registration rights granted pursuant
to an applicable registration rights agreement between the Company and such
other Person, the securities requested to be registered by such Person but only
in such amount and to the extent required by such agreement, SECOND, such
Registrable Securities requested to be included in such registration pursuant to
this Agreement and any securities required to be included in such registration
by other Persons who have incidental registration rights, on a PRO RATA basis
with respect to each type of security. It is expressly understood that the
underwriters may determine in their discretion to exclude all debt securities
from a registration of equity securities and VICE VERSA.
2.3. REGISTRATION PROCEDURES. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Sections 2.1 and 2.2, the
Company will, as promptly as possible:
(a) select counsel and independent accountants for the Company in
connection with such registration;
(b) prepare and (as promptly thereafter as practicable and in any
event within 45 days after the end of the 30-day period within which requests
for registration may be given to the Company) file with the Commission the
requisite registration statement to effect such registration and thereafter use
its best efforts to cause such registration statement to become effective and to
remain effective for the period specified in Section 2.3 (c), PROVIDED, HOWEVER,
that the Company may discontinue any registration of its securities which are
not Registrable Securities (and, under the circumstances specified in Section
2.2(a), its securities which are Registrable Securities) at any time prior to
the effective date of the registration statement relating thereto;
(c) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective (x)
in the case of a shelf registration statement, indefinitely, until all
securities covered by such shelf registration statement are sold, and (y) in all
other cases, for a period of not more than six months (or such shorter period
which will terminate when all Registrable Securities covered by such
registration statement have been sold (but not before the expiration of the
period referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable)) after the date of the original filing and to comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement until such time as all of
such securities have been disposed of in accordance with the intended methods of
disposition by the Registering Holders thereof set forth in such registration
statement; PROVIDED, HOWEVER, that at a reasonable time before filing any
registration statement or prospectus or supplement or amendment thereto or
document incorporated by reference therein, the Company shall furnish drafts of
such documents to counsel for the Registering Holders, which documents shall be
subject to reasonable review by such counsel; and FURTHER
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PROVIDED, that there shall not be counted as part of the six months any period
during which the prospectus may not be used pursuant to subsection (h) of this
Section 2.3;
(d) furnish to each Registering Holder and to any underwriter such
number of conformed copies of such registration statement and of each such
amendment and supplement thereto (in each case including all exhibits), the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under Rule
424 or Rule 430A under the Securities Act, in conformity with the requirements
of the Securities Act, documents incorporated by reference in such registration
statement, amendment, supplement or prospectus and such other documents (in each
case including all exhibits), as a Registering Holder or underwriter may
reasonably request;
(e) use its best efforts to register or qualify all Registrable
Securities and other securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as the Holders of a
majority of the Registrable Securities covered by such registration statement or
the underwriter shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement remains in
effect, and take any other action which may be reasonably necessary or advisable
to enable the Registering Holders to consummate the disposition in such
jurisdictions of the securities owned by such Registering Holders, except that
the Company shall not for any such purpose be required to qualify generally to
do business as a foreign corporation in any jurisdiction wherein it would not
but for the requirements of this subdivision 2.3(e) be obligated to be so
qualified, to subject itself to taxation in any such jurisdiction or to consent
to general service of process in any such jurisdiction;
(f) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
Registering Holders to consummate the disposition of such Registrable
Securities;
(g) furnish to each Registering Holder and the underwriters a
signed counterpart of: (x) an opinion of counsel for the Company, dated the
effective date of such registration statement (or, if such registration includes
an underwritten public offering, dated the date of the closing under the
underwriting agreement) covering such matters as are customarily covered by
opinions of issuer's counsel delivered to underwriters in underwritten public
offerings of securities; and (y) a "comfort" letter, dated the effective date of
such registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have certified the
Company's financial statements included in such registration statement, covering
matters which are customarily covered in accountants' letters delivered to the
underwriters in underwritten public offerings of securities, and such other
financial matters as the underwriters may reasonably request; PROVIDED that the
Company
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shall be under no obligation to cause a "comfort letter" to be delivered with
respect to any offering that is not underwritten if it would not be customary at
the time of such offering for the Company to deliver a "comfort letter";
(h) notify each Registering Holder at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which, the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made, and at
the request of any such Registering Holder promptly prepare and furnish to such
Registering Holder a reasonable number of copies of any supplement to or
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make statements therein not
misleading in the light of the circumstances under which they were made;
(i) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first full calendar month after the effective date of
such registration statement (as the term "effective date" is defined in Rule
158 under the Securities Act), which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and
will furnish to each Registering Holder, underwriter and Registering Holders' or
underwriter's counsel, at least two business days prior to the filing thereof, a
draft copy of any amendment or supplement to such registration statement or
prospectus or document incorporated by reference therein and shall not file any
such amendment or supplement or document incorporated by reference therein which
does not comply in all material respects with the applicable requirements of the
Securities Act and the Exchange Act or of the rules or regulations thereunder;
(j) provide and cause to be maintained a transfer agent for all
Registrable Securities covered by such registration statement from and after a
date not later than the effective date of such registration statement;
(k) use its best efforts (i) to list all Registrable Securities
covered by such registration statement on any securities exchange on which any
of the same class of securities as the Registrable Securities is then listed or
(ii) in the event such securities are not so listed, to have such Registrable
Securities qualified for inclusion on the NASDAQ National Market System, if
securities of the same class as the Registrable Securities are then so qualified
or (iii) in the event such securities are not so listed or qualified, to have
such Registrable Securities qualified for inclusion on the NASDAQ System; and
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<PAGE>
(l) furnish unlegended certificates representing ownership of the
Registrable Securities then being sold in such denominations as shall be
requested by Registering Holders or underwriters.
Without limiting the foregoing, if and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under Sections 2.1 and 2.2, the Company will be required to provide
all customary and reasonably necessary assistance in connection with the
registration and marketing of such Registrable Securities; PROVIDED, HOWEVER,
the Company will not be required to make its management available for any
roadshow presentations in connection with the registration of any Registrable
Securities.
The Company may require each Registering Holder to promptly furnish
the Company, as a condition precedent to including such Registering Holder's
Registrable Securities in any registration, such information regarding such
Registering Holder and the distribution of such securities as the Company may
from time to time reasonably request in writing.
Each Holder agrees, by acquisition of such Registrable Securities,
that upon receipt of any notice from the Company of the happening of any event
of the kind described in subdivision (h) of this Section 2.3, such Holder will
forthwith discontinue such Holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by subdivision (h) of this Section 2.3 and, if so
directed by the Company, will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies, then in such Holder's possession,
of the prospectus and any amendments or supplements thereto relating to such
Registrable Securities current at the time of receipt of such notice.
2.4. UNDERWRITTEN OFFERINGS.
(a) REQUESTED UNDERWRITTEN OFFERINGS. If requested by the
underwriters for any offering by Holders pursuant to a registration requested
under Section 2.1, the Company will enter into an underwriting agreement with
such underwriters for such offering, such agreement to be satisfactory in
substance and form to the Company, the Requesting Holders and the underwriters
and to contain such representations and warranties by the Company and such other
terms as are then generally prevailing in agreements of such type, including,
without limitation, indemnities to the effect and to the extent provided in
Section 2.8 hereof and, if applicable, provisions relating to "qualified
independent underwriters" as provided in 2.1(g). The Requesting Holders will
cooperate with the Company in the negotiation of the underwriting agreement,
PROVIDED that nothing herein contained shall diminish the foregoing obligations
of the Company. The Registering Holders shall be parties to such underwriting
agreement. No Registering Holder shall be required to make any representations
or warranties to or agreements with the Company or the underwriters other than
representations,
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warranties or agreements to or for the benefit of the Company and such
underwriters regarding such Registering Holder, such Registering Holder's
Registrable Securities, any other information supplied in writing by such
Registering Holder to the Company specifically for use in the Registration
Statement and any other representation required by law.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.2 and its securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any Holder
as provided in Section 2.2 and subject to the provisions of Section 2.2(b), use
its best efforts to arrange for such underwriters to include all the Registrable
Securities to be offered and sold by such Holder among the securities to be
distributed by such underwriters. The Registering Holders shall be parties to
the underwriting agreement between the Company and such underwriters. No
Registering Holder shall be required to make any representations or warranties
to or agreements with the Company or the underwriters other than
representations, warranties, or agreements to or for the benefit of the Company
and such underwriter regarding such Registering Holder, such Registering
Holder's Registrable Securities and any other information supplied in writing by
such Registering Holder to the Company specifically for use in the registration
statement and any other representation required by law.
(c) PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any underwritten registration hereunder unless such person (i)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements. If the Company and
Requesting Holders holding a majority of the Registrable Securities to be
included in a registration shall enter into an underwriting or similar agreement
that contains provisions which conflict with any provision of Section 2.4 or
2.7 hereof, the provisions of such agreement with respect to such matter shall
control for purposes of such underwritten offering.
(d) HOLDBACK AGREEMENT. (i) If the Company at any time shall
register its securities under the Securities Act (including any registration
pursuant to Sections 2.1 or 2.2 or pursuant to the Registration Rights Agreement
(as defined below)) for sale to the public pursuant to an underwritten offering
(excluding a registration initiated pursuant to Section 2.1(i) hereof or Section
4 of the Registration Rights Agreement), to the extent the following
restrictions are legally permitted, the Holders shall not sell publicly, make
Any short sale of, grant any option for the purchase of, or otherwise dispose
publicly of, any securities of the Company similar to those being registered
(other than those Registrable Securities included in such registration pursuant
to Sections 2.1 or 2.2) or securities convertible into or exercisable or
exchangeable for any such similar securities of the Company without the prior
written consent of the Company, for a period designated by the Company in
writing to the Holders,
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which period shall not begin more than 10 days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be made and
shall not last more than (i) 180 days, if such public offering is an initial
public offering, or (ii) 90 days in all other circumstances, in each case after
the closing of the sale of securities pursuant to such registration statement.
The Company shall obtain the agreement of any Person permitted to sell
securities in a registration to be bound by and to comply with this Section
2.4(d) with respect to such registration as if such Person was a Holder
hereunder.
(ii) If the Company at any time pursuant to Section 2.1 of this
Agreement shall register under the Securities Act Registrable Securities held by
Holders for sale to the public pursuant to an underwritten offering, the Company
shall not, without the prior written consent of a majority of Holders, effect
any public sale or distribution of securities similar to those being registered
(other than upon the exercise of securities convertible into or exercisable or
exchangeable for securities or other commitments existing or outstanding prior
to such holdback period or securities sold in such registration), or any
securities convertible into or exercisable or exchangeable for such similar
securities, for such period as shall be determined by the managing underwriters,
which period shall not begin more than 10 days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be made and
shall not last more than (i) 180 days, if such public offering is an initial
public offering, or (ii) 90 days in all other circumstances, in each case after
the closing of the sale of securities pursuant to such registration statement.
(iii) The Company will, at the request of the Requesting Holders
holding a majority of the securities to be registered, enforce the provisions of
Section 5 of the Registration Rights Agreement dated the date hereof among the
Company and the Shareholders (as defined therein) party thereto (the
"REGISTRATION RIGHTS AGREEMENT").
2.5. PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Registering Holders, the
underwriters and their respective counsel and accountants, the timely
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto and documents incorporated by reference
therein, and, subject to the execution of confidentiality agreements in form and
substance satisfactory to the Company, will give each of them such access to its
books and records and such opportunities o discuss the business of the Company
with its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of each of such
Registering Holders' and such underwriters' respective counsel, to conduct
appropriate due diligence within the meaning of the Securities Act.
2.6. POSTPONEMENT OF REGISTRATION: SUSPENSION. (a) If at the time of
any request to register Registrable Securities pursuant to Section 2.1 hereof,
the Company is
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engaged in or in good faith plans to engage in any financing, acquisition,
corporate reorganization or other material transactions (each a "MATERIAL
TRANSACTION") involving the Company which the Company's Board of Directors
determines in its good faith reasonable judgment would be adversely affected by
the filing of any registration statement otherwise required to be prepared and
filed pursuant to Section 2.1, the Company shall be entitled to postpone for a
reasonable period of time (but not exceeding 90 days from the date of the
request), the filing of such registration statement and shall promptly give the
Requesting Holders written notice of such determination, containing a general
statement of the reasons for such postponement and an approximation of the
anticipated delay (which shall be kept confidential by such Requesting Holders).
If the Company shall so postpone the filing of the registration statement, a
majority of the Requesting Holders shall have the right to withdraw the request
for registration by giving written notice to the Company within 30 days after
receipt of the notice of postponement and, in the event of such withdrawal, such
withdrawn request shall not be counted for purposes of the requests for
registration to which Holders are entitled pursuant to Section 2.1 hereof. Such
right to delay a request for registration pursuant to this Section 2.6 may not
be exercised more than once in any two year period.
(b) Anything contained in this Agreement to the contrary
notwithstanding, the Company may, by notice in writing to each holder of
Registrable Securities to which a prospectus relates, require such holder to
suspend, for up to 90 days (the "SUSPENSION PERIOD"), the use of any prospectus
included in a shelf registration statement filed under Section 2.1 hereof if a
Material Transaction exists that would require an amendment to such registration
statement or supplement to such prospectus (including any such amendment or
supplement made through incorporation by reference to a report filed under
Section 13 of the Exchange Act); PROVIDED that the Company shall not be entitled
to exercise this right more than once in any two year period. The Company may
(but shall not be obligated to) withdraw the effectiveness of any registration
statement subject to this provision.
2.7. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. The
Company agrees to indemnify and hold harmless each Holder holding Registrable
Securities covered by a registration statement, its officers, directors and
agents and each Person, if any, who controls such Holder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information furnished in writing to the Company by such Holder or on such
Holder's behalf expressly for use therein; PROVIDED that with respect to any
untrue statement or omission or alleged untrue statement or omission made in any
preliminary prospectus, or in any
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prospectus, as the case may be, the indemnity agreement contained in this
paragraph shall not apply to the extent that any such loss, claim, damage,
liability or expense results from the fact that a current copy of the prospectus
(or the amended or supplemented prospectus, as the case may be) was not sent or
given to the Person asserting any such loss, claim, damage, liability or expense
at or prior to the written confirmation of the sale of the Registrable
Securities concerned to such Person if it is determined that the Company has
provided such prospectus (or amended or supplemented prospectus) and it was the
responsibility of such Holder to provide such Person with a current copy of the
prospectus (or such amended or supplemented prospectus, as the case may be) and
such current copy of the prospectus (or such amended or supplemented prospectus,
as the case may be) would have cured the defect giving rise to such loss, claim,
damage, liability or expense. The Company also agrees to indemnify any
underwriters of the Registrable Securities, their officers and directors and
each Person who controls such underwriters on substantially the same basis as
that of the indemnification of the Holders provided in this Section 2.7.
(b) INDEMNIFICATION BY THE REGISTERING HOLDERS. Each Holder holding
Registrable Securities included in any registration statement agrees, severally
but not jointly, to indemnify and hold harmless the Company, its officers,
directors and agents and each Person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Holder, but only (i) with respect to information furnished in writing by
such Holder or on such Holder's behalf expressly for use in any registration
statement or prospectus relating to the Registrable Securities, or any amendment
or supplement thereto, or any preliminary prospectus or (ii) to the extent that
any loss, claim, damage, liability or expense described in Section 2.7(a)
results from the fact that a current copy of the prospectus (or the amended or
supplemented prospectus, as the case may be) was not sent or given to the Person
asserting any such loss, claim, damage, liability or expense at or prior to the
written confirmation of the sale of the Registrable Securities concerned to such
Person if it is determined that it was the responsibility of such Holder to
provide such Person with a current copy of the prospectus (or such amended or
supplemented prospectus, as the case may be) and such current copy of the
prospectus (or such amended or supplemented prospectus, as the case may be)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense. Each such Holder also agrees to indemnify and hold harmless the
underwriters of the Registrable Securities, their officers and directors and
each Person who controls such underwriters on substantially the same basis as
that of the indemnification of the Company provided in this Section 2.7(b). As a
condition to including Registrable Securities in any registration statement
filed in accordance with Section 2.3 hereof, the Company may require that it
shall have received an undertaking reasonably satisfactory to it from any
underwriter to indemnify and hold it harmless to the extent customarily provided
by underwriters with respect to similar securities.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect
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of which indemnity may be sought pursuant to this Section 2.7, such Person (an
"INDEMNIFIED PARTY") shall promptly notify the Person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Party, and shall assume the
payment of all fees and expenses; PROVIDED that the failure of any Indemnified
Party so to notify the Indemnifying Party shall not relieve the Indemnifying
Party of its obligations hereunder except to the extent that the Indemnifying
Party is materially prejudiced by such failure to notify. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of such Indemnified Party representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the Indemnifying Party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Indemnified Parties, and that all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Indemnified Parties, such firm shall be designated in writing by the Indemnified
Parties. The Indemnifying Party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent, or if there be a final judgment for the plaintiff, the Indemnifying
Party shall indemnify and hold harmless such Indemnified Parties from and
against any loss or liability (to the extent stated above) by reason of such
settlement or judgment. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending or
threatened proceeding in respect of which any Indemnified Party is or could have
been a party and indemnity could have been sought hereunder by such Indemnified
Party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability arising out of such proceeding.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 2.7 is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than in accordance with
its terms), then each such Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
as between the Company and the Holders holding Registrable Securities covered by
a registration statement on the one hand and the underwriters on the other, in
such proportion as is appropriate to reflect the relative benefits received by
the Company and such Holders on the one hand and the underwriters on the other,
from the offering of the Registrable Securities, or if such allocation is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits but also the relative fault of the Company and such
Holders on the one hand and of such underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the
19
<PAGE>
one hand and each such Holder on the other, in such proportion as is appropriate
to reflect the relative fault of the Company and of each such Holder in
connection with such statements or omissions, as well as any other relevant
equitable considerations. The relative benefits received by the Company and such
Holders on the one hand and such underwriters on the other shall be deemed to be
in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and such Holders bear to the total underwriting discounts and
commissions received by such underwriters, in each case as set forth in the
table on the cover page of the prospectus. The relative fault of the Company and
such Holders on the one hand and of such underwriters on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company and such Holders
or by such underwriters. The relative fault of the Company on the one hand and
of each such Holder on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 2.7 were determined by pro
rata allocation (even if the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 2.7, no underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the securities purchased by such underwriter in such offering,
less the aggregate amount of any damages which such underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission, and no Holder shall be required to contribute any
amount in excess of the amount by which the total price at which the Registrable
Securities of such Holder were offered to the public exceeds the amount of any
damages which such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Each such Holder's obligation
to contribute pursuant to this Section 2.7 is several in the proportion that the
proceeds of the offering received by such Holder bears to the total proceeds of
the offering received by all such Holders and not joint.
20
<PAGE>
3. AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented unless
in a writing signed by the Company and the Holders. Except as otherwise provided
herein, no waivers or consents to departures from the provisions hereof may be
given unless the Company has obtained the written consent of the Holders. Each
Holder shall be bound by any consent obtained in the manner authorized by this
Section 3, whether or not such Registrable Securities shall have been marked to
indicate such consent.
4. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election by written notice to the Company
effective upon receipt by the Company, be treated as a Holder for purposes of
any request or other action by any Holder pursuant to this Agreement or any
determination of any number or percentage of shares of Registrable Securities
held by any Holder contemplated by this Agreement. If the beneficial owner of
any Registrable Securities so elects, the Company may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities. Prior to receipt by the Company of written notice
contemplated hereby, any action taken by any nominee shall be binding upon any
such beneficial owner.
5. NO CONFLICT OF RIGHTS. Except for the Registration Rights
Agreement, the Company shall not, at any time after the date hereof, grant any
registration rights that conflict with, or have any priority over, the
registration rights granted hereby.
6. NOTICES. All communications provided for hereunder shall be sent
by first-class mail or overnight courier and (a) if addressed to the Buyers,
addressed to the Buyers in the manner set forth in the Securities Purchase
Agreement, or at such other address as the Buyers shall have furnished to the
Company in writing, or (b) if addressed to any other Holder, the address that
such Holder shall have furnished to the Company in writing, or, until any such
other Holder so furnishes to the Company an address, then to and at the address
of the last Holder who has furnished an address to the Company, or (c) if
addressed to the Company, to Guitar Center Management Company, Inc., 5155
Clareton Drive, Agoura Hills, CA 91362, Attention: Secretary or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to each holder of Registrable Securities at the time outstanding.
7. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns (including the Holders of the Exchange Debentures upon
exchange of the Senior Preferred Stock and Holders of the Common Stock and
Junior Preferred Stock upon exercise of the Warrants). As a condition to such
succession, or assignment or transfer, such successor, assignee or transferee
shall execute and deliver to the Company a letter agreement agreeing to be bound
by all the provisions of this Agreement applicable to Holders. In addition, and
whether or not any express assignment shall have been made, the provisions of
this
21
<PAGE>
Agreement which are for the benefit of the parties hereto other than the Company
shall also be for the benefit of and enforceable by any subsequent Holder,
subject to the provisions respecting the minimum numbers or percentages of
shares of Registrable Securities required in order to be entitled to certain
rights, or take certain actions, contained herein.
8. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
9. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
10. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; SERVICE OF
PROCESS. ANY SUIT, ACTION OR PROCEEDING SEEKING TO ENFORCE ANY PROVISION OF, OR
BASED ON ANY MATTER ARISING OUT OF OR IN CONNECTION WITH, THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY MAY BE BROUGHT AGAINST ANY OF THE PARTIES IN
THE COURTS OF THE STATE OF NEW YORK IN NEW YORK CITY, OR, IN THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND EACH OF THE PARTIES
HEREBY CONSENTS TO THE JURISDICTION OF SUCH COURTS (AND OF THE APPROPRIATE
APPELLATE COURTS) IN ANY SUCH SUIT, ACTION OR PROCEEDING AND WAIVES ANY
OBJECTION TO VENUE LAID THEREIN AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT
IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY HERETO
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY. TO THE EXTENT PERMITTED BY LAW, PROCESS IN ANY SUCH SUIT,
ACTION OR PROCEEDING MAY BE SERVED ON ANY PARTY ANYWHERE IN THE WORLD, WHETHER
WITHIN OR WITHOUT THE STATE OF NEW YORK. WITHOUT LIMITING THE FOREGOING, EACH
PARTY AGREES THAT SERVICE OF PROCESS ON SUCH PARTY AS PROVIDED IN SECTION 6
SHALL BE DEEMED EFFECTIVE SERVICE OF PROCESS ON SUCH PARTY.
11. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same agreement and shall
become effective only when one or more of the counterparts shall have been
signed by each party and delivered to the other party, it being understood that
all the parties need not sign the same counterpart.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Lawrence E. Thomas
---------------------------------
Name: LAWRENCE E. THOMAS
Title: PRESIDENT
DLJ MERCHANT BANKING PARTNERS, L.P.
By: DLJ Merchant Banking, Inc.
Managing General Partner
By:
---------------------------------
Name:
Title:
DLJ INTERNATIONAL PARTNERS, C.V.
By: DLJ Merchant Banking, Inc.
Advisory General Partner
By:
---------------------------------
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By:
---------------------------------
Name:
Title:
DLJ MERCHANT BANKING PARTNERS, L.P.
By: DLJ Merchant Banking, Inc.
Managing General Partner
By: /s/ David B. Wilson
---------------------------------
Name: DAVID B. WILSON
Title: SENIOR VICE PRESIDENT
DLJ INTERNATIONAL PARTNERS, C.V.
By: DLJ Merchant Banking, Inc.
Advisory General Partner
By: /s/ David B. Wilson
---------------------------------
Name: DAVID B. WILSON
Title: SENIOR VICE PRESIDENT
<PAGE>
DLJ OFFSHORE PARTNERS, C.V.
By: DLJ Merchant Banking, Inc.
Advisory General Partner
By: /s/ David B. Wilson
---------------------------------
Name: DAVID B. WILSON
Title: SENIOR VICE PRESIDENT
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/ David B. Wilson
---------------------------------
Name: DAVID B. WILSON
Title: SENIOR VICE PRESIDENT
<PAGE>
EXHIBIT 10.21
GUITAR CENTER MANAGEMENT COMPANY, INC.
_________________________________
$25,000,000
CREDIT AGREEMENT
Dated as of June 5, 1996
_________________________________
WELLS FARGO BANK, N.A.
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "AGREEMENT"), dated as of June 5, 1996, is
made between Guitar Center Management Company, Inc., a California corporation
(the "BORROWER"), and Wells Fargo Bank, N.A. (the "BANK").
The Borrower has requested the Bank to make revolving loans to, and to
issue Letters of Credit for the account of, the Borrower in an aggregate
principal amount of up to $25,000,000 at any one time outstanding. The Bank is
willing to make such loans to the Borrower and to issue such Letters of Credit,
in each case upon the terms and subject to the conditions set forth in this
Agreement.
Accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings:
"AFFILIATE" means any Person which, directly or indirectly, controls,
is controlled by or is under common control with another Person. For purposes
of the foregoing, "control," "controlled by" and "under common control with"
with respect to any Person shall mean 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 or by contract
or otherwise.
"APPLICABLE MARGIN" means with respect to Prime Rate Loans, 1.50% per
annum; and (ii) with respect to Eurodollar Rate Loans, 3.00% per annum; PROVIDED
THAT, after the Bank has received from the Borrower the financial statements
required to be delivered pursuant to Section 8.01(a)(i) for the fiscal quarter
ended September 30, 1996, the "Applicable Margin" shall be determined in
accordance with the following:
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<PAGE>
If Ratio of Funded Debt to Applicable Applicable
EBITDA of the Borrower Margin on Margin on
measured in accordance with Prime Rate Eurodollar
Section 8.02(a) is: Loans Rate Loans
--------------------------- ------------- -------------
Greater than 5.0 1.50% 3.00%
From 4.0 to 5.0 0.75% 2.00%
From 3.0 to 4.0 0.50% 1.50%
Less than 3.0 0.00% 1.25%
For the fiscal quarter beginning October 1, 1996 and for each fiscal
quarter thereafter, the Applicable Margin shall be calculated using the Ratio of
Funded Debt to EBITDA for the previous quarter.
"APPROVAL" has the meaning set forth in Section 7.01(d).
"BANK" has the meaning set forth in the recital of parties to this
Agreement.
"BANKRUPTCY CODE" means the U.S. Bankruptcy Code, as amended from time
to time.
"BORROWER" has the meaning set forth in the recital of parties to this
Agreement.
"BORROWER'S ACCOUNT" means the account of the Borrower maintained with
the Bank, bearing the number 4629103789.
"BORROWING BASE" means at any time the sum of (i) 80% of Eligible
Receivables at such time PLUS (ii) 70% of Eligible Inventory at such time,
MINUS, at all times prior to the occurrence of the Collateral Perfection Date,
(iii) Trade Payables at such time; PROVIDED, HOWEVER, that the Borrowing Base at
any time shall be determined by reference to the most recent Borrowing Base
Documents delivered to the Bank pursuant to Section 8.01(a).
"BORROWING BASE DOCUMENTS" mean the documents attached hereto as
EXHIBIT B that the Bank may require the Borrower to deliver in connection with
the Bank's monitoring of the Collateral and calculation of the Borrowing Base
(including calculation of the Trade Payables), including, if required, a
Borrowing Base certificate executed by a Responsible Officer of the Borrower.
"BRIDGE LOAN" means the financing to be provided by the GCMC Funding,
Inc. and Chemical Bank provided pursuant to the Bridge Financing Agreement.
2
<PAGE>
"BRIDGE FINANCING AGREEMENT" means the Bridge Financing Agreement
dated as of June 5, 1996, among the Borrower, GCMC Funding, Inc., and Chemical
Bank as amended, supplemented or otherwise modified from time to time to the
extent not prohibited by Section 8.04(j) of this Agreement.
"BUSINESS DAY" means a day (i) other than Saturday or Sunday, and
(ii) on which commercial banks are open for business in New York, New York, and
Los Angeles, California.
"CAPITAL LEASE" means, for any Person, any lease of property (whether
real, personal or mixed) which, in accordance with GAAP, would, at the time a
determination is made, be required to be recorded as a capital lease in respect
of which such Person is liable as lessee.
"CAPITALIZATION TRANSACTIONS" means, collectively, (i) the
Recapitalization, the Purchase and the Redemption, as such terms are defined in
the Transaction Agreement, (ii) the Bridge Loan and (iii) the Senior Preferred
Transaction.
"CAPITALIZATION TRANSACTIONS DOCUMENTS" means the Transaction
Agreement, the Senior Preferred Stock Purchase Agreement and the Bridge
Financing Agreement, and all other agreements or instruments, including the
Certificate of Determination of Preferences of 8% Junior Preferred Stock and the
Certificate of Determination of Preferences of 14% Senior Preferred Stock, and
warrants to purchase shares of 8% Junior Preferred Stock and common stock of the
Borrower ("Warrants"), entered into as of the Closing Date by the Borrower in
connection with the Transaction Agreement, the Senior Preferred Stock Purchase
Agreement or the Bridge Financing Agreement, in each case as amended,
supplemented or otherwise modified from time to time to the extent not
prohibited by Section 8.04(j) of this Agreement.
"CHANGE OF CONTROL" means the occurrence of one or more of the
following events (whether or not approved by the board of directors of the
Borrower): (a) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities 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 Borrower
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 Borrower than
that then held by the Initial Investors and their Affiliates; or (b) a sale or
transfer of all or substantially all of the assets of the Borrower to any person
or group (other than any group consisting principally of the Initial 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 Borrower (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 Borrower then in
office, other than as a result of election and removal of directors pursuant to
the provisions of the Certificate of Determination of Preferences of 14% Senior
Preferred Stock, the Bridge Financing Agreement or the Stockholders Agreement
governing the election and removal of directors.
3
<PAGE>
"CLOSING DATE" means the date of the initial borrowing hereunder.
"COLLATERAL" means the property described as "Collateral" in the
Collateral Documents, and all other property now existing or hereafter acquired
which may at any time after the occurrence of a Trigger Event be or become
subject to a Lien in favor of the Bank pursuant to the Collateral Documents or
otherwise, securing the payment and performance of the Obligations.
"COLLATERAL DOCUMENTS" means the Security Agreement, any other
agreement pursuant to which the Borrower or any Subsidiary provides a Lien on
any of its assets in favor of the Bank and all financing statements, fixture
filings, patent, trademark and copyright filings, assignments, acknowledgments
and other filings, documents and agreements made or delivered pursuant thereto.
"COLLATERAL PERFECTION DATE" means 91 days after the effective filing
of the Financing Statements (as defined in the Security Agreement) and the
recordation of the Trademark Assignment (as defined in the Security Agreement)
in the U.S. Patent and Trademark Office; provided, however, that such period
shall be extended to 366 days if in the reasonable judgment of the Bank, the
Bank determines that there is a risk that the preference period in connection
with a bankruptcy or similar proceeding involving the Borrower could be
determined by a court of competent jurisdiction to be 365 days prior to the
Borrower's commencing a case under the Bankruptcy Code.
"COMMITMENT" means the Revolving Commitment or the commitment to issue
any Letter of Credit, as the case may be.
"COMMITMENT FEE RATE" means 0.375% per annum; PROVIDED THAT, after the
Bank has received from the Borrower the financial statements required to be
delivered pursuant to Section 8.01(a)(i) for the fiscal quarter ended September
30, 1996, the "Commitment Fee Rate" shall be determined in accordance with the
following:
If Ratio of Funded Debt to
EBITDA of the Borrower Commitment
measured in accordance Fee
with Section 8.02(a) is: Rate
-------------------------- ----------
Greater than 5.0 0.375%
From 4.0 to 5.0 0.00%
From 3.0 to 4.0 0.00%
Less than 3.0 0.00%
For the fiscal quarter beginning October 1, 1996 and for each fiscal
quarter thereafter, the Commitment Fee Rate shall be calculated using the ratio
of Funded Debt to EBITDA for the previous quarter.
4
<PAGE>
"DEFAULT" means an Event of Default or an event or condition which
with notice or lapse of time or both would constitute an Event of Default.
"DESIGNATED EURODOLLAR MARKET" means, for any Eurodollar Rate Loan,
the London Interbank Market.
"DOLLARS" and the sign "$" each means lawful money of the United
States.
"EBITDA" means, for any period, (i) Net Income PLUS (ii) Interest
Expense PLUS (iii) income tax expense PLUS (iv) depreciation expense,
amortization expense and other non-cash expenses which were deducted in
determining Net Income PLUS (v) Transaction Expenses PLUS (vi) Excess
Compensation Expense that have occurred during the period of the Borrower, as
determined in accordance with GAAP.
"ELIGIBLE INVENTORY" means at any time the aggregate amount of the
Borrower's Inventory held for sale or use in the ordinary and usual course of
business, valued at the lower of cost on a FIFO basis or fair market value,
excluding the following:
(i) Inventory which is not owned by the Borrower free and clear
of all Liens and rights of others (other than those Liens described in clauses
(ii), (iii) and (vi) of definition of Permitted Liens);
(ii) From and after the occurrence of a Trigger Event, Inventory
in which the Bank shall not have a valid and perfected first priority Lien
(other than as a result of those Liens described in clauses (ii), (iii) and (vi)
of the definition of Permitted Liens);
(iii) Inventory which is located or has been shipped to
locations outside the United States (excluding its territories and possessions);
(iv) Inventory which is not in the direct possession of the
Borrower at one of the locations set forth in Part 1 of SCHEDULE 1 to the
Security Agreement, as amended from time to time, executed by the Borrower, or
as set forth in a notice to the Borrower pursuant to Section 5(e) of the
Security Agreement, and Inventory on lease or consignment;
(v) Inventory located on premises not owned by the Borrower
unless within 45 days of the Closing Date (or on the date the Borrower occupies
a premises, for premises not leased as of the Closing Date) the Borrower has
obtained from the lessor of such premises a landlord's waiver in substantially
the form of EXHIBIT E (provided that the Inventory at the premises will not be
excluded from Eligible Inventory if, using its best efforts, the consent the
Borrower obtains is not in recordable form; and provided further that for any
one premises Inventory whose aggregate value exceeds six months' base and
additional rent for such premises shall not be excluded from Eligible
Inventory);
5
<PAGE>
(vi) Inventory which is commingled with property of any
Person other than the Borrower;
(vii) Inventory which is obsolete, unmerchantable, spoiled,
damaged or unfit for sale or further processing; and
(viii) Inventory which, in the Bank's reasonable discretion,
is unacceptable due to age, type, category or quantity or is otherwise
ineligible (provided that such Inventory shall not be excluded from Eligible
Inventory until ten Business Days following notice from the Bank to the Borrower
that the Inventory is ineligible).
Any Inventory which is at any time Eligible Inventory, but which
subsequently becomes ineligible for any of the reasons enumerated above, shall
forthwith cease to be Eligible Inventory until such time as the infirmities
which caused such Inventory to become ineligible have been cured.
"ELIGIBLE RECEIVABLES" means at any time the aggregate amount of the
Borrower's Receivables, payable in cash in Dollars, net of applicable
allowances, reserves, discounts, returns, credits or offsets (including
allowances or reserves for doubtful accounts), excluding the following:
(i) Receivables not paid in full within 90 days from the
date of invoice;
(ii) Receivables owing by any Receivable Debtor when 20% or
more of the Borrower's Receivables from such Receivable Debtor are not Eligible
Receivables pursuant to clause (i) above;
(iii) Receivables for which the Borrower's right to receive
payment has not been fully earned by performance or is contingent upon the
fulfillment of any condition whatsoever or which otherwise do not arise from a
bona fide completed transaction;
(iv) Receivables against which there are asserted any
defenses, counterclaims, discounts (other than normal trade discounts granted in
the ordinary course of business) or offsets of any nature, whether well-founded
or otherwise;
(v) Receivables that do not comply with all applicable
legal requirements, including all laws, rules, regulations and orders of any
Governmental Authority;
(vi) Receivables which represent a prepayment or progress
payment or arising out of the placement of goods on consignment, guaranteed sale
or other arrangement by reason of which the payment by the Receivable Debtor may
be conditional or contingent;
6
<PAGE>
(vii) Receivables which are not owned by the Borrower free
and clear of all Liens and rights of others (other than those Liens described in
clauses (ii), (iii) and (vi) of the definition of Permitted Liens);
(viii) From and after the occurrence of a Trigger Event,
Receivables in which the Bank shall not have a valid and perfected first-
priority Lien;
(ix) Receivables owing by any officer, director, employee, agent,
partner, Subsidiary or Affiliate of the Borrower, or which arise from the sale,
lease, or performance of services to such Persons;
(x) Receivables owing (A) by the United States or any
department, agency or instrumentality thereof or (B) by a State or any
department, agency, instrumentality or political subdivision thereof, unless in
the case of Receivables described in sub-clause (A), the Bank has agreed to the
contrary in writing and the Borrower has complied with the Federal Assignment of
Claims Act with respect to such Receivables;
(xi) Receivables owing by any Receivables Debtor who is not
a resident of or located in either: (a) the United States; or (b) a province of
Canada that recognizes perfection of the Bank's Lien in the Borrower's
Receivables by means of a UCC-1 financing statement filed with the Secretary of
State of the State of California;
(xii) that portion of Receivables owing by any single
Receivable Debtor which exceeds 25% of the aggregate amount of Receivables owing
to the Borrower by all Receivable Debtors;
(xiii) Receivables which constitute the proceeds of Inventory
which Inventory is at the same time included in the Borrowing Base;
(xiv) Receivables owing by any Receivable Debtor who is the
subject of a case or proceeding described in Section 9.01(e) or who takes any
other action described in Section 9.01(e);
(xv) Receivables which are evidenced by a promissory note or
other instrument;
(xvi) Receivables with respect to which the terms or
conditions prohibit or restrict assignment or collection rights; and
(xvii) Receivables with respect to which the Bank, in its
reasonable discretion, deems the creditworthiness or financial condition of the
Receivable Debtor to be unsatisfactory or the prospect of payment or performance
to be impaired, and other Receivables which, in the Bank's reasonable
discretion, are otherwise ineligible (provided that Receivables
7
<PAGE>
shall not be excluded from Eligible Receivables until ten Business Days
following notice from the Bank to the Borrower that the Receivables are
ineligible).
Any Receivable which is at any time an Eligible Receivable, but which
subsequently becomes ineligible for any of the reasons enumerated above, shall
forthwith cease to be an Eligible Receivable until such time as the infirmities
which caused such Receivable to become ineligible have been cured.
"ENVIRONMENTAL CLAIM" means any and all administrative or judicial
actions, suits, orders, claims, liens, written notices, violations or
proceedings, whether civil or criminal, related to any applicable Environmental
Law or any Environmental Permit brought, issued or asserted by a Governmental
Authority or a third party for compliance, damages, personal injury or property
damage, penalties, removal, response, remedial action or other action resulting
from the Release of a Hazardous Substance at, to or from a Site or non-
compliance with Environmental Law.
"ENVIRONMENTAL LAWS" means all current and future federal, state,
local or foreign criminal or civil laws, statutes, common law duties, rules,
regulations, ordinances and codes, together with all administrative orders,
directives, written requests, licenses, authorizations and permits of, and
agreements with (including consent decrees), any Governmental Authorities, in
each case relating to or imposing liability or standards of conduct concerning
public health, safety and environmental protection matters, or relating to the
handling, use, generation, treatment, storage, transportation or disposal of
Hazardous Substances including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Clean Air Act, the Federal Water
Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal
Resource Conservation and Recovery Act, the Toxic Substances Control Act, the
Emergency Planning and Community Right-to-Know Act, the California Hazardous
Waste Control Law, the California Solid Waste Management, Resource Recovery and
Recycling Act, the California Water Code and the California Health and Safety
Code, all as may be amended or superseded from time to time.
"ENVIRONMENTAL PERMIT" means any permit, license, approval,
authorization or consent required by any Governmental Authority under applicable
Environmental Laws and includes any order, consent order or binding agreement
issued or entered into by a Governmental Authority under any applicable
Environmental Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974,
including (unless the context otherwise requires) any rules or regulations
promulgated thereunder.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which is under common control with the Borrower within the meaning
of Section 4001(a)(14) of ERISA and Sections 414(b), (c) and (m) of the Internal
Revenue Code.
"EURODOLLAR BUSINESS DAY" means a Business Day on which dealings in
Dollar deposits are carried on in the London interbank market.
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"EURODOLLAR RATE" means for each Interest Period for each Eurodollar
Rate Loan the rate per annum (rounded upward, if necessary, to the nearest whole
1/8 of 1%) determined by the Bank pursuant to the following formula:
Eurodollar Rate = Interbank Rate
------------------------------------
100% - Eurodollar Reserve Percentage
The Eurodollar Rate shall be adjusted automatically as of the effective date of
any change in the Eurodollar Reserve Percentage.
"EURODOLLAR RATE LOAN" means a Revolving Loan bearing interest at a
rate determined by reference to the Eurodollar Rate.
"EURODOLLAR RESERVE PERCENTAGE" means the maximum reserve requirement
percentage (including any ordinary, supplemental, marginal and emergency
reserves), if any, as determined by the Bank, then applicable under Regulation D
in respect of Eurocurrency funding (currently referred to as "Eurocurrency
Liabilities") of a member bank in the Federal Reserve System with deposits
exceeding $1,000,000,000.
"EVENT OF DEFAULT" has the meaning set forth in Section 9.01.
"EVENT OF LOSS" means with respect to any asset of the Borrower or
its Subsidiaries any of the following: (i) any material loss, destruction or
damage of such asset; (ii) any pending or threatened institution of any
proceedings for the condemnation or seizure of such asset or of any right of
eminent domain; or (iii) any actual condemnation, seizure or taking, by exercise
of the power of eminent domain or otherwise, of such asset, or confiscation of
such asset or requisition of the use of such asset.
"EXCESS COMPENSATION EXPENSE" means the difference between (i) the
cash payments for salary and bonus paid to Ray Scherr during the first and
second quarters of 1996 and (ii) $50,000.
"EXCLUDED TRADE PAYABLES" means (a) Trade Payables and other accounts
payable to trade creditors for goods and services and current operating
liabilities (not the result of borrowing money) incurred in the ordinary course
of the Borrower's business with customary terms (which in no event provide for
payment more than 12 months after delivery of goods or provision of services )
and which are not more than 90 days past due and (b) Trade Payables representing
special terms offered by vendors in connection with new store openings, "Special
Buy" situations or promotional situations which are not more than 90 days past
due; PROVIDED, that a Trade Payable shall still be an Excluded Trade Payable
after it is 90 days past due to the extent the Borrower is contesting its
obligation thereunder in good faith by appropriate proceedings, but up to a
maximum in the aggregate for all Trade Payables being contested of $250,000.
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"FDIC" means the Federal Deposit Insurance Corporation, or any
successor thereto.
"FINAL MATURITY DATE" means June 1, 2001.
"FINANCIAL CONDITION CERTIFICATE" means a certificate to be delivered
at the Closing by the Borrower certifying the financial condition of such party
at such time.
"FUNDED DEBT" means, without duplication, the sum of (i) the average
daily outstanding balance under the Revolving Loan for the most recently
completed fiscal quarter, (ii) all Subordinated Debt and (iii) all other
Indebtedness of the Borrower; PROVIDED THAT "Funded Debt" at any time shall be
determined by reference to the most recent financial statements delivered to the
Bank pursuant to Section 8.01(a)(i).
"GAAP" means generally accepted accounting principles in the U.S. as
in effect from time to time.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or other
governmental department, commission, board, bureau, agency, central bank, court,
tribunal or other instrumentality or authority, domestic or foreign, exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"HAZARDOUS SUBSTANCES" means any petroleum, petroleum hydrocarbons,
petroleum waste or petroleum products, underground storage tanks, asbestos or
asbestos-containing materials, pesticides, lead and lead-containing materials,
urea formaldehyde insulation and polychlorinated biphenyls (PCBs), ionizing and
non-ionizing radiation including radon and electromagnetic frequency radiation;
and any chemicals, materials, substances or wastes in any amount or
concentration which are now or hereafter become defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants" or words of similar import, under any Environmental Law.
"IRS" means the Internal Revenue Service, or any successor thereto.
"INDEBTEDNESS" means, for any Person: (i) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services, other than Excluded Trade Payables; (ii) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses; (iii) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property); (iv) all obligations under Capital
Leases; (v) all reimbursement or other obligations of such Person under or in
respect of letters of credit and bankers acceptances; and (vi) all indebtedness
of another Person secured by any Lien upon
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or in property owned by the Person for whom Indebtedness is being determined,
whether or not such Person has assumed or become liable for the payment of such
indebtedness of such other Person.
"INITIAL INVESTORS" shall have the meaning assigned to such term as of
the date hereof in the Certificate of Determination of Preferences of 14% Senior
Preferred Stock.
"INTERBANK RATE" means for each Interest Period for each Eurodollar
Rate Loan the rate per annum determined by the Bank to be the average (rounded
upward, if necessary, to the nearest whole 1/8 of 1%) of the rates at which
deposits in Dollars are offered to the Bank by prime banks in the Designated
Eurodollar Market, at approximately 11:00 local time in the Designated
Eurodollar Market, two Eurodollar Business Days before the first day of such
Interest Period, in an amount substantially equal to the proposed Eurodollar
Rate Loan and for a period of time comparable to such Interest Period.
"INTEREST EXPENSE" means, for any period, interest expense (including
that attributable to Capital Leases) of the Borrower, including all commissions,
discounts and other fees and charges owed with respect to standby letters of
credit, as determined in accordance with GAAP.
"INTEREST PAYMENT DATE" means a date specified for the payment of
interest pursuant to Section 3.01(c).
"INTEREST PERIOD" means, with respect to a Eurodollar Rate Loan, the
period determined in accordance with Section 3.01(b) applicable thereto.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986,
including (unless the context otherwise requires) any rules or regulations
promulgated thereunder.
"INVENTORY" means all "inventory" (as such term is defined in the
UCC).
"LETTER OF CREDIT" has the meaning set forth in Section 2.01(b).
"LETTER OF CREDIT AGREEMENT" has the meaning set forth in Section
2.01(b).
"LIEN" means any mortgage, deed of trust, pledge, security interest,
assignment, deposit arrangement, charge or encumbrance, lien (statutory or
other), or other preferential arrangement (including any conditional sale or
other title retention agreement, any financing lease having substantially the
same economic effect as any of the foregoing or any agreement to give any
security interest).
"LOAN DOCUMENTS" means this Agreement, the Revolving Note, the
Collateral Documents, and all other certificates, documents, agreements and
instruments delivered to the Bank under or in connection with this Agreement.
11
<PAGE>
"MATERIAL ADVERSE EFFECT" means any event, matter, condition or
circumstance which (i) has or would reasonably be expected to have a material
adverse effect on the business, properties, results of operations or condition
(financial or otherwise) of the Borrower and its Subsidiaries taken as a whole;
(ii) would materially and adversely impair the ability of the Borrower, or any
of its Subsidiaries to perform or observe any of its payment obligations or
material obligations under or in respect of the Loan Documents; or (iii)
materially and adversely affects the legality, validity, binding effect or
enforceability of any of the Loan Documents or, from and after the occurrence of
a Trigger Event, the perfection or priority of any Lien granted to the Bank
under any of the Collateral Documents.
"MAXIMUM RATE" has the meaning set forth in Section 3.06.
"MINIMUM AMOUNT" has the meaning set forth in Section 2.04.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in
Sections 3(37) and 4001(a)(3) of ERISA.
"NET INCOME" means, for any period, the net income of the Borrower for
such period taken as a single accounting period, as determined in accordance
with GAAP; PROVIDED, HOWEVER, that there shall be excluded therefrom all
extraordinary items (including sales of capital assets).
"NOTICE" means a Notice of Borrowing and any notice of conversion or
continuation under Section 3.05 or notice of prepayment under Section 4.02.
"NOTICE OF BORROWING" has the meaning set forth in Section 2.02.
"OBLIGATIONS" means the indebtedness, liabilities and other
obligations of the Borrower or any Subsidiaries to the Bank under or in
connection with any of the Loan Documents, including all Revolving Loans, all
interest accrued thereon, all fees due under this Agreement and all other
amounts payable by the Borrower to the Bank thereunder or in connection
therewith, whether now or hereafter existing or arising, and whether due or to
become due, absolute or contingent, liquidated or unliquidated, determined or
undetermined.
"PBGC" mean the Pension Benefit Guaranty Corporation, or any successor
thereto.
"PENSION PLAN" means any employee pension benefit plan covered by
Title IV of ERISA (other than a Multiemployer Plan) that is maintained for
employees of the Borrower or any ERISA Affiliate or with regard to which the
Borrower or ERISA Affiliate is a contributing sponsor within the meaning of
Sections 4001(a)(13) or 4069 of ERISA.
"PERMITTED INVESTMENTS" means any of the following Dollar denominated
investments, maturing within one year from the date of acquisition, selected by
the Borrower: (i) marketable direct obligations issued or unconditionally
guaranteed by the United States
12
<PAGE>
government or issued by any agency thereof and backed by the full faith and
credit of the United States; (ii) marketable direct obligations issued by any
state of the United States or any political subdivision of any such state or any
public instrumentality thereof and, at the time of acquisition, having the
highest credit rating obtainable from either Standard & Poor's Ratings Service,
a division of The McGraw-Hill Companies ("S&P") or Moody's Investors Service,
Inc. ("MOODY'S"); (iii) commercial paper or corporate promissory notes bearing
at the time of acquisition the highest credit rating either of S&P or Moody's
issued by United States, Australian, Canadian, European or Japanese bank holding
companies or industrial or financial companies; (iv) certificates of deposit
issued by and bankers acceptances of and interest bearing deposits with any
bank, or with any United States, Australian, Canadian, European or Japanese
commercial banks having capital and surplus of at least $500,000,000 or the
equivalent and which issues (or the parent of which issues) commercial paper or
other short term securities bearing the highest credit rating obtainable from
either S&P or Moody's; and (v) money market funds organized under the laws of
the United States or any state thereof that invest solely in any of the
foregoing investments permitted under clauses (i), (ii), (iii) and (iv).
"PERMITTED LIENS" means:
(i) Liens in favor of the Bank;
(ii) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and which are adequately reserved for in
accordance with GAAP;
(iii) Liens of materialmen, mechanics, warehousemen, carriers
or employees or other like Liens arising in the ordinary course of business and
securing obligations either not delinquent or being contested in good faith by
appropriate proceedings and which are adequately reserved for in accordance with
GAAP and which do not in the aggregate materially impair the use or value of the
property or risk the loss or forfeiture of title thereto;
(iv) Liens consisting of deposits or pledges to secure the
payment of worker's compensation, unemployment insurance or other social
security benefits or obligations, or to secure the performance of bids, trade
contracts, leases, public or statutory obligations, surety or appeal bonds or
other obligations of a like nature incurred in the ordinary course of business
(other than for Indebtedness or any Liens arising under ERISA);
(v) easements, rights of way, servitudes or zoning or
building restrictions and other encumbrances on real property, irregularities in
the title to such property, subleases and licenses of intellectual property
(including patents, trademarks, trade names, service marks, copyrights and all
rights with respect thereto) to the extent not prohibited by the Security
Agreement, which do not in the aggregate materially impair the use or value of
such property or risk the loss or forfeiture of title thereto;
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<PAGE>
(vi) statutory landlord's Liens under leases to which the
Borrower or any of its Subsidiaries is a party;
(vii) any judgment, attachment or similar Lien, but only if
(A) the judgment it secures has been discharged or execution thereof effectively
stayed pending appeal while such judgment is being contested in good faith and
by appropriate proceedings within 30 days of the entry thereof, or shall have
been discharged within five Business Days of the expiration of any such stay or
(B) all such Liens in the aggregate (excluding Liens covered by sub-clause (A))
at any time outstanding for the Borrower and its Subsidiaries do not exceed
$1,000,000 at any time;
(viii) Liens upon real and/or personal property (other than
Inventory or Intellectual Property Collateral (as such term is defined in the
Security Agreement)) acquired after the date hereof (by purchase, construction
or otherwise) by the Borrower or any of its Subsidiaries, each of which Liens
either (A) existed on such property before the time of its acquisition and was
not created in anticipation thereof or (B) was created solely for the purpose of
securing Indebtedness representing, or incurred to finance, refinance or refund,
the cost (including the cost of construction) of such property; PROVIDED that
(i) no such Lien shall extend to or cover any property of the Borrower or such
Subsidiary other than the property so acquired and improvements thereon and (ii)
the principal amount of Indebtedness secured by any such Lien shall at no time
exceed 100% of the fair market value (as determined in good faith by a
Responsible Officer and evidenced by an officer's certificate delivered to the
Bank) of such property at the time it was acquired (by purchase, construction or
otherwise);
(ix) Liens on property (other than Collateral) of any
corporation that becomes a Subsidiary of the Borrower after the date of this
Agreement, PROVIDED that such Liens are in existence at the time such
corporation becomes a Subsidiary of the Borrower and were not created in
anticipation thereof; and
(x) Liens on real property and related fixtures owned by
the Borrower on the date hereof but created hereafter to the extent the
Indebtedness secured thereby is permitted by Section 8.04(a)(vii).
(xi) additional Liens upon real and/or personal property
(other than Inventory) created after the date hereof, PROVIDED that the
aggregate Indebtedness secured thereby and incurred on and after the date hereof
shall not exceed $100,000 in the aggregate at any one time outstanding.
"PERSON" means an individual, corporation, partnership, joint venture,
trust, unincorporated organization, limited liability company, or any other
entity of whatever nature or any Governmental Authority.
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<PAGE>
"PLAN" means any employee pension benefit plan as defined in Section
3(2) of ERISA (including any Multiemployer Plan) and any employee welfare
benefit plan, as defined in Section 3(1) of ERISA (including any plan providing
benefits to former employees or their survivors).
"PREMISES" means any and all real property including all buildings and
improvements now or hereafter located thereon and all appurtenances thereto, now
or hereafter owned, leased, occupied or used by the Borrower or any of its
Subsidiaries.
"PRIME RATE" shall mean at any time the rate of interest most recently
announced within the Bank at its principal office in San Francisco as its Prime
Rate, with the understanding that the Bank's Prime Rate is one of its base rates
and serves as the basis upon which effective rates of interest are calculated
for those loans making reference thereto, and is evidenced by the recording
thereof after its announcement in such internal publication or publications as
the Bank may designate.
"PRIME RATE LOAN" means a Revolving Loan bearing interest at a rate
determined by reference to the Prime Rate.
"RECEIVABLE DEBTOR" means any Person obligated on a Receivable.
"RECEIVABLES" means all rights to payment arising out of the sale or
lease of goods or the performance of services in the ordinary and usual course
of business, however evidenced.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System.
"RELEASE" means any current or past spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing of Hazardous Substances into the environment.
"REQUIRED NOTICE DATE" has the meaning set forth in Section 2.05.
"RESPONSIBLE OFFICER" means, with respect to any Person, the chief
executive officer, the president, the chief financial officer or the treasurer
of such Person, or any other senior officer of such Person having substantially
the same authority and responsibility; or, with respect to compliance with
financial covenants, the chief financial officer or the treasurer of any such
Person, or any other senior officer of such Person involved principally in the
financial administration or controllership function of such Person and having
substantially the same authority and responsibility.
"REVOLVING COMMITMENT" means $25,000,000 (or such lesser amount as may
be reduced pursuant to Section 2.01(b)), or, where the context so requires, the
obligation of the Bank
15
<PAGE>
to make Revolving Loans up to such amount (or to issue Letters of Credit
pursuant to Section 2.01(b)) on the terms and conditions set forth in this
Agreement.
"REVOLVING EXPIRY DATE" means June 1, 2001.
"REVOLVING LOAN" has the meaning set forth in Section 2.01(a).
"REVOLVING NOTE" means the Promissory Note of the Borrower payable to
the order of the Bank, as described in Section 2.03(a).
"SEC" means the Securities and Exchange Commission, or any successor
thereto.
"SECURITY AGREEMENT" means the Security Agreement dated of even date
herewith executed by the Borrower in favor of the Bank, pursuant to which the
Lien of the Bank attaches only upon the giving of written notice by the Bank to
the Borrower of the occurrence of a Trigger Event.
"SENIOR PREFERRED STOCK PURCHASE AGREEMENT" means the Securities
Purchase Agreement dated as of June 5, 1996 among DLJ Merchant Banking Partners,
L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ
Merchant Banking Fund, Inc. (collectively, the "DLJ Entities") and the Borrower,
as amended, modified, supplemented or otherwise modified from time to time to
the extent not prohibited by Section 8.04(k) of this Agreement.
"SENIOR PREFERRED TRANSACTION" means the purchase pursuant to the
Senior Preferred Stock Purchase Agreement by DLJ Merchant Banking Partners, Inc.
(or an Affiliate thereof) and purchasers named therein of 14% Senior Preferred
Stock and Warrants.
"SITE" means all of the real property (including fixtures) currently,
formerly or hereafter owned, leased, operated or used by the Borrower or any
Subsidiary (including all soil, subsoil, surface waters and groundwater
thereat).
"SOLVENT" means, as to any Person at any time, that (i) the fair value
of the property of such Person is greater than the amount of such Person's
liabilities (including disputed, contingent and unliquidated liabilities) as
such value is established and liabilities evaluated for purposes of
Section 101(31) of the Bankruptcy Code; (ii) the present fair saleable value of
the property of such Person is not less than the amount that will be required to
pay the probable liability of such Person on its debts as they become absolute
and matured; (iii) such Person is able to realize upon its property and pay its
debts and other liabilities (including disputed, contingent and unliquidated
liabilities) as they mature in the normal course of business; (iv) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature; and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
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<PAGE>
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated as of
June 5, 1996 among the Borrower, the DLJ Entities and the other security holders
party thereto as in effect on the date the shares of 14% Senior Preferred Stock
are first issued.
"SUBORDINATED DEBT" means any Indebtedness permitted under Section
8.04(a) which is issued under an indenture or other agreement containing terms
consistent with the term sheet attached hereto as EXHIBIT D and otherwise in
form and substance acceptable to the Bank in the exercise of its reasonable
discretion.
"SUBSIDIARY" means with respect to any Person, corporation,
association, partnership, joint venture or other business entity of which more
than 50% of the voting stock or other equity interest is owned directly or
indirectly by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof.
"TANGIBLE NET WORTH" means, as of any date of determination, the sum
of total stockholders' equity of the Borrower plus the 14% Senior Preferred
Stock PLUS Subordinated Debt and MINUS the sum of any treasury stock or
intangible assets as determined in accordance with GAAP of the Borrower and any
obligations due to the Borrower from stockholders, employees and/or Affiliates.
"TAXES" has the meaning set forth in Section 4.04.
"TERMINATION EVENT" means any of the following:
(i) with respect to a Pension Plan, a reportable event
described in Section 4043 of ERISA and the regulations issued thereunder (other
than a reportable event not subject to the provisions for 30-day notice to the
PBGC under such regulations);
(ii) the withdrawal of any Revolving Loan party or an ERISA
Affiliate from a Plan during a plan year in which the withdrawing employer was a
"substantial employer" as defined in Section 4001(a)(2) or 4062(e) of ERISA;
(iii) the taking of any actions (including the filing of a
notice of intent to terminate) by the Borrower, an ERISA Affiliate, the PBGC, a
Plan Administrator, or any other Person to terminate a Pension Plan or the
treatment of a Plan amendment as a termination of a Pension Plan under
Section 4041 of ERISA;
(iv) any other event or condition which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan; or
(v) the complete or partial withdrawal of the Borrower or
an ERISA Affiliate from a Multiemployer Plan.
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"TRADE PAYABLES" means all amounts which in accordance with GAAP would
be characterized as a trade payable and in any event specifically including all
amounts owed to any Person for the purchase price of Inventory.
"TRANSACTION AGREEMENT" means the Agreement dated as of May 1, 1996,
among Chase Venture Capital Associates, L.P., Weston Presidio Capital II, L.P.,
Wells Fargo Small Business Investment Company, Inc., the Borrower and each of
the stockholders or option holders listed on the signature pages thereof, as
amended, supplemented or otherwise modified from time to time to the extent not
prohibited by Section 8.04(k) of this Agreement.
"TRADEMARK ASSIGNMENT" means that certain filing documentation to
record with the United States Patent and Trademark Office the Security Agreement
covering assignment of the Borrower's trademarks executed by the Borrower in
favor of the Bank.
"TRANSACTION EXPENSES" means the costs, expenses and fees (howsoever
termed) incurred or paid by the Borrower prior to December 31, 1996 in
connection with the Capitalization Transactions and prior to June 1, 1997 in
connection with the refinancing of the Bridge Loan; PROVIDED, HOWEVER, that the
aggregate amount of Transaction Expenses may not exceed $18,000,000.
"TRIGGER EVENT" means the occurrence of any of the following:
(i) the occurrence of any Event of Default;
(ii) a written demand is made against the Borrower for
indemnification in an amount in excess of $2,500,000 arising out of the
Capitalization Transactions;
(iii) the Borrower shall have failed to refinance the Bridge Loan
on or before November 30, 1996, or the actual date for the First Anniversary (as
defined in the Bridge Financing Agreement) shall have been accelerated pursuant
to Section 6.15(d) of the Bridge Financing Agreement (unless Bank shall have
determined in the exercise of its reasonable judgment that such acceleration
will not have a Material Adverse Effect);
(iv) the Borrower shall have failed to deliver the financial
statements and reports required under Section 8.01(a)(i), (ii) or (iv) within 5
Business Days after written request from the Bank made after the date such
financial statement or report is otherwise required to be delivered;
(v) any creditor of the Borrower shall threaten in writing to
file or shall file an involuntary petition against the Borrower or any of its
Subsidiaries seeking any of the relief specified in Section 9.01(e);
(vi) a motion for prejudgment attachment of assets of the
Borrower to secure a claim in excess of $2,000,000, legally sufficient in the
Bank's reasonable judgment to support a
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<PAGE>
judgment lien, shall be made (unless in the Bank's judgment the liability of
the Borrower is covered by insurance carried by a financially sound insurer that
does not contest its indemnity obligation);
(vii) a final judgment or order, legally sufficient in the Bank's
reasonable judgment to support a judgment lien, for the payment of money in
excess of $2,000,000 shall be rendered against the Borrower or any of its
Subsidiaries (unless in the Bank's judgment the liability of the borrower is
covered by insurance carried by a financially sound insurer that does not
contest its indemnity obligation);
(viii) the Borrower shall receive a written notice from any taxing
authority claiming the Borrower owes in excess of $2,000,000 for unpaid taxes;
(ix) the Borrower shall have failed to maintain a ratio as of the
end of any fiscal quarter referred to below of (A) Funded Debt to (B) EBITDA, of
the Borrower and its Subsidiaries on a consolidated basis, as determined in
accordance with GAAP, for the period of four consecutive fiscal quarters of the
Borrower then ended, of more than the following:
At 12/31/96 5.50
At 3/31/97 5.40
At 6/30/97 5.25
At 9/30/97 5.25
At 12/31/97, 3/31/98, 6/30/98 and 9/30/98 4.75
At 12/31/98 and the end of each fiscal
quarter thereafter 4.50
(x) the Borrower shall have failed to maintain a ratio as of the
end of any fiscal quarter referred to below of (A) EBITDA to (B) the sum of
Interest Expense PLUS regularly scheduled principal payments on Indebtedness
(excluding regularly scheduled principal payments under the Bridge Financing
Agreement) of the Borrower and its Subsidiaries on a consolidated basis, as
determined in accordance with GAAP, for the period of four consecutive fiscal
quarters of the Borrower then ended, of more than the following:
At 6/30/97 and 9/30/97 1.65
At 12/31/97, 3/31/98, 6/30/98 and 9/30/98 1.75
At 12/31/98 and the end of each fiscal quarter
quarter thereafter 2.25
(xi) for the fiscal year of the Borrower ended December 31, 1996, the
Borrower shall have an EBITDA of less than $18,000,000.
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"UCC" means the Uniform Commercial Code of the jurisdiction the law of
which governs the Loan Document in which such term is used or the attachment,
perfection or priority of the Lien on any Collateral.
"UNFUNDED ACCRUED BENEFITS" means the excess of a Pension Plan's
accrued benefits, as defined in Section 3(23) of ERISA, over the current value
of that Plan's assets, as defined in Section 3(26) of ERISA.
"UNITED STATES" and "U.S." each means the United States of America.
SECTION 1.02 ACCOUNTING TERMS; GAAP CHANGES.
(a) ACCOUNTING TERMS. Unless otherwise defined or the context
otherwise requires, all accounting terms not expressly defined herein shall be
construed, and all accounting determinations and computations required under the
Loan Documents shall be made, in accordance with GAAP, consistently applied.
(b) GAAP CHANGES. If any changes in GAAP from those used in the
preparation of the financial statements referred to in Section 7.01(p) ("GAAP
CHANGES") hereafter occasioned by the promulgation of rules, regulations,
pronouncements and opinions by or required by the Financial Accounting Standards
Board of the American Institute of Certified Public Accountants (or successors
thereto or agencies with similar functions) result in a change in the method of
calculation of, or in different components in, any of the financial covenants,
definitional provisions, standards or other terms or conditions found in this
Agreement, (i) the parties hereto agree to enter into negotiations with respect
to amendments to this Agreement to conform those covenants, definitional
provisions, standards or other terms and conditions as criteria for evaluating
the Borrower's financial condition and performance to substantially the same
criteria as were effective prior to such GAAP Change, and (ii) the Borrower
shall be deemed to be in compliance with the affected covenant or other
provision during the 60-day period following any such GAAP Change if and to the
extent that the Borrower would have been in compliance therewith under GAAP as
in effect immediately prior to such GAAP Change; PROVIDED, HOWEVER, that this
Section 1.02(b) shall not be deemed to require the Borrower or the Bank to agree
to modify any provision of this Agreement or any other Loan Document to reflect
any such GAAP Change and, if the parties, in their sole discretion, fail to
reach agreement on such modifications prior to the end of the 60-day period
referred to in clause (ii), the terms of this Agreement shall remain unchanged
and the compliance of the Borrower with the covenants and other provisions
contained herein shall, upon the expiration of such 60-day period, be calculated
in accordance with GAAP giving effect to such GAAP Change.
SECTION 1.03 INTERPRETATION. In the Loan Documents, except to the
extent the context otherwise requires:
(a) Any reference to an Article, a Section, a Schedule or an Exhibit
is a reference to an article or section thereof, or a schedule or an exhibit
thereto, respectively, and to
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a subsection or a clause is, unless otherwise stated, a reference to a
subsection or a clause of the Section or subsection in which the reference
appears.
(b) The words "hereof," "herein," "hereto," "hereunder" and the like
mean and refer to this Agreement or any other Loan Document as a whole and not
merely to the specific Article, Section, subsection, paragraph or clause in
which the respective word appears.
(c) The meaning of defined terms shall be equally applicable to both
the singular and plural forms of the terms defined.
(d) The words "including," "includes" and "include" shall be deemed
to be followed by the words "without limitation."
(e) References to agreements and other contractual instruments shall
be deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of the Loan Documents.
(f) References to statutes or regulations are to be construed as
including all statutory and regulatory provisions consolidating, amending or
replacing the statute or regulation referred to.
(g) Any table of contents, captions and headings are for convenience
of reference only and shall not affect the construction of this Agreement or any
other Loan Document.
(h) In the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including"; the words "to"
and "until" each mean "to but excluding"; and the word "through" means "to and
including."
(i) The use of a word of any gender shall include each of the
masculine, feminine and neuter genders.
(j) Any conflict or inconsistency in the terms of this Agreement and
those of the other Loan Documents shall be resolved in favor of this Agreement.
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(k) Any reference in this Agreement or any of the other Loan
Documents to "Subsidiary" or to "consolidated" or "consolidating" shall not be
applicable until such time as the Borrower shall have Subsidiaries.
(l) Any reference in this Agreement or any of the other Loan
Documents relating to or based upon the Borrower's knowledge (or similar
concepts) shall be deemed a reference to, and shall be deemed based upon, the
actual knowledge of the Responsible Officers of the Borrower.
ARTICLE II
THE LOANS
SECTION 2.01 THE LOANS.
(a) REVOLVING LOANS. The Bank agrees, on the terms and conditions
hereinafter set forth, to make revolving loans (each a "Revolving Loan" and,
collectively, the "Revolving Loans") to the Borrower from time to time on any
Business Day during the period from the Closing Date until the Revolving Expiry
Date, in an aggregate principal amount up to but not exceeding at any one time
outstanding the Revolving Commitment; PROVIDED, HOWEVER, that immediately after
giving effect to such Revolving Loans the aggregate principal amount of
Revolving Loans then outstanding shall not exceed the Borrowing Base then in
effect. Within the foregoing limits, during such period the Borrower may
borrow, repay the Revolving Loans in whole or in part, and reborrow, all in
accordance with the terms and conditions hereof. The amount of the Revolving
Commitment may be reduced from time to time at the election of the Borrower 10
Business Days after the receipt by the Bank of a written notice of election to
reduce from the Borrower. Once reduced, the amount of the Revolving Commitment
cannot be raised.
(b) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Revolving
Commitment, the Bank agrees from time to time to issue sight commercial or
standby letters of credit for the account of the Borrower and in favor of the
Borrower's trade suppliers to finance the Borrower's inventory purchases, or in
favor of the Borrower's landlords as security deposits under Borrower's leases,
or for any other purposes reasonably approved by the Bank (each, a "LETTER OF
CREDIT" and collectively, "LETTERS OF CREDIT"); PROVIDED HOWEVER, that the form
and substance of each Letter of Credit shall be subject to approval by the Bank,
in its reasonable discretion; and PROVIDED FURTHER, that the aggregate undrawn
amount of all outstanding Letters of Credit shall not at any one time exceed
$10,000,000. Each Letter of Credit (other than the Letter of Credit outstanding
as of the Closing Date) shall be issued for a term not to exceed three hundred
sixty-five (365) days, as designated by the Borrower; PROVIDED HOWEVER, that no
Letter of Credit shall have an expiration date subsequent to the Revolving
Expiry Date. The undrawn amount of all Letters of Credit shall be reserved
under the Revolving Commitment and shall not be available for advances
thereunder. Each Letter of Credit shall be subject to the additional terms and
conditions of the Letter of Credit Agreement substantially in the form of
EXHIBIT A,
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including the Continuing Standby Letter of Credit Agreement executed and
delivered by the Borrower in connection with the execution and delivery of this
Agreement, and related documents, if any, required by the Bank in connection
with the issuance thereof (each, a "LETTER OF CREDIT AGREEMENT" and
collectively, "LETTER OF CREDIT AGREEMENTS"). Each draft paid by the Bank under
a Letter of Credit shall be deemed a Revolving Loan and shall be repaid by the
Borrower in accordance with the terms and conditions of this Agreement
applicable to such Revolving Loans; PROVIDED HOWEVER, that if the Revolving
Commitment is not available, for any reason whatsoever, at the time any draft is
paid by the Bank, or if Revolving Loans are not available under the Revolving
Commitment at such time due to any limitation on borrowing set forth herein,
then the full amount of such draft shall be immediately due and payable from the
Borrower, together with interest thereon, from the date such amount is paid by
the Bank to the date such amount is fully repaid by the Borrower, at the
variable rate of interest applicable to Revolving Loans under the Revolving
Commitment. In such event, the Borrower agrees that the Bank, at the Bank's
sole discretion, may debit the Borrower's Account for the amount of any such
draft actually paid by the Bank.
(c) EXISTING LETTERS OF CREDIT. As of the date of this Agreement,
the Letter of Credit listed on SCHEDULE 5 issued by the Bank for the account of
the Borrower is outstanding. Such existing Letter of Credit will be included
with any Letters of Credit issued under this Agreement for purposes of
determining compliance with the $10,000,000 limitation on outstanding Letters of
Credit under Section 2.01(b), and for purposes of determining the aggregate
amount outstanding under the Revolving Commitment. On the Closing Date, the
Borrower will execute the Continuing Standby Letter of Credit Agreement in the
form included in EXHIBIT A which, on and after the Closing Date, will govern the
existing Letter of Credit and supersede the letter of credit agreement which
governed the existing Letter of Credit prior to the Closing Date.
SECTION 2.02 BORROWING PROCEDURE.
(a) NOTICE TO THE BANK. Each Revolving Loan shall be made upon
written or telephonic notice (in the latter case to be confirmed promptly in
writing) from the Borrower to the Bank, which notice shall be received by the
Bank not later than 10:00 A.M. (California time) on the Required Notice Date.
Each such notice (a "NOTICE OF BORROWING") shall be substantially in the form
of EXHIBIT C and shall, except as provided in Sections 5.01 and 5.04, be
irrevocable and binding on the Borrower, shall refer to this Agreement and shall
specify: (i) the proposed date of the borrowing, which shall be a Business Day;
(ii) whether the borrowing consists of a Prime Rate Loan or Eurodollar Rate
Loan; (iii) the amount of the borrowing, which shall be in a Minimum Amount;
(iv) if the borrowing consists of a Eurodollar Rate Loan, the duration of the
initial Interest Period with respect thereto, and (v) payment instructions with
respect to the funds to be made available to the Borrower as a result of such
borrowing. If any Notice of Borrowing shall fail to specify the duration of the
Interest Period for any borrowing comprised of a Eurodollar Rate Loan, the
Borrower shall be deemed to have selected an Interest Period of ninety (90)
days. Upon timely fulfillment of each of the applicable conditions set forth in
Article VI, and unless other payment instructions are provided by the Borrower,
the Bank shall make the Revolving Loan
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available to the Borrower by crediting the Borrower's Account with same day or
immediately available funds on such borrowing date.
(b) NET FUNDING. If the Bank shall make a new Revolving Loan
hereunder on a day on which the Borrower is to repay all or any part of an
outstanding Revolving Loan, the Bank shall apply the proceeds of its new
Revolving Loan to make such payment, and only an amount equal to the difference
(if any) between the amount being borrowed and the amount being repaid shall be
made available by the Bank to the Borrower as provided in subsection (a), or
remitted by the Borrower to the Bank as provided in Section 4.03, as the case
may be.
SECTION 2.03 EVIDENCE OF INDEBTEDNESS.
(a) REVOLVING NOTE. As additional evidence of the Indebtedness of
the Borrower to the Bank resulting from the Revolving Loans made by the Bank,
the Borrower shall execute and deliver to the Bank the Revolving Note, dated the
Closing Date, setting forth the Revolving Commitment as the maximum principal
amount thereof.
(b) RECORDKEEPING. The Bank shall record in its internal records the
date and amount of each Revolving Loan made, each conversion to a different
interest rate, each relevant Interest Period, the amount of principal and
interest due and payable from time to time hereunder, each payment thereof and
the resulting unpaid principal balance of such Revolving Loan. Any such
recordation shall be rebuttable presumptive evidence of the accuracy of the
information so recorded. Any failure so to record or any error in doing so
shall not, however, limit or otherwise affect the obligations of the Borrower
hereunder and under any Revolving Note to pay any amount owing with respect to
the Revolving Loans.
SECTION 2.04 MINIMUM AMOUNTS. Except for conversions of Eurodollar
Rate Loans made pursuant to Section 5.04 and mandatory prepayments made pursuant
to Section 4.02(b), any borrowing, conversion, continuation or prepayment of any
Revolving Loan hereunder shall be in an amount determined as follows (each such
specified amount a "MINIMUM AMOUNT"): (i) any borrowing or partial prepayment
of any Prime Rate Loan shall be in any amount selected by the Borrower; and
(ii) any borrowing, continuation or partial prepayment of, or conversion into,
any Eurodollar Rate Loan shall be in the amount of $250,000 or amounts of
$50,000 in excess thereof.
SECTION 2.05 REQUIRED NOTICE. Any Notice hereunder shall be given no
later than the date determined as follows (each such specified date a "REQUIRED
NOTICE DATE"): (i) any Notice with respect to a borrowing of, or conversion
into, any Prime Rate Loan shall be given at least one Business Day prior to the
date of the proposed borrowing or conversion; (ii) any Notice with respect to
any borrowing or continuation of, or conversion into, any Eurodollar Rate Loan
shall be given at least three Eurodollar Business Days prior to the date of the
proposed borrowing, conversion or continuation; and (iii) any Notice with
respect to any prepayment under Section 4.02 shall be given at least three
Business Days prior to the proposed prepayment date.
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ARTICLE III
INTEREST AND FEES; CONVERSION OR CONTINUATION
SECTION 3.01 INTEREST.
(a) INTEREST RATE. The Borrower shall pay interest on the unpaid
principal amount of each Revolving Loan from the date of such Revolving Loan
until the payment in full thereof, at the following rates:
(i) during such periods as such Revolving Loan is a Prime
Rate Loan, at a rate per annum equal at all times to the Prime Rate PLUS the
Applicable Margin; and
(ii) during such periods as such Revolving Loan is a
Eurodollar Rate Loan, at a rate per annum equal at all times during each
Interest Period for such Eurodollar Rate Loan to the Eurodollar Rate for such
Interest Period PLUS the Applicable Margin.
(b) INTEREST PERIODS. The initial and each subsequent Interest
Period for the Eurodollar Rate Loans shall be a period of one, two, three, six,
nine or twelve months, as determined by the Borrower. The determination of
Interest Periods shall be subject to the following provisions:
(i) in the case of immediately successive Interest Periods,
each successive Interest Period shall commence on the day on which the next
preceding Interest Period expires;
(ii) if any Interest Period pertaining to a Eurodollar Rate
Loan would otherwise end on a day which is not a Business Day, that Interest
Period shall be extended to the next succeeding Business Day unless the result
of such extension would be to carry such Interest Period into another calendar
month, in which event such Interest Period shall end on the immediately
preceding Business Day;
(iii) no Interest Period shall extend beyond the Revolving
Expiry Date with respect to any Revolving Loan;
(iv) any Interest Period pertaining to a Eurodollar Rate
Loan that begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the ending calendar month of
such Interest Period) shall end on the last Business Day of the ending calendar
month of such Interest Period; and
(v) the Eurodollar Rate shall be determined at the
beginning of an Interest Period and shall not vary during the Interest Period,
but the Applicable Margin may vary during an Interest Period if the Interest
Period straddles two or more quarters and the Funded Debt to EBITDA Ratio
changes from one quarter to the next.
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(c) INTEREST PAYMENT DATES. Subject to Section 3.02, interest on the
Revolving Loans shall be payable in arrears at the following times:
(i) interest on each Prime Rate Loan shall be payable monthly on
the last Business Day in each month, on the date of any prepayment or conversion
of any such Prime Rate Loan, and at maturity;
(ii) interest on each Eurodollar Rate Loan shall be payable on
the last day of each Interest Period for such Eurodollar Rate Loan, PROVIDED
that if any prepayment, conversion or continuation is effected other than on the
last day of such Interest Period, accrued interest on such Eurodollar Rate Loan
shall be due on such prepayment, conversion or continuation date as to the
principal amount of such Eurodollar Rate Loan prepaid, converted or continued.
(d) NOTICE TO THE BORROWER. Each determination by the Bank hereunder
of a rate of interest and of any change therein, including any changes in
(i) the Applicable Margin, (ii) the Prime Rate during any periods in which Prime
Rate Loans shall be outstanding, and (iii) the Eurodollar Reserve Percentage (if
any) during any periods in which Eurodollar Rate Loans shall be outstanding, in
the absence of manifest error shall be conclusive and binding on the parties
hereto and shall be promptly notified by the Bank to the Borrower. Such notice
shall set forth in reasonable detail the basis for any such determination or
change. The failure of the Bank to give any such notice specified in this
subsection shall not affect the Borrower's obligation to pay such interest or
fees.
SECTION 3.02 DEFAULT RATE OF INTEREST. In the event that any amount
of principal of or interest on any Revolving Loan, or any other amount payable
hereunder or under the other Loan Documents, is not paid in full when due
(whether at stated maturity, by acceleration or otherwise), the Borrower shall
pay interest on such unpaid principal, interest or other amount, from the date
such amount becomes due until the date such amount is paid in full, payable on
demand, at a rate per annum equal at all times to the Prime Rate PLUS 4%.
SECTION 3.03 FEES.
(a) COMMITMENT FEE. The Borrower agrees to pay to the Bank a
commitment fee on the average daily unused portion of the Revolving Commitment
as in effect from time to time from the Closing Date until the Revolving Expiry
Date at the rate per annum equal to the Commitment Fee Rate, payable quarterly
in arrears on the last Business Day of each March, June, September and December
in each year (which first payment shall be for the period from the Closing Date
to June 28, 1996), and on the Revolving Expiry Date. For purposes of
calculating the commitment fee, the average undrawn face amount of standby and
commercial Letters of Credit during any one fiscal quarter shall be considered a
portion of the Revolving Commitment which has been used.
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(b) FACILITY FEE AND TAX LOAN FEE. The Borrower agrees to pay to the
Bank a facility fee in the amount of $250,000, payable as follows: (i) $50,000
on the Closing Date and (ii) $50,000 at the end of each fiscal year of the
Borrower (beginning at the end of fiscal year 1996); provided, that no reduction
in the Revolving Commitment shall reduce the $250,000 facility fee; and,
provided further, that upon early termination or cancellation of this Agreement
or the Revolving Commitment, the Borrower shall pay in full the outstanding
balance of the $250,000 facility fee. In addition, the Borrower agrees to pay
promptly upon demand a $25,000 fee in connection with the Bank's agreement to
include provisions for tax loans as set forth in EXHIBIT H. Such fee shall be
non-refundable, regardless of whether or not tax loans are made.
(c) LETTER OF CREDIT FEES. For standby and commercial Letters of
Credit, the Borrower agrees that it shall pay to the Bank from time to time on
demand the normal issuance, presentation, amendment and other processing fees,
and other standard costs and charges, of the Bank relating to the Letters of
Credit as from time to time generally in effect. In addition to such amounts,
for each standby Letter of Credit the Borrower agrees to pay quarterly in
arrears a fee equal to the Applicable Margin then in effect for Eurodollar Rate
Loans for the quarter multiplied by the average undrawn face amount of such
Letter of Credit for the time it was outstanding during the quarter.
(d) FEES NONREFUNDABLE. All fees payable under this Section 3.03
shall be nonrefundable.
SECTION 3.04 COMPUTATIONS. All computations of fees and interest
(whether based upon the Prime Rate or Eurodollar Rate) hereunder shall be made
on the basis of a year of 360 days for the actual number of days occurring in
the period for which such interest is payable. Notwithstanding the foregoing,
if any Revolving Loan is repaid on the same day on which it is made, such day
shall be included in computing interest on such Revolving Loan.
SECTION 3.05 CONVERSION OR CONTINUATION.
(a) ELECTION. The Borrower may elect (i) to convert all or any part
of (A) any outstanding Prime Rate Loan into a Eurodollar Rate Loan, or (B) any
outstanding Eurodollar Rate Loan into a Prime Rate Loan; or (ii) to continue all
or any part of a Revolving Loan with one type of interest rate as such;
PROVIDED, HOWEVER, that if the amount of any Eurodollar Rate Loan shall have
been reduced, by payment, prepayment, or conversion of part thereof to be less
than $250,000, such Eurodollar Rate Loan shall automatically convert into a
Prime Rate Loan, and on and after such date the right of the Borrower to
continue such Revolving Loan as, and convert such Revolving Loan into, a
Eurodollar Rate Loan shall terminate. No outstanding Revolving Loan may be
converted into or continued as a Eurodollar Rate Loan if any Default has
occurred and is continuing.
(b) AUTOMATIC CONVERSION. On the last day of any Interest Period for
any Eurodollar Rate Loan, such Eurodollar Rate Loan shall, if not repaid,
automatically convert into a Prime Rate Loan unless the Borrower shall have made
a timely election to continue such Euro-
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dollar Rate Loan as such for an additional Interest Period or to convert such
Eurodollar Rate Loan as provided in subsection (a).
(c) NOTICE TO THE BANK. The conversion or continuation of any
Revolving Loans contemplated by subsection (a) shall be made upon written or
telephonic notice (in the latter case to be confirmed promptly in writing) from
the Borrower to the Bank, which notice shall be received by the Bank not later
than 10:00 A.M. (California time) on the Required Notice Date. Each such notice
shall be irrevocable and binding on the Borrower, shall refer to this Agreement
and shall specify: (i) the proposed date of the conversion or continuation,
which shall be a Business Day; (ii) the outstanding Revolving Loan (or part
thereof) to be converted into or continued as a Prime Rate or Eurodollar Rate
Loan, which shall be in a Minimum Amount; and (iii) that no Default exists
hereunder.
SECTION 3.06 HIGHEST LAWFUL RATE. Anything herein to the contrary
notwithstanding, if during any period for which interest is computed hereunder,
the applicable interest rate, together with all fees, charges and other payments
which are treated as interest under applicable law, as provided for herein or in
any other Loan Document, would exceed the maximum rate of interest which may be
charged, contracted for, reserved, received or collected by the Bank in
connection with this Agreement under applicable law (the "MAXIMUM RATE"), the
Borrower shall not be obligated to pay, and the Bank shall not be entitled to
charge, collect, receive, reserve or take, interest in excess of the Maximum
Rate, and during any such period the interest payable hereunder shall be limited
to the Maximum Rate.
ARTICLE IV
REPAYMENT, PREPAYMENT AND PAYMENTS
SECTION 4.01 REPAYMENT OF THE REVOLVING LOANS. The Borrower shall
repay to the Bank in full on the Revolving Expiry Date the aggregate principal
amount of the Revolving Loans outstanding on such date.
SECTION 4.02 PREPAYMENTS.
(a) OPTIONAL PREPAYMENTS. The Borrower may at any time or from time
to time, upon prior notice to the Bank not later than the Required Notice Date,
prepay the outstanding amount of the Revolving Loans in whole or in part,
without premium or penalty.
(b) MANDATORY PREPAYMENTS. If at any time the aggregate principal
amount of the outstanding Revolving Loans shall exceed the Borrowing Base, the
Borrower, upon becoming aware of such excess, shall immediately (without any
requirement for Notice) prepay the outstanding principal amount of the Revolving
Loans, in an amount equal to such excess (without premium or penalty) which
prepayment shall be applied in accordance with subsection 4.03(d).
(c) NOTICE. The Notice given of any prepayment shall specify the date
and amount of the prepayment and whether the prepayment is of Prime Rate or
Eurodollar Rate Loans or a
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combination thereof, and if of a combination thereof the amount of the
prepayment allocable to each. If the Notice of prepayment is given, the
Borrower shall make such prepayment and the prepayment amount specified in such
Notice shall be due and payable on the date specified therein, with accrued
interest to such date on the amount prepaid.
SECTION 4.03 PAYMENTS.
(a) PAYMENTS. The Borrower shall make each payment under the Loan
Documents, unconditionally in full without set-off, counterclaim or other
defense, not later than 11:00 A.M. (California time) on the day when due to the
Borrower's Account, or to such other office and account of the Bank as it from
time to time shall designate in a written notice to the Borrower.
(b) AUTHORIZATION TO BANK. The Bank may (but shall not be obligated
to), and the Borrower hereby authorizes the Bank to, charge any deposit account
of the Borrower with the Bank for the amount of any payment which is not made by
the time specified in subsection (a). The Bank shall promptly notify the
Borrower after charging any such account.
(c) EXTENSION. Whenever any payment hereunder shall be stated to be
due, or whenever any Interest Payment Date or any other date specified hereunder
would otherwise occur, on a day other than a Business Day, then, except as
otherwise provided herein, such payment shall be made, and such Interest Payment
Date or other date shall occur, on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of payment
of interest or commitment fee hereunder.
(d) APPLICATION. Unless the Bank shall receive a timely election by
the Borrower with respect to the application of any principal payments, each
payment of principal by the Borrower shall be applied (i) first, to the Prime
Rate Loans then outstanding, and (ii) second, to the Eurodollar Rate Loans then
outstanding (in order of maturity). Unless otherwise provided in this Agreement
and subject to the immediately preceding sentence, each payment by or on behalf
of the Borrower hereunder shall, unless a specific determination is made by the
Bank with respect thereto, be applied (i) first, to any fees, costs, expenses
and other amounts (other than principal and interest) due the Bank; (ii) second,
to accrued and unpaid interest due the Bank; and (iii) third, to principal due
the Bank.
SECTION 4.04 TAXES.
(a) NO REDUCTION OF PAYMENTS. The Borrower shall pay all amounts of
principal, interest, fees and other amounts due under the Loan Documents free
and clear of, and without reduction for or on account of, any present and future
taxes, levies, imposts, duties, fees, assessments, charges, deductions or
withholdings and all liabilities with respect thereto excluding, in the case of
the Bank, income and franchise taxes imposed on it by the United States, the
jurisdiction under the laws of which the Bank is organized or in which its
principal executive offices may be located or where it is doing business or any
political subdivision or taxing authority
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thereof or therein (all such nonexcluded taxes, levies, imposts, duties, fees,
assessments, charges, deductions, withholdings and liabilities being hereinafter
referred to as "Taxes"). If any Taxes shall be required by law to be deducted
or withheld from any payment, the Borrower shall increase the amount paid so
that the Bank receives when due (and is entitled to retain), after deduction or
withholding for or on account of such Taxes (including deductions or
withholdings applicable to additional sums payable under this Section 4.04), the
full amount of the payment provided for in the Loan Documents; PROVIDED,
HOWEVER, that the Borrower shall not be obligated to make any payments under
this Section 4.04 arising solely as a result of the sale or assignment of any
interest in the Revolving Loans by the Bank to any Person or any Affiliate of
the Bank, including payments attributable to the fact that as a result of an
assignment the Borrower may be required to deduct or withhold for Taxes a higher
percentage of any payments than the Borrower would have been required to deduct
or withhold had the Bank not made the assignment. The Bank hereby represents
that as of the Closing Date all payments of principal, interest and fees to be
made to it by the Borrower pursuant to this Agreement will be totally exempt
from withholding of United States federal tax.
(b) DEDUCTION OR WITHHOLDING; TAX RECEIPTS. If the Borrower makes
any payment hereunder in respect of which it is required by law to make any
deduction or withholding, it shall pay the full amount to be deducted or
withheld to the relevant taxation or other authority within the time allowed for
such payment under applicable law and promptly thereafter shall furnish to the
Bank an original or certified copy of a receipt evidencing payment thereof,
together with such other information and documents as the Bank may reasonably
request.
(c) INDEMNITY. If the Bank is required by law to make any payment on
account of Taxes, or any liability in respect of any Tax is imposed, levied or
assessed against the Bank, the Borrower shall indemnify the Bank for and against
such payment or liability, together with any incremental taxes, interest or
penalties, and all costs and expenses, payable or incurred in connection
therewith, including Taxes imposed on amounts payable under this Section 4.04,
whether or not such payment or liability was correctly or legally asserted. A
certificate of the Bank as to the amount of any such payment shall, in the
absence of manifest error, be conclusive and binding for all purposes.
ARTICLE V
YIELD PROTECTION
SECTION 5.01 INABILITY TO DETERMINE RATES. If the Bank shall
determine that adequate and reasonable means do not exist to ascertain the
Eurodollar Rate, or the Bank shall determine that the Eurodollar Rate does not
accurately reflect the cost to it of making or maintaining Eurodollar Rate
Loans, then the Bank shall give telephonic notice (promptly confirmed in
writing) to the Borrower of such determination. Such notice shall specify the
basis for such determination and shall, in the absence of manifest error, be
conclusive and binding for all purposes. Thereafter, the obligation of the Bank
to make or maintain Eurodollar Rate Loans hereunder shall be suspended until the
Bank revokes such notice. Upon receipt of such notice, the Borrower may revoke
any Notice then submitted by it. If the Borrower does not revoke such
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Notice, the Bank shall make, convert or continue Revolving Loans, as proposed by
the Borrower, in the amount specified in the Notice submitted by the Borrower,
but such Revolving Loans shall be made, converted or continued as Prime Rate
Loans instead of Eurodollar Rate Loans.
SECTION 5.02 FUNDING LOSSES. In the event (a "LOSS EVENT") that the
Borrower (i) repays, converts or prepays any Eurodollar Rate Loan on a date
other than the last day of an Interest Period for such Eurodollar Rate Loan
(whether as a result of an optional prepayment, a mandatory prepayment, a
payment as a result of acceleration or otherwise); (ii) fails to borrow a
Eurodollar Rate Loan after giving its Notice (other than as a result of the
operation of Section 5.01 or 5.04); (iii) fails to convert into or continue a
Eurodollar Rate Loan after giving its Notice (other than as a result of the
operation of Section 5.01 or 5.04); or (iv) fails to prepay a Eurodollar Rate
Loan after giving its Notice, then, in addition to such amounts as are required
to be paid by the Borrower pursuant to Section 5.03, the Borrower shall pay to
the Bank immediately upon demand a fee equal the "Eurodollar Loss" (as defined
below) discounted to present value at the Eurodollar Rate in effect on the date
of the Loss Event. For those events specified in clause (i), the Eurodollar
Loss is (A) the amount of interest which would have accrued on such Eurodollar
Rate Loan had it remained outstanding until the last day of the Interest Period
MINUS (B) the amount of interest which would have accrued for the same period
calculated at the Eurodollar Rate in effect on the date of the Loss Event. For
those events specified in clause (ii) above, the Eurodollar Loss is (A) the
amount of interest which would have accrued during the applicable Interest
Period had the Borrower borrowed the Eurodollar Rate Loan as specified in its
Notice MINUS (B) the amount of interest which would have accrued on such
Eurodollar Rate Loan for the same period calculated at the Eurodollar Rate in
effect on the date of the Loss Event. For those events specified in clause
(iii) above, the Eurodollar Loss is (A) the amount of interest which would have
accrued during the applicable Interest Period had the Borrower converted into or
continued a Eurodollar Rate Loan as specified in its Notice MINUS (B) the amount
of interest which would have accrued on such Eurodollar Rate Loan for the same
period calculated at the Eurodollar Rate in effect on the date of the Loss
Event. For those events specified in clause (iv) above, the Eurodollar Loss is
(A) the amount of interest which would accrue on the amounts the Borrower failed
to prepay as specified in its Notice from the date of such Notice until the last
day of the Interest Period applicable thereto, calculated at the Eurodollar Rate
in effect on the date of the Loss Event MINUS (B) the amount of interest which
would accrue on the amounts that the Borrower failed to prepay as specified in
its Notice from the date of such Notice until the last day of the Interest
Period applicable thereto, calculated at the Eurodollar Rate applicable to such
amount; PROVIDED THAT in any case where the Eurodollar Loss is calculated to be
less than zero, the Eurodollar Loss shall be equal to zero.
SECTION 5.03 REGULATORY CHANGES.
(a) INCREASED COSTS. If after the date hereof, the adoption of, or
any change in, any applicable law, rule or regulation, or any change therein, or
any change in the interpretation or administration thereof by any Governmental
Authority charged with the interpretation or administration thereof (a
"Regulatory Change"), or compliance by the Bank with any request, guideline or
directive (whether or not having the force of law) of any such Governmental
Authority shall
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impose, modify or deem applicable any reserve, special deposit or similar
requirement (including any such requirement imposed by the Board of Governors of
the Federal Reserve System, but excluding with respect to any Eurodollar Rate
Loan any such requirement included in the calculation of the Eurodollar Rate
applicable thereto) against assets of, deposits with or for the account of, or
credit extended by, the Bank or shall impose on the Bank or on the United States
market for certificates of deposit or the interbank eurodollar market any other
condition affecting its Eurodollar Rate Loans or its obligation to make such
Eurodollar Rate Loans, and the result of any of the foregoing is to increase the
cost to the Bank of making or maintaining any Eurodollar Rate Loan, or to reduce
the amount of any sum received or receivable by the Bank under this Agreement
with respect thereto, by an amount reasonably deemed by the Bank to be material,
then from time to time, within 15 days after demand by the Bank, the Borrower
shall pay to the Bank such additional amounts as shall compensate the Bank for
such increased cost or reduction.
(b) CAPITAL REQUIREMENTS. If the Bank shall have determined that any
Regulatory Change regarding capital adequacy, or compliance by the Bank (or any
corporation controlling the Bank) with any request, guideline or directive
regarding capital adequacy (whether or not having the force of law) of any
Governmental Authority, has or shall have the effect of reducing the rate of
return on the Bank's or such corporation's capital as a consequence of the
Bank's obligations hereunder to a level below that which the Bank or such
corporation would have achieved but for such adoption, change or compliance
(taking into consideration the Bank's or such corporation's policies with
respect to capital adequacy), by an amount reasonably deemed by the Bank to be
material, then from time to time, within 15 days after demand by the Bank, the
Borrower shall pay to the Bank such additional amounts as shall compensate the
Bank for such reduction.
(c) REQUESTS. Any such request for compensation by the Bank under
Section 4.04 or this Section 5.03 shall be made within one year of the Bank's
becoming aware of the occurrence of the change or circumstance giving rise to
such request and shall set forth the basis of calculation thereof and shall, in
the absence of manifest error, be conclusive and binding for all purposes. In
determining the amount of such compensation, the Bank may use any reasonable
averaging and attribution methods.
SECTION 5.04 ILLEGALITY. If the Bank shall determine that it has
become unlawful, as a result of any Regulatory Change, for the Bank to make,
convert into or maintain Eurodollar Rate Loans as contemplated by this
Agreement, the Bank shall promptly give notice of such determination to the
Borrower, and (i) the obligation of the Bank to make or convert into Eurodollar
Rate Loans shall be suspended until the Bank gives notice that the circumstances
causing such suspension no longer exist; and (ii) each of the Bank's outstanding
Eurodollar Rate Loans shall, if requested by the Bank, be converted into a Prime
Rate Loan not later than upon expiration of the Interest Period related to such
Eurodollar Rate Loan, or, if earlier, on such date as may be required by the
applicable Regulatory Change, as shall be specified in such request. Any such
determination shall, in the absence of manifest error, be conclusive and binding
for all purposes.
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SECTION 5.05 FUNDING ASSUMPTIONS. Solely for purposes of calculating
amounts payable by the Borrower to the Bank under this Article V, each
Eurodollar Rate Loan made by the Bank (and any related reserve, special deposit
or similar requirement) shall be conclusively deemed to have been funded at the
Interbank Rate used in determining the Eurodollar Rate for such Eurodollar Rate
Loan by a matching deposit or other borrowing in the interbank eurodollar market
for a comparable amount and for a comparable period, whether or not such
Eurodollar Rate Loan is in fact so funded.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01 CONDITIONS TO INITIAL LOANS AND LETTERS OF CREDIT. The
obligation of Bank to fund the initial Revolving Loan is subject to the
satisfaction or waiver by the Bank in its sole discretion of the following
conditions precedent:
(a) FEES AND EXPENSES. The Borrower shall have paid (i) all fees
then due in accordance with Section 3.03 and (ii) all invoiced costs and
expenses then due in accordance with Section 10.04(a).
(b) LOAN DOCUMENTS. The Bank shall have received the following Loan
Documents: the Revolving Note, the Collateral Documents and the Letter of
Credit Agreements for Letters of Credit then outstanding.
(c) DOCUMENTS AND ACTIONS RELATING TO COLLATERAL. The Bank shall
have received the following, in form and substance satisfactory to it:
(i) evidence that all action has been taken (other than
filings, registrations and recordings in governmental offices and notifications
of third parties) necessary to create, in favor of the Bank and in accordance
with the terms of the Collateral Documents, a perfected first priority Lien in
the Collateral automatically upon the giving of notice by the Bank to the
Borrower of the occurrence of a Trigger Event;
(ii) all UCC-1 financing statements executed by the Borrower
necessary to perfect the Bank's Lien in the Collateral (which shall be held by
the Bank pursuant to the Security Agreement until such time as the Bank may give
notice to the Borrower of the occurrence of a Trigger Event); and
(iii) evidence that the assets of the Borrower are free of
Liens other than Permitted Liens, including the results of searches conducted in
U.S. Patent and Trademark Office and the UCC filing records in each of the
governmental offices in which UCC-1 financing statements should be filed to
perfect the Bank's Lien in the Collateral.
(d) ADDITIONAL CLOSING DOCUMENTS AND ACTIONS. The Bank shall have
received the following, in form and substance satisfactory to it:
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(i) evidence that the $1,000,000 loan by the Borrower to
Larry E. Thomas has been paid in full;
(ii) evidence that the existing credit facilities with the
Bank have been paid in full;
(iii) a copy of SCHEDULE 4 (Disclosures of Borrower);
(iv) evidence of completion to the satisfaction of the Bank
of such investigations, reviews and audits with respect to the Borrower and its
operations as the Bank may deem appropriate;
(v) certificates of one or more nationally recognized
insurance brokers or other insurance specialists acceptable to the Bank, dated
as of a recent date prior to the Closing Date, stating that all insurance
required under this Agreement and the Collateral Documents is in full force and
effect, evidencing the insurance required under this Agreement and the
Collateral Documents;
(vi) a Form U-1 statement for the Bank completed in
accordance with the requirements of Regulation U of the Board of Governors of
the Federal Reserve System;
(vii) a certificate of the Borrower executed by a Responsible
Officer of the Borrower listing or attaching all (A) authorizations or approvals
of any Governmental Authority and (B) approvals or consents of any other Person,
required in connection with the Capitalization Transactions or the execution,
delivery and performance of the Capitalization Transactions Documents and the
Loan Documents specifically including all Hart-Scott-Rodino approvals (if any),
which certificate shall state that all such authorizations and approvals have
been obtained and are in full force and effect;
(viii) the financial statements of the Borrower required under
Section 4.11 of the Transaction Agreement;
(ix) completed Borrowing Base Documents as of the last
Business Day of the week preceding the week in which the Closing Date occurs,
together with the related collateral reports, also as of such date, specified in
Section 8.01(a);
(x) a certificate of the Borrower executed by a Responsible
Officer of the Borrower, dated the Closing Date, stating that (A) the
representations and warranties contained in Section 7.01 and in the other Loan
Documents are true and correct in all material respects on and as of the date of
such certificate as though made on and as of such date, and (B) on and as of the
Closing Date, no Default shall have occurred and be continuing or shall result
from the initial borrowing;
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(xi) a Financial Condition Certificate for the Borrower,
dated the Closing Date, together with attachments in form and substance
satisfactory to the Bank, demonstrating in a reasonable detail the basis for the
statements contained in such Financial Condition Certificate; and
(xii) a pro forma balance sheet of the Borrower as of April
30, 1996 giving effect to the transactions contemplated by the Capitalization
Transactions Documents as if they had occurred as of such date, prepared by
independent public accountants of recognized national standing.
(e) CORPORATE DOCUMENTS. The Bank shall have received the following,
in form and substance satisfactory to it:
(i) certified copies of the certificate or articles, as the
case may be, of incorporation of the Borrower, together with certificates as to
good standing and tax status, from the Secretary of State or other Governmental
Authority, as applicable, of the Borrower's state of incorporation and
certificates from the Secretary of State or other Governmental Authority, as
applicable, from each state where the Borrower is qualified to do business as a
foreign corporation as to the Borrower's status as a foreign corporation and tax
status, each dated as of a recent date prior to the Closing Date;
(ii) a certificate of the Secretary or Assistant Secretary
of the Borrower, dated the Closing Date, certifying (A) copies of the bylaws of
the Borrower and the resolutions of the Board of Directors of the Borrower
authorizing the execution, delivery and performance of the Loan Documents and
(B) the incumbency, authority and signatures of each officer of the Borrower
authorized to execute and deliver the Loan Documents and act with respect
thereto, upon which certificate the Bank may conclusively rely until it shall
have received a further certificate of the Secretary or an Assistant Secretary
of the Borrower cancelling or amending such prior certificate; and
(iii) a certificate of a Responsible Officer of the Borrower,
dated the Closing Date, certifying that true and correct copies of each of the
Capitalization Transaction Documents requested by the Bank are attached to such
certificate.
(f) LEGAL OPINIONS. The Bank shall have received the opinion of
Buchalter, Nemer, Fields & Younger, counsel to the Borrower, dated the Closing
Date, in a form acceptable to the Bank.
(g) CAPITALIZATION TRANSACTIONS. (A) The Bank shall have received
all agreements relating to the Capitalization Transactions, which agreements
shall be in form satisfactory to the Bank; (B) all conditions precedent with
respect to the Capitalization Transactions shall have been fulfilled and not
waived by the Borrower, as the case may be, without the prior consent of the
Bank; and (C) each of the transactions contemplated by the Capitalization
Transactions shall have been consummated.
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SECTION 6.02 CONDITIONS PRECEDENT TO ALL REVOLVING LOANS. The
obligation of the Bank to make each Revolving Loan shall be subject to the
satisfaction of each of the following conditions precedent:
(a) NOTICE. The Borrower shall have given the Notice of Borrowing as
provided in Section 2.02.
(b) MATERIAL ADVERSE EFFECT. On and as of the date of such Revolving
Loan, there shall have occurred no Material Adverse Effect since the date of
this Agreement (in the case of the initial Revolving Loan).
(c) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. On the date of such
Revolving Loan, both before and after giving effect thereto and to the
application of proceeds therefrom: (i) the representations and warranties
contained in Section 7.01 and in the other Loan Documents shall be true, correct
and complete in all material respects on and as of the date of such Revolving
Loan as though made on and as of such date; and (ii) no Default shall have
occurred and be continuing or shall result from the making of such Revolving
Loan. For purposes of this Section 6.02(c), clause (i) shall be deemed instead
to refer to the last day of the most recent quarter and year for which financial
statements have then been delivered in respect of the representation and
warranty made in Section 7.01(p); clause (i) shall not be deemed to refer to any
other representations and warranties which relate solely to an earlier date
(PROVIDED that such other representations and warranties shall be true, correct
and complete as of such earlier date); and clause (i) shall take into account
any amendments to the Schedules and other disclosures made in writing by the
Borrower to the Bank after the Closing Date and approved by the Bank. The
giving of any Notice of Borrowing and the acceptance by the Borrower of the
proceeds of each Revolving Loan made following the Closing Date shall each be
deemed a certification to the Bank that on and as of the date of such Revolving
Loan such statements are true.
(d) BORROWING BASE DOCUMENTS AND COLLATERAL REPORTS. The Borrower
shall have delivered to the Bank the completed Borrowing Base Documents,
together with the related collateral reports required under Section 8.01(a)(iv),
and the statements contained therein shall be true, correct and complete in all
material respects on and as of the date of such Revolving Loan as though made on
and as of such date, except for changes in the information set forth in such
Borrowing Base Documents in the ordinary course of business. The giving of any
Notice of Borrowing and the acceptance by the Borrower of the proceeds of a
Revolving Loan shall each be deemed a certification to the Bank that on and as
of the date of such Revolving Loan such statements are true, correct and
complete in all material respects, except for changes in the information set
forth in such Borrowing Base Documents in the ordinary course of business.
(e) ADDITIONAL DOCUMENTS. The Bank shall have received, in form and
substance satisfactory to it, such additional approvals, opinions, documents and
other information as the Bank may reasonably request.
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(f) SUBORDINATION PROVISIONS. There shall be no pending or
threatened legal proceeding in which any of the holders of the Subordinated Debt
shall have asserted that, for any reason, any subordination provision in favor
of the Bank contained in the indenture governing the debentures is invalid or
unenforceable for any reason whatsoever.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
SECTION 7.01 REPRESENTATIONS AND WARRANTIES. The Borrower represents
and warrants to the Bank that, except as set forth in the section of SCHEDULE 4
corresponding to the Sections set forth below:
(a) ORGANIZATION AND POWERS. The Borrower is a corporation duly
organized, validly existing and in good standing under the law of the
jurisdiction of its incorporation, is qualified to do business and is in good
standing in each jurisdiction in which the failure so to qualify or be in good
standing would result in a Material Adverse Effect and has all requisite power
and authority to own its assets and carry on its business and to execute,
deliver and perform its obligations under the Loan Documents.
(b) AUTHORIZATION; NO CONFLICT. The execution, delivery and
performance by the Borrower of the Loan Documents have been duly authorized by
all necessary corporate action of the Borrower and do not and will not
(i) contravene the terms of the certificate or articles, as the case may be, of
incorporation and the bylaws of the Borrower; (ii) result in a breach of or
constitute a default under any indenture or loan or credit agreement to which
the Borrower is a party or by which it or its properties are bound; (iii) result
in a breach of or constitute a default under any other agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected (except for any breach or default which would not result in
a Material Adverse Effect); (iv) violate any provision of any law, rule,
regulation, order, writ, judgment, injunction, decree or the like binding on or
affecting the Borrower (except for any violation which would not result in a
Material Adverse Effect); or (v) except as contemplated by this Agreement,
result in, or require, the creation or imposition of any Lien (other than a
Permitted Lien) upon or with respect to any of the properties of the Borrower.
(c) BINDING OBLIGATION. The Loan Documents constitute, or when
delivered under this Agreement will constitute, legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms except as such enforceability may be limited by (a)
bankruptcy, insolvency, reorganization, moratorium or similar laws of general
applicability affecting the enforcement of creditors' rights and (b) the
application of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(d) CONSENTS. No authorization, consent, approval, license,
exemption of, or filing or registration with (collectively, "Approvals"), any
Governmental Authority, or approval or consent of any other Person, is required
for the due execution, delivery or performance by the
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Borrower of any of the Loan Documents, except for recordings or filings in
connection with the perfection of the Liens on the Collateral in favor of the
Bank or those that have been obtained and except for any such Approval the
failure of which to obtain would not result in a Material Adverse Effect.
(e) NO DEFAULTS. The Borrower is not in default under any material
contract, lease, agreement, judgment, decree or order to which it is a party or
by which it or its properties may be bound, except where the default would not
have a Material Adverse Effect.
(f) TITLE TO PROPERTIES; LIENS. The Borrower has good and marketable
title to, or valid and subsisting leasehold interests in, their properties and
assets, including all property presently forming a part of the Collateral, and
there is no Lien upon or with respect to any of such properties or assets,
including any of the Collateral, except for Permitted Liens.
(g) LITIGATION. There are no actions, suits or proceedings pending
or, to the best of the Borrower's knowledge, threatened against or affecting the
Borrower or the properties of the Borrower before any Governmental Authority or
arbitrator which if determined adversely to the Borrower would result in a
Material Adverse Effect.
(h) COMPLIANCE WITH ENVIRONMENTAL LAWS. The Borrower is in
compliance with all Environmental Laws, whether in connection with the
ownership, use, maintenance or operation of its Premises or the conduct of any
business thereon, or otherwise except for non-compliance which would not result
in a Material Adverse Effect. Neither the Borrower, any of its Subsidiaries nor
to the best of the Borrower's knowledge, any previous owner, tenant, occupant,
user or operator of the Premises, or any present tenant or other present
occupant, user or operator of the Premises has used, generated, manufactured,
installed, treated, released, stored or disposed of any Hazardous Substances on,
under, or at the Premises, except in compliance with all applicable
Environmental Laws except for non-compliance which would not result in a
Material Adverse Effect. To the knowledge of the Borrower, no Hazardous
Substances have at any time been spilled, leaked, dumped, deposited, discharged,
disposed of or released on, under, at or from the Premises, nor have any of the
Premises been used at any time by any Person as a landfill or waste disposal
site except for any such action which would not result in a Material Adverse
Effect. There are no actions, suits, claims, notices of violation, hearings,
investigations or proceedings pending or, to the best of the Borrower's
knowledge, threatened against or affecting the Borrower or any of its
Subsidiaries or with respect to the ownership, use, maintenance and operation of
the Premises, relating to Environmental Laws or Hazardous Substances, except for
any thereof which would not result in a Material Adverse Effect.
(i) GOVERNMENTAL REGULATION. The Borrower is not subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Investment Company Act of 1940, the Interstate Commerce Act, any
state public utilities code or any other federal or state statute or regulation
limiting its ability to incur Indebtedness.
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(j) ERISA.
(i) The Borrower and all ERISA Affiliates have satisfied
all applicable contribution requirements under Section 412(c)(11) of the
Internal Revenue Code and have never sought a waiver under Section 412(d) of the
Internal Revenue Code;
(ii) No Termination Event has occurred and is continuing, or
is reasonably expected to occur;
(iii) the aggregate amount of Unfunded Accrued Benefits under
all Pension Plans (excluding in such computation Pension Plans with assets
greater than accrued benefits) does not exceed $250,000;
(iv) there is no condition or event under which the
Borrower, any ERISA Affiliate, or any Plan maintained by the Borrower or any
ERISA Affiliate could be subject to any risk of material liability under ERISA
or the Internal Revenue Code, regardless of whether the Borrower or any ERISA
Affiliate engaged in a transaction giving rise to the liability;
(v) neither the Borrower nor any ERISA Affiliate has
unfunded, contingent liability that exceeds $250,000 with respect to Plans that
provide post-retirement welfare benefits; and
(vi) all Plans maintained by, or contributed to by, the
Borrower or any ERISA Affiliate comply in all material respects, and have been
administered in material compliance with, the requirements of applicable law
(including, if applicable, foreign law, ERISA and the Internal Revenue Code),
and in accordance with each Plan's terms.
(k) SUBSIDIARIES. The name, capital structure and ownership of each
Subsidiary of the Borrower on the date of this Agreement is as set forth in
SCHEDULE 3. All of the outstanding capital stock of, or other interest in, each
such Subsidiary has been validly issued, and is fully paid and nonassessable.
Except as set forth in such Schedule, on the date of this Agreement the Borrower
has no equity interest in any Person.
(l) MARGIN REGULATIONS. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying "margin stock"
(within the meaning of Regulations G or U of the Board of Governors of the
Federal Reserve System of the United States). No part of the proceeds of the
Revolving Loans will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock.
(m) TAXES. The Borrower has duly filed all tax and information
returns required to be filed, and has paid all material taxes, fees, assessments
and other governmental charges or levies that have become due and payable,
except to the extent such taxes or other charges are being contested in good
faith and are adequately reserved against in accordance with GAAP.
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(n) PATENTS AND OTHER RIGHTS. Each of the Borrower and its
Subsidiaries possesses, or has a valid right to use, all permits, franchises,
licenses, patents, trademarks, trade names, service marks, copyrights and all
rights with respect thereto, free from burdensome restrictions, that are
necessary for the ownership, maintenance and operation of its business and
neither the Borrower nor any such Subsidiary is in violation of any rights of
others with respect to the foregoing, except for any such lack of possession or
right of use or any such violation which would not result in a Material Adverse
Effect.
(o) INSURANCE. SCHEDULE 7 sets out the insurance maintained by the
Borrower on the Closing Date on the properties of the Borrower and its
Subsidiaries and the Responsible Officers of the Borrower believe such insurance
is adequate in light of the Borrower's current business and proposed expansion.
(p) FINANCIAL STATEMENTS. The financial statements required to be
delivered under Section 6.01(d)(viii) of this Agreement fairly present in all
material respects the financial condition of the Borrower and the results of
operations of the Borrower for the periods covered by such statements, in each
case in accordance with GAAP consistently applied, subject, in the case of the
March 31, 1996, financial statements, to normal year-end adjustments and the
absence of notes. Since March 31, 1996 there has been no Material Adverse
Effect, it being understood that the consummation of the Capitalization
Transactions shall not be deemed to have been a Material Adverse Effect.
(q) BOOKS AND RECORDS. The Borrower has kept adequate records and
books of account, in which complete entries have been made in accordance with
GAAP, reflecting all material financial transactions of the Borrower.
(r) LIABILITIES. Neither the Borrower nor any of its Subsidiaries
has any material liabilities, fixed or contingent, which are required to be
disclosed in accordance with GAAP, that are not reflected in the financial
statements referred to in subsection (p), in the notes thereto or otherwise
disclosed in writing to the Bank, other than liabilities arising in the ordinary
course of business since March 31, 1996.
(s) LABOR DISPUTES, ETC. There are no strikes, lockouts or other
labor disputes against the Borrower or any of its Subsidiaries, or, to the best
of the Borrower's knowledge, threatened against or affecting the Borrower or any
of its Subsidiaries, and no Event of Loss has occurred with respect to any
assets or property of the Borrower or any of its Subsidiaries, in any such case
which may result in a Material Adverse Effect.
(t) SOLVENCY. The Borrower and each of its Subsidiaries is Solvent
after giving effect to the transactions contemplated by the Loan Documents and
the Capitalization Transactions Documents.
(u) DISCLOSURE. None of the representations or warranties made by
the Borrower or any of its Subsidiaries in the Loan Documents (including
SCHEDULE 4) taken as a
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whole, as of the date of such representations and warranties, and none of the
statements contained in each exhibit or report furnished by or on behalf of the
Borrower or any of its Subsidiaries to the Bank in connection with the Loan
Documents taken as a whole, contains any untrue statement of a material fact or
omits any material fact, known to the Borrower required to be stated therein or
necessary to make the statements made therein, in the light of the circumstances
under which they are made, not misleading.
(v) REPRESENTATIONS AND WARRANTIES CONTAINED IN CAPITALIZATION
TRANSACTIONS DOCUMENTS. Each of the representations and warranties of the
Borrower, and to the best of Borrower's knowledge, of each of the other parties
thereto, contained in the Capitalization Transactions Documents is true and
correct in all material respects as of the Closing Date (except for any such
representations and warranties that are stated to be made or true as of a
different date). In determining whether this representation or warranty has
been breached, the Bank shall in good faith value the Borrower's rights of
indemnification by considering (i) whether the Borrower has an express written
indemnification right; (ii) whether the indemnitor has contested its
indemnification obligation to the Borrower; and (iii) whether the indemnitor's
credit is sufficient to satisfy the underwriting standards of the Bank for an
unsecured loan to such indemnitor in the amount of the Borrower's indemnity
claim.
(w) NO NOTICES OF FAILURE OR BREACH. The Borrower has neither sent
nor received any notice of failure of condition or breach under any of the
Capitalization Transactions Documents, including under Section 8.4 of the
Transaction Agreement.
ARTICLE VIII
COVENANTS
SECTION 8.01 REPORTING COVENANTS. So long as any of the Obligations
(except for any reimbursement or indemnifications for which the Bank has not
made a claim) shall remain unpaid or the Bank shall have any Commitment, the
Borrower agrees that (unless the Bank gives its prior written consent to the
contrary, which may be given or withheld in its sole and absolute discretion):
(a) FINANCIAL STATEMENTS AND OTHER REPORTS. The Borrower will
furnish to the Bank:
(i) as soon as available and in any event within 45 days
after the end of the first three fiscal quarters of each fiscal year of the
Borrower or 90 days (in the case of the fourth fiscal quarter), a consolidated
and consolidating balance sheet of the Borrower and its Subsidiaries as of the
end of such quarter, and the related consolidated and, as to statements of
income only, consolidating statements of income, shareholders' equity and cash
flows of the Borrower and its Subsidiaries for such quarter and the portion of
the fiscal year through the end of such quarter, prepared in accordance with
GAAP consistently applied, all in reasonable detail and setting forth in
comparative form the figures for the corresponding period in the preceding
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fiscal year, together with a certificate of a Responsible Officer of the
Borrower stating that such financial statements fairly present in all material
respects the financial condition of the Borrower and its Subsidiaries as at such
date and the results of operations of the Borrower and its Subsidiaries for the
period ended on such date and have been prepared in accordance with GAAP
consistently applied, subject to changes resulting from normal, year-end audit
adjustments and except for the absence of notes;
(ii) as soon as available and in any event within 120 days
after the end of the first fiscal year of the Borrower and 90 days after the end
of each fiscal year of the Borrower thereafter, a consolidated and consolidating
balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal
year, and the related consolidated and, as to statements of income only,
consolidating statements of income, shareholders' equity and cash flows of the
Borrower and its Subsidiaries for such fiscal year, prepared in accordance with
GAAP consistently applied, all in reasonable detail and setting forth in
comparative form the figures for the previous fiscal year, and (A) in the case
of such consolidated financial statements, accompanied by a report thereon of
KPMG Peat Marwick LLP or another firm of independent certified public
accountants of recognized national standing acceptable to the Bank (acting
reasonably), which report shall be unqualified as to scope of audit or the
status of the Borrower and its Subsidiaries as a going concern, together with a
certificate of such independent public accountants stating that (1) their audit
examination of the Borrower and its Subsidiaries has included a review of the
terms of this Agreement as they relate to accounting matters; (2) in the course
of such audit examination, which audit was conducted by such accountants in
accordance with generally accepted auditing standards, such accountants have
obtained no knowledge that any Default has occurred and is continuing, or, if
such Default has occurred and is continuing, indicating the nature thereof; and
(3) based on their audit examination nothing has come to their attention which
causes them to believe that the Borrower is not in compliance with the financial
covenants of the Agreement; and (B) in the case of such consolidating financial
statements, certified by a Responsible Officer of the Borrower;
(iii) together with the financial statements required
pursuant to clauses (i) and (ii), a certificate of a Responsible Officer in the
form of EXHIBIT F as of the end of the applicable accounting period confirming
compliance with the financial covenants set forth in Section 8.02;
(iv) as soon as available and in any event not later than
ten Business Days after the end of each calendar month, (A) the completed
Borrowing Base Documents, (B) full and complete reports with respect to the
Receivables, including information as to the amount of backlog, concentration,
aging, identity of Receivable Debtors, letters of credit securing Receivables,
disputed Receivables and other matters, as the Bank shall request, and (C) a
detailed schedule of the Borrower's Inventory, each as of the end of such
immediately preceding fiscal month and in form and substance satisfactory to the
Bank; and
(v) a copy of any filing made with the SEC by the Borrower
or any of its Subsidiaries within five Business Days of filing.
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(b) ADDITIONAL INFORMATION. The Borrower will furnish to the Bank:
(i) promptly after the Borrower has knowledge or becomes
aware thereof, notice of the occurrence of any Event of Loss with respect to its
property or assets aggregating $500,000 or more;
(ii) promptly after the Borrower has knowledge or becomes
aware thereof, notice of the occurrence of any Default;
(iii) prompt written notice of (A) any proposed acquisition
of stock, assets or property by the Borrower or any of its Subsidiaries that
could reasonably be expected to result in environmental liability under
Environmental Laws, and (B)(1) any spillage, leakage, discharge, disposal,
leaching, migration or release of any Hazardous Substances required to be
reported to any Governmental Authority under applicable Environmental Laws, and
(2) all actions, suits, claims, notices of violation, hearings, investigations
or proceedings pending, or to the best of the Borrower's knowledge, threatened
against or affecting the Borrower or any of its Subsidiaries or with respect to
the ownership, use, maintenance and operation of the Premises, relating to
Environmental Laws or Hazardous Substances;
(iv) prompt written notice of all actions, suits and
proceedings before any Governmental Authority or arbitrator pending, or to the
best of the Borrower's knowledge, threatened against or affecting the Borrower
or any of its Subsidiaries which if adversely determined (A) would involve an
aggregate liability of $1,000,000 or more, or (B) otherwise could reasonably be
expected to have a Material Adverse Effect;
(v) promptly after the Borrower has knowledge or becomes
aware thereof, (A) notice of the occurrence of any Termination Event, together
with a copy of any notice of such Termination Event to the PBGC, and (B) the
details concerning any action taken or proposed to be taken by the IRS, PBGC,
Department of Labor or other Person with respect thereto;
(vi) promptly upon the commencement or increase of
contributions to, the adoption of, or an amendment to, a Plan by the Borrower or
an ERISA Affiliate, if such commencement or increase of contributions, adoption,
or amendment could reasonably be expected to result in a net increase in
unfunded liability to Borrower or an ERISA Affiliate in excess of $500,000, a
calculation of the net increase in unfunded liability;
(vii) promptly after filing or receipt thereof by the
Borrower or any ERISA Affiliate, copies of the following:
(A) each annual report (IRS Form 5500 series, if any),
together with all accompanying schedules, reports and information, filed with
the IRS;
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(B) any notice received from the PBGC of intent to
terminate or have a trustee appointed to administer any Pension Plan;
(C) any notice received from the sponsor of a Multiemployer
Plan concerning the imposition, delinquent payment, or amount of withdrawal
liability;
(D) any demand by the PBGC under Subtitle D of Title IV of
ERISA; and
(E) any notice received from the IRS regarding the
disqualification of a Plan intended to qualify under Section 401(a) of the
Internal Revenue Code;
(viii) the information regarding insurance maintained by the
Borrower and its Subsidiaries as required under Section 8.03(c);
(ix) the reports and notices as required by the Security
Agreement;
(x) on or prior to the date of delivery of any financial
statements pursuant to subsection (a), notice of any material change in
accounting policies or financial reporting practices by the Borrower or any of
its Subsidiaries;
(xi) promptly after the occurrence thereof, notice of any
labor controversy resulting in or threatening to result in any strike, work
stoppage, boycott, shutdown or other material labor disruption against or
involving the Borrower or any of its Subsidiaries which would reasonably be
expected to result in a Material Adverse Effect;
(xii) prompt written notice of any other condition or event
which has resulted, or that would reasonably be expected to result, in a
Material Adverse Effect;
(xiii) promptly after receipt thereof, all schedules, exhibits
or other documents evidencing any calculations supporting any adjustments to the
purchase price under the Transaction Agreement;
(xiv) (A) as soon as practicable, and in any event within 30
days after the beginning of each fiscal year of the Borrower, a budget for such
fiscal year presented on a monthly basis regarding the operations and capital
expenditures of the Borrower and its Subsidiaries on a consolidated basis,
together with an analysis of such budget prepared in reasonable detail by a
Responsible Officer of the Borrower; and, (B) within 15 days following their
preparation, (1) any operating budget of the Borrower otherwise prepared or
submitted to its Board of Directors and (2) any material revisions or amendments
made by the Borrower (and submitted to its Board of Directors) to any budget
delivered under this clause;
(xv) within 45 days of the end of each fiscal quarter, a
comparison of same store sales in form satisfactory to the Bank; and
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(xvi) such other information respecting the operations,
properties, business or condition (financial or otherwise) of the Borrower or
its Subsidiaries (including with respect to the Collateral) as the Bank may from
time to time reasonably request.
Each notice pursuant to subsections (b) (i) through (vii), (xi) and (xii) shall
be accompanied by a written statement by a Responsible Officer of the Borrower
setting forth details of the occurrence referred to therein, and stating what
action the Borrower proposes to take with respect thereto.
SECTION 8.02 FINANCIAL COVENANTS. So long as any of the Obligations
shall remain unpaid (except for any reimbursements or indemnifications for which
the Bank has not made a claim) or the Bank shall have any Commitment, the
Borrower agrees that:
(a) FUNDED DEBT RATIO. The Borrower will maintain a ratio as of the
end of any fiscal quarter referred to below of (A) Funded Debt to (B) EBITDA, of
the Borrower and its Subsidiaries on a consolidated basis, as determined in
accordance with GAAP, for the period of four consecutive fiscal quarters of the
Borrower then ended, of not greater than the following:
At 12/31/96 6.20
At 3/31/97 6.10
At 6/30/97 5.90
At 9/30/97 5.75
At 12/31/97, 3/31/98, 6/30/98 and 9/30/98 5.50
At 12/31/98 and the end of each fiscal
quarter thereafter 5.00
(b) DEBT SERVICE COVERAGE RATIO. The Borrower will maintain a ratio
as of the end of any fiscal quarter referred to below of (A) EBITDA to (B) the
sum of Interest Expense PLUS regularly scheduled principal payments on
Indebtedness (excluding regularly scheduled principal payments under the Bridge
Financing Agreement) of the Borrower and its Subsidiaries on a consolidated
basis, as determined in accordance with GAAP, for the period of four consecutive
fiscal quarters of the Borrower, of not less than the following:
At 6/30/97 and 9/30/97 1.40
At 12/31/97, 3/31/98, 6/30/98 and 9/30/98 1.50
At 12/31/98 and the end of each fiscal
quarter thereafter 1.75
(c) PROFITABILITY. The Borrower will earn not less than $1 in profit
during any period comprised of two of the Borrower's fiscal quarters.
(d) MINIMUM INCREASES IN NET WORTH. The Borrower's Tangible Net
Worth as of the end of each of the Borrower's fiscal quarters referred to below
must have increased over the preceding quarter as follows:
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FOR EACH FISCAL QUARTER ENDED DURING: MINIMUM INCREASE IN
------------------------------------- TANGIBLE NET WORTH
-------------------
1997 $1,250,000
1998 $1,250,000
1999 $2,000,000
2000 $2,000,000
2001 $2,000,000
(e) MINIMUM EBITDA. For the fiscal year of the Borrower ended
December 31, 1996, EBITDA shall not be less than $16,000,000.
SECTION 8.03 ADDITIONAL AFFIRMATIVE COVENANTS. So long as any of the
Obligations shall remain unpaid (except for any reimbursements or
indemnifications for which the Bank has not made a claim) or the Bank shall have
any Commitment, the Borrower agrees that:
(a) PRESERVATION OF EXISTENCE, ETC. (i) The Borrower will, and will
cause each of its Subsidiaries to, maintain and preserve its corporate
existence, and (ii) the Borrower will, and will cause each of its Subsidiaries
to maintain and preserve its rights to transact business and all other rights,
franchises and privileges necessary or desirable in the normal course of its
business and operations and the ownership of its properties, in each case except
in connection with any transactions permitted by Section 8.04, and except where
the failure to so maintain or preserve would not result in a Material Adverse
Effect.
(b) PAYMENT OF TAXES, ETC. The Borrower will, and will cause each of
its Subsidiaries to, pay and discharge all material taxes, fees, assessments and
governmental charges or levies imposed upon it or upon its properties or assets
prior to the date on which penalties attach thereto, and all lawful claims for
labor, materials and supplies which, if unpaid, might become a Lien upon any
properties or assets of the Borrower or any Subsidiary, except to the extent
such taxes, fees, assessments or governmental charges or levies, or such claims,
are being contested in good faith by appropriate proceedings and are adequately
reserved against in accordance with GAAP.
(c) MAINTENANCE OF INSURANCE. The Borrower will, and will cause each
of its Subsidiaries to, carry and maintain in full force and effect, at its own
expense the insurance set forth on SCHEDULE 7 or substantially similar insurance
or such additional insurance coverage as the Bank may reasonably request and as
is available on commercially reasonable terms (including as to amounts,
deductibles and risk) with financially sound and reputable insurance companies.
The Borrower will use its best efforts to obtain within 15 Business Days of the
Closing Date an endorsement to its insurance policy in substantially the form of
EXHIBIT G. If the Borrower cannot obtain such endorsement due to the fact that
insurer will not issue it prior to such time as the Revolving Loan may become
secured, the Borrower shall instead be required to obtain an
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endorsement within 10 Business Days of the giving of written notice by the Bank
to the Borrower of the occurrence of a Trigger Event, which endorsement shall be
in substantially the same as the form attached as EXHIBIT G except that it shall
become effective immediately upon issuance and shall not contain the conditional
language constituting the first paragraph of EXHIBIT G. After the giving of
written notice by the Bank to the Borrower of the occurrence of a Trigger Event,
insurance on the Collateral shall name the Bank as additional insured and as
loss payee. Upon the request of the Bank, the Borrower shall furnish the Bank
from time to time with full information as to the insurance carried by it and,
if so requested, copies of all such insurance policies. The Borrower shall also
furnish to the Bank at least once in each calendar year a certificate of the
Borrower's insurance broker or other insurance specialist stating that all
premiums then due on the policies relating to insurance on the Collateral have
been paid, that such policies are in full force and effect and that such
insurance coverage and such policies comply with all the requirements of this
subsection (c). All insurance policies required under this subsection (c) shall
provide that they shall not be terminated or cancelled nor shall any such policy
be materially changed without at least 30 days' prior written notice to the
Borrower and the Bank. Receipt of notice of termination or cancellation of any
such insurance policies or reduction of coverages or amounts thereunder shall
entitle the Bank to renew any such policies, cause the coverages and amounts
thereof to be maintained at levels required pursuant to the first sentence of
this subsection (c) or otherwise to obtain similar insurance in place of such
policies, in each case at the expense of the Borrower.
(d) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Borrower will, and
will cause each of its Subsidiaries to, keep adequate records and books of
account, in which complete entries will be made in accordance with GAAP,
reflecting all material financial transactions of the Borrower and its
Subsidiaries. The Borrower will, and will cause each of its Subsidiaries to,
make available on demand from the Bank its account receivable and inventory
records within five Business Days and all other records within ten days of
request.
(e) INSPECTION RIGHTS; AUDITS. The Borrower will at any reasonable
time and from time to time (i) permit the Bank or any of its agents or
representatives to visit and inspect any of the properties of the Borrower and
its Subsidiaries and to examine and make copies of and abstracts from the
records and books of account of the Borrower and its Subsidiaries, and to
discuss the business affairs, finances and accounts of the Borrower and any such
Subsidiary with any of the officers, employees or accountants of the Borrower or
such Subsidiary, and (ii) permit the Bank or any of its agents or
representatives to conduct periodic audits of the Collateral at such frequencies
as the Bank shall reasonably deem appropriate, in each such case so long as the
Bank shall not unreasonably disrupt the Borrower's business. In addition, and
without limiting the generality of the foregoing, the Bank shall be entitled to
conduct an examination of the Collateral as soon as practicable following the
Closing Date. The Borrower agrees that it will make available the Collateral
for such examination within 5 Business Days of receiving a request from the Bank
and further agrees to pay to the Bank on demand all reasonable out-of-pocket
costs and expenses of the Bank related to such examination.
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(f) COMPLIANCE WITH LAWS, ETC. The Borrower will, and will cause
each of its Subsidiaries to, comply in all material respects with the
requirements of all applicable laws, rules, regulations and orders of any
Governmental Authority (including all Environmental Laws) and the terms of any
indenture, contract or other instrument to which it may be a party or under
which it or its properties may be bound; PROVIDED, HOWEVER, that (i) the
Borrower shall not be obligated to comply with (A) any such laws, rules,
regulations and orders unless the failure to so comply would result in a
Material Adverse Effect and (B) the terms of any indenture, contract or other
instrument unless the failure to so comply would result in a Material Adverse
Effect provided in no event shall the Borrower be permitted not to comply with
the terms of any indenture, contract or other instrument if such noncompliance
would cause a Default or Event of Default under Section 9.01(f) hereof; and (ii)
the Borrower shall be permitted to contest the application of any laws, rules,
regulations and orders of any Governmental Authority provided such contest is
being diligently prosecuted, a reserve is created for any potential liability to
the extent required by GAAP, and the Borrower provides copies of any filings,
correspondence or other information to the Bank with respect to such contest.
(g) MAINTENANCE OF PROPERTIES, ETC. The Borrower will, and will
cause each of its Subsidiaries to, maintain and preserve all of its properties
necessary or useful in the proper conduct of its business in good working order
and condition in accordance with the general practice of other corporations of
similar character and size, ordinary wear and tear excepted.
(h) LICENSES. The Borrower will, and will cause each of its
Subsidiaries to, obtain and maintain all Approvals necessary in connection with
the execution, delivery and performance of the Loan Documents, the consummation
of the transactions therein contemplated or the operation and conduct of its
business and ownership of its properties, unless the failure to so obtain or
maintain such Approval would not result in a Material Adverse Effect.
(i) ACTION UNDER ENVIRONMENTAL LAWS.
(A) The Borrower agrees to, and will cause each of its
Subsidiaries to, operate their respective businesses and each Site materially in
compliance with all applicable Environmental Laws and Environmental Permits.
The Borrower and each Subsidiary agree to keep each currently owned, leased or
operated Site free and clear of any Environmental Claims or Liens imposed for
failure to so comply with any Environmental Laws (each, an "ENVIRONMENTAL
LIEN"); PROVIDED HOWEVER, that so long as no Default or Event of Default shall
occur and be continuing, the Borrower and each Subsidiary shall have the right
at its cost and expense, and acting in good faith, to contest, object or appeal
by appropriate legal proceeding the validity of any Environmental Lien. The
contest, objection or appeal with respect to the validity of an Environmental
Lien shall suspend the Borrower's and its Subsidiaries' obligation to eliminate
such Environmental Lien under this paragraph pending a final and non-appealable
determination by appropriate administrative or judicial authority of the
legality, enforceability or status of such Environmental Lien, provided that the
following conditions are satisfied: (i) contemporaneously with the commencement
of such proceedings, the Borrower shall give written notice thereof to the Bank;
and (ii) if under applicable law any real property or improvements thereon are
subject
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to sale or forfeiture for failure to satisfy the Environmental Lien prior to a
final determination of the legal proceedings, the Borrower or such Subsidiary
must successfully move to stay such sale, forfeiture or foreclosure pending
final and non-appealable determination of the Borrower's (or Subsidiary's)
action; and (iii) the Borrower or such Subsidiary must, if reasonably requested,
furnish to the Bank a good and sufficient bond, surety, letter of credit or
other security reasonably satisfactory to the Bank equal to the amount
(including any interest and penalty) secured by the Environmental Lien.
(B) The Borrower agrees to, and will cause each of its
Subsidiaries to, use commercially reasonable efforts to enforce the obligations
of any other Person who is potentially liable for any Environmental Claim by
administrative or judicial process. The Borrower and each Subsidiary shall
notify the Bank of any incident or occurrence of which it has knowledge that
could reasonably be expected to be the subject of a material Environmental Claim
against the Borrower or any Subsidiary. The Borrower and each Subsidiary shall
use commercially reasonable efforts to diligently pursue investigation,
resolution or defense of such Environmental Claim.
(j) USE OF PROCEEDS. The Borrower will use the proceeds of the
Revolving Loans solely for general corporate purposes; PROVIDED, HOWEVER, that
the Borrower shall be permitted to use up to $2,000,000 of the Revolving Loans
disbursed on the Closing Date to consummate the Capitalization Transactions in
accordance with the Capitalization Transactions Documents.
(k) CASH MANAGEMENT. The Borrower has established at the Bank the
Borrower's Account and shall timely cause all collections, cash, or other cash
equivalents received from any source to be timely swept into the Borrower's
Account; provided, that the terms and conditions applicable to the Borrower's
Account are commercially reasonable and substantially the same terms and
conditions offered by the Bank generally to its corporate clients.
(l) FURTHER ASSURANCES AND ADDITIONAL ACTS. The Borrower will
execute, acknowledge, deliver, file, notarize and register at its own expense
all such further agreements, instruments, certificates, documents and assurances
and perform such acts as the Bank shall reasonably deem necessary or appropriate
to effectuate the purposes of the Loan Documents, and promptly provide the Bank
with evidence of the foregoing satisfactory in form and substance to the Bank.
(m) AVAILABILITY OF PERMITTED INDEBTEDNESS. The Borrower will, and
will cause each of its Subsidiaries to, maintain available not less than
$2,500,000 of permitted additional Indebtedness either under the general basket
provided therein or pursuant to the permitted indebtedness tied to increases in
the borrowing base under the definition (or any similar provision) of "permitted
indebtedness" contained in the indenture for the permanent loans refinancing the
Bridge Loan.
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(n) MODIFICATION TO LOAN AGREEMENT. The Borrower shall within ten
Business Days of the closing of the Refinancing Indenture (as defined below)
execute and deliver to the Bank an amendment to this Agreement in form and
substance reasonably acceptable to the Bank: (x) to incorporate any covenants or
conditions contained in the Refinancing Indenture that are more restrictive than
those set forth in this Agreement; (y) to make appropriate adjustments,
determined by the Bank in its reasonable discretion, to the definition of
Trigger Event; and (z) to adjust the financial covenants in Section 8.02 to
maintain an appropriate spread, determined by the Bank in its reasonable
discretion, between such financial covenants and those set forth in the
Refinancing Indenture.
SECTION 8.04 NEGATIVE COVENANTS. So long as any of the Obligations
shall remain unpaid (except for any reimbursements or indemnifications for which
the Bank has not made a claim) or the Bank shall have any Commitment, the
Borrower agrees that:
(a) INDEBTEDNESS. The Borrower will not, and will not permit any of
its Subsidiaries to, create, incur, assume or otherwise become liable for or
suffer to exist any Indebtedness, other than:
(i) Indebtedness of the Borrower to the Bank hereunder;
(ii) Indebtedness of the Borrower and its Subsidiaries
existing on the Closing Date and set forth in SCHEDULE 1 or extensions, renewals
and refinancings of such Indebtedness; provided such refinancing of the Bridge
Loan shall only be permitted Indebtedness if: (a) the principal balance does not
exceed the sum of $100,000,000 PLUS all "Additional Obligations" as defined in
the Bridge Financing Agreement PLUS up to an additional $10,000,000 for
refinancing expenses; (b) the indenture or agreement evidencing such refinanced
Indebtedness ("Refinancing Indenture") shall not prohibit the Borrower or any of
its Subsidiaries from performing their respective obligations under any Loan
Documents; (c) the Bank shall have received an opinion in the form of EXHIBIT I
from Buchalter, Nemer, Fields & Younger, or other counsel reasonably acceptable
to the Bank; (d) the Refinancing Indenture shall not require any regularly
scheduled principal payments nor have a maturity prior to the Revolving Expiry
Date; (e) if the Refinancing Indenture contains a cross-default for any non-
payment default under this Agreement, such cross-default under the Refinancing
Indenture must be structured so that it is only triggered if the Bank has given
the Borrower written notice of the non-payment default under this Agreement and
demanded a cure thereof.
(iii) Guaranty Obligations of the Borrower and its
Subsidiaries existing on the Closing Date and set forth in SCHEDULE 6.
(iv) Indebtedness consisting of guarantees resulting from
endorsement of negotiable instruments for collection by the Borrower or any such
Subsidiary in the ordinary course of business;
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(v) Indebtedness of the Borrower and its Subsidiaries which
in the aggregate incurred in any one fiscal year does not exceed 50% of capital
expenditures permitted under Section 8.04(g) for such fiscal year and which is
comprised of (A) Indebtedness under Capital Leases and (B) Indebtedness secured
solely by Permitted Liens upon or in the property acquired by the Borrower or
any of its Subsidiaries to secure the purchase price of such property or
Indebtedness incurred solely for the purpose of financing the acquisition of
such property, or extensions, renewals and refinancings of such Indebtedness,
PROVIDED that the principal amount of such Indebtedness being extended, renewed
or refinanced does not increase;
(vi) Indebtedness of the Borrower to any of its wholly owned
Subsidiaries or of any of its wholly owned Subsidiaries to another of its wholly
owned Subsidiaries; and
(vii) Indebtedness of the Borrower and its Subsidiaries
incurred after the date hereof of up to $4,000,000 secured by the real estate
and related fixtures now owned by the Borrower provided that as a condition to
the incurrence of any such Indebtedness (a) no Default shall have occurred and
be continuing at the time of, or would occur after giving effect to, the
incurrence of such Indebtedness, and (b) on the date of such incurrence the
ratio of Funded Debt to EBITDA of the Borrower and its Subsidiaries on a
consolidated basis as calculated in accordance with Section 8.02(a) shall not be
greater than 4.0 to 1.0; and
(viii) Indebtedness of the Borrower consisting of "Additional
Obligations" as currently defined on the date hereof in the Bridge Financing
Agreement.
(b) LIENS; NEGATIVE PLEDGES.
(i) The Borrower will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with
respect to any of its properties, revenues or assets, whether now owned or
hereafter acquired, other than Permitted Liens.
(ii) The Borrower will not, and will not permit any of its
Subsidiaries to, enter into any agreement (other than this Agreement and any
other Loan Document) prohibiting the creation or assumption of any Lien in favor
of Bank upon any of its properties, revenues or assets, whether now owned or
hereafter acquired except for any agreement creating a Permitted Lien.
(c) CHANGE IN NATURE OF BUSINESS. The Borrower will not, and will
not permit any of its Subsidiaries to, engage in any material line of business
substantially different from those lines of business carried on by it at the
date hereof except for lines of business reasonably related to the Company's
lines of business on the date hereof, but in no event may Borrower expand its
business into manufacturing or distribution for others.
(d) RESTRICTIONS ON FUNDAMENTAL CHANGES. The Borrower will not, and
will not permit any of its Subsidiaries to, merge with or consolidate into, or
acquire all or substantially
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all of the assets of, any Person, or sell, transfer, lease or otherwise dispose
of (whether in one transaction or in a series of transactions) all or
substantially all of its assets, except that:
(i) any of the Borrower's wholly owned Subsidiaries may
merge with, consolidate into or transfer all or substantially all of its assets
to another of the Borrower's wholly owned Subsidiaries (provided the surviving
entity is a corporation incorporated under the laws of a state in the United
States) or into or to the Borrower and in connection therewith such Subsidiary
may be liquidated or dissolved;
(ii) the Borrower or any of its Subsidiaries may sell or
dispose of assets in accordance with the provisions of subsection 8.04(e); and
(iii) the Borrower or any of its Subsidiaries may make any
investment permitted by subsection 8.04(f).
(e) SALES OF ASSETS. The Borrower will not, and will not permit any
of its Subsidiaries to, sell, lease, transfer, or otherwise dispose of, (whether
in one transaction or a series of transactions) any assets (including any shares
of stock in any Subsidiary or other Person), except:
(i) sales or other dispositions of Inventory in the
ordinary course of business;
(ii) sales or other dispositions of assets which have become
worn out or obsolete or which are promptly being replaced, or, for assets which
are not Collateral, for which a contract for replacement is entered into within
180 days of such sale or dispositions;
(iii) sales or other dispositions of assets by any of its
wholly owned Subsidiaries to another of its wholly owned Subsidiaries (provided
such Subsidiary is a corporation incorporated under the laws of a state in the
United States) or to the Borrower;
(iv) sales of up to $4,000,000 (less any Indebtedness under
Section 8.04(e)(vii)) in aggregate book value or fair market value (whichever is
greater) of real property and related fixtures and equipment (other than
Inventory) which the Borrower leases back from the purchaser within 180 days of
the sale;
(v) sales of any assets (other than Collateral) the
proceeds of which do not in the aggregate exceed $500,000 in any one fiscal
year; and
(vi) sales of any real property or equipment where the sale
occurs within 180 days of the purchase (which must be after the date hereof) of
such real property or equipment and the purchaser thereof leases such asset back
to the Borrower on commercially reasonable terms.
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(f) LOANS AND INVESTMENTS. The Borrower will not, and will not
permit any of its Subsidiaries to, purchase or otherwise acquire the capital
stock, assets (constituting a business unit), obligations or other securities of
or any interest in any Person, or otherwise extend any credit to or make any
additional investments in any Person, other than in connection with:
(i) extensions of credit in the nature of accounts
receivable or notes receivable arising from the sales of goods or services in
the ordinary course of business;
(ii) extensions of credit by the Borrower to any of its
wholly owned Subsidiaries or by any of its wholly owned Subsidiaries to another
of its wholly owned Subsidiaries or the Borrower; PROVIDED THAT any such
extensions of credit to any Subsidiary which is not incorporated under the laws
of a state in the United States by the Borrower or any of its other Subsidiaries
shall be: (A) only in the amounts necessary for such Subsidiary to operate in
the ordinary course of its business; and (B) in an aggregate amount of no more
than $500,000 per fiscal year of the Borrower;
(iii) Permitted Investments;
(iv) additional purchases of or investments in the stock of
Subsidiaries not exceeding $1,000,000 in any fiscal year of the Borrower as to
all such investments in the aggregate (to the extent there is availability under
the limitation on capital expenditures in such year permitted by subsection
8.04(g)); or
(v) additional investments up to but not exceeding $100,000
made in any fiscal year of the Borrower;
(vi) repurchases, redemptions, retirements or other
acquisition of any capital stock of the Borrower or any Subsidiary but only to
the extent permitted under Section 8.04(i) below; or
(vii) loans made to senior executives of the Borrower for
certain individual tax liability, but solely to the extent permitted under, and
in compliance with, the terms set forth in Exhibit H.
(g) CAPITAL EXPENDITURES. The Borrower will not, and will not permit
any of its Subsidiaries to, make any expenditures for fixed or capital assets,
including obligations under Capital Leases, on a consolidated basis, in any
fiscal year of the Borrower (as such amount is reduced by any purchases or
investments in such year permitted by subsection 8.04(f)(iv)) in excess of the
amount permitted during the fiscal year as set forth below:
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1996 $5,500,000
1997 $6,000,000
1998 $6,000,000
1999 $6,000,000
2000 $6,000,000
2001 $6,000,000
PROVIDED that the amount of permitted capital expenditures in the next fiscal
year may be increased by the amount of the capital expenditure permitted in the
immediately prior fiscal year that was not used in such prior fiscal year.
(h) SALES AND LEASEBACKS. The Borrower will not, and will not permit
any of its Subsidiaries to, become liable, directly or indirectly, with respect
to any lease, of any property (whether real, personal or mixed), whether now
owned or hereafter acquired, (i) which the Borrower or such Subsidiary has sold
or transferred or is to sell or transfer to any other Person or (ii) which the
Borrower or such Subsidiary intends to use for substantially the same purposes
as any other property which has been or is to be sold or transferred by the
Borrower or such Subsidiary to any other Person in connection with such
lease, unless such sale or transfer is permitted under subsection 8.04(e)(iv) or
(vi).
(i) DISTRIBUTIONS.
(i) The Borrower will not declare or pay any dividends in
respect of the Borrower's capital stock, or purchase, redeem, retire or
otherwise acquire for value any of its capital stock now or hereafter
outstanding, return any capital to its shareholders as such, or make any
distribution of assets to its shareholders as such, or permit any of its
Subsidiaries to purchase, redeem, retire, or otherwise acquire for value any
stock of the Borrower, except that, the Borrower may:
(A) declare and deliver dividends and distributions payable
only in common or preferred stock of the Borrower;
(B) purchase, redeem, retire, or otherwise acquire shares
of its capital stock with the proceeds received from a substantially concurrent
issue of new shares of its capital stock provided such newly issued capital
stock does not contain any redemption or cash dividend provisions more favorable
to the holders than those provided in the shares so purchased, redeemed, retired
or otherwise acquired; and
(C) after December 31, 1997, declare and pay cash dividends
to its stockholders and purchase, redeem, retire or otherwise acquire shares of
its own outstanding capital stock for cash during any fiscal year of the
Borrower if after giving effect thereto the aggregate amount of such dividends,
purchases, redemptions, retirements and acquisitions paid or made during any
fiscal year of the Borrower is not in excess of 25% of Net Income of the
Borrower for the fiscal year immediately preceding the year in which such
dividend, purchase,
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redemption, retirement or acquisition is paid or made and provided at the time
of both the declaration and payment of such dividend, purchase, redemption,
retirement or acquisition, no Default has occurred and is continuing, PROVIDED,
HOWEVER, that any loan made under Subsection 8.04(f) shall reduce the amount
dollar for dollar available under this Subsection 8.04(i)(i)(C).
(ii) The Borrower will not permit any Subsidiary of the Borrower
to grant or otherwise agree to or suffer to exist any consensual restrictions on
the ability of such Subsidiary to pay dividends and make other distributions to
the Borrower, or to pay any Indebtedness owed to the Borrower or transfer
properties and assets to the Borrower.
(j) AMENDMENTS TO CAPITALIZATION TRANSACTIONS DOCUMENTS. The
Borrowers shall not change, amend or modify the terms of any (a) Capitalization
Transaction Documents if the effect of such change, amendment or modification is
to (i) accelerate the dates upon which any cash dividends are payable; (ii) make
any optional redemption mandatory; (iii) remove or modify the condition to
mandatory redemption of the Borrower's compliance with this Agreement; (iv)
require the Borrower to execute any indenture for the 14% Senior Preferred Stock
which has not been approved by the Bank; (v) increase the rate of interest by
more than 300 basis points over the current interest rate, dividends, or fees
payable thereunder by more than $250,000 or accelerate the date upon which any
fees in excess of $250,000 must be paid; (vi) change or amend any other term if
such change would create an obligation, contingent or absolute, for the Company
to pay money or distribute assets to any Person prior to Final Maturity Date
unless permitted under this Agreement; or (vii) modify the restrictions on
transfers by the holders of the voting securities of the Borrower so as to make
it easier to make transfers without triggering a Change of Control; or (b) any
Subordinated Debt.
(k) REDEMPTION OF SUBORDINATED DEBT OR PREFERRED STOCK. The Borrower
will not, and will not permit any of its Subsidiaries to, make any voluntary or
optional payment of principal or repayment on principal, redemption, exchange or
acquisition for value of, or any sinking fund or similar principal payment with
respect to, any Subordinated Debt or preferred stock except with respect to
preferred stock solely to the extent provided in Section 8.04(i)(i)(A), (B) or
(C).
(l) TRANSACTIONS WITH RELATED PARTIES. Except for (i) the
transactions provided for in the Capitalization Transactions Documents
(specifically including the refinancing of the Bridge Loan) and (ii) the matters
set out on SCHEDULE 8 (but only to the extent (i) and (ii) are not otherwise
prohibited by this Agreement), the Borrower will not, and will not permit any of
its Subsidiaries to, enter into any transaction, including the purchase, sale or
exchange of property or the rendering of any services, with any Affiliate, any
officer or director thereof or any Person which beneficially owns or holds 5% or
more of the equity securities, or 5% or more of the equity interest, thereof (a
"RELATED PARTY"), or enter into, assume or suffer to exist, or permit any
Subsidiary to enter into, assume or suffer to exist, any employment or
consulting contract with any Related Party, except a transaction or contract
which is in the ordinary course of the Borrower's or such Subsidiary's business
and which is upon fair and reasonable terms not less favorable to the Borrower
or such Subsidiary than it would obtain in a comparable arm's length
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transaction with a Person not a Related Party, as determined in the case of any
transaction with a value of $500,000 or more in good faith by the Board of
Directors of the Company.
(m) ACCOUNTING CHANGES. The Borrower will not, and will not suffer
or permit any of its Subsidiaries to, make any significant change in accounting
treatment or reporting practices, except as required or permitted by GAAP, or
change the fiscal year of the Borrower or of any of its consolidated
Subsidiaries.
(n) CREATION OF SUBSIDIARIES. The Borrower will not create or permit
to exist any Subsidiary except upon the following conditions:
(i) such Subsidiary is wholly owned by the Borrower;
(ii) all shares of capital stock issued by such Subsidiary
are pledged to the Bank pursuant to a stock pledge agreement in form and
substance acceptable to the Bank;
(iii) such Subsidiary executes and delivers to the Bank (a) a
guaranty of the Obligations in form and substance acceptable to the Bank, (b) a
security agreement in the form of the Security Agreement, with such changes
thereto as the Bank shall reasonably request, (c) UCC-1 Financing Statements for
each jurisdiction in which filing is the appropriate method for perfection; and
(d) such additional documents or agreements as the Bank shall reasonably
request; and
(iv) such Subsidiary was formed for the purpose of acquiring
or constructing new stores.
SECTION 8.05 TRIGGER EVENTS. As an accommodation to the Borrower,
the Bank has agreed to fund the Revolving Loans under this Agreement without
attachment or perfection of the Liens to be granted under the Security Agreement
by the Borrower in the Collateral upon the giving of written notice by the Bank
to the Borrower of the occurrence of a Trigger Event. This accommodation was
made by the Bank in reliance on the unconditional and automatic right of the
Bank under this Agreement and the Security Agreement upon the occurrence of a
Trigger Event and the giving of written notice of such occurrence by the Bank to
the Borrower to file with each of the appropriate governmental offices the UCC-1
Financing Statement and Trademark Assignment delivered by the Borrower at
Closing and to take all other actions in its capacity as lender or as the
attorney-in-fact of the Borrower under the power of attorney contained in the
Security Agreement in order to perfect its Lien in the Collateral.
ARTICLE IX
EVENTS OF DEFAULT
SECTION 9.01 EVENTS OF DEFAULT. Any of the following events which
shall occur shall constitute an "Event of Default":
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(a) PAYMENTS. (i) The Borrower shall fail to pay when due any amount
of principal of, or interest on, any Revolving Loan or Revolving Note, or (ii)
the Borrower shall fail to pay when due any fee or other amount payable under
the Loan Documents (other than the amounts referred to in the immediately
preceding clause (i)) and such failure shall continue unremedied for a period of
five Business Days after written notice by the Bank to the Borrower.
(b) REPRESENTATIONS AND WARRANTIES. Any representation or warranty
by the Borrower under or in connection with the Loan Documents shall prove to
have been incorrect in any material respect when made or deemed made, and the
Bank determines that such representation or warranty is not capable of being
cured or the Borrower shall fail to make such representation or warranty correct
in all material respects within thirty (30) days from the Borrower's knowledge
thereof.
(c) FAILURE BY BORROWER TO PERFORM CERTAIN COVENANTS. The Borrower
shall fail to perform or observe any term, covenant or agreement contained in
Section 8.02, or subsections (a), (d) or (j) of Section 8.03.
(d) FAILURE BY BORROWER TO PERFORM OTHER COVENANTS. The Borrower
shall fail to perform or observe any other term, covenant or agreement contained
in this Agreement or any other Loan Document on its part to be performed or
observed and any such failure shall remain unremedied for a period of 30 days
from the earlier to occur of notice from the Bank or the Borrower's knowledge
thereof (unless the Bank determines that such failure is not capable of remedy);
provided that, at any time after the Bridge Loan has been refinanced, upon
written notice from the Borrower to the Bank provided promptly upon the
occurrence of such Default, such 30-day period shall be extended for an
additional 30 days so long as (i) the failure is not in the observation or
performance of a covenant contained in Section 8.02, (ii) the Borrower is
diligently proceeding to cure such Default and (iii) such Default could not be
expected in the reasonable judgment of the Bank to have a Material Adverse
Effect.
(e) BANKRUPTCY. The Borrower or any of its Subsidiaries shall admit
in writing its inability to, or shall fail generally or be generally unable to,
pay its debts (including its payrolls) as such debts become due, or shall make a
general assignment for the benefit of creditors; or Borrower or any of its
Subsidiaries shall file a voluntary petition in bankruptcy or a petition or
answer seeking reorganization, to effect a plan or other arrangement with
creditors or any other relief under the Bankruptcy Code or under any other state
or federal law relating to bankruptcy or reorganization granting relief to
debtors, whether now or hereafter in effect, or shall file an answer admitting
the jurisdiction of the court and the material allegations of any involuntary
petition filed against the Borrower or any such Subsidiary pursuant to the
Bankruptcy Code or any such other state or federal law; or the Borrower or any
of its Subsidiaries shall be adjudicated a bankrupt, or shall apply for or
consent to the appointment of any custodian, receiver or trustee for all or any
substantial part of the Borrower or any such Subsidiary's property, or shall
take any action to authorize any of the actions or events set forth above in
this subsection; or an involuntary petition seeking any of the relief specified
in this subsection shall be filed against the Borrower or any of its
Subsidiaries and shall not be dismissed within 90 days; or any
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order for relief shall be entered against the Borrower or any of its
Subsidiaries in any involuntary proceeding under the Bankruptcy Code or any such
other state or federal law referred to in this subsection 9.01(e).
(f) DEFAULT UNDER OTHER INDEBTEDNESS. The Borrower or any of its
Subsidiaries shall (i) fail to make any payment of any principal of, or interest
or premium on, any Indebtedness (other than in respect of the Revolving Loans)
in an aggregate principal amount outstanding of at least $2,000,000 when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise), (ii) to perform or observe any term, covenant or condition on its
part to be performed or observed under any agreement or instrument relating to
any such Indebtedness, when required to be performed or observed, and such
failure shall continue after the applicable grace period, if any, specified in
such agreement or instrument, if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration of, the maturity of such
Indebtedness; or any such Indebtedness shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; or (iii) any mortgagee under
any mortgage or beneficiary under any deed of trust secured by any real property
of the Borrower shall accelerate the maturity of any obligation secured by such
mortgage or deed of trust.
(g) JUDGMENTS.
(i) A final judgment or order for the payment of money in
excess of $2,000,000 shall be rendered against the Borrower or any of its
Subsidiaries and such judgment or order (A) is not fully covered by third party
insurance, or (B) remains undischarged or unstayed for sixty (60) days after
entry thereof (or the day upon which the judgment creditor can exercise any
remedies, if such day occurs sooner than sixty (60) days after entry of the
judgment or order); or
(ii) any non-monetary judgment or order shall be rendered
against the Borrower or any of its Subsidiaries which has or would reasonably be
expected to have a Material Adverse Effect and there shall be any period of
thirty (30) consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect.
(h) ERISA.
(i) The Borrower or an ERISA Affiliate shall fail to pay
when due, after the expiration of any applicable grace period, any installment
payment with respect to its withdrawal liability under a Multiemployer Plan;
(ii) The Borrower or an ERISA Affiliate shall fail to
satisfy its contribution requirements under Section 412(c)(11) of the Internal
Revenue Code, whether or not it has sought a waiver under Section 412(d) of the
Internal Revenue Code;
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(iii) in the case of a Termination Event involving the
withdrawal from a Pension Plan of a "substantial employer" (as defined in
Section 4001(a)(2) or Section 4062(e) of ERISA), the Borrower's or an ERISA
Affiliate's proportionate share of that Pension Plan's Unfunded Accrued Benefits
is more than $1,000,000;
(iv) in the case of a Termination Event involving the
complete or partial withdrawal from a Multiemployer Plan, the Borrower or an
ERISA Affiliate withdrawing employer has incurred a withdrawal liability in an
aggregate amount exceeding $1,000,000;
(v) in the case of a Termination Event not described in
clause (iii) or (iv), the Unfunded Accrued Benefits of the relevant Pension Plan
or Plans exceed $1,000,000;
(vi) a Plan of the Borrower or an ERISA Affiliate that is
intended to be qualified under Section 401(a) of the Internal Revenue Code shall
lose its qualification, and the loss can reasonably be expected to impose on the
Borrower or an ERISA Affiliate liability (for additional taxes, to Plan
participants, or otherwise) in the aggregate amount of $1,000,000 or more;
(vii) the commencement or increase of contributions to, the
adoption of, or the amendment of a Plan by, the Borrower or an ERISA Affiliate
shall result in a net increase in unfunded liabilities to the Borrower or an
ERISA Affiliate in excess of $1,000,000; or
(viii) the occurrence of any combination of events listed in
clauses (iii) through (vii) that involves a net increase in aggregate Unfunded
Accrued Benefits and unfunded liabilities in excess of $1,000,000.
(i) DISSOLUTION, ETC. The Borrower shall (i) liquidate, wind up or
dissolve (or suffer any liquidation, wind-up or dissolution), except to the
extent expressly permitted by Section 8.04, (ii) suspend its operations other
than in the ordinary course of business, or (iii) take any corporate action to
authorize any of the actions or events set forth above in this subsection (i).
(j) MATERIAL ADVERSE CHANGE. A material adverse change in the
business, results of operations or financial condition of the Borrower shall
have occurred which gives reasonable grounds to conclude, in the reasonable
judgment of the Bank, that the Borrower will be unable to perform or observe in
the normal course its obligations under the Loan Documents.
(k) CHANGE OF CONTROL. The occurrence of any Change of Control.
(l) SUBORDINATION PROVISIONS. Any subordination provision for the
benefit of the Bank related to any of the Subordinated Debt shall for any reason
be revoked or invalidated, or otherwise cease to be in full force and effect, or
the Indebtedness hereunder shall for any reason not have the priority
contemplated by the documents governing the Subordinated Debt.
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(m) COLLATERAL DOCUMENTS. The Borrower shall fail to perform or
observe any term, covenant or agreement contained in the Collateral Documents on
its part to be performed or observed and any such failure shall remain
unremedied for a period of thirty (30) days from the occurrence thereof (unless
the Bank determines that such failure is not capable of remedy), or any of the
Collateral Documents after delivery thereof shall for any reason be revoked or
invalidated, or otherwise cease to be in full force and effect, or the Borrower
or any of its Subsidiaries shall contest in any manner the validity or
enforceability thereof, or the Borrower or any of its Subsidiaries shall deny
that it has any further liability or obligation thereunder; or any of the
Collateral Documents for any reason, except to the extent permitted by the terms
thereof, shall cease to create a valid and perfected first priority Lien subject
only to Permitted Liens in a portion of the Collateral purported to be covered
thereby whose value exceeds $250,000.
SECTION 9.02 EFFECT OF EVENT OF DEFAULT. If any Event of Default
shall occur and be continuing, the Bank may (i) by notice to the Borrower,
(A) declare its Commitments to be terminated, whereupon the same shall forthwith
terminate, and (B) declare the entire unpaid principal amount of the Revolving
Loans and the Revolving Notes, all interest accrued and unpaid thereon and all
other Obligations to be forthwith due and payable, whereupon the Revolving Loans
and the Revolving Notes, all such accrued interest and all such other
Obligations shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Borrower, PROVIDED that if an event described in Section 9.01(e)
shall occur, the result which would otherwise occur only upon giving of notice
by the Bank to the Borrower as specified in this clause (i) shall occur
automatically, without the giving of any such notice; and (ii) whether or not
the actions referred to in clause (i) have been taken, (A) exercise any or all
of the Bank's rights and remedies under the Collateral Documents, and
(B) proceed to enforce all other rights and remedies available to the Bank under
the Loan Documents and applicable law.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 AMENDMENTS AND WAIVERS. Except as otherwise provided
herein or in any other Loan Document, (i) no amendment to any provision of this
Agreement and the other Loan Documents shall be effective unless it is in
writing and has been signed by the Borrower and the Bank; and (ii) no waiver of
any provision of this Agreement or any other Loan Document, or consent to any
departure by the Borrower or other party therefrom, shall be effective unless it
is in writing and has been signed by the Bank; PROVIDED, HOWEVER, that
notwithstanding the foregoing provisions of this Section 10.01, any term or
provision of any such other Loan Document may be amended without the agreement
or consent of, or prior notice to, the Borrower, to the extent such Loan
Document expressly provides for amendments without Borrower agreement or
consent. Any such amendment, waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
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SECTION 10.02 NOTICES.
(a) NOTICES. All notices and other communications provided for
hereunder and under the other Loan Documents shall, unless otherwise stated
herein, be in writing (including by facsimile transmission) and mailed, sent or
delivered to the respective parties hereto at or to their respective addresses
or facsimile numbers set forth below their names on the signature pages hereof,
or at or to such other address or facsimile number as shall be designated by any
party in a written notice to the other party hereto. All such notices and
communications shall be effective (i) if delivered by hand, when delivered; and
(ii) if sent by mail, by overnight courier service, or by facsimile
transmission, when received; PROVIDED, HOWEVER, that notices and communications
to the Bank pursuant to Articles II, III and IV shall not be effective until
received.
(b) FACSIMILE AND TELEPHONIC NOTICE. The Borrower acknowledges and
agrees that the agreement of the Bank herein and in any other Loan Document to
receive certain notices by telephone and facsimile is solely for the convenience
and at the request of the Borrower. The Bank shall be entitled to rely on the
authority of any Person purporting to be a Person authorized by the Borrower to
give such notice and the Bank shall not have any liability to the Borrower or
other Person on account of any action taken or not taken by the Bank in reliance
upon such telephonic or facsimile notice. The obligation of the Borrower to
repay the Revolving Loans and the other Obligations shall not be affected in any
way or to any extent by any failure by the Bank to receive written confirmation
of any telephonic or facsimile notice or the receipt by the Bank of a
confirmation which is at variance with the terms understood by the Bank to be
contained in the telephonic or facsimile notice.
SECTION 10.03 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part
of the Bank to exercise, and no delay in exercising, any right, remedy, power or
privilege under any Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, remedy, power or privilege
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The rights and remedies under the Loan
Documents are cumulative and not exclusive of any rights, remedies, powers and
privileges that may otherwise be available to the Bank.
SECTION 10.04 COSTS AND EXPENSES; INDEMNIFICATION.
(a) COSTS AND EXPENSES. The Borrower agrees to pay on demand,
whether or not the transactions contemplated hereby shall be consummated:
(i) the reasonable out-of-pocket costs and expenses of the
Bank, and the reasonable fees and disbursements of counsel to the Bank
(including reasonable allocated costs of internal counsel), in connection with
the negotiation, preparation, execution, delivery and administration of the Loan
Documents, and any amendments, modifications or waivers of the terms thereof;
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(ii) all reasonable out of pocket title, appraisal
(including the reasonable allocated actual cost of internal appraisal services),
survey, audit, environmental inspection, consulting, search, recording, filing
and similar costs, fees and expenses incurred or sustained by the Bank or any of
its Affiliates in connection with and pursuant to the terms of the Loan
Documents or the Collateral; and
(iii) all reasonable out of pocket costs and expenses of the
Bank and its Affiliates, and fees and disbursements of counsel (including
reasonable allocated costs of internal counsel), in connection with (A) any
Default, (B) the enforcement or attempted enforcement of, and preservation of
any rights or interests under, the Loan Documents, (C) any out-of-court workout
or other refinancing or restructuring or any bankruptcy case, and (D) the
preservation of and realization upon any of the Collateral, including any
losses, costs and expenses sustained by the Bank as a result of any failure by
the Borrower to perform or observe its obligations contained in the Loan
Documents.
(b) INDEMNIFICATION. Whether or not the transactions contemplated
hereby shall be consummated, the Borrower hereby agrees to indemnify the Bank,
any Affiliate thereof and their respective directors, officers, employees,
agents, counsel and other advisors (each an "INDEMNIFIED PERSON") against, and
hold each of them harmless from, any and all liabilities, obligations, losses,
claims, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever, including the reasonable fees
and disbursements of counsel to an Indemnified Person (including reasonable
allocated costs of internal counsel), which may be imposed on, incurred by, or
asserted against any Indemnified Person, (i) in any way relating to or arising
out of any of the Loan Documents or the Capitalization Transactions Documents,
the use or intended use of the proceeds of the Revolving Loans, or the
transactions contemplated hereby or thereby, (ii) with respect to any
investigation, litigation or other proceeding relating to any of the foregoing,
irrespective of whether the Indemnified Person shall be designated a party
thereto, or (iii) in any way relating to or arising out of any Environmental
Claims, of whatever kind or nature, known or unknown, contingent or otherwise,
arising out of or in any way related to (A) the presence or Release of Hazardous
Substances upon, into, from or affecting any Site or from any location at which
a Hazardous Substance has been handled, transported, stored, treated or disposed
of by or on behalf of the Borrower or any Subsidiary; and (B) any violation of
any Environmental Law, by the Borrower or any Subsidiary or any of their agents,
tenants, subtenants or invitees; and (C) the imposition of any Environmental
Lien for the recovery of costs expended in the investigation, study or
remediation of any environmental liability of (or asserted against) the Borrower
or any Subsidiary (the "INDEMNIFIED LIABILITIES"); PROVIDED that the Borrower
shall not be liable to any Indemnified Person for any portion of such
Indemnified Liabilities to the extent they are found by a final decision of a
court of competent jurisdiction to have resulted from such Indemnified Person's
gross negligence or willful misconduct. If and to the extent that the foregoing
indemnification is for any reason held unenforceable, the Borrower agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. This Section
10.04(b) and Section 10.04(c) below shall survive any payment of any Revolving
Notes and any termination of the Loan Documents.
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(c) STRICT LIABILITY. The Borrower agrees that to the extent that
the Borrower or any Subsidiary is strictly liable without regard to fault under
any Environmental Law, the Borrower's obligation to the Bank under any of the
indemnification provisions of this Agreement shall likewise be strict without
regard to fault with respect to the violation of any Environmental Law which
results in any liability to any of the Indemnified Persons referred to in
Section 10.04(b) above.
(d) OTHER CHARGES. The Borrower agrees to indemnify the Bank against
and hold it harmless from any and all present and future stamp, transfer,
documentary and other such taxes, levies, fees, assessments and other similar
charges made by any jurisdiction by reason of the execution, delivery,
performance and enforcement of the Loan Documents.
SECTION 10.05 RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default the Bank hereby is authorized at any time
and from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Bank to or for the credit or the
account of the Borrower against any and all of the Obligations of the Borrower
now or hereafter existing under this Agreement and the other Loan Documents,
irrespective of whether or not the Bank shall have made any demand under this
Agreement or any such other Loan Document and although such Obligations may be
unmatured. The Bank agrees promptly to notify the Borrower after any such set-
off and application made by the Bank; PROVIDED that the failure to give such
notice shall not affect the validity of such set-off and application. The
rights of the Bank under this Section 10.05 are in addition to other rights and
remedies (including other rights of set-off) which the Bank may have.
SECTION 10.06 SURVIVAL. All covenants, agreements, representations
and warranties made in any Loan Documents shall, except to the extent otherwise
provided therein, survive the execution and delivery of this Agreement, the
making of the Revolving Loans and the execution and delivery of the Revolving
Notes, and shall continue in full force and effect so long as the Bank has any
Commitment, any Revolving Loans remain outstanding or any other Obligations
(except for reimbursement and indemnifications for which the Bank has not made a
claim) remain unpaid. Without limiting the generality of the foregoing, the
obligations of the Borrower under Section 10.04, and all similar obligations
under the other Loan Documents (including all obligations to pay costs and
expenses and all indemnity obligations), shall survive the repayment of the
Revolving Loans and the termination of the Commitment.
SECTION 10.07 BENEFITS OF AGREEMENT. The Loan Documents are entered
into for the sole protection and benefit of the parties hereto and their
successors and assigns, and no other Person shall be a direct or indirect
beneficiary of, or shall have any direct or indirect cause of action or claim in
connection with, any Loan Document.
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SECTION 10.08 BINDING EFFECT; ASSIGNMENT.
(a) BINDING EFFECT. This Agreement shall become effective when it
shall have been executed by the Borrower and the Bank and thereafter shall be
binding upon, inure to the benefit of and be enforceable by the Borrower, the
Bank and their respective successors and assigns.
(b) ASSIGNMENT. The Borrower shall not have the right to assign its
rights and obligations hereunder or under the other Loan Documents or any
interest herein or therein without the prior written consent of the Bank. The
Bank may sell, assign, transfer or grant participations in all or any portion of
the Bank's rights and obligations hereunder and under the other Loan Documents
to any other bank or financial institution organized or incorporated in the
United States on the basis set forth below in this subsection (b).
(i) Except in the case of assignments to an Affiliate of
the Bank, each assignment shall be in an amount of at least $1,000,000.
(ii) In the event of any assignment of the entire Agreement
and all Revolving Loans, the assignee shall be deemed the "Bank" for all
purposes of this Agreement and the other Loan Documents with respect to the
rights and obligations assigned to it, and the obligations of the Bank so
assigned shall thereupon terminate.
(iii) In the event of any partial assignment or assignments,
the Bank, the Borrower and such assignee shall enter into such amendments to
this Agreement and the other Loan Documents as shall be necessary to effect such
assignment or assignments and establish an arrangement whereby the Bank serves
as agent and representative of the assignee(s) with the intent that the Borrower
need only communicate with the Bank and not with such assignee(s) in connection
with the Borrower's obligations under the Agreement; provided that the Borrower
shall not be responsible for any costs or expenses of the Bank or such assignees
in connection therewith. Any such amendments to this Agreement and the Loan
Documents shall provide for customary agency provisions, include a definition of
"majority banks" and provide that the Bank, as agent, shall conduct visitations,
appraisals and inspections. Additionally, upon the request of the Bank or the
assignee, the Borrower shall execute and deliver substitute Revolving Notes to
the Bank or the assignee, dated the effective date of such assignment, setting
forth the respective portions of the reallocated Revolving Commitment as the
maximum principal amount thereof, and containing other appropriate insertions,
and the Bank shall thereupon return the Revolving Notes previously held by it;
provided that the Borrower shall not be responsible for any costs or expenses of
the Bank or such assignees in connection therewith.
(iv) The Borrower agrees that in connection with any such
grant or assignment, the Bank may deliver to the prospective participant or
assignee financial statements and other relevant information relating to the
Borrower and its Subsidiaries; provided that such prospective assignee shall
agree to abide by the provisions of Section 10.09.
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SECTION 10.09 CONFIDENTIALITY. The Bank shall hold all non-public
information relating to the Borrower obtained by it under or in connection with
the negotiation, execution or performance of this Agreement in accordance with
its customary procedures for handling confidential information of this nature,
except for: (i) disclosure to its Affiliates or to its counsel or to any agent
or advisor acting on its behalf in connection with the negotiation, execution or
performance of the Loan Documents, provided that such Person has been advised of
the confidential nature of such information and such Person agrees to abide by
the provisions of this Section 10.09; (ii) disclosure as reasonably required in
connection with a transfer to a prospective assignee or participant of all or
part of its Revolving Loan or any participation therein, as provided in
Section 10.08(b); (iii) disclosure as may be required or requested by any
Governmental Authority or representative thereof or pursuant to legal process;
(iv) disclosure to any Person and in any proceeding necessary in the Bank's
reasonable judgment to protect its interests in connection with any claim or
dispute involving the Bank; and (v) any other disclosure with the prior written
consent of the Borrower. Prior to any disclosure by the Bank of such non-public
information permitted under clause (iii) (other than in connection with an
examination of the financial condition of the Bank or any of its Affiliates by
any Governmental Authority), it shall, if permitted by applicable laws or
judicial order, notify the Borrower of such pending disclosure. In no event
shall the Bank be obligated or required to return any materials furnished by the
Borrower or its Subsidiaries. Notwithstanding the foregoing, such obligation of
confidentiality shall not apply if the information or substantially similar
information (A) is rightfully received by the Bank from a Person other than the
Borrower or any of its Affiliates without the Bank being under an obligation to
such Person not to disclose such information, or (B) is or becomes part of the
public domain.
SECTION 10.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA, WITHOUT
REFERENCE TO THE CHOICE OF LAW PROVISIONS THEREOF.
SECTION 10.11 SUBMISSION TO JURISDICTION.
(a) SUBMISSION TO JURISDICTION. The Borrower hereby (i) submits to
the non-exclusive jurisdiction of the courts of the State of California and the
Federal courts of the United States sitting in the State of California for the
purpose of any action or proceeding arising out of or relating to the Loan
Documents, (ii) agrees that all claims in respect of any such action or
proceeding may be heard and determined in such courts, (iii) irrevocably waives
(to the extent permitted by applicable law) any objection which it now or
hereafter may have to the laying of venue of any such action or proceeding
brought in any of the foregoing courts, and any objection on the ground that any
such action or proceeding in any such court has been brought in an inconvenient
forum and (iv) agrees that a final and non-appealable 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 permitted by law.
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(b) NO LIMITATION. Nothing in this Section 10.11 shall limit the
right of the Bank to bring any action or proceeding against the Borrower or its
property in the courts of other jurisdictions.
SECTION 10.12 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY
AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT
CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK HEREBY AGREE THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY.
WITHOUT IN ANY WAY LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO
ANY ACTION, COUNTERCLAIM, OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART,
TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS. A COPY OF THIS SECTION 10.12 MAY BE FILED WITH
ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL BY JURY AND
CONSENT TO TRIAL BY COURT.
SECTION 10.13 LIMITATION ON LIABILITY. No claim shall be made by the
Borrower or its Affiliates against the Bank or any of its Affiliates, directors,
employees, attorneys or agents for any special, indirect, exemplary,
consequential or punitive damages in respect of any breach or wrongful conduct
(whether or not the claim therefor is based on contract, tort or duty imposed by
law), in connection with, arising out of or in any way related to the
transactions contemplated by the Loan Documents or any act or omission or event
occurring in connection therewith; and the Borrower hereby waives, releases and
agrees not to sue upon any such claim for any such damages, whether or not
accrued and whether or not known or suspected to exist in its favor.
SECTION 10.14 ENTIRE AGREEMENT. The Loan Documents reflect the entire
agreement between the Borrower and the Bank with respect to the matters set
forth herein and therein and supersede any prior agreements, commitments,
drafts, communication, discussions and understandings, oral or written, with
respect thereto, and is intended by each of the parties hereto to be the
complete statement of the terms and conditions, and the final expression, of
their agreement relating to the subject matter hereof and thereof.
SECTION 10.15 INTERPRETATION. The Loan Documents are the result of
negotiations between and have been reviewed by counsel to the Bank and the
Borrower, and are
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the product of all parties thereto. Accordingly, the Loan Documents shall not
be construed against the Bank merely because of the Bank's involvement in the
preparation thereof.
SECTION 10.16 SEVERABILITY. Whenever possible, each provision of the
Loan Documents shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of any of
the Loan Documents shall be prohibited by or invalid under any such law or
regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed
modified to conform to the minimum requirements of such law or regulation, or,
if for any reason it is not deemed so modified, it shall be ineffective and
invalid only to the extent of such prohibition or invalidity without affecting
the remaining provisions of such Loan Document, or the validity or effectiveness
of such provision in any other jurisdiction.
SECTION 10.17 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute but one and the same agreement and all
signatures need not appear on any one counterpart.
[The remainder of this page intentionally left blank.]
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[COUNTERPART SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
THE BORROWER
GUITAR CENTER MANAGEMENT COMPANY, INC.,
a California corporation
By /s/ MARTY ALBERTSON
-------------------------------
Marty Albertson
Title: Executive Vice President
Address:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91301
Attn: Bruce Ross
Attn: Barry F. Soosman
Fax No.: (818) 735-4923
THE BANK
WELLS FARGO BANK, N.A.
By /s/ F. M. BRIGGS
---------------------------
Title: Vice President
Address:
Wells Fargo Bank
Commercial Banking Office
6001 Topanga Canyon Blvd., Suite 205
Woodland Hills, CA 91367
Attn.: Fredric M. Briggs
Fax No.: (818) 347-1675
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TABLE OF CONTENTS
PAGE
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ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . 1
SECTION 1.01 Certain Defined Terms. . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02 Accounting Terms; GAAP Changes . . . . . . . . . . . . . . . 19
(a) Accounting Terms . . . . . . . . . . . . . . . 19
(b) GAAP Changes . . . . . . . . . . . . . . . . . 19
SECTION 1.03 Interpretation . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE II
THE LOANS. . . . . . . . . . . . . . . . 21
SECTION 2.01 The Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 21
(a) Revolving Loans. . . . . . . . . . . . . . . . 21
(b) Letter of Credit Subfeature. . . . . . . . . . 21
(c) Existing Letters of Credit . . . . . . . . . . 22
SECTION 2.02 Borrowing Procedure. . . . . . . . . . . . . . . . . . . . . 22
(a) Notice to the Bank . . . . . . . . . . . . . . 22
(b) Net Funding. . . . . . . . . . . . . . . . . . 23
SECTION 2.03 Evidence of Indebtedness . . . . . . . . . . . . . . . . . . 23
(a) Revolving Note . . . . . . . . . . . . . . . . 23
(b) Recordkeeping. . . . . . . . . . . . . . . . . 23
SECTION 2.04 Minimum Amounts. . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.05 Required Notice. . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE III
INTEREST AND FEES; CONVERSION OR CONTINUATION. . . . . . . 24
SECTION 3.01 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(a) Interest Rate. . . . . . . . . . . . . . . . . 24
(b) Interest Periods . . . . . . . . . . . . . . . 24
(c) Interest Payment Dates . . . . . . . . . . . . 24
(d) Notice to the Borrower . . . . . . . . . . . . 25
SECTION 3.02 Default Rate of Interest . . . . . . . . . . . . . . . . . . 25
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PAGE
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SECTION 3.03 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(a) Commitment Fee . . . . . . . . . . . . . . . . 25
(b) Facility Fee and Tax Loan Fee. . . . . . . . . 25
(c) Letter of Credit Fees. . . . . . . . . . . . . 26
(d) Fees Nonrefundable . . . . . . . . . . . . . . 26
SECTION 3.04 Computations . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.05 Conversion or Continuation . . . . . . . . . . . . . . . . . 26
(a) Election . . . . . . . . . . . . . . . . . . . 26
(b) Automatic Conversion . . . . . . . . . . . . . 26
(c) Notice to the Bank . . . . . . . . . . . . . . 26
SECTION 3.06 Highest Lawful Rate. . . . . . . . . . . . . . . . . . . . . 27
ARTICLE IV
REPAYMENT, PREPAYMENT AND PAYMENTS. . . . . . . . . . 27
SECTION 4.01 Repayment of the Revolving Loans . . . . . . . . . . . . . . 27
. . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.02 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . 27
(a) Optional Prepayments . . . . . . . . . . . . . 27
(b) Mandatory Prepayments. . . . . . . . . . . . . 27
(c) Notice . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.03 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(b) Authorization to Bank. . . . . . . . . . . . . 28
(c) Extension. . . . . . . . . . . . . . . . . . . 28
(d) Application. . . . . . . . . . . . . . . . . . 28
SECTION 4.04 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(a) No Reduction of Payments . . . . . . . . . . . 28
(b) Deduction or Withholding; Tax Receipts . . . . 29
(c) Indemnity. . . . . . . . . . . . . . . . . . . 29
ARTICLE V
YIELD PROTECTION . . . . . . . . . . . . . . 29
SECTION 5.01 Inability to Determine Rates . . . . . . . . . . . . . . . . 29
SECTION 5.02 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . 29
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SECTION 5.03 Regulatory Changes . . . . . . . . . . . . . . . . . . . . . 30
(a) Increased Costs. . . . . . . . . . . . . . . . 30
(b) Capital Requirements . . . . . . . . . . . . . 31
(c) Requests . . . . . . . . . . . . . . . . . . . 31
SECTION 5.04 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.05 Funding Assumptions. . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VI
CONDITIONS PRECEDENT . . . . . . . . . . . . . 31
SECTION 6.01 Conditions to Initial Loans and Letters of Credit. . . . . . 31
(a) Fees and Expenses. . . . . . . . . . . . . . . 32
(b) Loan Documents . . . . . . . . . . . . . . . . 32
(c) Documents and Actions Relating to Collateral . 32
(d) Additional Closing Documents and Actions . . . 32
(e) Corporate Documents. . . . . . . . . . . . . . 33
(f) Legal Opinions . . . . . . . . . . . . . . . . 34
(g) Capitalization Transactions. . . . . . . . . . 34
SECTION 6.02 Conditions Precedent to All Revolving Loans. . . . . . . . . 34
(a) Notice . . . . . . . . . . . . . . . . . . . . 34
(b) Material Adverse Effect. . . . . . . . . . . . 34
(c) Representations and Warranties; No Default . . 34
(d) Borrowing Base Documents and Collateral Reports 35
(e) Additional Documents . . . . . . . . . . . . . 35
ARTICLE VII
REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . 35
SECTION 7.01 Representations and Warranties . . . . . . . . . . . . . . . 35
(a) Organization and Powers. . . . . . . . . . . . 35
(b) Authorization; No Conflict . . . . . . . . . . 35
(c) Binding Obligation . . . . . . . . . . . . . . 36
(d) Consents . . . . . . . . . . . . . . . . . . . 36
(e) No Defaults. . . . . . . . . . . . . . . . . . 36
(f) Title to Properties; Liens . . . . . . . . . . 36
(g) Litigation . . . . . . . . . . . . . . . . . . 36
(h) Compliance with Environmental Laws . . . . . . 36
(i) Governmental Regulation. . . . . . . . . . . . 37
(j) ERISA. . . . . . . . . . . . . . . . . . . . . 37
(k) Subsidiaries . . . . . . . . . . . . . . . . . 38
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PAGE
----
(l) Margin Regulations . . . . . . . . . . . . . . 38
(m) Taxes. . . . . . . . . . . . . . . . . . . . . 38
(n) Patents and Other Rights . . . . . . . . . . . 38
(o) Insurance. . . . . . . . . . . . . . . . . . . 38
(p) Financial Statements . . . . . . . . . . . . . 38
(q) Books and Records. . . . . . . . . . . . . . . 39
(r) Liabilities. . . . . . . . . . . . . . . . . . 39
(s) Labor Disputes, Etc. . . . . . . . . . . . . . 39
(t) Solvency . . . . . . . . . . . . . . . . . . . 39
(u) Disclosure . . . . . . . . . . . . . . . . . . 39
(v) Representations and Warranties Contained in
Capitalization Transactions Documents. . . . 39
(w) No Notices of Failure or Breach. . . . . . . . 39
ARTICLE VIII
COVENANTS. . . . . . . . . . . . . . . . 40
SECTION 8.01 Reporting Covenants. . . . . . . . . . . . . . . . . . . . . 40
(a) Financial Statements and Other Reports . . . . 40
(b) Additional Information . . . . . . . . . . . . 41
SECTION 8.02 Financial Covenants. . . . . . . . . . . . . . . . . . . . . 43
(a) Funded Debt Ratio. . . . . . . . . . . . . . . 43
(b) Debt Service Coverage Ratio. . . . . . . . . . 43
(c) Profitability. . . . . . . . . . . . . . . . . 44
(e) Minimum EBITDA . . . . . . . . . . . . . . . . 44
SECTION 8.03 Additional Affirmative Covenants . . . . . . . . . . . . . . 44
(a) Preservation of Existence, Etc.. . . . . . . . 44
(b) Payment of Taxes, Etc. . . . . . . . . . . . . 44
(c) Maintenance of Insurance . . . . . . . . . . . 45
(d) Keeping of Records and Books of Account. . . . 45
(e) Inspection Rights; Audits. . . . . . . . . . . 45
(f) Compliance with Laws, Etc. . . . . . . . . . . 46
(g) Maintenance of Properties, Etc.. . . . . . . . 46
(h) Licenses . . . . . . . . . . . . . . . . . . . 46
(i) Action Under Environmental Laws. . . . . . . . 46
(j) Use of Proceeds. . . . . . . . . . . . . . . . 47
(k) Cash Management. . . . . . . . . . . . . . . . 47
(l) Further Assurances and Additional Acts . . . . 47
SECTION 8.04 Negative Covenants . . . . . . . . . . . . . . . . . . . . . 48
(a) Indebtedness . . . . . . . . . . . . . . . . . 48
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PAGE
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(b) Liens; Negative Pledges. . . . . . . . . . . . 49
(c) Change in Nature of Business . . . . . . . . . 49
(d) Restrictions on Fundamental Changes. . . . . . 50
(e) Sales of Assets. . . . . . . . . . . . . . . . 50
(f) Loans and Investments. . . . . . . . . . . . . 51
(g) Capital Expenditures . . . . . . . . . . . . . 51
(h) Sales and Leasebacks . . . . . . . . . . . . . 52
(i) Distributions. . . . . . . . . . . . . . . . . 52
(j) Amendments to Capitalization Transactions
Documents . . . . . . . . . . . . . . . . . . . . . 53
(k) Redemption of Subordinated Debt or Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . 53
(l) Transactions with Related Parties. . . . . . . 53
(m) Accounting Changes . . . . . . . . . . . . . . 54
(n) Creation of Subsidiaries . . . . . . . . . . . 54
SECTION 8.05 Trigger Events . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE IX
EVENTS OF DEFAULT. . . . . . . . . . . . . . 54
SECTION 9.01 Events of Default. . . . . . . . . . . . . . . . . . . . . . 54
(a) Payments . . . . . . . . . . . . . . . . . . . 54
(b) Representations and Warranties . . . . . . . . 55
(c) Failure by Borrower to Perform Certain
Covenants. . . . . . . . . . . . . . . . . . . 55
(d) Failure by Borrower to Perform Other Covenants 55
(e) Bankruptcy . . . . . . . . . . . . . . . . . . 55
(f) Default Under Other Indebtedness . . . . . . . 56
(g) Judgments. . . . . . . . . . . . . . . . . . . 56
(h) ERISA. . . . . . . . . . . . . . . . . . . . . 56
(i) Dissolution, Etc.. . . . . . . . . . . . . . . 57
(j) Material Adverse Change. . . . . . . . . . . . 57
(k) Change of Control. . . . . . . . . . . . . . . 57
(l) Subordination Provisions . . . . . . . . . . . 57
(m) Collateral Documents . . . . . . . . . . . . . 57
SECTION 9.02 Effect of Event of Default . . . . . . . . . . . . . . . . . 58
ARTICLE X
MISCELLANEOUS. . . . . . . . . . . . . . . 58
SECTION 10.01 Amendments and Waivers. . . . . . . . . . . . . . . . . . . 58
SECTION 10.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 58
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PAGE
----
(a) Notices. . . . . . . . . . . . . . . . . . . . 58
(b) Facsimile and Telephonic Notice. . . . . . . . 59
SECTION 10.03 No Waiver; Cumulative Remedies. . . . . . . . . . . . . . . 59
SECTION 10.04 Costs and Expenses; Indemnification . . . . . . . . . . . . 59
(a) Costs and Expenses . . . . . . . . . . . . . . 59
(b) Indemnification. . . . . . . . . . . . . . . . 60
(c) Strict Liability . . . . . . . . . . . . . . . 60
(d) Other Charges. . . . . . . . . . . . . . . . . 60
SECTION 10.05 Right of Set-Off. . . . . . . . . . . . . . . . . . . . . . 61
SECTION 10.06 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 10.07 Benefits of Agreement . . . . . . . . . . . . . . . . . . . 61
SECTION 10.08 Binding Effect; Assignment. . . . . . . . . . . . . . . . . 61
(a) Binding Effect . . . . . . . . . . . . . . . . 61
(b) Assignment . . . . . . . . . . . . . . . . . . 61
SECTION 10.09 Confidentiality . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 10.11 Submission to Jurisdiction. . . . . . . . . . . . . . . . . 63
(a) Submission to Jurisdiction . . . . . . . . . . 63
(b) No Limitation. . . . . . . . . . . . . . . . . 63
SECTION 10.12 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . 63
SECTION 10.13 Limitation on Liability . . . . . . . . . . . . . . . . . . 64
SECTION 10.14 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 64
SECTION 10.15 Interpretation. . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 10.16 Severability. . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 10.17 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 64
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EXHIBIT 10-22
REVOLVING PROMISSORY NOTE
Los Angeles, California
$25,000,000.00 June 5, 1996
FOR VALUE RECEIVED, the undersigned, Guitar Center Management Company,
Inc., a California corporation (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES
TO PAY to the order of Wells Fargo Bank, N.A. (the "Bank") on the Revolving
Expiry Date the principal sum of TWENTY FIVE MILLION DOLLARS ($25,000,000.00)
or, if less, the aggregate outstanding principal amount of the Revolving Loans
made by the Bank to the Borrower pursuant to the Credit Agreement referred to
below.
The Borrower further promises to pay interest on the Revolving Loans
outstanding hereunder from time to time at the interest rates, and payable on
the dates, set forth in the Credit Agreement.
Both principal and interest are payable in lawful money of the United
States of America and in same day or immediately available funds to the Bank, at
the account specified in Section 4.03(a) of the Credit Agreement.
The Bank shall record the date and amount of each Revolving Loan made,
each conversion to a different interest rate, each relevant Interest Period, the
amount of principal and interest due and payable from time to time hereunder,
each payment thereof, and the resulting unpaid principal balance hereof, in the
Bank's internal records, and any such recordation, absent manifest error, shall
be rebuttable presumptive evidence of the accuracy of the information so
recorded; PROVIDED, HOWEVER, that the Bank's failure so to record shall not
limit or otherwise affect the obligations of the Borrower hereunder and under
the Credit Agreement to repay the principal of and interest on the Revolving
Loans.
This promissory note is the Revolving Note referred to in, and is
subject to and entitled to the benefits of, the Credit Agreement dated as of
June 5, 1996 (as amended, modified, renewed, extended or replaced from time
to time, the "Credit Agreement") between the Borrower and the Bank. Capitalized
terms used herein shall have the respective meanings assigned to them in the
Credit Agreement.
Upon the giving of written notice by the Bank to the Borrower of the
occurrence of a Trigger Event, this promissory note will be secured by certain
Collateral more specifically described in the Credit Agreement and the
Collateral Documents.
The Credit Agreement provides, among other things, for acceleration
(which in certain cases shall be automatic) of the maturity hereof upon the
occurrence of certain stated
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events, in each case without presentment, demand, protest or further notice of
any kind, all of which are hereby expressly waived.
This promissory note is subject to prepayment in whole or in part as
provided in the Credit Agreement.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF CALIFORNIA.
GUITAR CENTER MANAGEMENT COMPANY, INC.,
a California corporation
By: /s/ MARTY ALBERTSON
__________________________________
Title: Executive Vice President
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EXHIBIT 10.23
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated as of June 5, 1996,
is made between Guitar Center Management Company, Inc., a California corporation
(the "Borrower") and Wells Fargo Bank, N.A. (the "Bank").
The Borrower and the Bank are parties to a Credit Agreement dated as
of June 5, 1996 (as amended, modified, renewed, extended or replaced from time
to time, the "Credit Agreement"). The obligation of the Bank to fund the
Revolving Loans and to issue the Letters of Credit pursuant to the Credit
Agreement are conditioned upon the Borrower entering into this Agreement and,
upon the giving of written notice by the Bank to the Borrower of the occurrence
of a Trigger Event, granting to the Bank the security interests hereinafter
provided to secure the obligations of the Borrower described below.
Accordingly, the parties hereto agree as follows:
SECTION 1 DEFINITIONS; INTERPRETATION.
(a) TERMS DEFINED IN CREDIT AGREEMENT. All capitalized terms used in
this Agreement and not otherwise defined herein shall have the meanings assigned
to them in the Credit Agreement.
(b) CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings:
"ACCOUNTS" means any and all accounts of the Borrower, whether now
existing or hereafter acquired or arising, and in any event includes all
accounts receivable, contract rights, rights to payment and other obligations of
any kind owed to the Borrower arising out of or in connection with the sale or
lease of merchandise, goods or commodities or the rendering of services or
arising from any other transaction, however evidenced, and whether or not earned
by performance, all guaranties, indemnities and security with respect to the
foregoing, and all letters of credit relating thereto, in each case whether now
existing or hereafter acquired or arising.
"BOOKS" means all books, records and other written, electronic or
other documentation in whatever form maintained now or hereafter by or for the
Borrower in connection with the ownership of its assets or the conduct of its
business or evidencing or containing information relating to the Collateral,
including: (i) ledgers;(ii) records indicating, summarizing, or evidencing the
Borrower's assets (including Inventory and Rights to Payment), business
operations or financial condition;(iii) computer programs and software;(iv)
computer discs, tapes, files, manuals, spreadsheets;(v) computer printouts and
output of whatever kind;(vi) any other computer prepared or electronically
stored, collected or reported information and equipment of any kind; and (vii)
any and all other rights now or hereafter arising out of any contract or
agreement between the Borrower and any service bureau, computer or data
processing company
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or other Person charged with preparing or maintaining any of the Borrower's
books or records or with credit reporting, including with regard to the
Borrower's Accounts.
"COLLATERAL" has the meaning set forth in Section 2.
"DOCUMENTS" means any and all documents of title, bills of lading,
dock warrants, dock receipts, warehouse receipts and other documents of the
Borrower, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to the Borrower for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired or arising.
"FINANCING STATEMENTS" has the meaning set forth in Section 3.
"GENERAL INTANGIBLES" means all general intangibles of the Borrower,
now existing or hereafter acquired or arising, and in any event includes: (i)
all tax and other refunds, rebates or credits of every kind and nature to which
the Borrower is now or hereafter may become entitled;(ii) all good will, choses
in action and causes of action, whether legal or equitable, whether in contract
or tort and however arising;(iii) all Intellectual Property Collateral;(iv) all
uncertificated securities and interests in limited and general partnerships;(v)
all rights of stoppage in transit, replevin and reclamation;(vi) all licenses,
permits, consents, indulgences and rights of whatever kind issued in favor of or
otherwise recognized as belonging to the Borrower by any Governmental Authority;
and (vii)all indemnity agreements, guaranties, insurance policies and other
contractual, equitable and legal rights of whatever kind or nature; in each case
whether now existing or hereafter acquired or arising.
"INSTRUMENTS" means any and all negotiable instruments, certificated
securities and every other writing which evidences a right to the payment of
money, in each case whether now existing or hereafter acquired.
"INTELLECTUAL PROPERTY COLLATERAL" means the following properties and
assets owned or held by the Borrower or in which the Borrower otherwise has any
interest, now existing or hereafter acquired or arising:
(i) all patents and patent applications, domestic or foreign, all
licenses relating to any of the foregoing and all income and royalties with
respect to any licenses (including such patents, patent applications and patent
licenses as described in SCHEDULE 1), all rights to sue for past, present or
future infringement thereof, all rights arising therefrom and pertaining thereto
and all reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof;
(ii) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works
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of authorship have been published and whether said copyrights are statutory or
arise under the common law, and all other rights and works of authorship
(including the copyrights and copyright applications described in SCHEDULE 1),
all rights, claims and demands in any way relating to any such copyrights or
works, including royalties and all rights of renewal and extension of copyright;
(iii) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, drawings, specifications, blue prints, descriptions,
inventions, name plates and catalogs;
(iv) all state (including common law), federal and foreign trademarks,
service marks and trade names, corporate names, company names, business names,
fictitious business names, trade styles, trade dress, logos, other source or
business identifiers, designs and general intangibles of like nature, now
existing or hereafter adopted or acquired, together with and including all
licenses therefor held by the Borrower (unless otherwise prohibited by any
license or related licensing agreement under circumstances where the granting of
the security interest would have the effect under applicable law of the
termination or permitting termination of the license for breach and where the
licensor, other than any Affiliate of the Borrower, has elected such termination
remedy), all registrations and recordings thereof, all income and royalties with
respect to such licenses, whether registered or unregistered and wherever
registered and all applications filed or to be filed in connection therewith,
including registrations and applications in the PTO, any State of the United
States or any other country or any political subdivision thereof, and all
reissues, extensions or renewals thereof, including without limitation any of
the foregoing identified on SCHEDULE 1 hereto (as the same may be amended,
modified or supplemented from time to time), and the right (but not the
obligation) to register claims under any state or federal trademark law or
regulation or any trademark law or regulation of any foreign country and to
apply for, renew and extend any of the same, to sue or bring opposition or
cancellation proceedings in the name of the Borrower or in the name of the Bank
for past, present or future infringement or unconsented use thereof, and all
rights arising therefrom throughout the world;
(v) all claims, causes of action and rights to sue for past, present
or future infringement or unconsented use of any Intellectual Property
Collateral and all rights arising therefrom and pertaining thereto;
(vi) all general intangibles related to or arising out of any of the
Intellectual Property Collateral and all the goodwill of the Borrower's business
symbolized by the Intellectual Property Collateral or associated therewith;
(vii) all products and Proceeds of any and all the Intellectual
Property Collateral; and
(viii) the entire goodwill of or associated with the businesses now or
hereafter conducted by the Borrower connected with and symbolized by any of the
aforementioned properties and assets.
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"INVENTORY" means any and all of the Borrower's inventory in all of
its forms, wherever located, whether now owned or hereafter acquired, and in any
event includes all goods (including goods in transit) which are held for sale,
lease or other disposition, including those held for display or demonstration or
out on lease or consignment or to be furnished under a contract of service, or
which are raw materials, work in process, finished goods or materials used or
consumed in the Borrower's business, and the resulting product or mass, and all
repossessed, returned, rejected, reclaimed and replevied goods, together with
all parts, components, supplies and other materials used or usable in connection
with the manufacture, production, packing, shipping, advertising, selling or
furnishing of such goods; and all other items hereafter acquired by the Borrower
by way of substitution, replacement, return, repossession or otherwise, and all
additions and accessions thereto, and any Document representing or relating to
any of the foregoing at any time.
"PROCEEDS" means whatever is receivable or received from or upon the
sale, lease, license, collection, use, exchange or other disposition, whether
voluntary or involuntary, of any Collateral, including "proceeds" as defined at
UCC Section 9306 as it relates to the Collateral, any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to or for the account of the
Borrower from time to time with respect to any of the Collateral, any and all
payments (in any form whatsoever) made or due and payable to the Borrower from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any Governmental
Authority (or any Person acting under color of governmental authority), any and
all other amounts from time to time paid or payable under or in connection with
any of the Collateral or for or on account of any damage or injury to or
conversion of any Collateral by any Person, any and all other tangible or
intangible property received upon the sale or disposition of Collateral, and all
proceeds of proceeds.
"PTO" means the United States Patent and Trademark Office and any
successor thereto.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all Chattel Paper, Documents, General Intangibles,
Instruments and Proceeds.
"SECURED OBLIGATIONS" means the Obligations as defined in the Credit
Agreement.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of California; PROVIDED, HOWEVER, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of the security interest in any Collateral is governed by
the Uniform Commercial Code as in effect in a jurisdiction other than the State
of California, the term "UCC" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof relating
to such attachment, perfection or priority and for purposes of definitions
related to such provisions.
(c) TERMS DEFINED IN UCC. Where applicable and except as otherwise
defined herein, terms used in this Agreement shall have the meanings assigned to
them in the UCC.
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(d) INTERPRETATION. The rules of interpretation set forth in
Section 1.03 of the Credit Agreement shall be applicable to this Agreement and
are incorporated herein by this reference.
(e) EFFECT OF DELAYED GRANT AND PERFECTION OF LIEN. The Borrower
acknowledges that each of the covenants, representations and warranties
contained herein shall be effective from the date of execution hereof, except to
the extent the effectiveness of such covenant, representation or warranty is
expressly conditioned upon the Bank's giving written notice to the Borrower of
the occurrence of a Trigger Event.
SECTION 2 SECURITY INTEREST.
(a) GRANT OF SECURITY INTEREST. As security for the payment and
performance of the Secured Obligations, the Borrower effective automatically
upon the giving of written notice by the Bank to the Borrower of the occurrence
of a Trigger Event pledges, assigns, transfers, hypothecates and sets over to
the Bank, and hereby grants to the Bank, a security interest in all of the
Borrower's right, title and interest in, to and under the following property,
wherever located and whether now existing or owned or hereafter acquired or
arising (collectively, the "Collateral"): (i) all Accounts;(ii) all Books;(iii)
all Documents;(iv) all General Intangibles;(v) all Instruments;(vi) all
Intellectual Property Collateral;(vii) all Inventory;(viii) all Rights to
Payment; and (ix) all products and Proceeds of any and all of the foregoing.
(b) The foregoing grant of a security interest shall not include any
rights or interests in any General Intangibles, Intellectual Property Collateral
or contracts if and to the extent that (a) the terms of the document or
documents creating or evidencing such General Intangibles, Intellectual Property
Collateral or contract rights prohibit the assignment or encumbrance thereof and
(b) the term prohibiting such assignment or encumbrance is effective as a matter
of law and (c) the term prohibiting such assignment or encumbrance has not been
waived or the consent of the necessary party to the grant of a security interest
to the Bank has not been obtained; PROVIDED, THAT (i) if any such prohibition is
subsequently lifted, terminated or is otherwise no longer effective as a matter
of law or is waived or the consent of the necessary party is obtained, the
security interest granted hereby shall automatically include such rights or
interests in General Intangibles, Intellectual Property Collateral or contract
rights formerly subject to such prohibition without any further action on the
part of the Borrower or the Bank and (ii) the exclusion in this paragraph shall
not limit, impair or otherwise affect the Bank's security interest in any rights
or interests of the Borrower in or to monies due or to become due under any such
General Intangibles, Intellectual Property Collateral or contract rights
(including, without limitation, any Accounts).
(c) BORROWER REMAINS LIABLE. Anything herein to the contrary
notwithstanding, (i) the Borrower shall remain liable under any contracts,
agreements and other documents included in the Collateral, to the extent set
forth therein, to perform all of its duties and obligations thereunder to the
same extent as if this Agreement had not been executed, (ii) the exercise by the
Bank of any of the rights hereunder shall not release the Borrower from any of
its duties or obligations under such contracts, agreements and other documents
included in the Collateral
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(except to the extent it is no longer possible or commercially practicable for
the Borrower to fulfill any duty or obligation as a result of the Bank's
foreclosure of its Collateral), and (iii) the Bank shall not have any obligation
or liability under any contracts, agreements and other documents included in the
Collateral by reason of this Agreement, nor shall the Bank be obligated to
perform any of the obligations or duties of the Borrower thereunder or to take
any action to collect or enforce any such contract, agreement or other document
included in the Collateral hereunder.
(d) CONTINUING SECURITY INTEREST. The Borrower agrees that this
Agreement shall create a continuing security interest in the Collateral from and
after the giving of written notice by the Bank to the Borrower of the occurrence
of a Trigger Event which shall remain in effect until terminated in accordance
with Section 23.
SECTION 3 PERFECTION PROCEDURES.
(a) FINANCING STATEMENTS AND TRADEMARK ASSIGNMENT. The Borrower
shall execute and deliver to the Bank concurrently with the execution of this
Agreement each of the financing statements listed on SCHEDULE 2 hereto and the
Trademark Assignment, and at any time and from time to time after the giving of
written notice by the Bank to the Borrower of the occurrence of a Trigger Event,
all financing statements, continuation financing statements, termination
statements, security agreements, chattel mortgages, assignments, patent,
copyright and the Trademark Assignment, trademark recordation cover sheets,
fixture filings, warehouse receipts, documents of title, affidavits, reports,
notices, schedules of account, letters of authority and all other documents and
instruments, in form reasonably satisfactory to the Bank (together with each of
the financing statements listed on SCHEDULE 2 hereto and the Trademark
Assignment, collectively, the "Financing Statements"), and take all other
action, as the Bank may reasonably request, in each case to perfect and continue
perfected, maintain the priority of or provide notice of the Bank's security
interest in the Collateral and to accomplish the purposes of this Agreement.
(b) CERTAIN AGENTS. Any third person at any time after the giving of
written notice by the Bank to the Borrower of the occurrence of a Trigger Event
and from time to time thereafter holding all or any portion of the Collateral
shall be deemed to, and shall, hold the Collateral as the agent of, and as
pledge holder for, the Bank. After the giving of written notice by the Bank to
the Borrower of the occurrence of a Trigger Event, Borrower shall cause any such
third party holding in excess of $250,000 in value of such Collateral to agree
to return such Collateral to the Borrower or to execute a written
acknowledgement in favor of the Bank confirming that such person is holding such
Collateral as the agent of, and as pledge holder for, the Bank.
(c) INSTRUMENTS. Within five days of receipt of any Instrument with
a principal balance of $100,000 or more, the Borrower shall deliver such
Instrument to the Bank as a bailee provided that the Bank shall not be deemed to
have possession for purposes of perfection of its security interest therein
until the Bank has given written notice of the occurrence of a Trigger Event.
(d) BANK AGREEMENT REGARDING FILINGS. The Bank agrees not to file any
Financing Statement (including the Trademark Assignment) or other instruments to
perfect its security
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interest in the Collateral until in the good faith judgment of the Bank a
Trigger Event has occurred and the Bank has given a written notice thereof to
the Borrower.
SECTION 4 REPRESENTATIONS AND WARRANTIES. In addition to the
representations and warranties of the Borrower set forth in the Credit
Agreement, the Borrower hereby represents and warrants to the Bank that:
(a) LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL. The
Borrower's chief executive office and principal place of business is located at
the address set forth in SCHEDULE 1, and all other locations where the Borrower
conducts business or Collateral is kept are set forth in SCHEDULE 1.
(b) LOCATIONS OF BOOKS. All locations where Books pertaining to the
Rights to Payment are kept, including all equipment necessary for accessing such
Books and the names and addresses of all service bureaus, computer or data
processing companies and other Persons keeping any Books or collecting Rights to
Payment for the Borrower, are set forth in SCHEDULE 1, subject to such changes
in location as may be permitted by Section 5(d) hereof.
(c) TRADE NAMES AND TRADE STYLES. All trade names and trade styles
under which the Borrower presently conducts its business operations which are
material to the Borrower are set forth in SCHEDULE 1, and, except as set forth
in SCHEDULE 1, or otherwise disclosed to the Bank in writing in materials
provided to the Bank, the Borrower has not, within the past five years (i) used
any other corporate, trade or fictitious name;(ii) changed its name;(iii) been
the surviving or resulting corporation in a merger or consolidation; or (iv)
acquired through asset purchase or otherwise any business of any Person.
(d) OWNERSHIP OF COLLATERAL. The Borrower is, and, except as
permitted by Section 5(i), will continue to be, the owner of the Collateral (or,
in the case of after-acquired Collateral, at the time the Borrower acquires
rights in such Collateral, will be the sole and complete owner thereof except
for the ownership rights of others in any Intellectual Property Collateral),
free from any Lien other than Permitted Liens.
(e) ENFORCEABILITY; PRIORITY OF SECURITY INTEREST.(i) This Agreement
automatically upon the giving of written notice by the Bank to the Borrower of
the occurrence of a Trigger Event creates a security interest which is
enforceable against the Collateral in which the Borrower then has rights and
will create a security interest which is enforceable against the Collateral in
which the Borrower thereafter acquires rights at the time the Borrower acquires
any such rights; and (ii) the Bank will have, automatically upon the giving of
written notice by the Bank to the Borrower of the occurrence of a Trigger Event
and the proper filing by the Bank of (a) the financing statements executed and
delivered by the Borrower on the Closing Date in the appropriate filing offices
in each of the jurisdictions listed on SCHEDULE 2 hereto (and in each other
jurisdiction in which the Borrower locates Collateral or relocates its chief
executive offices after the Closing Date) and (b) the Trademark Assignment with
the PTO, a perfected and first priority security interest under the UCC and
applicable federal law (subject to Permitted Liens) in the Collateral in which
the Borrower then has rights, and will have a perfected and first priority
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security interest under the UCC and applicable federal law (subject to Permitted
Liens) in the Collateral in which the Borrower thereafter acquires rights at the
time the Borrower acquires any such rights, in each case securing the payment
and performance of the Secured Obligations. To the best of the Borrower's
knowledge, the value as of the Closing Date of any assets which would be
excluded from the Lien of the Bank under Section 2(b) above after the Bank gives
written notice to the Borrower of the occurrence of a Trigger Event and takes
the actions described in the foregoing sentence, does not exceed $250,000.
(f) OTHER FINANCING STATEMENTS. No effective Financing Statement
naming the Borrower as debtor, assignor, grantor, mortgagor, pledgor or the like
and covering all or any part of the Collateral is on file in any filing or
recording office in any jurisdiction listed on SCHEDULE 2.
(g) RIGHTS TO PAYMENT.
(i) To the knowledge of the Borrower, the Rights to Payment
represent valid, binding and enforceable obligations of the account debtors
or other Persons obligated thereon, representing undisputed, bona fide
transactions completed in accordance with the terms and provisions
contained in any documents related thereto, and are and will be genuine,
free from Liens (other than Permitted Liens), and to the knowledge of the
Borrower, not subject to any adverse claims, counterclaims, setoffs,
defaults, disputes, defenses, discounts, retainages, holdbacks or
conditions precedent of any kind of character, except to the extent
reflected by the Borrower's reserves for uncollectible Rights to Payment or
to the extent, if any, that such account debtors or other Persons may be
entitled to normal and ordinary course trade discounts, returns,
adjustments and allowances in accordance with Section 5(m), or as otherwise
disclosed to the Bank in writing;
(ii) to the Borrower's knowledge, all account debtors and other
obligors on the Rights to Payment are solvent and generally paying their
debts as they come due;
(iii) all Rights to Payment comply in all material respects with
all applicable laws concerning form, content and manner of preparation and
execution, including where applicable any federal or state consumer credit
laws;
(iv) the Borrower has not assigned any of its rights under the
Rights to Payment except as provided in this Agreement or as set forth in
the other Loan Documents or to any collection agency or person engaged to
assist any collection of any Rights to Payment;
(v) with respect to the Rights to Payment constituting Eligible
Receivables, except as disclosed in writing to the Bank, the Borrower has
no knowledge that any of the criteria for eligibility are not or are no
longer satisfied; and
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(vi) all statements made, all unpaid balances and all other
information in the Books and other documentation relating to the Rights to
Payment are true and correct in all material respects and in all respects
what they purport to be.
(h) INVENTORY. No Inventory is stored with any bailee, warehouseman
or similar Person or on any premises leased to the Borrower, nor has any
Inventory been consigned to the Borrower or consigned by the Borrower to any
Person or is held by the Borrower for any Person under any "bill and hold" or
other arrangement, except as set forth in SCHEDULE 1 (as the same may be updated
from time to time by the Borrower delivering written notice thereof to the
Bank); and with respect to the Inventory constituting Eligible Inventory, except
as disclosed in writing to the Bank, the Borrower has no knowledge that any of
the criteria for eligibility are not or are no longer satisfied.
(i) INTELLECTUAL PROPERTY.
(i) Except for those items which are either set forth in
SCHEDULE 1 or are not material to the Borrower's business, the Borrower
does not own, possess or use under any licensing arrangement any patents,
copyrights, trademarks, service marks or trade names, nor is there
currently pending before any Governmental Authority any application for
registration of any patent, copyright, trademark, service mark or trade
name;
(ii) all patents, copyrights, trademarks, service marks and trade
names which are material to the business of the Borrower are subsisting and
have not been adjudged invalid or unenforceable in whole or in any material
part in a final and non-appealable judgment;
(iii) all maintenance fees required to be paid on account of any
patents which are material to the business of the Borrower have been timely
paid for maintaining such patents in force, and, to Borrower's knowledge,
each of such patents is valid and enforceable except where such non-payment
or where the invalidity or unenforceability would not have a Material
Adverse Effect;
(iv) to the Borrower's knowledge after due inquiry, no material
infringement or unauthorized use presently is being made by any Person of
any Intellectual Property Collateral, except where such infringement or
unauthorized use would not have a Material Adverse Effect;
(v) the Borrower is the sole and exclusive owner of the
Intellectual Property Collateral which is material to the business of the
Borrower except for those items of Intellectual Property Collateral for
which the Borrower is only a licensee, as noted on SCHEDULE 1, and the
past, present and contemplated future use of such Intellectual Property
Collateral by the Borrower has not, does not and will not infringe or
violate any right, privilege or license agreement of or with any other
Person which infringement or violation would be reasonably likely to have a
Material Adverse Effect;
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(vi) the Borrower owns, has material rights under, is a party to,
or is an assignee of a party to all material licenses, patents, patent
applications, copyrights, service marks, trademarks, trademark
applications, trade names and all other Intellectual Property Collateral
reasonably necessary to continue to conduct its business as heretofore
conducted except any such failure of the Borrower which would not have a
Material Adverse Effect;
(vii) with respect to any Intellectual Property Collateral
material to the business of the Borrower for which the Borrower is either a
licensor or a licensee pursuant to a license or licensing agreement
regarding such Intellectual Property Collateral, to the knowledge of the
Borrower, each such license or licensing agreement is in full force and
effect, the Borrower is not in material default of any of its obligations
thereunder and other than the parties to such licenses or licensing
agreements, to the knowledge of the Borrower, no other Person has any
rights in or to any of the Intellectual Property Collateral except any
rights which would not have a Material Adverse Effect. The past, present
and contemplated future use by the Borrower of the Intellectual Property
Collateral under which the Borrower is a licensee has not, does not and to
the knowledge of the Borrower, will not materially infringe upon or
materially violate any right, privilege or license agreement of or with any
other Person; and
(viii) the Borrower has the unqualified right, power and authority
to pledge and to grant the Bank a security interest in all of the
Intellectual Property Collateral pursuant to this Agreement, and to
execute, deliver and perform its obligations in accordance with the terms
of this Agreement, without the consent or approval of any other Person
except as already obtained.
SECTION 5 COVENANTS. In addition to the covenants of the Borrower
set forth in the Credit Agreement, so long as any of the Secured Obligations
(other than indemnity, reimbursement or contribution claims for which no claim
has been made by the Bank) remain unsatisfied or the Bank shall have any
Commitment, the Borrower agrees that:
(a) DEFENSE OF COLLATERAL. The Borrower will appear in and defend
any action, suit or proceeding which may affect to a material extent its title
to, or right or interest in, or the Bank's right or interest in, the Collateral
(unless in the Company's reasonable judgment the cost of such appearance or
defense would exceed the value of the Collateral in question).
(b) PRESERVATION OF COLLATERAL. Subject to the reasonable business
judgment of the Borrower, the Borrower will do and perform all reasonable acts
that may be necessary and appropriate to maintain, preserve and protect the
Collateral subject to permitted dispositions contemplated by Subsection 5(i).
(c) COMPLIANCE WITH LAWS, ETC. The Borrower will comply in all
material respects with all laws, regulations and ordinances, and all policies of
insurance, relating in a material way to the possession, operation, maintenance
and control of the Collateral.
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(d) LOCATION OF BOOKS AND CHIEF EXECUTIVE OFFICE. The Borrower will:
(i) keep all Books pertaining to the Rights to Payment at the locations set
forth in SCHEDULE 1 or in any other locations allowed by this Agreement; and
(ii) give at least 30 days' prior written notice to the Bank of (A) any changes
in any such location where Books pertaining to the Rights to Payment are kept,
including any change of name or address of any service bureau, computer or data
processing company or other Person preparing or maintaining any Books or
collecting Rights to Payment for the Borrower or (B) any change in the location
of the Borrower's chief executive office or principal place of business.
(e) LOCATION OF COLLATERAL. The Borrower will: (i) keep the
Collateral at the locations set forth in SCHEDULE 1 and not remove the
Collateral from such locations (other than disposals of Collateral permitted by
subsection (i)) except upon at least 30 days' prior written notice of any
removal to the Bank; and (ii) give the Bank at least 30 days' prior written
notice of any change in the locations set forth in SCHEDULE 1.
(f) CHANGE IN NAME, IDENTITY OR STRUCTURE. The Borrower will give at
least 30 days' prior written notice to the Bank of (i) any change in its name,
(ii) any changes in, additions to or other modifications of its trade names and
trade styles set forth in Schedule 1, and (iii) any changes in its identity or
structure in any manner which might make any Financing Statement filed hereunder
incorrect or misleading.
(g) MAINTENANCE OF RECORDS. The Borrower will keep separate,
materially accurate and reasonably complete Books with respect to the
Collateral, disclosing the Bank's security interest hereunder.
(h) INVOICING OF SALES. The Borrower will invoice all of its sales
upon forms customary in the industry and to the extent consistent with industry
practices to maintain proof of delivery and customer acceptance of goods.
(i) DISPOSITION OF COLLATERAL. The Borrower will not surrender or
lose possession of (other than to the Bank), sell, lease, rent, or otherwise
dispose of or transfer any of the Collateral or any right or interest therein,
except to the extent permitted by the Credit Agreement.
(j) LIENS. The Borrower will keep the Collateral free of all Liens
except Permitted Liens.
(k) EXPENSES. The Borrower will pay all expenses of protecting,
storing, warehousing, insuring, handling and shipping the Collateral (unless
such expenses are promptly paid by a third party pursuant to an agreement with
the Borrower).
(l) LEASED PREMISES. At the Bank's request, the Borrower will take
commercially reasonable efforts to obtain from each Person from whom the
Borrower leases any premises at which any Collateral is at any time present such
subordination, waiver, consent and estoppel agreements as the Bank may
reasonably require, in form and substance reasonably
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satisfactory to the Bank. The failure by the Borrower to obtain a landlord's
waiver shall not affect the calculation of Eligible Inventory under clause (v)
of the definition of Eligible Inventory contained in the Credit Agreement;
(m) RIGHTS TO PAYMENT. The Borrower will:
(i) in addition to the items required by Section 8.01(a)(iv) of
the Credit Agreement, and with such frequency as the Bank may reasonably
require, furnish to the Bank full and complete reports, in form and
substance reasonably satisfactory to the Bank, with respect to the
Accounts, including information as to concentration, aging, identity of
account debtors, letters of credit securing Accounts, disputed Accounts and
other matters, as the Bank shall reasonably request;
(ii) give only normal discounts, allowances and credits as to
Accounts and other Rights to Payment, in the ordinary course of business,
according to normal trade practices utilized by the Borrower in the past or
as may be customary in the Borrower's industry or as may be new trade
practices of the Borrower developed in its reasonable business judgment,
and enforce all Accounts and other Rights to Payment (other than Accounts
or Rights to Payment which are immaterial in amount) strictly in accordance
with their material terms, and take all such reasonable action to such end
as may from time to time be reasonably requested by the Bank, except that
the Borrower may grant any extension of the time for payment or enter into
any agreement to make a rebate or otherwise to reduce the amount owing on
or with respect to, or compromise or settle for less than the full amount
thereof, any Account or other Right to Payment, according to normal trade
practices utilized by the Borrower in the past or as may be customary in
the Borrower's industry or as may be new trade practices of the Borrower
developed in its reasonable business judgment;
(iii) if any material discount, allowance, credit, extension of
time for payment, agreement to make a rebate or otherwise to reduce the
amount owing on, or compromise or settle with respect to, an Account or
other Right to Payment exists or occurs, or if, to the knowledge of the
Borrower, any material dispute, setoff, claim, counterclaim or defense
exists or has been asserted or threatened with respect to an Account or
other Right to Payment, disclose such fact fully in the Books relating to
such Account or other Right to Payment and in connection with any invoice
or report furnished by the Borrower to the Bank relating to such Account or
other Right to Payment;
(iv) if any Accounts in excess of $100,000 in the aggregate arise
from contracts with the United States or any department, agency or
instrumentality thereof, immediately notify the Bank thereof and execute
any documents and instruments and take any other steps reasonably requested
by the Bank in order that all monies due and to become due thereunder shall
be assigned to the Bank and notice thereof given to the Federal authorities
under the Federal Assignment of Claims Act;
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(v) in accordance with its reasonable business judgment perform
and comply in all material respects with its obligations in respect of the
Accounts and other Rights to Payment;
(vi) upon the occurrence of an Event of Default, when reasonably
requested by the Bank, notify the account debtors and other obligors on the
Rights to Payment or any designated portion thereof that payment shall be
made directly to the Bank or to such other Person or location as the Bank
shall specify; and
(vii) upon the occurrence of any Event of Default, establish such
lockbox or similar arrangements for the payment of the Accounts and other
Rights to Payment as the Bank shall reasonably require.
(n) DOCUMENTS, ETC. Upon an Event of Default which is continuing,
when requested by the Bank, the Borrower will (i) immediately deliver to the
Bank, or an agent designated by it, appropriately endorsed or accompanied by
appropriate instruments of transfer or assignment, all Documents and
Instruments, and all other Rights to Payment at any time evidenced by promissory
notes, trade acceptances or other instruments and (ii) mark all Documents with
such legends as the Bank shall specify.
(o) INVENTORY. In addition to its obligations pursuant to Section
8.01(a)(iv) of the Credit Agreement, the Borrower will:
(i) at least once a month, and at such other times as the Bank
shall request, prepare and deliver to the Bank a report of all Inventory,
in form and substance reasonably satisfactory to the Bank;
(ii) upon the request of the Bank, but at least once a month,
take a physical listing of the Inventory and make a copy of such physical
listing available to the Bank for inspection at the location provided in
Part 1(a) of SCHEDULE 1 hereto; and
(iii) not store any Inventory with a bailee, warehouseman or
similar Person or on premises leased to the Borrower, nor dispose of any
Inventory on a bill-and-hold, guaranteed sale, sale and return, sale on
approval, consignment or similar basis, nor acquire any Inventory from any
Person on any such basis, without in each case giving the Bank prior
written notice thereof or preparing and delivering to the Bank a revised
SCHEDULE 1 describing such transaction.
(p) INTELLECTUAL PROPERTY COLLATERAL. The Borrower will:
(i) not enter into any material agreement (including any license
or royalty agreement) involving a transfer of any material interest of the
Borrower in any Intellectual Property Collateral, without in each case
giving the Bank prior notice thereof;
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(ii) not allow or suffer any Intellectual Property Collateral
which is material to the Borrower's business to become abandoned, nor any
registration thereof to be terminated, forfeited, expired or dedicated to
the public;
(iii) promptly give the Bank notice of any rights the Borrower may
obtain to any new material patentable inventions, copyrightable works or
other new Intellectual Property Collateral which is material to the
Borrower's business, prior to the filing of any application for
registration thereof;
(iv) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all
continuations, continuations-in-part, applications for reissue,
applications for certificate of correction and like matters as shall be
reasonable and appropriate in accordance with prudent business practice,
and promptly and timely pay any and all maintenance, license, registration
and other fees, taxes and expenses incurred in connection with any
Intellectual Property Collateral unless such payment is being contested in
good faith and the failure to make such payment does not create a risk that
the Borrower's rights in and to such Intellectual Property Collateral will
be materially adversely affected;
(v) promptly give the Bank written notice of the occurrence of
any event that would reasonably be expected to have a material adverse
effect on any of the Intellectual Property Collateral, including any
petition under the Bankruptcy Code filed by or against any licensor of any
of the Intellectual Property Collateral for which the Borrower is a
licensee; and
(vi) if Borrower shall obtain rights to any new trademarks, any
new patentable inventions or become entitled to the benefit of any patent
application or patent for any reissue, division, or continuation, of any
patent, the provisions of this Agreement shall automatically apply thereto.
Borrower shall bear any expenses incurred in connection with future patent
applications or trademark registrations. Without limiting Borrower's
obligation under this Section 5(p), Borrower authorizes the Bank to modify
this Agreement by amending SCHEDULE 1 to include any such new patent or
trademark rights. Notwithstanding the foregoing, no failure to so modify
this Agreement or amend SCHEDULE 1 shall in any way affect, invalidate or
detract from the Bank's continuing security interest in all Collateral,
whether or not listed on SCHEDULE 1.
(q) NOTICES, REPORTS AND INFORMATION. The Borrower will (i) notify
the Bank of any material claim made or asserted against the Collateral by any
Person or other event which would reasonably be expected to materially adversely
affect the value of the Collateral or the Bank's Lien thereon; (ii) furnish to
the Bank such statements and schedules further identifying and describing the
Collateral and such other reports and other information in connection with the
Collateral as the Bank may reasonably request, all in reasonable detail; and
(iii) upon request of the Bank make such demands and requests for information
and reports as the Borrower is entitled to make in respect of the Collateral.
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(r) ASSETS EXCLUDED FROM COLLATERAL. The Borrower shall use
commercially reasonable efforts when entering into new contracts or acquiring
assets that are Collateral not to agree to any restrictions on the Borrower's
rights to grant a Lien in favor of Bank in such contract or asset.
SECTION 6 COLLECTION OF RIGHTS TO PAYMENT. Until the Bank exercises
its rights hereunder to collect Rights to Payment, the Borrower shall endeavor
in the first instance in a commercially reasonable manner to collect all amounts
due or to become due on or with respect to the Rights to Payment. At the
request of the Bank, upon and after the occurrence of any Event of Default which
is continuing, all remittances received by the Borrower shall be held in trust
for the Bank and, in accordance with the Bank's instructions, remitted to the
Bank or deposited to an account with the Bank in the form received (with any
necessary endorsements or instruments of assignment or transfer).
SECTION 7 AUTHORIZATION; BANK APPOINTED ATTORNEY-IN-FACT. The Bank
shall have the right at any time after the giving of written notice by the Bank
to the Borrower of the occurrence of a Trigger Event to, in the name of the
Borrower, or in the name of the Bank or otherwise, without notice to or assent
by the Borrower, and the Borrower hereby constitutes and appoints the Bank (and
any of the Bank's officers or employees or agents designated by the Bank) as the
Borrower's true and lawful attorney-in-fact, with full power and authority to:
(i) sign any of the Financing Statements which must be executed or
filed to perfect or continue perfected, maintain the priority of or provide
notice of the Bank's security interest in the Collateral;
(ii) take possession of and endorse any notes, acceptances, checks,
drafts, money orders or other forms of payment or security and collect any
Proceeds of any Collateral;
(iii) sign and endorse any invoice or bill of lading relating to any of
the Collateral, warehouse or storage receipts, drafts against customers or other
obligors, assignments, notices of assignment, verifications and notices to
customers or other obligors;
(iv) notify the U.S. Postal Service and other postal authorities to
change the address for delivery of mail addressed to the Borrower to such
address as the Bank may designate; and, without limiting the generality of the
foregoing, establish with any Person lockbox or similar arrangements for the
payment of the Rights to Payment;
(v) receive, open and process with assistance of Borrower of all mail
addressed to the Borrower;
(vi) send requests for verification of Rights to Payment to the
customers or other obligors of the Borrower;
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(vii) contact, or direct the Borrower to contact, all account debtors
and other obligors on the Rights to Payment and instruct such account debtors
and other obligors to make all payments directly to the Bank;
(viii) assert, adjust, sue for, compromise or release any claims under
any policies of insurance covering the Collateral;
(ix) exercise dominion and control over, and refuse to permit further
withdrawals from, Deposit Accounts maintained with the Bank or any other bank,
financial institution or other Person;
(x) notify each Person maintaining lockbox or similar arrangements
for the payment of the Rights to Payment to remit all amounts representing
collections on the Rights to Payment directly to the Bank;
(xi) ask, demand, collect, receive and give acquittances and receipts
for any and all Rights to Payment, enforce payment or any other rights in
respect of the Rights to Payment and other Collateral, grant consents, agree to
any amendments, modifications or waivers of the agreements and documents
governing the Rights to Payment and other Collateral, and otherwise file any
claims, take any action or institute, defend, settle or adjust any actions,
suits or proceedings with respect to the Collateral, as the Bank may deem
necessary or desirable to maintain, preserve and protect the Collateral, to
collect the Collateral or to enforce the rights of the Bank with respect to the
Collateral;
(xii) execute any and all applications, documents, papers and
instruments necessary for the Bank to use the Intellectual Property Collateral
and grant or issue any exclusive or non-exclusive license or sublicense with
respect to any Intellectual Property Collateral;
(xiii) file this Agreement (or an abstract hereof) or any other document
describing the Bank's interest in the Collateral with the United States Patent
and Trademark Office;
(xiv) execute any modification of Schedule 1 of this Agreement pursuant
to Section 5(p)(vi) of this Agreement;
(xv) execute any and all endorsements, assignments or other documents
and instruments necessary to sell, lease, assign, convey or otherwise transfer
title in or dispose of the Collateral; and
(xvi) from and after the giving of written notice by the Bank to the
Borrower of the occurrence of a Trigger Event, execute any and all such other
documents and instruments, and do any and all acts and things for and on behalf
of the Borrower, which the Bank may reasonably deem necessary or advisable to
maintain, protect, realize upon and preserve the Collateral and the Bank's
security interest therein and to accomplish the purposes of this Agreement,
including (A) to defend, settle, adjust or (after the occurrence of any Event of
Default) institute any action, suit or proceeding with respect to the
Intellectual Property Collateral, (B) after the occurrence of any
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Event of Default, to assert or retain any rights under any license agreement for
any of the Intellectual Property Collateral, including without limitation any
rights of the Borrower arising under Section 365(n) of the Bankruptcy Code, and
(C) after the occurrence of any Event of Default, to execute any and all
applications, documents, papers and instruments for the Bank to use the
Intellectual Property Collateral, to grant or issue any exclusive or non-
exclusive license or sub-license with respect to any Intellectual Property
Collateral, and to assign, convey or otherwise transfer title in or dispose of
the Intellectual Property Collateral; PROVIDED, HOWEVER, that in no event shall
the Bank have the unilateral power, prior to the occurrence and continuation of
an Event of Default, to assign any of the Intellectual Property Collateral to
any Person, including itself, without the Borrower's written consent. The
foregoing shall in no way limit the Bank's rights and remedies upon or after the
occurrence of an Event of Default.
The Bank agrees that, except upon and after the occurrence and during the
continuance of an Event of Default, it shall not exercise the power of attorney,
or any rights granted to the Bank, pursuant to clauses (ii) through (xv). The
foregoing power of attorney is coupled with an interest and irrevocable so long
as the Bank has any Commitment outstanding or the Secured Obligations (other
than indemnity, reimbursement or contribution claims for which no claim has been
made by the Bank) have not been indefeasibly paid in cash and performed in full.
The Borrower hereby acknowledges that the Bank has relied on the specific
enforceability of this power of attorney in delaying until the giving of written
Notice by the Bank to the Borrower of the occurrence of a Trigger Event the
attachment and perfection of the Bank's Lien in the Collateral. The Borrower
hereby ratifies, to the extent permitted by law, all that the Bank shall
lawfully and in good faith do or cause to be done by virtue of and in compliance
with this Section 7.
SECTION 8 BANK PERFORMANCE OF BORROWER OBLIGATIONS. The Bank may
perform or pay any obligation which the Borrower has agreed to perform or pay
under or in connection with this Agreement, and the Borrower shall reimburse the
Bank on demand for any reasonable amounts paid by the Bank pursuant to this
Section 8.
SECTION 9 BANK'S DUTIES. Notwithstanding any provision contained in
this Agreement, the Bank shall have no duty to exercise any of the rights,
privileges or powers afforded to it and shall not be responsible to the Borrower
or any other Person for any failure to do so or delay in doing so. Beyond the
exercise of reasonable care to assure the safe custody of Collateral in the
Bank's possession and the accounting for moneys actually received by the Bank
hereunder or upon the disposition of Collateral in accordance with this
Agreement, the Bank shall have no duty or liability to exercise or preserve any
rights, privileges or powers pertaining to the Collateral.
SECTION 10 REMEDIES.
(a) REMEDIES. Upon the occurrence and during the continuance of any
Event of Default, the Bank shall have, in addition to all other rights and
remedies granted to it in this Agreement, the Credit Agreement or any other Loan
Document, all rights and remedies of a secured party under the UCC and other
applicable laws. Without limiting the generality of the foregoing, the Borrower
agrees that:
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(i) The Bank may peaceably and without notice enter any premises
of the Borrower, take possession of any Collateral, remove or dispose of
all or part of the Collateral on any premises of the Borrower or elsewhere,
and otherwise collect, receive, appropriate and realize upon all or any
part of the Collateral, and demand, give receipt for, settle, renew,
extend, exchange, compromise, adjust, or sue for all or any part of the
Collateral, as the Bank may determine.
(ii) The Bank may require the Borrower to assemble all or any
part of the Collateral and make it available to the Bank, at any place and
time designated by the Bank.
(iii) The Bank may use or transfer any of the Borrower's rights
and interests in any Intellectual Property Collateral, by license, by
sublicense (to the extent permitted by an applicable license) or otherwise,
on such conditions and in such manner as the Bank may determine.
(iv) The Bank may secure the appointment of a receiver of the
Collateral or any part thereof (to the extent and in the manner provided by
applicable law).
(v) The Bank may sell, resell, lease, use, assign, transfer or
otherwise dispose of any or all of the Collateral in its then condition or
following any commercially reasonable preparation or processing (utilizing
in connection therewith any of the Borrower's assets, without charge or
liability to the Bank therefor) at public or private sale, by one or more
contracts, in one or more parcels, at the same or different times, for cash
or credit or for future delivery without assumption of any credit risk, all
as the Bank deems advisable; PROVIDED, HOWEVER, that the Borrower shall be
credited with the net proceeds of sale only when such proceeds are finally
collected by the Bank. The Bank shall have the right upon any such public
sale, and, to the extent permitted by law, upon any such private sale, to
purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption, which right or equity of redemption the Borrower
hereby releases, to the extent permitted by law. The Borrower hereby
agrees that the sending of notice by hand delivery, to the address of the
Borrower set forth in the Credit Agreement, of the place and time of any
public sale or of the time after which any private sale or other intended
disposition is to be made, shall be deemed reasonable notice thereof if
such notice is given ten days prior to the date of such sale or other
disposition or the date on or after which such sale or other disposition
may occur, PROVIDED that the Bank may provide the Borrower shorter notice
or no notice, to the extent permitted by the UCC or other applicable law.
(b) LICENSE. The Borrower agrees that the Bank shall at all times
have such royalty free licenses, to the extent permitted by law, for any
Intellectual Property Collateral that shall be reasonably necessary to permit
the exercise of any of the Bank's rights or remedies upon or after the
occurrence of an Event of Default and shall additionally have the right to
license and/or sublicense any Intellectual Property Collateral, whether general,
special or otherwise, and whether on an exclusive or a nonexclusive basis, any
of the Intellectual Property Collateral,
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throughout the world for such term or terms, on such conditions, and in such
manner, as the Bank in its sole discretion shall determine. In addition to and
without limiting any of the foregoing, upon the occurrence and during the
continuance of an Event of Default, the Bank shall have the right but shall in
no way be obligated to bring suit, or to take such other action as the Bank
deems necessary or advisable, in the name of the Borrower or the Bank, to
enforce or protect any of the Intellectual Property Collateral, in which event
the Borrower shall, at the request of the Bank, do any and all lawful acts and
execute any and all documents required by the Bank in aid of such enforcement.
To the extent that the Bank shall elect not to bring suit to enforce such
Intellectual Property Collateral, the Borrower agrees to use all reasonable
measures and its diligent efforts, whether by action, suit, proceeding or
otherwise, to prevent the infringement, misappropriation or violations thereof
by others and for that purpose agrees diligently to maintain any action, suit or
proceeding against any Person necessary to prevent such infringement,
misappropriation or violation.
(c) PROCEEDS ACCOUNT. To the extent that any of the Secured
Obligations may be contingent, unmatured or unliquidated (including with respect
to undrawn amounts under the Letters of Credit) at such time as there may exist
a continuing Event of Default, the Bank may, at its election, acting in a
commercially reasonable manner (i) retain the proceeds of any sale, collection,
disposition or other realization upon the Collateral (or any portion thereof) in
a special purpose non-interest-bearing restricted deposit account (the "Proceeds
Account") created and maintained by the Bank for such purpose (which shall
constitute a Deposit Account included within the Collateral hereunder) until
such time as the Bank may elect to apply such proceeds to the Secured
Obligations, and the Borrower agrees that such retention of such proceeds by the
Bank shall not be deemed strict foreclosure with respect thereto; (ii) in any
manner elected by the Bank, estimate the liquidated amount of any such
contingent, unmatured or unliquidated claims and apply the proceeds of the
Collateral against such amount; or (iii) otherwise proceed in any manner
permitted by applicable law. The Borrower agrees that the Proceeds Account
shall be a blocked account and that upon the irrevocable deposit of funds into
the Proceeds Account, the Borrower shall not have any right of withdrawal with
respect to such funds. Accordingly, the Borrower irrevocably waives until the
termination of this Agreement in accordance with Section 23 the right to make
any withdrawal from the Proceeds Account and the right to instruct the Bank to
honor drafts against the Proceeds Account.
(d) APPLICATION OF PROCEEDS. Subject to subsection (c), the cash
proceeds actually received from the sale or other disposition or collection of
Collateral, and any other amounts received in respect of the Collateral the
application of which is not otherwise provided for herein, shall be applied as
provided in the last sentence of Section 4.03(d) of the Credit Agreement. Any
surplus thereof which exists after payment and performance in full of the
Secured Obligations (other than indemnity, reimbursement or contribution claims
for which no claim has been made by the Bank) shall be promptly paid over to the
Borrower or otherwise disposed of in accordance with the UCC or other applicable
law. The Borrower shall remain liable to the Bank for any deficiency which
exists after any sale or other disposition or collection of Collateral.
SECTION 11 FUTURE RIGHTS. For so long as any of the Secured
Obligations (other than indemnity, reimbursement or contribution claims for
which no claims has been made by the
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Bank) remain outstanding, or, if earlier, until the Bank shall have released or
terminated, in whole but not in part, its interest in the Collateral, if and
when the Borrower shall obtain rights to any new Collateral, or any reissue,
renewal or extension or continuation-in-part of any rights in Collateral, the
provisions of Section 2 shall automatically apply thereto and the Borrower shall
give to the Bank prompt notice thereof. The Borrower shall do all things
necessary or advisable by the Bank to ensure at all times after the giving of
written notice by the Bank to the Borrower of the occurrence of a Trigger Event
the validity, perfection, priority and enforceability of the security interest
of the Bank in such future acquired Collateral. The Borrower hereby authorizes
the Bank at all times after the giving of written notice by the Bank to the
Borrower of the occurrence of a Trigger Event to modify, amend or supplement the
Schedules hereto and to reexecute this Agreement or the Trademark Assignment
from time to time on the Borrower's behalf and as its attorney-in-fact to
include any future Collateral and to cause such reexecuted Agreement or
Trademark Assignment or such modified, amended or supplemented Schedules to be
filed with the PTO.
SECTION 12 CERTAIN WAIVERS. The Borrower waives, to the fullest
extent permitted by law,(i) any right of redemption with respect to the
Collateral, whether before or after sale hereunder, and all rights, if any, of
marshalling of the Collateral or other collateral or security for the Secured
Obligations;(ii) any right to require the Bank (A) to proceed against any
Person,(B) to exhaust any other collateral or security for any of the Secured
Obligations,(C) to pursue any remedy in the Bank's power, or (D) to make or give
any presentments, demands for performance, notices of nonperformance, protests,
notices of protests or notices of dishonor in connection with any of the
Collateral; and (iii) all claims, damages, and demands against the Bank arising
out of the repossession, retention, sale or application of the proceeds of any
sale of the Collateral.
SECTION 13 NOTICES. All notices or other communications hereunder
shall be given in the manner and to the addresses specified in the Credit
Agreement. All such notices and other communications shall be effective (i) if
delivered by hand, when delivered; (ii) if sent by mail or by facsimile
transmission, when received; PROVIDED, HOWEVER, that all notices and
communications to the Bank shall not be effective until received.
SECTION 14 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of
the Bank to exercise, and no delay in exercising, any right, remedy, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, remedy, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. The rights and remedies under this Agreement are cumulative
and not exclusive of any rights, remedies, powers and privileges that may
otherwise be available to the Bank.
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SECTION 15 COSTS AND EXPENSES; INDEMNIFICATION; OTHER CHARGES.
(a) COSTS AND EXPENSES. The Borrower agrees to pay on demand all
costs and expenses and other charges as provided in Section 10.04 of the Credit
Agreement.
(b) INDEMNIFICATION. The Borrower hereby agrees to indemnify the
Bank and its Affiliates, and their respective directors, officers, employees,
agents, counsel and other advisors (each an "Indemnified Person") against, and
hold each of them harmless from, any and all liabilities, obligations, losses,
claims, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever, including the reasonable fees
and disbursements of counsel to an Indemnified Person (including reasonable
allocated costs of internal counsel), which may be imposed on, incurred by, or
asserted against any Indemnified Person, in any way relating to or arising out
of this Agreement or the transactions contemplated hereby or any action taken or
omitted to be taken by the Indemnified Party hereunder, including any
infringement or alleged infringement with respect to any Intellectual Property
Collateral (collectively, the "Indemnified Liabilities"); PROVIDED that the
Borrower shall not be liable to a particular Indemnified Person for any portion
of such Indemnified Liabilities to the extent such Indemnified Person is found
by a final decision of a court of competent jurisdiction to have resulted from
such Indemnified Person's gross negligence or willful misconduct. If and to the
extent that the foregoing indemnification is for any reason held unenforceable,
the Borrower agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
(c) OTHER CHARGES. The Borrower agrees to indemnify the Bank against
and hold it harmless from any and all present and future stamp, transfer,
documentary and other such taxes, levies, fees, assessments and other charges
made by any jurisdiction by reason of the execution, delivery, performance and
enforcement of this Agreement.
(d) INTEREST. Any amounts payable to the Bank under this Section 15
or otherwise under this Agreement if not paid upon demand shall bear interest
from the date of such demand until paid in full, at the rate of interest set
forth in Section 3.02 of the Credit Agreement.
SECTION 16 BINDING EFFECT. This Agreement shall be binding upon,
inure to the benefit of and be enforceable by the Borrower and the Bank, and
their respective successors and assigns to the extent such assignee was
permitted under the Credit Agreement.
SECTION 17 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA, EXCEPT AS
REQUIRED BY MANDATORY PROVISIONS OF LAW AND TO THE EXTENT THE VALIDITY OR
PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR THE REMEDIES HEREUNDER, IN
RESPECT OF ANY COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN
CALIFORNIA.
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SECTION 18 ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the
entire agreement of the parties with respect to the subject matter hereof and
shall not be amended except by the written agreement of the parties as provided
in the Credit Agreement.
SECTION 19 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only to
the extent of such prohibition or invalidity without affecting the remaining
provisions of this Agreement, or the validity or effectiveness of such provision
in any other jurisdiction.
SECTION 20 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute but one and the same agreement and all
signatures need not appear on any one counterpart.
SECTION 21 INCORPORATION OF PROVISIONS OF THE CREDIT AGREEMENT. To
the extent the Credit Agreement contains provisions of general applicability to
the Loan Documents, such provisions are incorporated herein by this reference.
SECTION 22 NO INCONSISTENT REQUIREMENTS. The Borrower acknowledges
that this Agreement and the other Loan Documents may contain covenants and other
terms and provisions variously stated regarding the same or similar matters, and
agrees that all such covenants, terms and provisions are cumulative and all
shall be performed and satisfied in accordance with their respective terms.
SECTION 23 TERMINATION. Upon the termination of the Commitment of
the Bank, the surrender of the Letters of Credit and payment and performance in
full of all Secured Obligations (other than indemnity, reimbursement or
contribution claims for which no claim has been made by the Bank), this
Agreement shall terminate and the Bank shall promptly execute and deliver to the
Borrower such documents and instruments reasonably requested by the Borrower as
shall be necessary to evidence termination of all security interests given by
the Borrower to the Bank hereunder; PROVIDED, HOWEVER, that the obligations of
the Borrower under Section 15 shall survive such termination.
[the remainder of this page intentionally left blank]
22
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[COUNTERPART SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
THE BORROWER
GUITAR CENTER MANAGEMENT COMPANY,
a California corporation
[NOTARIZE SIGNATURE] By: /s/ LARRY E. THOMAS
--------------------------------
Title: President
Address:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91301
Attn.: Bruce Ross and Barry F. Soosman
Fax No.: (818) 735-4923
THE BANK
WELLS FARGO BANK, N.A.
[NOTARIZE SIGNATURE] By: /s/ F. M. BRIGGS
--------------------------------
Title: Vice President
Address:
Wells Fargo Bank
Commercial Banking Office
6001 Topanga Canyon Blvd., Suite 205
Woodland Hills, CA 91367
Attn.: Frederic M. Briggs
Fax No.: (818) 993-1930
23
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- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
DATED AS OF JULY 2, 1996
BY AND AMONG
GUITAR CENTER MANAGEMENT COMPANY, INC.,
AS ISSUER,
AND
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION,
AND
CHASE SECURITIES INC.,
AS PURCHASERS
- --------------------------------------------------------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of July 2, 1996, by and among GUITAR CENTER MANAGEMENT COMPANY,
INC., a California corporation (the "Issuer"), and DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION ("DLJ") and CHASE SECURITIES INC. ("CSI", and together
with DLJ, the "Purchasers").
This Agreement is made pursuant to the Purchase Agreement, dated June
27, 1996, among the Issuer and the Purchasers (the "Purchase Agreement"), which
provides for the sale by the Issuer to the Purchasers of $100,000,000 aggregate
principal amount of 11% Senior Notes due 2006 (the "Securities"). In order to
induce the Purchasers to enter into the Purchase Agreement, the Issuer has
agreed to provide to the Purchasers and their respective direct and indirect
transferees, among other things, the registration rights for the Securities set
forth in this Agreement. The execution of this Agreement is a condition to the
closing of the transactions contemplated by the Purchase Agreement.
The parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings (and, unless otherwise indicated, capitalized terms used
herein without definition shall have the meanings ascribed to them by the
Purchase Agreement):
ADVICE: See Section 5 hereof.
APPLICABLE PERIOD: See Section 2 hereof.
CLOSING DATE: The Closing Date as defined in the Purchase Agreement.
EFFECTIVENESS PERIOD: See Section 3 hereof.
EFFECTIVENESS TARGET DATE: See Section 4(a)(ii) hereof.
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EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
EXCHANGE OFFER: See Section 2 hereof.
EXCHANGE OFFER REGISTRATION STATEMENT: See Section 2 hereof.
EXCHANGE SECURITIES: See Section 2 hereof.
HOLDER: Any holder of Transfer Restricted Securities.
INDEMNIFIED PERSON: See Section 7 hereof.
INDENTURE: The Indenture, dated as of July 2, 1996, by and between
the Issuer, and U.S. Trust Company of California, N.A., as trustee, pursuant to
which the Securities are being issued, as amended or supplemented from time to
time in accordance with the terms thereof.
INSPECTORS: See Section 5 hereof.
ISSUE DATE: The date of first issuance of the Securities under the
Indenture.
ISSUER: See the introductory paragraph of this Agreement.
LIQUIDATED DAMAGES: See Section 4 hereof.
NASD: The National Association of Securities Dealers, Inc.
PARTICIPATING BROKER-DEALER: See Section 2 hereof.
PERSON or PERSON: An individual, trustee, corporation, partnership,
joint stock company, trust, unincorporated association, union, business
association, firm or other legal entity.
PROSPECTUS: The prospectus included in any Registration Statement
(including, without limitation, any prospectus subject to completion and a
prospectus that includes any information previously omitted from a prospectus
filed as part
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of an effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Exchange Securities and/or the Transfer Restricted Securities (as applicable)
covered by such Registration Statement (including any Registration Statement
required by Section 10 hereof), and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
PURCHASE AGREEMENT: See the introductory paragraph to this Agreement.
PURCHASERS: See the introductory paragraph to this Agreement.
RECORDS: See Section 5 hereof.
REGISTRATION DEFAULT: See Section 4 hereof.
REGISTRATION STATEMENT: Any registration statement (including any
registration statement required by Section 10 hereof) of the Issuer, including,
but not limited to, the Exchange Offer Registration Statement and the Shelf
Registration statement, or that otherwise covers any of the Transfer Restricted
Securities or Exchange Securities pursuant to the provisions of this Agreement,
including the Prospectus, amendments and supplements to such registration
statement, including post-effective amendments, all exhibits, and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
RULE 144: Rule 144 promulgated pursuant to the Securities Act, as
currently in effect, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC.
RULE 144A: Rule 144A promulgated pursuant to the Securities Act, as
currently in effect, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC.
RULE 415: Rule 415 promulgated pursuant to the Securities Act, as
such rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
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<PAGE>
RULE 424: Rule 424 promulgated pursuant to the Securities Act, as
currently in effect, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
SECURITIES: This term shall have the meaning set forth in the
introductory paragraphs of this Agreement, and shall include all Transfer
Restricted Securities and/or Exchange Securities, including those covered by a
Registration Statement (or an amendment thereto) filed pursuant to Section 10
hereof.
SECURITIES ACT: The Securities Act of 1933, as amended, and the rules
and regulations of the SEC promulgated thereunder.
SHELF NOTICE: See Section 2 hereof.
SHELF REGISTRATION: See Section 3 hereof.
TIA: The Trust Indenture Act of 1939, as amended.
TRANSFER RESTRICTED SECURITIES: The Securities upon original issuance
thereof and at all times subsequent thereto, until in the case of any such
Securities, the earliest to occur of, the date on which (i) a Registration
Statement covering such Securities has been declared effective by the SEC and
such Securities have been disposed of in accordance with such effective
Registration Statement, (ii) such Securities are sold or distributed in
compliance with Rule 144, or (iii) such Securities cease to be outstanding
(including, without limitation, upon an exchange of such Securities for Exchange
Securities in the Exchange Offer).
TRUSTEE: The trustee under the Indenture and, if applicable, the
trustee under any indenture governing the Exchange Securities.
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in
which securities of the Issuer are sold to an underwriter for reoffering to the
public.
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2. EXCHANGE OFFER
(a) The Issuer agrees to file with the SEC within 60 days after the
Issue Date a registration statement related to an offer to exchange (the
"Exchange Offer") any and all of the Transfer Restricted Securities for a like
aggregate principal amount of debt securities of the Issuer (the "Exchange
Securities") which Exchange Securities will be (i) substantially identical to
the Securities, except that such Exchange Securities will not contain terms with
respect to transfer restrictions, (ii) entitled to the benefits of the Indenture
or a trust indenture which is identical to the Indenture (other than such
changes to the Indenture or any such identical trust indenture as are necessary
to comply with any requirements of the SEC to effect or maintain the
qualification thereof under the TIA) and which, in either case, has been
qualified under the TIA, and (iii) registered pursuant to an effective
Registration Statement in compliance with the Securities Act. The Exchange
Offer will be registered pursuant to the Securities Act on an appropriate form
of Registration Statement (the "Exchange Offer Registration Statement") and will
comply with all applicable tender offer rules and regulations promulgated
pursuant to the Exchange Act and shall be duly registered or qualified pursuant
to all applicable state securities or Blue Sky laws, except as would subject the
Issuer to general taxation where it is not currently subject. The Exchange
Offer shall not be subject to any condition, other than that the Exchange Offer
does not violate any applicable law or interpretation of the staff of the SEC.
No securities shall be included in the Exchange Offer Registration Statement
other than the Transfer Restricted Securities and the Exchange Securities. The
Issuer agrees to (x) use its best efforts to cause the Exchange Offer
Registration Statement to become effective pursuant to the Securities Act within
135 days after the Issue Date; (y) keep the Exchange Offer open for not less
than 30 days (or such longer period required by applicable law) after the date
that the notice of the Exchange Offer referred to below is mailed to Holders;
and (z) use its reasonable best efforts to consummate the Exchange Offer within
60 days after the Effectiveness Target Date. Each Holder who participates in
the Exchange Offer will be required to represent that any Exchange Securities
received by it will be acquired in the ordinary course of its business, that at
the time of the consummation of the Exchange Offer such Holder will have no
arrangement or understanding with any person to participate in the distribution
of the Exchange Securities, and that such Holder is not an "affiliate" of the
Issuer within the meaning of Rule 405 of the Securities Act (or that if it is
such an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable). Each Holder that
is not a Participating Broker-Dealer (as defined below) will be required to
5
<PAGE>
represent that it is not engaged in, and does not intend to engage in, the
distribution of the Exchange Securities. Each Holder that (i) is a
Participating Broker-Dealer and (ii) will receive Exchange Securities for its
own account in exchange for the Transfer Restricted Securities that it acquired
as the result of market-making or other trading activities will be required to
acknowledge that it will deliver a prospectus as required by law in connection
with any resale of such Exchange Securities. Upon consummation of the Exchange
Offer in accordance with this Agreement, the Issuer shall have no further
obligation to register Transfer Restricted Securities pursuant to this
Agreement.
(b) The Issuer shall include within the Prospectus contained in the
Exchange Offer Registration Statement a section entitled "Plan of Distribution,"
reasonably acceptable to the Purchasers (including for purposes of Section 10
hereof), which shall contain a summary statement of the positions taken or
policies made by the staff of the SEC with respect to the potential
"underwriter" status of any broker-dealer that is the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of Exchange Securities received by
such broker-dealer in the Exchange Offer (a "Participating Broker-Dealer").
Such "Plan of Distribution" section shall also allow the use of the Prospectus
by all persons subject to the prospectus delivery requirements of the Securities
Act, including all Participating Broker-Dealers, and include a statement
describing the means by which Participating Broker-Dealers may resell the
Exchange Securities.
The Issuer shall use its best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement the Prospectus
contained therein, in order to permit such Prospectus to be lawfully delivered
by all persons subject to the prospectus delivery requirements of the Securities
Act for a period of at least 180 days from the consummation of the Exchange
Offer (including such longer period if extended pursuant to the last paragraph
of Section 5 hereof), or if reasonably required by either Purchaser, such longer
period required to satisfy the Issuer's obligations as set forth in Section 10
hereof (the "Applicable Period").
In connection with the Exchange Offer, the Issuer shall:
(a) mail as promptly as practicable to each Holder a copy of the
Prospectus forming part of the Exchange Offer Registration Statement,
together with an appropriate letter of transmittal and related documents;
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<PAGE>
(b) utilize the services of a depositary for the Exchange Offer with
an address in the Borough of Manhattan, The City of New York; and
(c) permit Holders to withdraw tendered Securities at any time prior
to the close of business, New York time, on the last Business Day on which
the Exchange Offer shall remain open.
As soon as practicable after the close of the Exchange Offer, the
Issuer shall:
(i) accept for exchange all Securities tendered and not withdrawn
pursuant to the Exchange Offer;
(ii) deliver to the Trustee for cancellation all Securities so
accepted for exchange; and
(iii) cause the Trustee to authenticate and deliver promptly to each
Holder of Securities, Exchange Securities equal in principal amount to the
Securities of such Holder so accepted for exchange.
(c) If (1) prior to the consummation of the Exchange Offer,
applicable interpretations of the staff of the SEC do not permit the Issuer to
effect the Exchange Offer, or (2) if for any other reason the Exchange Offer is
not consummated within 60 days after the effective date of the Exchange Offer
Registration Statement, then the Issuer shall promptly deliver to the Holders
and the Trustee written notice thereof (the "Shelf Notice") and the Issuer shall
file a Registration Statement pursuant to Section 3 hereof. Following the
delivery of a Shelf Notice to the Holders of Transfer Restricted Securities, the
Issuer shall not have any further obligation to conduct the Exchange Offer.
3. SHELF REGISTRATION
If the Issuer is required to deliver a Shelf Notice as contemplated by
Section 2(c) hereof (or if necessary to comply with its obligations set forth in
Section 10 hereof), then:
(a) SHELF REGISTRATION. The Issuer shall prepare and file with the
SEC, within 45 days after such filing obligation arises, a Registration
Statement for an offering to be made on a continuous basis pursuant to Rule 415
covering all
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<PAGE>
of the Transfer Restricted Securities (or, if necessary to comply with its
obligations set forth in Section 10 hereof, the Securities) (the "Shelf
Registration"). The Shelf Registration shall be on Form S-1 or another
appropriate form permitting registration of the Transfer Restricted Securities
(or the Securities, as appropriate) for resale by the Holders in the manner or
manners designated by them (including, without limitation, one or more
underwritten offerings). The Issuer shall not permit any securities other than
the Transfer Restricted Securities (or the Securities, as appropriate) to be
included in the Shelf Registration. The Issuer shall use its best efforts, as
described in Section 5(b) hereof, to cause the Shelf Registration to be declared
effective pursuant to the Securities Act on or prior to the 135th day after such
filing obligation arises and to keep the Shelf Registration continuously
effective under the Securities Act until the later of the date which is 36
months after the Issue Date (or such longer period if extended pursuant to the
last paragraph of Section 5 hereof or the last sentence of the first paragraph
of Section 9(b) hereof), or if reasonably required by either Purchaser, the date
necessary to satisfy the Issuer's obligations as set forth in Section 10 hereof
or such shorter period (subject to Section 10) ending when either (1) all
Transfer Restricted Securities covered by the Shelf Registration have been sold
in the manner set forth and as contemplated in the Shelf Registration or (2)
there ceases to be outstanding any Securities (the "Effectiveness Period").
(b) SUPPLEMENTS AND AMENDMENTS. The Issuer shall promptly supplement
and amend the Shelf Registration if required by the rules, regulations or
instructions applicable to the registration form used for such Shelf
Registration, if required by the Securities Act to comply with its obligations
set forth in Section 10 hereof, or if reasonably requested in writing timely
received setting forth the reasons for such request by the Holders of a majority
in aggregate principal amount of the Transfer Restricted Securities covered by
such Registration Statement or by any underwriter of such Transfer Restricted
Securities.
(c) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH
THE SHELF REGISTRATION. No Holder of Transfer Restricted Securities may include
any of its Transfer Restricted Securities in any Shelf Registration pursuant to
this Agreement unless and until such Holder furnishes to the Issuer in writing,
within 10 Business Days after receipt of a request therefor, such information
specified in Item 507 or 508, as applicable, of Regulation S-K under the
Securities Act or any other information required by the Securities Act or state
securities laws for use in connection with any Shelf Registration or Prospectus
or preliminary Prospectus included therein. Each Holder as to which any Shelf
Registration is
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<PAGE>
being effected agrees to furnish promptly to the Issuer all information required
to be disclosed in order to make the information previously furnished to the
Issuer by such Holder not materially misleading.
4. LIQUIDATED DAMAGES
(a) The Issuer and the Purchasers agree that the Holders of Transfer
Restricted Securities will suffer damages if the Issuer fails to fulfill its
obligations pursuant to Section 2 or Section 3 hereof and that it would not be
possible to ascertain the extent of such damages. Accordingly, in the event of
such failure by the Issuer to fulfill such obligations, the Issuer hereby agrees
to pay liquidated damages ("Liquidated Damages") to each Holder of Transfer
Restricted Securities under the circumstances and to the extent set forth below:
(i) if neither the Exchange Offer Registration Statement nor the
Shelf Registration has been filed with the SEC on or prior to the date
specified herein for such filing; or
(ii) if neither the Exchange Offer Registration Statement nor the
Shelf Registration is declared effective by the SEC on or prior to the
date specified herein for such effectiveness (the "Effectiveness
Target Date"); or
(iii) if an Exchange Offer Registration Statement is declared
effective by the SEC, on or prior to 45 days following the earlier of
(i) the effectiveness thereof, or (ii) the Effectiveness Target Date,
the Issuer has not exchanged Exchange Securities for all Securities
validly tendered in accordance with the terms of the Exchange Offer;
or
(iv) the Shelf Registration has been declared effective by the
SEC and such Shelf Registration ceases to be effective or usable at
any time during the Effectiveness Period;
(any of the foregoing, a "Registration Default") then, with respect to the first
90-day period or portion thereof following such Registration Default, the Issuer
shall pay to each Holder of Transfer Restricted Securities Liquidated Damages in
an amount equal to $.05 per week per $1,000 principal amount of Transfer
Restricted Securities held by such Holder for each week or portion thereof that
the Registra-
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tion Default continues. The amount of such Liquidated Damages will increase by
an additional $.05 per week per $1,000 principal amount of Transfer Restricted
Securities with respect to each subsequent 90-day period or portion thereof
until all Registration Defaults have been cured; PROVIDED, HOWEVER, that
Liquidated Damages shall not at any time exceed $.30 per week per $1,000
principal amount of Transfer Restricted Securities (regardless of whether one or
more than one Registration Default is outstanding). Following the cure of all
Registration Defaults relating to any Transfer Restricted Securities, the
accrual of Liquidated Damages with respect to such Transfer Restricted
Securities will cease. A Registration Default under clause (i) above shall be
cured on the date that either the Exchange Registration Statement or the Shelf
Registration is filed with the SEC; a Registration Default under clause (ii)
above shall be cured on the date that either the Exchange Registration Statement
or the Shelf Registration is declared effective by the SEC; a Registration
Default under clause (iii) above shall be cured on the earlier of the date (A)
the Exchange Offer is consummated or (B) the Issuer delivers a Shelf Notice to
the Holders of Restricted Securities; and a Registration Default under clause
(iv) above shall be cured on the earlier of (A) the date the Shelf Registration
is declared effective and is usable or (B) the Effectiveness Period expires.
(b) The Issuer shall notify the Trustee within one business day after
each and every date on which a Registration Default occurs. Liquidated Damages
shall be paid by the Issuer to the Holders on the semi-annual interest payment
dates provided in the Indenture (or, with respect to tendering Holders, such
earlier date that Securities are repurchased or redeemed pursuant to the terms
of the Indenture) to the Holders on the related interest payment record date (or
the record date set for such repurchase or redemption as applicable) or at such
sooner time of which the Issuer shall notify the Holders, by wire transfer of
immediately available funds to the accounts specified by them or by mailing
checks to their registered addresses if no such accounts have been specified on
or before the fifth business day preceding the semi-annual interest payment date
(or, with respect to tendering Holders, such earlier date that Securities are
repurchased or redeemed pursuant to the terms of the Indenture) provided in the
Indenture (whether or not any interest is then payable on the Securities). Each
obligation to pay Liquidated Damages shall be deemed to commence accruing on the
date of the applicable Registration Default.
5. REGISTRATION PROCEDURES
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In connection with the registration of any Exchange Securities or
Transfer Restricted Securities pursuant to Section 2 or 3 hereof, the Issuer
shall effect such registration to permit the sale of such Exchange Securities or
Transfer Restricted Securities (as applicable) in accordance with the intended
method or methods of disposition thereof, and pursuant thereto the Issuer shall:
(a) Prepare and file with the SEC, a Registration Statement or
Registration Statements as prescribed by Section 2 or Section 3 hereof, and use
its best efforts to cause such Registration Statement to become effective and
remain effective as provided herein; PROVIDED that, if (1) such filing is
pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Securities during the Applicable Period, before filing any
Registration Statement or Prospectus or any amendments or supplements thereto,
the Issuer shall furnish to and afford the Holders of the Transfer Restricted
Securities and each such Participating Broker-Dealer, as the case may be,
covered by such Registration Statement, their counsel and the managing
underwriters, if any, a reasonable opportunity to review copies of all such
documents (including copies of any documents to be incorporated by reference
therein and all exhibits thereto) proposed to be filed (at least 4 Business Days
prior to such filing, or such later date as is reasonable under the
circumstances). The Issuer shall not file any Registration Statement or
Prospectus or any amendments or supplements thereto in respect of which the
Holders, pursuant to this Agreement, must be afforded an opportunity to review
prior to the filing of such document, if the Holders of a majority in aggregate
principal amount of the Transfer Restricted Securities covered by such
Registration Statement, or such Participating Broker-Dealer, as the case may be,
their counsel, or the managing underwriters, if any, shall reasonably object in
writing received within 1 Business Day prior to filing setting forth the reasons
for objection.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Shelf Registration or Exchange Offer Registration Statement,
as the case may be, as may be necessary to keep such Registration Statement
continuously effective for the EFFECTIVENESS PERIOD or the APPLICABLE PERIOD, as
the case may be; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
(or any similar provision then in force) under the Securities Act; and comply
with the provisions of the Securities Act, the Exchange Act and the rules
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and regulations of the SEC promulgated thereunder applicable to it with respect
to the disposition of all securities covered by such Registration Statement as
so amended or in such Prospectus as so supplemented and with respect to the
subsequent resale of any Securities being sold by a Participating Broker-Dealer
covered by any such Prospectus; the Issuer shall be deemed not to have used its
best efforts to keep a Registration Statement effective during the Applicable
Period if it voluntarily takes any action that results in selling Holders of the
Transfer Restricted Securities covered thereby or Participating Broker-Dealers
seeking to sell Exchange Securities not being able to sell such Transfer
Restricted Securities or such Exchange Securities during that period, unless (i)
such action is required by applicable law, or (ii) such action is taken by it in
good faith and for valid business reasons (not including avoidance of its
obligations hereunder), including, but not limited to, the acquisition or
divestiture of assets.
(c) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, notify the selling Holders of Transfer
Restricted Securities, or each known Participating Broker-Dealer, as the case
may be, their counsel (to the extent previously identified to the Issuer in
writing) and the managing underwriters, if any, promptly (but in any event
within two business days) and confirm such notice in writing, (i) when a
Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective (including in such notice a
written statement that any Holder may, upon request, obtain, without charge, one
conformed copy of such Registration Statement or post-effective amendment
including financial statements and schedules, documents incorporated or deemed
to be incorporated therein by reference and exhibits), (ii) of the issuance by
the SEC of any stop order suspending the effectiveness of a Registration
Statement or of any order preventing or suspending the use of any preliminary
Prospectus or the initiation of any proceedings for that purpose, (iii) if at
any time when a Prospectus is required by the Securities Act to be delivered in
connection with sales of the Transfer Restricted Securities the representations
and warranties of the Issuer contained in any agreement (including any
underwriting agreement) contemplated by Section 5(l) below cease to be true and
correct, (iv) of the receipt by the Issuer of any notification with respect to
the suspension of the qualification or exemption from qualification of a
Registration Statement or any of the Transfer Restricted Securities or the
Exchange Securities to
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be sold by any Participating Broker-Dealer for offer or sale in any
jurisdiction, or the initiation of any proceeding for such purpose, (v) of the
happening of any event or any information becoming known that makes any
statement made in such Registration Statement or related Prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in such
Registration Statement, Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and that in the case of
the Prospectus, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (vi) of the Issuer's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.
(d) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, use its best efforts to prevent the
issuance of any order suspending the effectiveness of a Registration Statement
or of any order preventing or suspending the use of a Prospectus or suspending
the qualification (or exemption from qualification) of any of the Transfer
Restricted Securities or the Exchange Securities (as applicable) to be sold by
any Participating Broker-Dealer, for sale in any jurisdiction, and, if any such
order is issued, to use every reasonable effort to obtain the withdrawal of any
such order at the earliest possible moment.
(e) If a Shelf Registration is filed pursuant to Section 3 hereof and
if requested by the managing underwriters, if any, or the Holders of a majority
in aggregate principal amount of the Transfer Restricted Securities being sold
in connection with an underwritten offering, (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriters, if any, or such Holders reasonably
request to be included therein, (ii) make all required filings of such
prospectus supplement or such post-effective amendment as soon as practicable
after the Issuer has received notification of the matters to be incorporated in
such prospectus supplement or post-effective amendment, and (iii) supplement or
make amendments to such Registra-
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tion Statement with such information as the managing underwriters, if any, or
such Holders reasonably request to be included therein.
(f) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, furnish to each selling Holder of
Transfer Restricted Securities and to each such Participating Broker-Dealer who
so requests in writing and to counsel identified in writing by such Holder and
each managing underwriter, if any, without charge, one conformed copy of the
Registration Statement or Registration Statements and each post-effective
amendment thereto, including financial statements and schedules, and, if
requested, all documents incorporated or deemed to be incorporated therein by
reference and all exhibits.
(g) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, deliver to each selling Holder of
Transfer Restricted Securities, or each such Participating Broker-Dealer, as the
case may be, and the underwriters, if any, without charge, as many copies of the
Prospectus or Prospectuses (including each form of preliminary Prospectus) and
each amendment or supplement thereto and any documents incorporated by reference
therein as such Persons may reasonably request; and, subject to the last
paragraph of this Section 5 hereof, the Issuer hereby consents to the use of
such Prospectus and each amendment or supplement thereto by each of the selling
Holders of Transfer Restricted Securities or each such Participating Broker-
Dealer, as the case may be, and the underwriters or agents, if any, and dealers
(if any), in connection with the offering and sale of the Transfer Restricted
Securities covered by or the sale by Participating Broker-Dealers of the
Exchange Securities pursuant to such Prospectus and any amendment or supplement
thereto.
(h) Prior to any public offering of Transfer Restricted Securities or
any delivery of a Prospectus contained in the Exchange Offer Registration
Statement by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, to use its best efforts to register or
qualify, and to cooperate with the selling Holders of Transfer Restricted
Securities or each such Participating Broker-Dealer, as the case may be, the
underwriters, if any, and their
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respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Transfer Restricted
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions as any selling Holder, Participating Broker-Dealer, or the
managing underwriters reasonably request in writing, PROVIDED that where
Exchange Securities held by Participating Broker-Dealers or Transfer Restricted
Securities are offered other than through an underwritten offering, the Issuer
agrees to cause its counsel to perform Blue Sky investigations and file
registrations and qualifications required to be filed pursuant to this Section
5(h) as so requested by the Selling Holders or Participating Broker-Dealers in
writing; keep each such registration or qualification (or exemption therefrom)
effective during the period such Registration Statement is required to be kept
effective and do any and all other acts or things reasonably necessary or
advisable to enable the disposition in such jurisdictions of the Exchange
Securities held by Participating Broker-Dealers or the Transfer Restricted
Securities covered by the applicable Registration Statement; PROVIDED that the
Issuer shall not be required to (A) qualify generally to do business in any
jurisdiction where it is not then so qualified or (B) subject itself to general
taxation in any such jurisdiction.
(i) If a Shelf Registration is filed pursuant to Section 3 hereof,
cooperate with the selling Holders of Transfer Restricted Securities and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Transfer Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company, and enable such Transfer
Restricted Securities to be in such denominations and registered in such names
as the managing underwriters, if any, or Holders may reasonably request.
(j) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, upon the occurrence of any event
contemplated by paragraph 5(c)(v) or 5(c)(vi) (subject to the last paragraph of
this Section 5) above, as promptly as practicable prepare and (subject to
Section 5(a) hereof) file with the SEC, at the expense of the Issuer, a
supplement or post-effective amendment to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, or file any other required document so
that, as thereafter delivered to the purchasers of the Transfer Restricted
Securities being sold thereunder or to the purchasers of the
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Exchange Securities to whom such Prospectus will be delivered by a Participating
Broker-Dealer, any such Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(k) Prior to the effective date of the first Registration Statement
relating to the Transfer Restricted Securities, (i) provide the Trustee with
certificates for the Securities in a form eligible for deposit with The
Depository Trust Company and (ii) provide a CUSIP number for the Securities.
(l) In connection with an underwritten offering of Transfer
Restricted Securities pursuant to a Shelf Registration, enter into an
underwriting agreement as is customary in underwritten offerings and take all
such other actions as are reasonably requested by the managing underwriters in
order to expedite or facilitate the registration or the disposition of such
Transfer Restricted Securities, and in such connection, (i) make such
representations and warranties to the underwriters, with respect to the business
of the Issuer and its subsidiaries and the Registration Statement, Prospectus
and documents, if any, incorporated or deemed to be incorporated by reference
therein, in each case, as are customarily made by issuers to underwriters in
underwritten offerings, and confirm the same if and when requested; (ii) obtain
opinions of counsel to the Issuer and updates thereof in form and substance
reasonably satisfactory to the managing underwriters, addressed to the
underwriters covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested by
underwriters; (iii) obtain "cold comfort" letters and updates thereof in form
and substance reasonably satisfactory to the managing underwriters from the
independent certified public accountants of the Issuer (and, if necessary, any
other independent certified public accountants of any subsidiary of the Issuer
or of any business acquired by any of them for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings and such other
matters as are reasonably requested by underwriters as permitted by Statement on
Auditing Standards No. 72; and (iv) if an underwriting agreement is entered
into, the same shall contain indemnification provisions and procedures no less
favorable than those set forth in Section 7 hereof (or such other provisions and
procedures acceptable to Holders of a majority in aggregate principal amount of
Transfer Restricted Securities covered by such
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Registration Statement and the managing underwriters or agents) with respect to
all parties to be indemnified pursuant to said Section. The above shall be done
at each closing under such underwriting agreement, or as and to the extent
required thereunder.
(m) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Securities during the Applicable Period, make available for inspection by any
selling Holder of such Transfer Restricted Securities being sold, or each such
Participating Broker-Dealer, as the case may be, any underwriter participating
in any such disposition of Transfer Restricted Securities, if any, and any
attorney, accountant or other agent retained by such selling Holder or each such
Participating Broker-Dealer, as the case may be, or underwriter (collectively,
the "Inspectors"), at the offices where normally are kept, during reasonable
business hours and upon reasonable notice, all financial and other records,
pertinent corporate documents and properties of the Issuer and its subsidiaries
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise any applicable due diligence responsibilities, and cause the officers,
directors and employees of the Issuer and its subsidiaries to supply all
information in each case reasonably requested by any such Inspector in
connection with such Registration Statement. If requested by the Company, each
of the Inspectors will agree with the Company that Records which the Issuer
determines, in good faith, to be confidential and any Records which it notifies
the Inspectors are confidential shall not be disclosed by the Inspectors, unless
(i) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in such Registration Statement, (ii) the release of
such Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction or (iii) the information in such Records has been made
generally available to the public.
(n) Provide an indenture trustee for the Transfer Restricted
Securities or the Exchange Securities, as the case may be, and cause the
Indenture to be qualified under the TIA not later than the effective date of the
Exchange Offer or the first Registration Statement relating to the Transfer
Restricted Securities; and in connection therewith, cooperate with the trustee
under any such indenture and the Holders of the Transfer Restricted Securities,
to effect such changes to such indenture as may be required for such indenture
to be so qualified in accordance with the terms of the TIA; and execute, and use
its best efforts to
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cause such trustee to execute, all documents as may be required to effect such
changes, and all other forms and documents required to be filed with the SEC to
enable such indenture to be so qualified in a timely manner.
(o) Comply with all applicable rules and regulations of the SEC and,
as soon as reasonably practicable, make generally available to its security
holders consolidated earnings statements of the Issuer (including a condensed
consolidating footnote if required under SEC rules), which need not be certified
by an independent public accountant, that satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder.
(p) If an Exchange Offer is to be consummated, upon delivery of the
Transfer Restricted Securities by Holders to the Issuer (or to such other Person
as directed by the Issuer) in exchange for the Exchange Securities, the Issuer
shall mark, or cause to be marked where appropriate, on such Transfer Restricted
Securities that such Transfer Restricted Securities are being cancelled in
exchange for the Exchange Securities.
(q) Cooperate with each seller of Transfer Restricted Securities
covered by any Registration Statement and each underwriter, if any,
participating in the disposition of such Transfer Restricted Securities and
their respective counsel in connection with any filings required to be made with
the NASD.
(r) Use its best efforts to take all other steps necessary to effect
the registration of the Transfer Restricted Securities covered by a Registration
Statement contemplated hereby.
(s) Use its best efforts to cause the Transfer Restricted Securities
or the Exchange Securities, as applicable, covered by an effective registration
statement required by Section 2 or Section 3 hereof to be rated with appropriate
rating agencies, if so requested by the Holders of a majority in aggregate
principal amount of Transfer Restricted Securities relating to such registration
statement or the managing underwriters in connection therewith, if any.
The Issuer may require each seller of Transfer Restricted Securities
or Participating Broker-Dealer as to which any registration is being effected to
furnish to the Issuer such information regarding such seller or Participating
Broker-Dealer and the distribution of such Transfer Restricted Securities or
Exchange Securities to be sold by such Participating Broker-Dealer, as the case
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may be, as the Issuer may, from time to time, reasonably request. The Issuer
may exclude from such registration the Transfer Restricted Securities or
Exchange Securities of any seller or Participating Broker-Dealer, as the case
may be, who fails to furnish such information within a reasonable time after
receiving such request.
Each Holder of Transfer Restricted Securities and each Participating
Broker-Dealer agrees by acquisition of such Transfer Restricted Securities or
Exchange Securities to be sold by such Participating Broker-Dealer, as the case
may be, that, upon receipt of any notice from the Issuer of the happening of any
event of the kind described in Section 5(c)(ii), 5(c)(iv), 5(c)(v) or 5(c)(vi)
hereof, such Holder shall forthwith discontinue disposition of such Transfer
Restricted Securities covered by such Registration Statement or Prospectus or
Exchange Securities to be sold by such Participating Broker-Dealer, as the case
may be, until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 5(j) hereof, or until it is advised in
writing (the "Advice") by the Issuer (in the case of notice delivered as a
result of the happening of an event described in Section 5(c)(vi), after a
period not in excess of 15 consecutive days for two separate occasions within
any consecutive 12 months) that the use of the applicable Prospectus may be
resumed, and has received copies of any amendments or supplements thereto. In
the event the Issuer shall give any such notice, each of the Effectiveness
Period and the Applicable Period shall be extended by the number of days during
such periods from and including the date of the giving of such notice to and
including the date when each seller of Transfer Restricted Securities covered by
such Registration Statement or Exchange Securities to be sold by such
Participating Broker-Dealer, as the case may be, shall have received (x) the
copies of the supplemented or amended Prospectus contemplated by Section 5(j) or
(y) the Advice.
6. REGISTRATION EXPENSES
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Issuer shall be borne by the Issuer
whether or not the Exchange Offer or a Shelf Registration is filed or becomes
effective, including, without limitation, (i) all registration and filing fees
(including, without limitation, (A) fees with respect to filings required to be
made with the NASD in connection with an underwritten offering and (B) fees and
expenses of compliance with state securities or Blue Sky laws (including,
without limitation, reasonable fees and disbursements of counsel in connection
with Blue Sky qualifications of the
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Transfer Restricted Securities or Exchange Securities and determination of the
eligibility of the Transfer Restricted Securities or Exchange Securities for
investment under the laws of such jurisdictions (x) where the Holders of
Transfer Restricted Securities are located, in the case of the Exchange
Securities, or (y) as provided in Section 5(h) hereof, in the case of Transfer
Restricted Securities or Exchange Securities to be sold by a Participating
Broker-Dealer during the Applicable Period)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Transfer Restricted
Securities or Exchange Securities in a form eligible for deposit with The
Depository Trust Company and of printing Prospectuses if the printing of
Prospectuses is requested by the managing underwriters, if any, or, in respect
of Transfer Restricted Securities or Exchange Securities to be sold by any
Participating Broker-Dealer during the Applicable Period, by the Holders of a
majority in aggregate principal amount of the Transfer Restricted Securities
included in any Registration Statement or of such Exchange Securities, as the
case may be), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Issuer (v) fees and disbursements of all
independent certified public accountants referred to in Section 5(l)(iii) hereof
(including, without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance), (vi) the fees and
expenses of any "qualified independent underwriter" or other independent
appraiser participating in an offering pursuant to Section 3 of Schedule E to
the By-laws of the NASD, (vii) rating agency fees, (viii) Securities Act
liability insurance, if the Issuer desires such insurance, (ix) fees and
expenses of all other Persons retained by the Issuer (x) internal expenses of
the Issuer (including, without limitation, all salaries and expenses of officers
and employees of the Issuer performing legal or accounting duties), (xi) the
expense of any annual audit, (xii) the fees and expenses incurred in connection
with the listing of the securities to be registered on any securities exchange,
and (xiii) the expenses relating to printing, word processing and distributing
all Registration Statements, underwriting agreements, securities sales
agreements, and indentures.
(b) In connection with any Shelf Registration hereunder, the Issuer
shall reimburse the Holders of the Transfer Restricted Securities being
registered in such registration for the reasonable fees and disbursements of not
more than one counsel chosen by the Holders of a majority in aggregate principal
amount of the Transfer Restricted Securities to be included in such Registration
Statement and other reasonable out-of-pocket expenses of the Holders of Transfer
Restricted Securities reasonably incurred in connection with the registration of
the Transfer Restricted Securities.
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7. INDEMNIFICATION
The Issuer agrees to indemnify and hold harmless (i) each of the
Purchasers, each Holder of Transfer Restricted Securities, each Holder of
Exchange Securities and each Participating Broker-Dealer, (ii) each person, if
any, who controls (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) any such Person (any of the persons referred to
in this clause (ii) being hereinafter referred to as a "controlling person"),
and (iii) the respective officers, directors, partners, employees,
representatives and agents of any of such Person or any controlling person (any
person referred to in clause (i), (ii) or (iii) may hereinafter be referred to
as an "Indemnified Person") to the fullest extent lawful, from and against any
and all losses, claims, damages, liabilities, judgments, actions and expenses
(including, without limitation, and as incurred, reimbursement of all reasonable
costs of investigating, preparing, pursuing or defending any claim or action, or
any investigation or proceeding by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel to any
Indemnified Person) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus (as amended or supplemented if the Issuer shall have furnished any
amendments or supplements thereto) or any preliminary Prospectus, or caused by,
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except insofar as such losses, claims, damages, or liabilities are
caused by (i) any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information relating to
any Indemnified Person furnished to the Issuer or any underwriter in writing by
such Indemnified Person expressly for use therein, or (ii) any untrue statement
contained in or omission from a preliminary Prospectus if a copy of the
Prospectus (as then amended or supplemented, if the Issuer shall have furnished
to or on behalf of the Holder participating in the distribution relating to the
relevant Registration Statement any amendments or supplements thereto) was not
sent or given by or on behalf of such Holder to the person asserting any such
losses, liabilities, claims, damages or expenses who purchased Securities, if
such is required by law at or prior to the written confirmation of the sale of
such Securities to such person and the untrue statement contained in or omission
from such preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) , unless the failure to deliver the
Prospectus (or the Prospectus as amended or
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<PAGE>
supplemented) to such Holder results from the failure by the Company to comply
with its obligations under Section 5(g) or 10(a)(iii) hereof. The Issuer shall
notify the Holders promptly upon becoming aware thereof of the institution,
threat or assertion of any claim, proceeding (including any governmental
investigation) or litigation of which it shall have become aware relating to
this Agreement which involves the Issuer or an Indemnified Person.
In connection with any Registration Statement in which a Holder of
Transfer Restricted Securities is participating, such Holder of Transfer
Restricted Securities agrees, severally and not jointly, to indemnify and hold
harmless the Issuer and its directors and officers and each person who controls
the Issuer within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Issuer to each Indemnified Person, but only with reference to information
relating to such Indemnified Person furnished to the Issuer in writing by such
Indemnified Person expressly for use in any Registration Statement or
Prospectus, any amendment or supplement thereto, or any preliminary Prospectus.
The liability of any Indemnified Person pursuant to this paragraph shall in no
event exceed the net proceeds received by such Indemnified Person from sales of
Transfer Restricted Securities giving rise to such obligations.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the "indemnifying
person") in writing, and the indemnifying person, shall be entitled to retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying person may reasonably
designate in such proceeding and shall pay the reasonable fees and expenses
actually incurred by such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party, unless (i) the indemnifying person and the indemnified
party shall have mutually agreed in writing to the contrary, (ii) the
indemnifying person failed reasonably promptly to assume the defense and employ
counsel reasonably satisfactory to the indemnified party or (iii) the named
parties to any such action (including any impleaded parties) include both such
indemnified party and the indemnifying person, or any affiliate of the
indemnifying person and such indemnified party shall have been reasonably
22
<PAGE>
advised by counsel that either (x) there may be one or more legal defenses
available to it which are different from or additional to those available to the
indemnifying person or such affiliate of the indemnifying person or (y) a
conflict may exist between such indemnified party and the indemnifying person or
such affiliate of the indemnifying person (in which case the indemnifying person
shall not have the right to assume the defense of such action on behalf of such
indemnified party), it being understood, however, that the indemnifying person
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all such indemnified parties, which firm shall be designated in writing by those
indemnified parties who sold a majority in outstanding aggregate principal
amount of Transfer Restricted Securities sold by all such indemnified parties,
and any such separate firm for the Issuer, its directors, officers and such
control persons of the Issuer shall be designated in writing by the Issuer. The
indemnifying person shall not be liable for any settlement of any proceeding
effected without its prior written consent, but if settled with such consent or
if there be a final judgment for the plaintiff, the indemnifying person agrees
to indemnify any indemnified party from and against any loss or liability by
reason of such settlement or judgment. No indemnifying person shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
If the indemnification provided for in the first and second paragraphs
of this Section 7 is unavailable to an indemnified party in respect of any
losses, claims, damages, liabilities, or expenses referred to therein (other
than by reason of the exceptions provided therein), then each indemnifying
person under such paragraphs, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities, or expenses
(i) in such proportion as is appropriate to reflect the relative fault of the
indemnified party on the one hand and the indemnifying person(s) on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities, or expenses or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits re-
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ferred to in clause (i) above but also the relative fault of the indemnifying
person(s) and the indemnified party, as well as any other relevant equitable
considerations. The relative fault of the Issuer on the one hand and any
Indemnified Persons on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Issuer or by such Indemnified Persons and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by PRO RATA allocation
(even if such indemnified parties were treated as one entity for such purpose)
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses actually incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, in no event shall an
Indemnified Person be required to contribute any amount in excess of the amount
by which proceeds received by such Indemnified Person from sales of Transfer
Restricted Securities or Exchange Securities exceeds the amount of any damages
that such Indemnified Person has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section 7
will be in addition to any liability which the indemnifying persons may
otherwise have to the indemnified parties referred to above. The Indemnified
Persons' obligations to contribute pursuant to this Section 7 are several in
proportion to the respective principal amount of Securities sold by each of the
Indemnified Persons hereunder and not joint.
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8. RULES 144 AND 144A
The Issuer covenants that for so long as any Transfer Restricted
Securities remain outstanding, it will make available to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
from such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Securities Act in order to permit resales of such Transfer
Restricted Securities pursuant to Rule 144A under the Securities Act, as such
rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
From and after the effectiveness of the Exchange Registration
Statement or the Shelf Registration Statement, the Issuer covenants that it will
file any reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder in a
timely manner and, will take such further action as any Holder of Transfer
Restricted Securities may reasonably request, all to the extent required from
time to time to enable such Holder to sell Transfer Restricted Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144 and Rule 144A under the Securities Act, as
such rules may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC.
9. UNDERWRITTEN REGISTRATIONS
(a) If any of the Transfer Restricted Securities covered by any Shelf
Registration are to be sold in an underwritten offering, the investment banker
or investment bankers and manager or managers that will manage the offering will
be selected by the Holders of a majority in aggregate principal amount of such
Transfer Restricted Securities included in such offering and reasonably
acceptable to the Issuer.
No Holder of Transfer Restricted Securities may participate in any
underwritten registration hereunder, unless such Holder (a) agrees to sell such
Holder's Transfer Restricted Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
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<PAGE>
(b) Each Holder of Transfer Restricted Securities agrees, if
requested (pursuant to a timely written notice) by the managing underwriters in
an underwritten offering or placement agent in a private offering of the
Issuer's debt securities, not to effect any private sale or distribution
(including a sale pursuant to Rule 144(k) or Rule 144A under the Securities Act,
but excluding non-public sales to any of its affiliates, officers, directors,
employees and controlling persons) of any of the Securities, except pursuant to
an Exchange Offer, during the period beginning 10 days prior to, and ending 90
days after, the closing date of the underwritten offering. If a request is made
pursuant to this Section 9(b) at any time when a Shelf Registration is
effective, then the time period during which such Shelf Registration is required
to remain continuously effective for such holders of Transfer Restricted
Securities pursuant to the terms of this Agreement shall be extended by 100
days.
The foregoing provisions shall not apply to any Holder of Transfer
Restricted Securities if such Holder is prevented by applicable statute or
regulation from entering into any such agreement.
The Issuer agrees, without the written consent of the managing
underwriters in an underwritten offering of Transfer Restricted Securities
covered by a Registration Statement filed pursuant to Section 3 hereof, not to
effect any public or private sale or distribution of their respective debt
securities, including a sale pursuant to Regulation D or Rule 144A under the
Securities Act, during the period beginning 10 days prior to, and ending 90 days
after, the closing date of each underwritten offering made pursuant to such
Registration Statement (PROVIDED, HOWEVER, that such period shall be extended by
the number of days from and including the date of the giving of any notice
pursuant to Section 5(c)(v) hereof to and including the date when each seller of
Transfer Restricted Securities covered by such Registration Statement shall have
received the copies of the supplemented or amended Prospectus contemplated by
Section 5(j) hereof).
10. MARKET MAKING.
Notwithstanding any other provision of this Agreement, the Company
will, for the sole benefit of each of the Purchasers, and for so long as any of
the Securities are outstanding and either Purchaser or any of their respective
Affiliates (as defined in the rules and regulations of the SEC under the
Securities Act) owns any equity securities of the Company and proposes to make a
market in the Securities as part of its business in the ordinary course:
26
<PAGE>
(a) The Company will:
(i) (A) periodically amend the Registration
Statement so that the information contained in the
Registration Statement complies with the
requirements of Section 10(a) under the Securities
Act; (B) if reasonably requested by such
Purchaser, within 45 days following the end of the
Company's most recent fiscal quarter, file a
supplement to the Prospectus which sets forth the
financial results of the Company for the previous
quarter; (C) amend the Registration Statement or
supplement the Prospectus when necessary in the
Company's reasonable judgment with advice of
counsel to reflect any material changes in the
information provided therein; and (D) amend the
Registration Statement when required to do so in
order to comply with Section 10(a)(3) of the
Securities Act; PROVIDED, HOWEVER, that (1) prior
to filing any post-effective amendment to the
Registration Statement or any supplement to the
Prospectus, the Company will furnish to such
Purchaser copies of all such documents proposed to
be filed, which documents will be subject to the
review of such Purchaser and its counsel, (2) the
Company will not file any post-effective amendment
to the Registration Statement or any supplement to
the Prospectus to which such Purchaser and its
counsel shall reasonably object in writing setting
forth the reasons for such objection and (3) the
Company will provide such Purchaser's counsel and
such Purchaser with copies of each amendment or
supplement filed; PROVIDED, FURTHER, that with
respect to (1) and (2) the Company shall be
notified within 3 Business Days of any objection
or comments to such post-effective amendment or
supplement and, PROVIDED, FURTHER, that the
Company shall not be required to comply with the
foregoing requirements on account of having to
take action in good faith for valid business
reasons (not including
27
<PAGE>
avoidance of its obligations hereunder) and shall
be entitled to notify the Purchasers on no more
than two separate occasions during any consecutive
12 months that their use of the Prospectus must
cease for a continuous period not in excess of 15
Business Days;
(ii) notify such Purchaser and (if requested
by such Purchaser) confirm such advice in writing,
(A) when any Prospectus supplement or amendment or
post-effective amendment to the Registration
Statement has been filed, and, with respect to any
post-effective amendment, when the same has become
effective; (B) of any request by the SEC for any
post-effective amendment or supplement to the
Registration Statement, any supplement or
amendment to the Prospectus or for additional
information; (C) the issuance by the SEC of any
stop order suspending the effectiveness of the
Registration Statement or the initiation of any
proceedings for that purpose; (D) of the receipt
by the Company of any notification with respect to
the suspension of the qualification of the
Securities for sale in any jurisdiction or the
initiation or threatening of any proceedings for
such purpose; (E) of the happening of any event
which makes any statement made in the Registration
Statement, the Prospectus or any amendment or
supplement thereto untrue or which requires the
making of any changes in the Registration
Statement, the Prospectus or any amendment or
supplement thereto, in order to make the
statements therein not misleading; and (F) of any
advice from a nationally recognized statistical
rating organization that such organization has
placed the Company under surveillance or review
with negative implications or has determined to
downgrade the rating of the Securities or any
other debt obligation of the Company whether or
not such downgrade shall have been publicly
announced;
28
<PAGE>
(iii) furnish to such Purchaser, without
charge, (i) at least one conformed copy of any
post-effective amendment to the Registration
Statement; and (ii) as may copies of any amendment
or supplement to the Prospectus as such Purchaser
may reasonably request;
(iv) consent to the use of the Prospectus or
any amendment or supplement thereto by such
Purchaser in connection with the offering and sale
of the Securities;
(v) furnish to such Purchaser copies of all
materials furnished by the Company to its
shareholders and all public reports and all
reports and financial statements furnished by the
Company to the Nasdaq National Market System or
any U.S. national securities exchange or quotation
service upon which the Securities may be listed
pursuant to requirements of or agreements with
such exchange or quotation service or to the SEC
pursuant to the Exchange Act or any rule or
regulation of the SEC thereunder; and
(vi) in the event of the issuance of any stop
order suspending the effectiveness of the
Registration Statement or of any order suspending
the qualification of the Securities for sale in
any jurisdiction, to use promptly its best efforts
to obtain its withdrawal.
(b) The Company represents that any post-effective amendments to the
Registration Statement or any amendments or supplements to the Prospectus will,
when they become effective or are filed with the SEC, as the case may be,
conform in all respects to the requirements of the Securities Act and will not,
as of the effective date of such post-effective amendments and as of the filing
date of amendments or supplements to the Prospectus contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; PROVIDED
that no representation or warranty is made as to information contained in or
omitted from either Registration Statement or Prospectus in reliance upon and in
conformity with
29
<PAGE>
written information furnished to the Company by such Purchaser specifically for
inclusion therein.
(c) Each time that the Registration Statement or Prospectus shall be
amended or the Prospectus shall be supplemented, the Company shall, concurrently
with such amendment or supplement, furnish such Purchaser and its counsel with a
certificate of its Chairman of the Board or its President and its chief
financial officer, together with the written opinion of its counsel (as
specified in clauses (i) and (iii) below), to the effect that:
(i) The Registration Statement has been
declared effective and such amendment has become
effective under the Securities Act as of the date
and time specified in such certificate and such
opinion; such amendment to the Prospectus (or such
supplement to the Prospectus, as the case may be)
was filed with the SEC pursuant to the
subparagraph of Rule 424(b) specified in such
certificate and such opinion on the date specified
therein; and, to the knowledge of such officers
and such counsel, no stop order suspending the
effectiveness of the Registration Statement has
been issued and no proceeding for that purpose is
pending or threatened by the SEC;
(ii) Such officers have carefully examined
the Registrations Statement and the Prospectus and
such amendment or supplement thereto and, as of
the date of such amendment or supplement, the
Registration Statement and the Prospectus, as
amended or supplemented, as the case may be, did
not include any untrue statement of a material
fact and did not omit to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading; and
(iii) In advising the Company with
respect to the post-effective amendment (but
without independent investigation of any facts)
nothing has come to the attention of counsel to
the Company that would
30
<PAGE>
lead it to believe that the Registration Statement
(or any post-effective amendment thereto), at the
time of its effective date, contained any untrue
statement of a material fact or omitted to state a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, or that the Prospectus contains any
untrue statement of a material fact or omits to
state a material fact required to be stated
therein or necessary to make the statement
therein, in the light of the circumstances under
which they were made, not misleading.
(d) Each time that the Registration Statement or Prospectus shall be
amended or the Prospectus shall be supplemented to include audited annual
financial information, the Company shall, concurrently with such amendment or
supplement, furnish such Purchaser and its counsel with a letter of the
independent public accountants for the Company of nationally recognized
standing, addressed to such Purchaser and dated the date of delivery of such
letter, (i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the SEC and (ii) a customary and reasonable "cold comfort"
letter.
(e) The Company hereby agrees to indemnify such Purchaser, and if
applicable, contribute to such Purchaser in accordance with Section 7 hereof.
(f) The Company will comply with the provisions of this Section 10 at its
own expense.
(g) The agreements contained in this Section 10 and the representations,
warranties and agreements contained in this Agreement shall survive the initial
offers and sales of the Securities pursuant to a Registration Statement filed
pursuant to Section 2 or Section 3 hereof, and shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of any indemnified party.
11. MISCELLANEOUS
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<PAGE>
(a) REMEDIES. In the event of a breach by the Issuer of any of its
obligations under this Agreement, each Holder of Transfer Restricted Securities,
in addition to being entitled to exercise all rights provided herein, in the
Indenture or, in the case of the Purchasers, in the Purchase Agreement, or
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Agreement. The Issuer agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect of
such breach, it shall waive the defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. The Issuer has not, as of the date
hereof, and it shall not, after the date of this Agreement, enter into any
agreement with respect to any of its securities that is inconsistent or
conflicts with the rights granted to the Holders of Transfer Restricted
Securities in this Agreement or otherwise conflicts with the provisions hereof.
The Issuer has not entered, and will not enter, into any agreement with respect
to any of its securities which will grant to any Person piggy-back registration
rights with respect to a Registration Statement. Notwithstanding the foregoing
provisions of this Section 11(b) or the third sentence of Section 3(a), the
Company may comply with its obligations as set forth in (a) Section 2.2 of the
Registration Agreement, dated as of June 5, 1996, among DLJ Merchant Banking
Partners, L.P., a Delaware limited partnership, DLJ International Partners,
C.V., a Netherlands Antilles limited partnership, DLJ Offshore Partners, C.V., a
Netherlands Antilles limited partnership, and DLJ Merchant Banking Fund, Inc., a
Delaware corporation, and the Company and (b) Section 3 of the Registration
Rights Agreement, dated as of June 5, 1996, among the Company and the
Shareholders named therein, both in the case of (a) and (b), as in effect on the
date of this Agreement.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to or departures from the provisions
hereof may not be given, unless the Issuer has obtained the written consent of
Holders of at least a majority of the then outstanding aggregate principal
amount of Transfer Restricted Securities. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders of Transfer Restricted
Securities whose securities are being sold pursuant to a Registration Statement
and that does not directly or indirectly affect, impair, limit or compromise the
rights of other Holders of Transfer Restricted
32
<PAGE>
Securities may be given by Holders of at least a majority in aggregate principal
amount of the Transfer Restricted Securities being sold by such Holders pursuant
to such Registration Statement; PROVIDED that the provisions of this sentence
may not be amended, modified or supplemented except in accordance with the
provisions of the immediately preceding sentence. In addition, notwithstanding
the foregoing, neither this sentence nor any provision of Section 10 may be
amended, modified or supplemented without the prior written consent of each
Purchaser who owns equity securities of the Company.
(d) NOTICES. All notices and other communications (including,
without limitation, any notices or other communications to the Trustee) provided
for or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next-day air courier or telecopier:
(i) if to a Holder of Transfer Restricted Securities, at the
most current address given by the Trustee to the Issuer; and
(ii) if to the Issuer, 5155 Clareton Drive, Agoura Hills,
California 91301, Attention: Bruce Ross, Chief Financial Officer, with
copies to Buchalter, Nemer, Fields and Younger, a professional
corporation, 601 S. Figueroa, Suite 2200, Los Angeles, California
90017, Attention: Mark Bonenfant, Esq.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being timely delivered to a next-day air courier, if made by next-day air
courier; and when receipt has been confirmed by the addressee, if telecopied.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee under the
Indenture at the address specified in such Indenture.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto, including, without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities. The Issuer
agrees that the Holders of the Securities shall be third party creditor
beneficiaries to the agreements made hereunder by the Purchasers, the Issuer and
each Holder shall have the
33
<PAGE>
right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights hereunder.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties hereto that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(j) ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement, is intended by the parties hereto as a final expression of their
agreement, and is intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein.
34
<PAGE>
(k) SECURITIES HELD BY THE ISSUER OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Securities is
required hereunder, Securities held by the Issuer or its affiliates (as such
term is defined in Rule 405 under the Securities Act , other than the Purchasers
or their affiliates) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
35
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
GUITAR CENTER MANAGEMENT COMPANY,
INC.
By: /s/ Larry E. Thomas
------------------------------------
Name: Larry Thomas
Title: President and Chief Executive
Officer
The foregoing Registration Rights
Agreement is hereby confirmed and
accepted as of the date first
above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Jason Ackerman
-------------------------
Name: Jason Ackerman
Title: Vice President
CHASE SECURITIES INC.
By: /s/ Tom Walker
-------------------------
Name: Tom Walker
Title: Managing Director
36
<PAGE>
37
<PAGE>
THE OPTION GRANTED PURSUANT TO THIS STOCK OPTION AGREEMENT (THE "OPTION")
AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE OPTION OR THE SHARES UNDER THE SECURITIES ACT, OR AN
OPINION OF COUNSEL ADDRESSED TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of June 5, 1996 among Guitar Center
Management Company, Inc., a California corporation (the "Company"), and Lawrence
Thomas (the "Optionee").
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
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 shares of Common Stock (the "Option Shares") for a purchase price per
share of $1.00 (as adjusted from time to time in accordance with the terms of
this Agreement, the "Exercise Price").
SECTION 2. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the earlier to occur of (i) the tenth
anniversary of the date hereof or (ii) the consummation of a Company Sale,
unless the Option shall have sooner been terminated in accordance with the terms
of this Agreement. Anything contained in this Agreement to the contrary
notwithstanding, the Option shall terminate, become null and void and be of no
further force or effect upon the occurrence of a Termination Event if such
termination occurs prior to the occurrence of an Acceleration Event.
Furthermore, if a Termination Event occurs after the occurrence of an
Acceleration Event, the Optionee shall be permitted to exercise the Option as to
any and all unexercised Vested Shares only during the period within 90 days
after the Termination Date.
SECTION 3. VESTING AND EXERCISE OF OPTION.
(a) Unless accelerated pursuant to Section 6, the
Option shall vest in three equal installments on each of the
seventh, eighth and ninth anniversary of the date hereof.
(b) The Option may be exercised only to the
extent it has vested. Subject to the provisions of Section 2, the Optionee may
exercise the Option as to any and all Vested
<PAGE>
Shares, from time to time, in whole or in part, until the termination of the
Option Term. Upon termination of the Option Term, the Option granted hereunder
shall expire and the Optionee shall have no further right to exercise any
portion of the Option.
SECTION 4. EXERCISE PROCEDURES.
The Optionee may exercise this Option by giving written notice to the
Company pursuant to Section 11(c). The notice shall specify the election to
exercise the Option and the number of Option Shares for which it is being
exercised. The notice shall be signed by the Optionee. The Optionee shall
deliver to the Company at the time of giving the notice payment of the Purchase
Price in accordance with Section 5. If an exercise of any portion of the Option
is to be made in connection with a Public Offering or Company Sale, the exercise
of all or any portion of the Option may, at the election of the Optionee, be
conditioned upon the consummation of the Public Offering or Company Sale, in
which case such exercise shall be deemed not to be effective if such Public
Offering or Company Sale is not consummated and if, in the case of a Company
Sale, such Company Sale is consummated, the exercise will be deemed to have
occurred immediately prior to the consummation of such Company Sale.
SECTION 5. PAYMENT FOR STOCK.
The entire Purchase Price shall be paid in lawful money of the United
States of America by check.
SECTION 6. ACCELERATED VESTING.
Notwithstanding anything contained in Section 3 to the contrary and
subject to the provisions of this Agreement:
(a) If no Termination Event has previously occurred
and if a Qualified Public Offering is consummated at a price per
share to the public (the "Public Offering Price") sufficient to
cause the Calculated Corporate Value of the Company to be equal
to or greater than the Applicable Target Value as of the date
such Qualified Public Offering is consummated, then all Unvested
Shares shall immediately vest.
(b) If (i) no Termination Event has previously
occurred, (ii) a Public Offering has been consummated, (iii) a
Significant Public Float exists on the Market Determination Date
referred to in clause (iv) below, and (iv) the Current Public
Market Value as of any date (the "Market Determination Date")
occurring more than 20 days after a Public Offering is sufficient
to cause the Calculated Corporate Value of the Company to be
equal to or greater than the Applicable Target Value for such
Market Determination Date, then all Unvested Shares shall
immediately vest.
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<PAGE>
(c) If no Termination Event has previously occurred
and if a Company Sale is consummated and the Shareholder
Consideration paid in such Company Sale is sufficient to cause
the Indicated Value of the Company to be equal to or greater than
the Applicable Target Value as of the date on which the Company
Sale is consummated, then all Unvested Shares shall immediately
vest.
(d) If (i) no Qualified Public Offering or Company
Sale shall have occurred and (ii) Optionee's employment with the
Company is terminated by the Company without Cause (unless such
termination was accompanied by the Requisite Approval) or is
terminated by the Optionee with Reasonable Justification, then
all Unvested Shares shall immediately vest.
SECTION 7. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, the Option and the
rights and privileges conferred hereby shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of the Option, or of any right or privilege conferred hereby, contrary to the
provisions hereof, or upon any attempted sale under any execution, attachment or
similar process upon the rights and privileges conferred hereby, the Option
shall automatically expire and the rights and privileges conferred hereby shall
immediately become null and void. Any shares issued to the Optionee (or his
successors, heirs or assigns) upon exercise of the Option shall be subject to
the restrictions contained in the Stockholders' Agreement and shall be deemed
Management Stockholder Shares (as defined in the Stockholders' Agreement) for
all purposes thereunder.
SECTION 8. OPTIONEE'S EMPLOYMENT.
Nothing in the Option shall confer upon the Optionee any right to
continue to be employed by the Company or interfere in any way with the right of
the Company or its stockholders, as the case may be, to terminate the Optionee's
employment or retention by the Company or to increase or decrease the Optionee's
compensation at any time.
SECTION 9. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES.
(a) COMPLIANCE WITH SECURITIES LAWS
No shares of Common Stock shall be issued and delivered upon the
exercise of this Option, unless and until the Company and/or the Optionee shall
have complied with all applicable federal or state registration, listing and/or
qualification
-3-
<PAGE>
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
The Board in its discretion may, as a condition to the exercise of
this Option, require the Optionee (i) to represent in writing that the shares of
Common Stock received upon exercise of this 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 shares of Common Stock acquired upon the exercise of
this Option that have not been registered under the Securities Act shall, if
required by the Board, bear the following legend and such additional legends as
may be required by the Stockholders' Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). 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 SAID ACT."
(b) S-8 REGISTRATION
Concurrent with, or promptly following completion of a Public
Offering, the Company shall register on Form S-8 (or any successor form), if and
to the extent then so registrable, all shares of Common Stock issuable upon
exercise of this Option.
SECTION 10. SHARES AND ADJUSTMENTS.
(a) GENERAL. In the event of any stock dividend,
stock split or share combination, a proportionate adjustment will
be made in (i) the number of Option Shares, and (ii) the Exercise
Price, in each case to prevent dilution or enlargement of the
rights under this Agreement. This Agreement 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 Purchase Agreement dated May 1, 1996 among the
Company and the other parties thereto.
(b) ORGANIC CHANCRE. If an Organic Change occurs,
in lieu of the Option Shares issuable upon exercise of the
Option, the Option will thereafter be exercisable for such shares
of stock, securities or assets (including cash) as may be issued
or payable with respect to or in exchange for the number of
shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of the Option had such Organic Change
not taken place.
-4-
<PAGE>
(c) RESERVATION OF RIGHTS. Except as expressly
provided in this Section 10, the Optionee shall have no rights by reason of (i)
any subdivision or consolidation of shares of stock of any class, (ii) the
payment of any dividend or (iii) any other increase or decrease in the number of
shares of stock of any class. Any issue by the Company of shares of stock of
any class, or securities convertible into or exercisable or exchangeable for
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of the
Option Shares subject to the Option. The grant of the Option shall not affect in
any way the right or power of the Company to make adjustments, reclassification,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 11. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. In the event that the
Company determines that it is required to withhold, federal,
state or local tax as a result of the exercise of the Option, the Optionee, as
a condition to the exercise of the Option, shall make arrangements reasonably
satisfactory to the Company to enable the Company to satisfy all withholding
requirements.
(b) RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights
as a stockholder with respect to any Option Shares subject to the Option until
such Option Shares have been issued in the name of the Optionee. Nothing
contained in this Section 11(b) will impair any contract rights which the
Optionee may hold.
(c) NOTICE. Any notice required by the terms of this Agreement
shall be given in writing and shall be deemed effective upon personal delivery
or 5 business days after being deposited with the United States Postal Service,
by registered or certified mail with postage and fees prepaid and addressed to
the party entitled to such notice at the address shown on the books and records
of the Company (or at such other address as such party may designate by 10 days'
advance written notice to the other party to this Agreement).
(d) ENTIRE AGREEMENT. This Agreement, and the other agreements
entered into contemporaneous herewith, constitute the entire contract between
the parties hereto with regard to the subject matter hereof, and supersede all
prior agreements relating hereto.
(e) CHOICE OF LAW. THIS AGREEMENT WILL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE 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
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<PAGE>
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.
(f) AMENDMENTS. This Agreement may be amended or modified only
in a writing signed by the Company and the Optionee.
(g) NO STRICT CONSTRUCTION. The language of this Agreement will
be deemed to be the language chosen by the parties hereto to express their
mutual intent and no rule of strict construction will be applied against any
person.
(h) MUTUAL 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.
SECTION 12. DEFINITIONS.
"AGREEMENT" shall mean this Stock Option Agreement.
"APPLICABLE TARGET VALUE" means with respect to any Potential
Acceleration Event, an amount equal to $280,000,000 increased (or decreased) by
the positive (or negative) amount equal to the Cumulative Adjustment Amount as
of the date of such Potential Acceleration Event.
"BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
"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 1996 Performance Stock Option Plan.
"CAUSE" shall have the meaning ascribed to it in the Employment
Agreement.
"COMMON STOCK" means the Company's Common Stock, no par value.
"COMMON STOCK EQUIVALENTS" means the right to acquire, whether or not
immediately exercisable, one share of Common Stock, whether evidenced by an
option, warrant, convertible security or other instrument or agreement,
including the shares
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<PAGE>
of Common Stock issuable pursuant to those certain two Stock Option Agreements
between the Company on the one hand and Larry Thomas or Marty Albertson on the
other hand (this Stock Option Agreement being one of such Stock Option
Agreements).
"COMPANY SALE" shall have the meaning ascribed to "Sale of the
Company" in the Stockholders' Agreement.
"CUMULATIVE ADJUSTMENT AMOUNT" shall mean, as of the date of any
Potential Acceleration Event (after giving pro-forma effect to such Potential
Acceleration Event), the cumulative amount (without duplication) of the
following payments from the date immediately following the date hereof through
and including such Potential Acceleration Event: (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 redemptions 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.
"CURRENT PUBLIC MARKET VALUE" means as to any security (i) the average
of the closing prices of such security's sales on all domestic securities
exchanges on which such security may at the time be listed, or, (ii) if there
have been no sales on any such exchange on any day, the average of the highest
bid and lowest asked prices on all such exchanges at the end of such day, or,
(iii) if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, on such day, or, (iv) if on any day such security is not quoted
in the NASDAQ System, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 20 days consisting of the 20 business days
preceding the day the "Current Public Market Value" is being determined.
"EMPLOYMENT AGREEMENT" means that certain Employment Agreement, dated
as of the date hereof, between the Company and the Optionee.
"EXERCISE PRICE" has the meaning given to such term in Section 1.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time.
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<PAGE>
"JUNIOR PREFERRED STOCK" means the Company's 8% Junior Preferred Stock
referenced in the Purchase Agreement.
"MARKET PRICE DETERMINATION" means the determination of the Calculated
Corporate Value of the Company as of any Market Determination Date pursuant to
Section 6(b).
"OPTION" has the meaning given to such term in Section l.
"OPTION SHARES" has the meaning given to such term in Section l.
"OPTION TERM" has the meaning given to such term in Section 2.
"OPTION VESTING DETERMINATION SHARES" means the shares of Common Stock
and Common Stock Equivalents outstanding minus any Reserved Shares under the
Company's 1996 Performance Stock Option Plan not classified as Shares Available
for Award.
"ORGANIC CHANGE" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Company's assets to another Person or other transaction which is effected in
such a way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock.
"PERSON" shall be construed broadly and shall include, without
limitation, an individual, a partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
"POTENTIAL ACCELERATION EVENT" means a Qualified Public Offering,
Market Price Determination or Company Sale.
"PUBLIC OFFERING" means the sale, whether by the Company or its
Stockholders, in an underwritten public offering registered under the Securities
Act, of shares of equity securities, other than any offering made in connection
with a business acquisition or an employee benefit plan, with such shares being
listed on a national securities exchange or the Nasdaq National Market System.
"PUBLIC OFFERING PRICE" means the gross selling price (before
underwriters discount) for a share of Common Stock in a Qualified Public
Offering.
"PURCHASE PRICE" means the Exercise Price multiplied by the number of
Shares with respect to which the Option is being exercised.
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<PAGE>
"QUALIFIED PUBLIC OFFERING" means the first Public Offering of shares
of Common Stock having an aggregate offering value (before underwritten
discount) of at least $35 million.
"REASONABLE JUSTIFICATION" shall have the meaning ascribed to it in
the Employment Agreement.
"REQUISITE APPROVAL" means a determination by 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.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SHARE" shall mean one share of Common Stock, as adjusted in
accordance with Section 10 (if applicable).
"SIGNIFICANT PUBLIC FLOAT" will be deemed to exist on any Market
Determination Date if the aggregate number of shares of Common Stock which have
been sold to the public pursuant to one or more Public Offerings and to the
public pursuant to Rule 144 under the Securities Act and which, in either case,
have not been repurchased by the Company or any of its Subsidiaries, equals or
exceeds 20% of the Option Vesting Determination Shares.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement dated the
date hereof among the Company and certain of its stockholder.
"SUBSIDIARY" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 504 of the total combined voting power
of all classes of outstanding stock of such corporation.
"TERMINATION EVENT" means a termination of the Optionee's employment
with the Company and its Subsidiaries if such termination constitutes a
Voluntary Termination or a termination for Cause.
"TRANSFER" shall be construed broadly and shall include any transfer
of Common Stock, including without limitation, by way of issuance, sale,
participation, pledge, gift, bequeath, intestate transfer, distribution,
liquidation, merger or consolidation.
"UNVESTED SHARES" means the number of Option Shares which have not
vested in accordance with Sections 3 or 6 of this Agreement.
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<PAGE>
"VESTED SHARES" means the number of Option Shares, if any, which have
vested in accordance with Sections 3 or 6 of this Agreement.
"VOLUNTARY TERMINATION" means the termination of Optionee's employment
with the Company as a result of such Optionee's resignation without Good Reason.
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<PAGE>
IN WITNESS WHEREOF; the Company has caused this Option Agreement to be
executed on its behalf by its officer duly authorized to act on behalf of the
Board, and the Optionee has personally executed is Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ Marty Albertson
-------------------------------------
Name: Marty Albertson
Title: Executive Vice President
/s/ Lawrence Thomas
----------------------------------------
Lawrence Thomas
<PAGE>
THE OPTION GRANTED PURSUANT TO THIS STOCK OPTION AGREEMENT (THE "OPTION")
AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE OPTION OR THE SHARES UNDER THE SECURITIES ACT, OR AN
OPINION OF COUNSEL ADDRESSED TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of June 5, 1996 among Guitar Center
Management Company, Inc., a California corporation (the "Company"), and Marty
Albertson (the "Optionee").
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
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 shares of Common Stock (the "Option Shares") for a purchase price per
share of $1.00 (as adjusted from time to time in accordance with the terms of
this Agreement, the "Exercise Price").
SECTION 2. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the earlier to occur of (i) the tenth
anniversary of the date hereof or (ii) the consummation of a Company Sale,
unless the Option shall have sooner been terminated in accordance with the terms
of this Agreement. Anything contained in this Agreement to the contrary
notwithstanding, the Option shall terminate, become null and void and be of no
further force or effect upon the occurrence of a Termination Event if such
termination occurs prior to the occurrence of an Acceleration Event.
Furthermore, if a Termination Event occurs after the occurrence of an
Acceleration Event, the Optionee shall be permitted to exercise the Option as to
any and all unexercised Vested Shares only during the period within 90 days
after the Termination Date.
SECTION 3. VESTING AND EXERCISE OF OPTION.
(a) Unless accelerated pursuant to Section 6, the Option shall
vest in three equal installments on each of the seventh, eighth and ninth
anniversary of the date hereof.
(b) The Option may be exercised only to the extent it has
vested. Subject to the provisions of Section 2, the Optionee may exercise the
Option as to any and all Vested
<PAGE>
Shares, from time to time, in whole or in part, until the termination of the
Option Term. Upon termination of the Option Term, the Option granted hereunder
shall expire and the Optionee shall have no further right to exercise any
portion of the Option.
SECTION 4. EXERCISE PROCEDURES.
The Optionee may exercise this Option by giving written notice to the
Company pursuant to Section 11(c). The notice shall specify the election to
exercise the Option and the number of Option Shares for which it is being
exercised. The notice shall be signed by the Optionee. The Optionee shall
deliver to the Company at the time of giving the notice payment of the Purchase
Price in accordance with Section 5. If an exercise of any portion of the Option
is to be made in connection with a Public Offering or Company Sale, the exercise
of all or any portion of the Option may, at the election of the Optionee, be
conditioned upon the consummation of the Public Offering or Company Sale, in
which case such exercise shall be deemed not to be effective if such Public
Offering or Company Sale is not consummated and if, in the case of a Company
Sale, such Company Sale is consummated, the exercise will be deemed to have
occurred immediately prior to the consummation of such Company Sale.
SECTION 5. PAYMENT FOR STOCK.
The entire Purchase Price shall be paid in lawful money of the United
States of America by check.
SECTION 6. ACCELERATED VESTING.
Notwithstanding anything contained in Section 3 to the contrary and
subject to the provisions of this Agreement:
(a) If no Termination Event has previously occurred and if a
Qualified Public Offering is consummated at a price per share to the public
(the "Public Offering Price") sufficient to cause the Calculated Corporate
Value of the Company to be equal to or greater than the Applicable Target
Value as of the date such Qualified Public Offering is consummated, then all
Unvested Shares shall immediately vest.
(b) If (i) no Termination Event has previously occurred, (ii) a
Public Offering has been consummated, (iii) a Significant Public Float exists on
the Market Determination Date referred to in clause (iv) below, and (iv) the
Current Public Market Value as of any date (the "Market Determination Date")
occurring more than 20 days after a Public Offering is sufficient to cause
the Calculated Corporate Value of the Company to be equal to or greater than
the Applicable Target Value for such Market Determination Date, then all
Unvested Shares shall immediately vest.
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<PAGE>
(c) If no Termination Event has previously occurred and if a Company
Sale is consummated and the Shareholder Consideration paid in such Company Sale
is sufficient to cause the Indicated Value of the Company to be equal to or
greater than the Applicable Target Value as of the date on which the Company
Sale is consummated, then all Unvested Shares shall immediately vest.
(d) If (i) no Qualified Public Offering or Company Sale shall have
occurred and (ii) Optionee's employment with the Company is terminated by the
Company without Cause (unless such termination was accompanied by the Requisite
Approval) or is terminated by the Optionee with Reasonable Justification, then
all Unvested Shares shall immediately vest.
SECTION 7. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, the Option and the
rights and privileges conferred hereby shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of the Option, or of any right or privilege conferred hereby, contrary to the
provisions hereof, or upon any attempted sale under any execution, attachment or
similar process upon the rights and privileges conferred hereby, the Option
shall automatically expire and the rights and privileges conferred hereby shall
immediately become null and void. Any shares issued to the Optionee (or his
successors, heirs or assigns) upon exercise of the Option shall be subject to
the restrictions contained in the Stockholders' Agreement and shall be deemed
Management Stockholder Shares (as defined in the Stockholders' Agreement) for
all purposes thereunder.
SECTION 8. OPTIONEE'S EMPLOYMENT.
Nothing in the Option shall confer upon the Optionee any right to
continue to be employed by the Company or interfere in any way with the right of
the Company or its stockholders, as the case may be, to terminate the Optionee's
employment or retention by the Company or to increase or decrease the Optionee's
compensation at any time.
SECTION 9. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES.
(a) COMPLIANCE WITH SECURITIES LAWS
No shares of Common Stock shall be issued and delivered upon the
exercise of this Option, unless and until the Company and/or the Optionee shall
have complied with all applicable federal or state registration, listing and/or
qualification
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<PAGE>
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
The Board in its discretion may, as a condition to the exercise of
this Option, require the Optionee (i) to represent in writing that the shares of
Common Stock received upon exercise of this 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 shares of Common Stock acquired upon the exercise of
this Option that have not been registered under the Securities Act shall, if
required by the Board, bear the following legend and such additional legends as
may be required by the Stockholders' Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). 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 SAID ACT."
(b) S-8 REGISTRATION
Concurrent with, or promptly following completion of a Public
Offering, the Company shall register on Form S-8 (or any successor form), if and
to the extent then so registrable, all shares of Common Stock issuable upon
exercise of this Option.
SECTION 10. SHARES AND ADJUSTMENTS.
(a) GENERAL. In the event of any stock dividend, stock split or
share combination, a proportionate adjustment will be made in (i) the number of
Option Shares, and (ii) the Exercise Price, in each case to prevent dilution or
enlargement of the rights under this Agreement. This Agreement 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 Purchase
Agreement dated May 1, 1996 among the Company and the other parties thereto.
(b) ORGANIC CHANGE. If an Organic Change occurs, in lieu of the
Option Shares issuable upon exercise of the Option, the Option will thereafter
be exercisable for such shares of stock, securities or assets (including cash)
as may be issued or payable with respect to or in exchange for the number of
shares of Common Stock immediately theretofore acquirable and receivable upon
exercise of the Option had such Organic Change not taken place.
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<PAGE>
(c) RESERVATION OF RIGHTS. Except as expressly provided in this
Section 10, the Optionee shall have no rights by reason of (i) any subdivision
or consolidation of shares of stock of any class, (ii) the payment of any
dividend or (iii) any other increase or decrease in the number of shares of
stock of any class. Any issue by the Company of shares of stock of any class,
or securities convertible into or exercisable or exchangeable for shares of
stock of any class, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or Exercise Price of the Option Shares
subject to the Option. The grant of the Option shall not affect in any way the
right or power of the Company to make adjustments, reclassification,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 11. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. In the event that the Company determines
that it is required to withhold, federal, state or local tax as a result of the
exercise of the Option, the Optionee, as a condition to the exercise of the
Option, shall make arrangements reasonably satisfactory to the Company to enable
the Company to satisfy all withholding requirements.
(b) RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights
as a stockholder with respect to any Option Shares subject to the Option until
such Option Shares have been issued in the name of the Optionee. Nothing
contained in this Section 11(b) will impair any contract rights which the
Optionee may hold.
(c) NOTICE. Any notice required by the terms of this Agreement
shall be given in writing and shall be deemed effective upon personal delivery
or 5 business days after being deposited with the United States Postal Service,
by registered or certified mail with postage and fees prepaid and addressed to
the party entitled to such notice at the address shown on the books and records
of the Company (or at such other address as such party may designate by 10 days'
advance written notice to the other party to this Agreement).
(d) ENTIRE AGREEMENT. This Agreement, and the other agreements
entered into contemporaneous herewith, constitute the entire contract between
the parties hereto with regard to the subject matter hereof, and supersede all
prior agreements relating hereto.
(e) CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE 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
-5-
<PAGE>
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.
(f) AMENDMENTS. This Agreement may be amended or modified only
in a writing signed by the Company and the Optionee.
(g) NO STRICT CONSTRUCTION. The language of this Agreement will
be deemed to be the language chosen by the parties hereto to express their
mutual intent and no rule of strict construction will be applied against any
person.
(h) MUTUAL 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.
SECTION 12. DEFINITIONS.
"AGREEMENT" shall mean this Stock Option Agreement.
"APPLICABLE TARGET VALUE" means with respect to any Potential
Acceleration Event, an amount equal to $280,000,000 increased (or decreased) by
the positive (or negative) amount equal to the Cumulative Adjustment Amount as
of the date of such Potential Acceleration Event.
"BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
"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 1996 Performance Stock Option Plan.
"CAUSE" shall have the meaning ascribed to it in the Employment
Agreement.
"COMMON STOCK" means the Company's Common Stock, no par value.
"COMMON STOCK EQUIVALENTS" means the right to acquire, whether or not
immediately exercisable, one share of Common Stock, whether evidenced by an
option, warrant, convertible security or other instrument or agreement,
including the shares
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<PAGE>
of Common Stock issuable pursuant to those certain two Stock Option Agreements
between the Company on the one hand and Larry Thomas or Marty Albertson on the
other hand (this Stock Option Agreement being one of such Stock Option
Agreements).
"COMPANY SALE" shall have the meaning ascribed to "Sale of the
Company" in the Stockholders' Agreement.
"CUMULATIVE ADJUSTMENT AMOUNT" shall mean, as of the date of any
Potential Acceleration Event (after giving pro-forma effect to such Potential
Acceleration Event), the cumulative amount (without duplication) of the
following payments from the date immediately following the date hereof through
and including such Potential Acceleration Event: (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 redemptions 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.
"CURRENT PUBLIC MARKET VALUE" means as to any security (i) the average
of the closing prices of such security's sales on all domestic securities
exchanges on which such security may at the time be listed, or, (ii) if there
have been no sales on any such exchange on any day, the average of the highest
bid and lowest asked prices on all such exchanges at the end of such day, or,
(iii) if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, on such day, or, (iv) if on any day such security is not quoted
in the NASDAQ System, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 20 days consisting of the 20 business days
preceding the day the "Current Public Market Value" is being determined.
"EMPLOYMENT AGREEMENT" means that certain Employment Agreement, dated
as of the date hereof, between the Company and the Optionee.
"EXERCISE PRICE" has the meaning given to such term in Section l.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time.
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<PAGE>
"JUNIOR PREFERRED STOCK" means the Company's 8% Junior Preferred Stock
referenced in the Purchase Agreement.
"MARKET PRICE DETERMINATION" means the determination of the Calculated
Corporate Value of the Company as of any Market Determination Date pursuant to
Section 6(b).
"OPTION" has the meaning given to such term in Section l.
"OPTION SHARES" has the meaning given to such term in Section l.
"OPTION TERM" has the meaning given to such term in Section 2.
"OPTION VESTING DETERMINATION SHARES" means the shares of Common Stock
and Common Stock Equivalents outstanding minus any Reserved Shares under the
Company's 1996 Performance Stock Option Plan not classified as Shares Available
for Award.
"ORGANIC CHANGE" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Company's assets to another Person or other transaction which is effected in
such a way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock.
"PERSON" shall be construed broadly and shall include, without
limitation, an individual, a partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
"POTENTIAL ACCELERATION EVENT" means a Qualified Public Offering,
Market Price Determination or Company Sale.
"PUBLIC OFFERING" means the sale, whether by the Company or its
Stockholders, in an underwritten public offering registered under the Securities
Act, of shares of equity securities, other than any offering made in connection
with a business acquisition or an employee benefit plan, with such shares being
listed on a national securities exchange or the Nasdaq National Market System.
"PUBLIC OFFERING PRICE" means the gross selling price (before
underwriters discount) for a share of Common Stock in a Qualified Public
Offering.
"PURCHASE PRICE" means the Exercise Price multiplied by the number of
Shares with respect to which the Option is being exercised.
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"QUALIFIED PUBLIC OFFERING" means the first Public Offering of shares
of Common Stock having an aggregate offering value (before underwritten
discount) of at least $35 million.
"REASONABLE JUSTIFICATION" shall have the meaning ascribed to it in
the Employment Agreement.
"REQUISITE APPROVAL" means a determination by 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.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SHARE" shall mean one share of Common Stock, as adjusted in
accordance with Section 10 (if applicable).
"SIGNIFICANT PUBLIC FLOAT" will be deemed to exist on any Market
Determination Date if the aggregate number of shares of Common Stock which have
been sold to the public pursuant to one or more Public Offerings and to the
public pursuant to Rule 144 under the Securities Act and which, in either case,
have not been repurchased by the Company or any of its Subsidiaries, equals or
exceeds 20% of the Option Vesting Determination Shares.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement dated the
date hereof among the Company and certain of its stockholder.
"SUBSIDIARY" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 504 of the total combined voting power
of all classes of outstanding stock of such corporation.
"TERMINATION EVENT" means a termination of the Optionee's employment
with the Company and its Subsidiaries if such termination constitutes a
Voluntary Termination or a termination for Cause.
"TRANSFER" shall be construed broadly and shall include any transfer
of Common Stock, including without limitation, by way of issuance, sale,
participation, pledge, gift, bequeath, intestate transfer, distribution,
liquidation, merger or consolidation.
"UNVESTED SHARES" means the number of Option Shares which have not
vested in accordance with Sections 3 or 6 of this Agreement.
-9-
<PAGE>
"VESTED SHARES" means the number of Option Shares, if any, which have
vested in accordance with Sections 3 or 6 of this Agreement.
"VOLUNTARY TERMINATION" means the termination of Optionee's employment
with the Company as a result of such Optionee's resignation without Good Reason.
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option Agreement to
be executed an its behalf by its officer duly authorized to act on behalf of the
Board, and the Optionee has personally executed is Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ LAWRENCE E. THOMAS
-----------------------------------
Name: Lawrence E. Thomas
Title: President
/s/ MARTY ALBERTSON
-----------------------------------
Marty Albertson
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG
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. 333-00000) and related Prospectus of Guitar
Center Management Company, Inc. dated August 19, 1996.
/s/ ERNST & YOUNG LLP
Los Angeles, California
August 14, 1996
<PAGE>
EXHIBIT 25-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)__
------------
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
(Exact name of trustee as specified in its charter)
95-4311476
(I.R.S. employer
identification No.)
515 South Flower Street, Suite 2700
Los Angeles, CA 90071
(Address of principal (Zip Code)
executive offices)
DWIGHT LIU
515 South Flower Street, Suite 2700
Los Angeles, California 90071
(213) 861-5000
(Name, address, including zip code and telephone number of agent for service)
----------------------------
Guitar Center Management Company, Inc.
(Exact name of obligor as specified in its charter)
CALIFORNIA 95-3266031
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
<PAGE>
5155 Clareton Drive
Agoura Hills, California 91301
(Address of principal chief executive offices)
11.00% Senior Notes, Due 2006
(Title of indenture securities)
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
490 L'Enfant Plaza East, S.W.
Washington, D.C. 20219
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Federal Reserve Bank (12th District)
San Francisco, California
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
--------------------------------
<PAGE>
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15.
The obligor currently is not in default under any of its outstanding
securities for which U.S. Trust Company of California, N.A. is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15
of Form T-1 are not required under General Instruction B.
16. LIST OF EXHIBITS
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
California, N.A. currently in effect; incorporated herein by reference to
Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 33-33031.
T-1.2 - Included in Exhibit T-1.1
T-1.3 - Included in Exhibit T-1.1
T-1.4 - A copy of the By-Laws of U.S. Trust Company of California, N.A.,
as amended to date; incorporated by reference to Exhibit T-1.4 filed with Form
T-1 Statement, Registration No. 33-54136.
T-1.6 - The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939; incorporated herein by reference to Exhibit T-1.6
filed with Form T-1 Statement, Registration No. 33-33031.
T-1.7 - A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority
-------------------------------
<PAGE>
NOTE
As of August 13, 1996 the Trustee had 20,000 shares of Capital Stock
outstanding, all of which are owned by U.S. Trust Corporation
The responses to Items 2, 5, 6, 7, 8, 9, 10, 11 and 14 set forth the information
requested as though U. S. Trust Company of California, N.A. and U.S. Trust
Corporation were the "trustee."
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
Pursuant to the requirements of the Trust Indenture of Act of 1939, the trustee,
U.S. Trust Company of California, N.A., a corporation organized and existing
under the laws of the State of California, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Los Angeles, and State of
California, on the 14th day of August, 1996.
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
Trustee
By: /s/ Sandee' Parks
-------------------------------------------
Sandee' Parks
Authorized Signatory
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 1,796 6,494
<SECURITIES> 0 0
<RECEIVABLES> 2,162 3,189
<ALLOWANCES> 200 100
<INVENTORY> 31,278 39,595
<CURRENT-ASSETS> 35,694 50,397
<PP&E> 21,905 23,132
<DEPRECIATION> 8,629 9,094
<TOTAL-ASSETS> 49,719 65,366
<CURRENT-LIABILITIES> 29,692 22,799
<BONDS> 0 100,000
0 0
0 158,683
<COMMON> 4,987 1,436
<OTHER-SE> 14,777 (218,032)
<TOTAL-LIABILITY-AND-EQUITY> 49,719 65,366
<SALES> 170,671 91,048
<TOTAL-REVENUES> 170,671 91,048
<CGS> 123,415 65,249
<TOTAL-COSTS> 35,751<F1> 88,246<F2>
<OTHER-EXPENSES> 49 6,176<F3>
<LOSS-PROVISION> 0 (100)
<INTEREST-EXPENSE> 382 6,046
<INCOME-PRETAX> 11,202 (74,669)
<INCOME-TAX> 345 131
<INCOME-CONTINUING> 10,857 (74,800)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,857 (74,800)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1>INCLUDES DEFERRED COMPENSATION EXPENSE OF $3.087.
<F2>INCLUDES DEFERRED COMPENSATION EXPENSE OF $69,892.
<F3>REPRESENTS TRANSACTION EXPENSES RELATED TO THE RECAPITALIZATION.
</FN>
</TABLE>
<PAGE>
LETTER OF TRANSMITTAL
GUITAR CENTER MANAGEMENT COMPANY, 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.
MAIN DELIVERY TO: U.S. Trust Company of California, N.A., EXCHANGE AGENT
BY 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
CONFIRM BY TELEPHONE: Dwight Liu
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1996 (the "Prospectus"), of Guitar Center
Management Company, Inc., 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 MANAGEMENT COMPANY, 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.
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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.
