<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996
REGISTRATION NO. 333-10491
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GUITAR CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5733 95-4600862
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(818) 735-8800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
BRUCE ROSS
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
GUITAR CENTER, INC.
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(818) 735-8800
(Name and address, including zip code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Mark Bonenfant Nicholas P. Saggese
Buchalter, Nemer, Fields & Younger, Skadden, Arps, Slate, Meagher & Flom
a Professional Corporation 300 South Grand Avenue
601 South Figueroa Street, Suite 2400 Los Angeles, California 90017
Los Angeles, California 90017 (213) 687-5000
(213) 891-0700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- --------------
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. / /
- --------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
------------------------------------------------ ---------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover of the Prospectus.......... Facing Page of the Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of the
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front Cover Page of the Prospectus; Additional
Information; Outside Back Cover Page of the Prospectus
3. Summary Information; Risk Factors............... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. The Recapitalization
5. Determination of Offering Price................. Not Applicable
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page of the Prospectus; Prospectus
Summary; the Recapitalization; The Exchange Offer
9. Description of Securities to be Registered...... Description of the Notes
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information with Respect to the Registrant...... Outside Front Cover Page of the Prospectus; Prospectus
Summary; Risk Factors; Recapitalization; Dividend
Policy; Capitalization; Selected Financial Data;
Unaudited Pro Forma Condensed Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Certain
Transactions; Description of Capital Stock; Description
of the Notes; Description of the New Credit Facility
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
, 1996
$100,000,000
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2006
FOR ANY AND ALL OUTSTANDING
11% SENIOR NOTES DUE 2006
OF
GUITAR CENTER, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 18,
1996, UNLESS EXTENDED.
Guitar Center, Inc., a Delaware corporation (successor to Guitar Center
Management, Inc., a California Corporation, "Guitar Center" or the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange its outstanding 11%
Senior Notes due 2006 (the "Old Notes"), of which an aggregate of $100 million
principal amount is outstanding as of the date hereof, for an equal amount of
newly issued 11% Senior Notes due 2006 (the "New Notes"). The New Notes will be
general, unsecured obligations of the Company. The New Notes will rank senior in
right of payment to all subordinate indebtedness of the Company, and PARI PASSU
in right of payment with all other senior indebtedness of the Company, including
the Company's outstanding indebtedness under the New Credit Facility (as defined
herein). Other than the $5.4 million of indebtedness outstanding under the New
Credit Facility as of June 30, 1996, the Company has not issued, and does not
have any present intention to issue, any significant indebtedness to which the
Notes would be senior or PARI PASSU in right of payment. The New Credit
Facility, upon the occurrence of certain events, will be secured by
substantially all of the assets of the Company. See "The New Credit Facility."
The indebtedness outstanding under the New Credit Facility is PARI PASSU to the
New Notes in right of payment. After giving effect to the Exchange Offer and the
Recapitalization (as defined herein), on a PRO FORMA basis, as of June 30, 1996,
the Company would have had approximately $105.4 million of outstanding
Indebtedness (as defined herein) and remaining capacity under the New Credit
Facility of approximately $13.7 million. See "Capitalization."
The New Notes are being offered hereby in order to satisfy certain
obligations of the Company under the Registration Rights Agreement, dated July
2, 1996, among the Company and certain other signatories thereto (the
"Registration Rights Agreement"). The form and terms of the Old Notes will be
the same as those of the New Notes except that the New Notes will have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and hence will not be subject to certain transfer restrictions, registration
rights and related liquidated damages provisions applicable to the Old Notes.
The New Notes will evidence the same debt as the Old Notes and will be entitled
to the benefits of an indenture (the "Indenture"), dated as of July 2, 1996, by
and between the Company and U.S. Trust Company of California, N.A., as trustee
(the "Trustee"). The Indenture provides for the issuance of both the Old Notes
and the New Notes. The Old Notes and the New Notes are referred to herein
collectively as the "Notes" and holders of the Notes are sometimes referred to
herein as the "Holders."
The Notes will mature on July 1, 2006. Interest on the Notes will be payable
in cash semi-annually on January 1 and July 1 of each year commencing on January
1, 1997. The Company will not be required to make any mandatory redemption or
sinking fund payment with respect to the Notes prior to maturity. The Notes will
be redeemable at the option of the Company, in whole or in part, on or after
July 1, 2001, at the redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. Notwithstanding the foregoing,
prior to July 1, 1999, the Company may redeem up to 33 1/3% of the aggregate
principal amount of the Notes originally outstanding, at a redemption price
equal to 110% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the redemption date, with the Net Cash Proceeds (as defined herein)
of an Initial Public Equity Offering (as defined herein); PROVIDED that at least
66 2/3% of the aggregate principal amount of the Notes originally outstanding
remain outstanding immediately thereafter. Upon a Change of Control (as defined
herein), the Company will be required to make an irrevocable and unconditional
offer to repurchase all outstanding Notes at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all expenses incident to the Exchange Offer (which shall not
include the expenses of any Holder in connection with resales of the New Notes).
The Company will accept for exchange any and all validly tendered Old Notes on
or prior to 5:00 p.m. New York City time, on December 18, 1996 (such date and
time, if and as extended, the "Expiration Date"). Tenders of Old Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. Old Notes may be tendered only in integral multiples of $1,000. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Old Notes, the Company will promptly cause the return of all previously
tendered Old Notes.
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
[DESCRIPTION OF PHOTOGRAPH ON 2 PAGES SPREAD]
Photographs depicting the interior of a Guitar Center Management Company,
Inc. retail store with the following captions:
a. "Customers are encouraged to hold and play instruments."
b. "Knowledgeable salespeople demonstrate the latest multi-media
technology."
c. "Each department offers an extensive selection of brand name
merchandise."
d. "Each store features a display of 300 to 500 guitars on its 'guitar
wall'."
e. "One of the largest selections of vintage guitars."
Photograph of Little Richard at a Guitar Center Management Company, Inc.
retail store with the following caption:
"Little Richard's introduction into the Rock Walk."
<PAGE>
Based on interpretations contained in no action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission"), the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold, and
otherwise transferred by a holder thereof (other than (i) a broker-dealer who
purchases such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
who is an affiliate of the Company (within the meaning of Rule 405 under the
Securities Act)), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the holder is acquiring
the New Notes in its ordinary course of business and is not participating, and
has no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. This Prospectus has been prepared
for use in connection with the Exchange Offer and may be used by Chase
Securities Inc. ("CSI") and Donaldson, Lufkin & Jenrette ("DLJ") in connection
with offers and sales related to market-making transactions in the Notes. CSI
and DLJ may act as principals or agents in such transactions. Such sales will be
made at prices related to prevailing market prices at the time of sale. The
Letter of Transmittal states that by so acknowledging and by delivering a
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the Notes will develop. To the extent
that a market for the Notes does develop, the market value of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, market conditions, general economic conditions, the Company's results of
operations and financial condition, the market for similar securities, and other
conditions. Such conditions might cause the Notes, to the extent that they are
actively traded, to trade at a significant discount from face value. See "Risk
Factors -- Absence of Public Market for the Notes."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE
INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE FOLLOWING EVENTS: (I) 100 TO
1 STOCK SPLIT EFFECTUATED ON JUNE 5, 1996; AND (II) THE REINCORPORATION OF THE
COMPANY FROM A CALIFORNIA TO A DELAWARE CORPORATION, EFFECTUATED ON NOVEMBER 1,
1996.
THE COMPANY
Guitar Center, Inc. (the "Company" or "Guitar Center") is the nation's
leading retailer of guitars, amplifiers, percussion instruments, keyboards and
pro audio and recording equipment with 28 stores operating in 14 major markets.
Over the past five fiscal years, the Company's net sales and operating income
have grown at compound annual growth rates of 21.9% and 34.0%, respectively.
Guitar Center offers a unique retail concept in the music products industry,
combining an interactive, hands-on shopping experience with superior customer
service and a broad selection of brand name, high-quality products at guaranteed
low prices. The Company creates an entertaining and exciting atmosphere in its
stores with bold and dramatic merchandise presentations, highlighted by bright,
multi-colored lighting, high ceilings, music and videos. Management believes
approximately 80% of the Company's sales are to professional and aspiring
musicians who generally view the purchase of music products as a career
necessity. These sophisticated customers rely upon the Company's knowledgeable
and highly trained salespeople to answer technical questions and to assist in
product demonstrations.
The Guitar Center prototype store generally ranges in size from 12,000 to
15,000 square feet (as compared to a typical music products retail store which
averages 3,230 square feet) and is designed to encourage customers to hold and
play instruments. Each store carries an average of 7,000 core stock keeping
units ("SKUs"), which management believes is significantly greater than a
typical music products retail store, and is organized into five departments,
each focused on one product category. These departments cater to a musician's
specific product needs and are staffed by specialized salespeople, many of whom
are practicing musicians. Management believes this retail concept differentiates
the Company from its competitors and encourages repeat business.
Guitar Center stores historically have generated strong and stable operating
results. All of the Company's stores have been profitable and have generated
positive comparable store sales growth in each of the past four fiscal years.
The following summarizes certain key operating statistics of a Guitar Center
store:
<TABLE>
<S> <C>
Average 1995 net sales per square foot......................... $ 646
Average 1995 net sales per store (1)........................... 8,513,000
Average 1995 store-level operating income (1).................. 1,239,000
Average 1995 store-level operating income margin............... 14.6%
</TABLE>
- ------------------------------
(1) Excludes results of the Company's Brea, California store opened in December
1995.
Guitar Center stores have typically generated positive operating income
within the first three months of opening. In addition, based on new store
openings since fiscal 1993, Guitar Center stores have demonstrated high
store-level operating income and store-level operating income margins averaging
approximately $0.6 million and 11.2%, respectively, and sales per square foot
averaging $465, during the first full twelve months of operations.
The United States retail market for music products in 1995 was estimated in
a study by MUSIC TRADE magazine to be approximately $5.5 billion in net sales,
representing a five-year compound annual growth rate of 7.9%. The industry is
highly fragmented with the nation's leading five music products retailers
accounting for approximately 7.9% of the industry's net sales in 1994. The
Company believes it
3
<PAGE>
benefits from several advantages relative to smaller competitors including
volume purchasing discounts, centralized operations and other financial
controls, advertising economies and the ability to offer an extremely broad and
deep selection of merchandise.
Management is highly committed to the success of Guitar Center. Management's
goal is to continue to expand Guitar Center's position as the leading music
products retailer throughout the United States. The Company's growth strategy is
to continue to increase its presence in its existing markets and to open new
stores in strategically selected markets. The Company will continue to pursue
its strategy of clustering stores in major markets to take advantage of
operating and advertising efficiencies and to build awareness of the Guitar
Center name in new markets. The Company has opened a total of seven stores in
fiscal 1996 and expects to open approximately eight stores in each of fiscal
1997 and fiscal 1998. The Company has committed substantial resources to
building a corporate infrastructure and management information systems that it
believes can support the Company's needs, including its expansion plans, for the
foreseeable future. Guitar Center believes it is well-positioned to continue to
implement its expansion strategy.
For fiscal years ended December 31, 1993, 1994, 1995 and for the six months
ended June 30, 1996 the Company had net income (loss) of $5.1 million, $8.8
million, $10.9 million and ($74.8) million, respectively. The results for the
six months ended June 30, 1996 reflect a recorded deferred compensation expense
of $69.9 million and $10.9 million for transaction costs and financing fees
incurred in connection with the Recapitalization (as defined below). These
expenses are non-recurring following the Recapitalization.
BUSINESS STRATEGY
The principal elements of the Company's business strategy are as follows:
EXTENSIVE SELECTION OF MERCHANDISE. Guitar Center offers an extensive
selection of brand name music products complemented by lesser known, hard to
find items and unique, vintage equipment. Guitar Center offers an average of
7,000 core SKUs per store, providing a breadth and depth of in-stock items which
management believes is not available from traditional music products retailers.
HIGHLY INTERACTIVE, MUSICIAN-FRIENDLY STORE CONCEPT. The purchase of
musical instruments is a highly personal decision for musicians. Management
therefore believes that a large part of the Company's success is attributable to
its creative instrument presentations and colorful, interactive displays which
encourage the customer to hold and play instruments as well as to participate in
product demonstrations. Each store also provides private sound-controlled rooms
to enhance the customers' listening experience while testing various
instruments.
EXCEPTIONAL CUSTOMER SERVICE. Exceptional customer service is fundamental
to the Company's operating strategy. Accordingly, the Company provides extensive
training programs for its salespeople, who specialize in one of the Company's
five product categories. Many of the Company's salespeople are also musicians.
With the advances in technology and continuous new product introductions in the
music products industry, customers increasingly rely on qualified salespeople to
offer expert advice and assist in product demonstrations. Management believes
that its emphasis on training and customer service distinguishes the Company
within the industry and is a critical part of Guitar Center's success.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the low price leader
in each of its markets. Guitar Center underscores its pricing commitment by
offering a 30-day low price guarantee. The Company is generally among its
vendors' largest customers and thereby benefits from volume purchasing discounts
and other terms not available to the typical music products retailer. Although
prices are usually determined on a regional basis, store managers are trained
and authorized to adjust prices in response to local market conditions.
INNOVATIVE PROMOTIONAL AND MARKETING PROGRAMS. Guitar Center sponsors
innovative promotional and marketing events which include in-store
demonstrations, famous artist appearances and weekend themed sales events
designed to create significant store traffic and exposure. Management believes
these events help the Company to build a loyal customer base and to encourage
repeat business. Since its inception, the Company has compiled a unique,
proprietary database containing information on more
4
<PAGE>
than one million customers. Guitar Center utilizes this database to advertise to
select target customers based on historical buying patterns. The Company
believes the typical music products retailer does not have the resources to
support large-scale promotional events or an extensive advertising program.
EXPANSION STRATEGY. Guitar Center's expansion strategy is to continue to
increase its market share in existing markets and to penetrate new markets. The
Company has opened a total of seven stores in fiscal 1996, and expects to open
approximately eight stores in each of fiscal 1997 and 1998. In preparation for
these additional stores, management has dedicated a substantial amount of its
resources over the past several years to building the infrastructure necessary
to support a large national chain. In addition, the Company believes it has
developed a unique and highly effective methodology for targeting prospective
store sites which includes analyzing demographic and psychographic
characteristics of a potential store location.
THE RECAPITALIZATION
On June 5, 1996, the Company consummated a series of transactions to effect
a recapitalization of the Company (the "Recapitalization") in order to transfer
ownership of the Company from its sole stockholder, the Scherr Living Trust (the
"Scherr Trust") to members of management and the Investors (as defined herein).
See "The Recapitalization and Related Transactions."
REINCORPORATION
On November 1, 1996 the Company reincorporated from California to Delaware
and changed its name from Guitar Center Management Company, Inc. to Guitar
Center, Inc. The Company's principal executive offices are located at 5155
Clareton Drive, Agoura Hills, California 91301.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary information for the fiscal years ended October 31, 1991 and
1992, the two months ended December 31, 1992 and the fiscal years ended December
31, 1993, 1994 and 1995 has been derived from the audited financial statements
of the Company. The financial data as of and for the six-month period ended June
30, 1995 and June 30, 1996 are derived from the unaudited consolidated financial
statements which, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) for a fair presentation of
such data. The results for the interim periods are not necessarily indicative of
the results for the full fiscal year. The summary unaudited PRO FORMA data for
the year ended December 31, 1995, and the six months ended June 30, 1995 and
1996 give effect to the Recapitalization (including the Company's conversion of
tax status from an "S" corporation to a "C" corporation and other tax
consequences related to the Recapitalization), as if it all had been consummated
as of January 1, 1995. The Recapitalization occurred on June 5, 1996 and is
reflected in the June 30, 1996 historical financial statement. See "Unaudited
Pro Forma Condensed Financial Data" and the notes thereto. The PRO FORMA
financial data set forth below is not necessarily indicative of the results that
would have been achieved or that may be achieved in the future. The summary
historical and PRO FORMA financial data should be read in conjunction with "The
Recapitalization and Related Transactions," "Unaudited Pro Forma Condensed
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical Financial Data" and the
financial statements of the Company and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
---------------- ------------ --------------------------- -----------------
1991 1992 1992 1993 1994 1995 1995 1996
------- ------- ------------ ------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $74,872 $85,592 $18,726 $97,305 $129,039 $170,671 $76,888 $ 91,048
Gross profit.................................... 22,064 25,472 5,393 28,778 36,764 47,256 21,146 25,799
Selling, general and administrative expenses.... 18,896 20,998 3,547 21,889 26,143 32,664 15,100 18,318
Deferred compensation expense (a)............... (230) -- 373 1,390 1,259 3,087 1,040 69,892
Operating income (loss)......................... 3,398 4,474 1,473 5,499 9,362 11,505 5,006 (62,411)
Non recurring transaction expense............... -- -- -- -- -- -- -- 6,176
Net income (loss)............................... 2,702 3,987 1,385 5,105 8,829 10,857 4,845 (74,764)
PRO FORMA FOR INCOME TAX PROVISION: (B)
Historical income (loss) before provision for
income taxes................................... $ 2,755 $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ 4,919 $(74,633)
Pro forma provision for income taxes............ 1,086 1,753 773 2,856 4,478 6,144 2,562 --
------- ------- ------------ ------- -------- -------- ------- --------
Pro forma net income (loss)..................... $ 1,669 $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ 2,357 $(74,633)
------- ------- ------------ ------- -------- -------- ------- --------
------- ------- ------------ ------- -------- -------- ------- --------
OPERATING DATA:
Net sales per gross square foot (c)............. $ 366 $ 407 -- $ 454 $ 518 $ 646 $ 292 $ 320
Stores open at end of period.................... 15 15 15 17 20 21 20 24
Net sales growth................................ 6.0% 14.3% 18.7% 13.7% 32.6% 32.3% 40.0% 18.4%
Increase in comparable store sales (d).......... 5.9% 11.5% 18.7% 11.4% 17.3% 23.4% 27.4% 11.8%
Inventory turns................................. 3.1x 3.3x 3.4x 3.4x 3.4x 3.7x 3.6x 3.7x
Ratio of earnings to fixed charges (e).......... 3.7x 5.8x 13.8x 9.1x 11.6x 11.7x 13.7x --
Capital expenditures............................ $ 1,192 $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 888 $ 3,523
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
------------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA DATA:
Net sales............................................... $ 170,671 $ 76,888 $ 91,048
Operating income........................................ 15,967 6,734 7,913
Net income.............................................. 2,551 554 1,196
Ratio of earnings to fixed charges...................... 1.4x 1.2x 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 6,494 $ 2,909
Net working capital............................................. 27,598 24,013
Total assets.................................................... 65,366 65,366
Total long term and revolving debt (including current
maturities).................................................... 105,421 105,421
Senior preferred stock.......................................... 13,702 --
Warrants........................................................ 6,500 6,500
Stockholders' equity (deficit).................................. (71,615) (71,615)
</TABLE>
- ------------------------
(a) For the six months ended June 30, 1996, the Company recorded deferred
compensation expense of $69.9 million related to the cancellation and
exchange of management stock options pursuant to the Recapitalization. After
the Recapitalization, these expenses will be non-recurring, as the deferred
compensation plan was terminated.
(b) Pro forma provision for income taxes reflects the estimated statutory
provision for income taxes assuming the Company was a "C" corporation.
(c) Net sales per gross square foot does not include new stores opened during
the reporting period. Information for the two months ended December 31, 1992
is not meaningful.
(d) Compares net sales for the comparable periods.
(e) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one third of lease expense, which management believes
is representative of the interest components of lease expense. Earnings were
insufficient to cover fixed charges by $74.6 million for the six months
ended June 30, 1996.
7
<PAGE>
THE EXCHANGE OFFER
The form and terms of the Old Notes will be the same as those of the New
Notes except that the New Notes will have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and hence will not be subject to
certain transfer restrictions, registration rights and related liquidated
damages provisions applicable to the Old Notes.
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THE EXCHANGE OFFER..................... The Company is offering to exchange an aggregate of
$100 million principal amount of New Notes for a
like principal amount of Old Notes. The Old Notes
may be exchanged only in multiples of $1,000
principal amount. The Company will issue the New
Notes on or promptly after the Expiration Date. See
"The Exchange Offer."
EXPIRATION DATE........................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on December 18, 1996, unless
extended in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended.
CONDITIONS TO THE EXCHANGE OFFER....... The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
whole or in part and from time to time in its sole
discretion. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer." The Exchange
Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange.
PROCEDURES FOR TENDERING OLD NOTES..... Each Holder desiring to accept the Exchange Offer
must complete and sign the Letter of Transmittal,
have the signature thereon guaranteed if required
by the Letter of Transmittal, and mail or deliver
the Letter of Transmittal, together with the Old
Notes or a Notice of Guaranteed Delivery and any
other required documents (such as evidence of
authority to act satisfactory to the Company in its
sole discretion, if the Letter of Transmittal is
signed by someone acting in a fiduciary or
representative capacity), to the Exchange Agent (as
defined) at the address set forth herein prior to
5:00 p.m., New York City time, on the Expiration
Date. Any beneficial owner of the Old Notes whose
Old Notes are registered in the name of a nominee,
such as a broker, dealer, commercial bank or trust
company and who wishes to tender Old Notes in the
Exchange Offer, should instruct such entity or
person to promptly tender on such beneficial
owner's behalf. See "The Exchange Offer --
Procedures for Tendering Old Notes."
GUARANTEED DELIVERY PROCEDURES......... Holders of Old Notes who wish to tender their Old
Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old
Notes or any other documents required by the Letter
of Transmittal to the Exchange Agent prior to the
Expiration Date (or complete the procedure for
book-entry transfer on a timely basis), may tender
their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer -- Guaranteed
Delivery Procedures."
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The Letter of Transmittal provides that each Holder
of Old Notes (other than participating
broker-dealers) will represent to the Company that,
among other things, the New Notes acquired pursuant
to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving
such New Notes, that neither such Holder of Old
Notes nor any such other person has an arrangement
or understanding with any person to participate in
the distribution of such New Notes and that neither
the Holder nor any such person is an "affiliate" of
the Company, as defined in Rule 405 under the
Securities Act. Any tendered Old Notes not accepted
for exchange for any reason will be returned
promptly after the expiration or termination of the
Exchange Offer. See "The Exchange Offer."
WITHDRAWAL RIGHTS...................... Tenders of Old Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
ACCEPTANCE OF OLD NOTES AND DELIVERY OF
NEW NOTES............................ The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to the Expiration Date. The
New Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration
Date. See "The Exchange Offer -- Terms of the
Exchange Offer."
RESALES OF NEW NOTES................... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any Holder thereof (other
than any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
Holder's business and that such Holder has no
arrangement or understanding with any person to
participate in the distribution of such New Notes,
and provided, further, that each broker-dealer that
receives New Notes for its own account in exchange
for Old Notes must acknowledge that it will deliver
a Prospectus in connection with any resale of such
New Notes. See "Plan of Distribution." If a Holder
of Old Notes does not exchange such Old Notes for
New Notes pursuant to the Exchange Offer, such Old
Notes will continue to be subject to the
restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be
offered or sold, unless registered under the
Securities Act, except pursuant to an exception
from, or in a transaction not subject to, the
Securities Act and
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applicable state securities laws. See "The Exchange
Offer -- Consequences of Failure to Exchange" and
"Description of Senior Notes."
CONSEQUENCES OF FAILURE TO EXCHANGE.... Holders of Old Notes who do not exchange their Old
Notes for New Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on
transfer of such Old Notes as set forth in the
legend thereon. In general, Old Notes may not be
offered or sold, except pursuant to a registration
statement under the Securities Act or any exemption
from registration thereunder and in compliance with
applicable state securities laws. In the event the
Company completes the Exchange Offer, holders of
Old Notes will have no further rights to
registration or liquidated damages pursuant to the
Registration Rights Agreement.
CERTAIN TAX CONSIDERATIONS............. There will be no Federal income tax consequences to
Holders exchanging Old Notes for New Notes pursuant
to the Exchange Offer and a Holder will have the
same adjusted basis and holding period in the New
Notes as in the Old Notes immediately before the
exchange.
REGISTRATION RIGHTS AGREEMENT.......... The Exchange Offer is intended to satisfy the
registration rights of Holders of Old Notes under
the Registration Rights Agreement, which rights
terminate upon consummation of the Exchange Offer.
EXCHANGE AGENT......................... U.S. Trust Company of California, N.A. is the
Exchange Agent. The address and telephone number of
the Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent."
THE NOTES
SECURITIES OFFERED..................... $100 million aggregate principal amount of 11%
Senior Notes due 2006.
MATURITY............................... July 1, 2006.
INTEREST PAYMENT DATES................. January 1 and July 1, commencing on January 1,
1997.
OPTIONAL REDEMPTION.................... The Notes will be redeemable at the option of the
Company, in whole or in part, on or after July 1,
2001, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the
date of redemption. Notwithstanding the foregoing,
prior to July 1, 1999, the Company may redeem up to
33 1/3% of the aggregate principal amount of the
Notes originally outstanding at a redemption price
equal to 110% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the
redemption date, with the Net Cash Proceeds of an
Initial Public Equity Offering; PROVIDED that at
least 66 2/3% of the aggregate principal amount of
the Notes originally outstanding remain outstanding
immediately thereafter. See "Description of Notes
-- Optional Redemption."
SINKING FUND........................... None.
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RANKING................................ The New Notes will be general, unsecured
obligations of the Company. The New Notes will rank
senior in right of payment to all subordinate
indebtedness of the Company, and PARI PASSU in
right of payment with all other senior indebtedness
of the Company, including the Company's outstanding
indebtedness under the New Credit Facility. The
Company has not issued (other than the $5.4 million
of indebtedness outstanding under the New Credit
Facility as of June 30, 1996), and does not have
any present intention to issue, any significant
indebtedness to which the Notes would be senior or
PARI PASSU in right of payment. The New Credit
Facility, upon the occurrence of certain events,
will be secured by substantially all of the assets
of the Company. See "The New Credit Facility."
After giving effect to the Exchange Offer and the
Recapitalization (as defined herein), on a PRO
FORMA basis, as of June 30, 1996, the Company would
have had approximately $105.4 million of
outstanding Indebtedness (as defined herein) and
remaining capacity under the New Credit Facility
(as defined herein) of approximately $13.7 million.
CHANGE OF CONTROL OFFER................ Upon a Change of Control, the Company will be
required to make an irrevocable and unconditional
offer to repurchase all outstanding Notes at 101%
of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
repurchase. A Change of Control will not result
from a sale of the Company or substantially all of
the Company's assets to a person or group of
persons who are Investors (as defined herein) and
the Holders would not receive the benefit of this
provision in the event of such a transaction. See
"Description of Notes -- Certain Covenants --
Repurchase of Notes at the Option of the Holder
Upon a Change of Control."
CERTAIN COVENANTS...................... The Indenture contains certain covenants with
respect to the Company that, among other things,
limit the ability of the Company and any
subsidiaries of the Company to (i) incur additional
Indebtedness and issue Disqualified Capital Stock
(as defined herein); (ii) pay dividends or make
other distributions and certain investments; (iii)
create certain liens; (iv) sell certain assets; (v)
enter into certain transactions with affiliates; or
(vi) enter into certain mergers or consolidations
involving the Company. See "Description of Notes --
Certain Covenants."
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RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by Holders prior to tendering their Old Notes in the Exchange Offer.
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RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PRIOR TO
TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS"
FOR A DESCRIPTION OF OTHER FACTORS AFFECTING THE BUSINESS OF THE COMPANY.
RESTRICTIONS UPON TRANSFER OF AND LIMITED TRADING MARKET FOR OLD NOTES
The New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of tenders of such Old Notes. Therefore, holders
of Old Notes desiring to tender such Old Notes in exchange for New Notes should
allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor
the Company is under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange. Old Notes that are not
tendered or are tendered but not accepted will, following consummation of the
Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer who receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or any other trading activities, must acknowledge
that it will deliver a Prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
BLUE SKY RESTRICTIONS; COMPLIANCE WITH STATE SECURITIES LAWS
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration of qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
POTENTIAL CONSEQUENCES OF SIGNIFICANT LEVERAGE
As of June 30, 1996, the Company had approximately $105.4 million of
outstanding Indebtedness, its ratio of total long-term debt to total
capitalization was approximately 221.9% and it had a stockholders' deficit of
approximately $71.6 million. See "Capitalization" and "Unaudited Pro Forma
Condensed Financial Data."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company may not generate sufficient cash to service its debt obligations
including its obligations under the Notes; (ii) the Company's ability to obtain
financing for future working capital needs or other purposes may be limited;
(iii) a substantial portion of the Company's cash flow from operations will be
dedicated to debt service, thereby reducing funds available for operations; and
(iv) the substantial indebtedness and the restrictive covenants to which the
Company is subject under the terms of its indebtedness, including the terms of
the New Credit Facility and the Indenture, may make the Company more vulnerable
to economic downturns, may hinder its ability to execute its growth strategy,
may reduce its flexibility to respond to changing business conditions and
opportunities and may limit its ability to withstand competitive pressures.
The Company's ability to generate sufficient cash to meet its debt service
obligations will depend on future operating performance, which will be subject,
in part, to factors beyond its control, including prevailing economic conditions
and financial, business and other factors. While the Company believes that cash
flow from operations will be adequate to meet its debt service obligations,
there can be no assurance that the Company will generate cash in sufficient
amounts. In the event the Company's operating cash flow is not sufficient to
fund the Company's expenditures or to service its debt including
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the Notes, the Company may be required to raise additional financing through
capital contributions, the refinancing of all or part of its indebtedness
(including the Notes) or sales of its assets. There can be no assurance that the
Company will be able to obtain any such additional financing or effect
satisfactory refinancings or asset sales on favorable terms, if at all.
FRAUDULENT TRANSFER CONSIDERATIONS
The obligations of the Company under the indebtedness represented by the
Notes may be subject to review under relevant federal and state fraudulent
transfer laws, as well as other similar laws regarding creditors rights
generally or distributions to stockholders, if a bankruptcy case or a lawsuit
(including circumstances not involving bankruptcy) is commenced by or on behalf
of any unpaid creditor or a representative of the Company's creditors, such as a
trustee in bankruptcy or the Company as debtor in possession. If a court, in
such a lawsuit, were to find that the Company incurred the indebtedness
represented by the Notes (i) with the intent to hinder, delay or defraud present
or future creditors or contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of others; or (ii) received
less than a reasonably equivalent value or fair consideration for any such
indebtedness and, at the time of such incurrence (a) was insolvent; (b) was
rendered insolvent by reason of such incurrence; (c) was engaged or about to
engage in a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business; or (d) intended to incur,
or believed or reasonably should have believed that it would incur, debts beyond
its ability to pay such debts as they matured, such court could void the
obligations under the Notes, direct the return of any amounts paid thereunder to
the Company or to a fund for the benefit of its creditors, subordinate such
obligations to all other indebtedness of the relevant obligor or take other
action detrimental to the Holders.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction that is being applied. Generally, however, a
company would be considered insolvent if either (i) the sum of its debts
(including contingent or unliquidated debts) is greater than all of its property
at a fair valuation; or (ii) if the then fair salable value of its assets is
less than the amount that is required to pay its probable liability on its
existing debts (including contingent or unliquidated debts) as they became
absolute and matured.
The Company however, believes that it was at the time of the
Recapitalization and is now solvent and that it had at the time of the
Recapitalization and now has sufficient capital to carry on its business and
that it believed at the time of the Recapitalization and now believes that it
was and will be able to pay its debts as they mature. There can be no assurance
however, that a court would reach the same conclusion.
AGGRESSIVE GROWTH STRATEGY
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. The Company, which currently
operates 28 stores, has opened seven stores in fiscal 1996 and expects to open
approximately eight stores in each of fiscal 1997 and fiscal 1998, which
represent significant increases in the number of stores previously opened and
operated by the Company. Although historically the Company has opened new stores
and expanded or relocated existing stores, prior to this year the Company had
not opened more than 4 new stores for any twelve-month period for the last three
fiscal years. The Company's expansion plan is dependent upon a number of
factors, including the identification of suitable sites, the negotiation of
acceptable leases for such sites, the hiring, training and retention of skilled
personnel, the availability of adequate financial resources, the adaptation of
its distribution and other operational and management information systems
("MIS") to such sites, the ability of the Company's vendors to supply its needs
on a timely basis and other factors, some of which are beyond the control of the
Company. There can be no assurance that the Company will be successful in
opening such new stores on schedule, if at all, or that such newly opened stores
will achieve sales and profitability levels comparable to existing stores, if
they are profitable at all, or that the Company will improve its overall market
position and profitability as a result therefrom.
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The Company's expansion strategy includes clustering new stores in existing
markets, which has in certain instances resulted in some transfer of sales from
existing stores to new locations. In addition, the Company's expansion into new
markets has in certain circumstances presented competitive and merchandising
challenges that are different from those currently encountered by the Company in
its current markets. These challenges include the effective management of stores
that are in distant locations and the incurrence of significant start-up costs,
including costs related to promotions and advertising. Although the Company is
continually evaluating the adequacy of its existing systems and procedures,
including store management, financial controls and MIS in connection with the
Company's planned expansion, there can be no assurance that the Company will
adequately anticipate all of the changing demands which its expanding operations
will impose on such systems. The failure by the Company to identify and respond
to such demands may have an adverse effect on the Company's business and
prospects. See "Business."
DEPENDANCE ON SUPPLIERS
The Company's business as well as its expansion plans are dependent to a
significant degree upon its suppliers. The Company does not have any long-term
supply contracts with its suppliers. The loss of certain key vendors or the
failure to establish and maintain relationships with brand name vendors could
have a material adverse effect on the Company's business. The Company believes
it currently has adequate supply sources; however, there can be no assurance,
especially given the Company's expansion plans, that the Company will be able to
acquire sufficient quantities and an appropriate mix of such merchandise at all
or at acceptable prices.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
Historically, the Company's sales growth has resulted from comparable store
sales growth. There can be no assurance that such growth will continue. A
variety of factors affect the Company's comparable store sales results
including, among others, economic conditions, consumer trends, retail sales,
music trends, changes in the Company's merchandise mix, distribution of
products, transfer of sales to new locations and the Company's ability to
execute its business strategy efficiently, including its strategy of clustering
stores in certain markets. The Company's quarterly comparable store sales
results have fluctuated significantly in the past. The Company's comparable
store sales results were 24.4%, 28.5%, 25.5% and 13.5% in the first, second,
third and fourth quarters of fiscal 1995, respectively, and 14.5% and 9.3% in
the first and second quarters of fiscal 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company does not expect comparable store sales to continue to increase at
historical rates.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the services of Larry Thomas, President and Chief Executive Officer,
and Marty Albertson, Executive Vice President and Chief Operating Officer, as
well as its ability to attract and retain additional key personnel with the
skills and expertise necessary to manage its existing business and effectuate
its planned growth. The loss or unavailability of the services of one or both of
these individuals or other key personnel could have a material adverse effect on
the Company. In June 1996, in connection with the Recapitalization, the Company
entered into a five-year employment agreement with each of Messrs. Thomas and
Albertson. The Company currently carries key man insurance on the lives of
Messrs. Thomas and Albertson in the amount of $5.0 million and $3.5 million,
respectively. See "Management."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
As of June 30, 1996, 13 of the Company's stores were located in California
and generated 55.9% and 55.7% of the Company's net sales for fiscal 1995 and the
six months ended June 30, 1996, respectively. Although the Company has opened
stores in other areas in the United States, a significant percentage of the
Company's net sales is likely to remain concentrated in California for the
foreseeable future. Consequently, the Company's results of operations and
financial condition are heavily dependent upon general consumer trends and other
general economic conditions in California.
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COMPETITION
The market for musical instruments is fragmented and highly competitive. The
Company competes with many different types of retailers who sell many or most of
the items sold by the Company, including other specialty retailers and catalogue
retailers. The Company's expansion into new markets in which its competitors are
already established, competitors' expansion into markets in which the Company is
currently operating, or the entry into the Company's markets by competitors with
substantial financial or other resources may have a material adverse effect on
the Company's operations.
IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS; CHANGING CONSUMER PREFERENCES
The Company's business is sensitive to customers' spending patterns, which
in turn are subject to prevailing economic conditions. There can be no assurance
that consumer spending will not be affected by economic conditions, thereby
impacting the Company's growth, net sales and profitability. A decline in
economic conditions in one or more of the markets in which the Company's stores
are concentrated could have an adverse effect on the Company's financial
condition and results of operations. Although the Company attempts to stay
abreast of consumer preferences for musical products and accessories
historically offered for sale by the Company, any sustained failure by the
Company to identify and respond to such trends would have a material adverse
effect on the Company's business, results of operations and financial condition.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Old Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The New Notes will constitute a
new issue of securities with no established trading market. The Company does not
intend to list the New Notes on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Company has been advised by DLJ and CSI that
they presently intend to make a market in the Notes. However, DLJ and CSI are
not obligated to do so and any market-making activities with respect to the
Notes may be discontinued at any time without notice. In addition, such market-
marking activity will be subject to the limits imposed by the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be
limited during the Exchange Offer. If a trading market does not develop or is
not maintained, holders of the Notes may experience difficulty in reselling the
Notes or may be unable to sell them at all. If a market for the Notes develops,
any such market may be discontinued at any time. If a public trading market
develops for the Notes, future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
results of operations and the market for similar securities. Depending on
prevailing interest rates, the market for similar securities and other factors,
including the financial condition of the Company, the Notes may trade at a
discount from their principal amount.
CONTROL BY CERTAIN STOCKHOLDERS
Management owns 35.7%, the Investors own 50% and the Scherr Trust owns 8.9%
of the Company's issued and outstanding Common Stock. Under a Stockholders
Agreement (as defined herein) entered into at the time of the Recapitalization,
the Management Stockholders (as defined herein) have the right to elect four
directors, the Investors have the right to elect four directors, the Scherr
Trust has the right to elect one director and the Investors have the right to
elect two additional directors who are not affiliated with the Company or any
stockholder subject to the approval of Larry Thomas, so long as he is the
Company's Chief Executive Officer. Under the Stockholders Agreement, a wide
range of actions to be taken by the Company will require approval of two-thirds
of the Board of Directors, including the sale of the Company and the
consummation of an initial public offering. Thus, if representatives of various
stockholder groups are unable to reach consensus on matters requiring two-thirds
approval, the operations and growth of the Company could be adversely affected.
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THE RECAPITALIZATION AND RELATED TRANSACTIONS
On June 5, 1996, Guitar Center consummated a series of transactions to
effect a Recapitalization of the Company in order to transfer ownership of the
Company from its sole stockholder, the Scherr Trust, to members of management
and the Investors (as defined herein). The Recapitalization included the
following transactions: (i) members of the Company's management purchased
500,000 shares of the Company's common stock, $.01 par value (the "Common
Stock") for $0.5 million cash; (ii) members of the Company's management received
495,000 shares of Junior Preferred Stock, with an aggregate liquidation
preference of $49.5 million in exchange for cancellation of outstanding options
exercisable for 49,500,000 shares of Common Stock; (iii) the Scherr Trust,
received 198,000 shares of Junior Preferred Stock with an aggregate liquidation
preference of $19.8 million in exchange for 19,800,000 shares of Common Stock;
(iv) Chase Venture Capital Associates, L.P. ("Chase VCA"), Wells Fargo Small
Business Investment Company, Inc. ("WFSB"), Weston Presidio Capital II, L.P.
("WPC") and CB Capital Investors, Inc. ("CB Capital" and together with Chase
VCA, WFSB and WPC, the "Investors") purchased 700,000 shares of Common Stock and
693,000 shares of 8% Junior Preferred Stock, $0.01 par value (the "Junior
Preferred Stock") for $70.0 million cash; (v) the DLJ Investors (as defined
herein) purchased 800,000 shares of 14% Senior Preferred Stock, $0.01 par value
(the "Senior Preferred Stock") with an aggregate liquidation value of $20.0
million and warrants (the "Warrants") to purchase 73,684 shares of Common Stock
and 72,947 shares of Junior Preferred Stock, for an aggregate purchase price of
$20.0 million cash; (vi) GCMC Funding, Inc. ("DLJ Bridge") purchased $51.0
million aggregate principal amount of senior unsecured increasing rate notes for
cash and Chemical Bank ("Chemical") loaned $49.0 million to the Company
(together, the "Bridge Facility"); (vii) the Company repurchased 120,000,000
shares of Common Stock from the Scherr Trust for approximately $113.1 million
cash; (viii) the Company cancelled 31,907,400 options to purchase Common Stock
held by certain members of management in exchange for approximately $27.9
million cash; and (ix) the Company cancelled its revolving credit facility (the
"Old Credit Facility") upon repaying in cash the approximately $35.9 million
outstanding pursuant thereto. Fees and expenses incurred by the Company to
effect the Recapitalization and the Bridge Facility aggregated approximately
$10.9 million. See "Certain Transactions."
In connection with the Recapitalization, the Company granted to each of two
executive officers ten year options to purchase 43,344 shares of Common Stock,
and adopted the 1996 Performance Stock Plan for the benefit of the Company's key
employees. See "Management." Upon consummation of the Recapitalization,
management, the Investors, and the Scherr Trust owned approximately 35.7%,
50.0%, and 14.3%, respectively, of the issued and outstanding Common Stock of
the Company. Upon the effectiveness of the Recapitalization, the Company entered
into a $25 million revolving credit facility (the "New Credit Facility") with
Wells Fargo Bank, N.A. ("WFB"). See "The New Credit Facility." At the time of
Recapitalization the Company increased the number of authorized shares of Common
Stock to 10 million shares. Immediately following the Recapitalization, the
Company effected a 100 to 1 stock split.
On July 2, 1996 the Company issued an aggregate of $100 million of its 11%
Senior Notes due 2006 (the "Old Notes") to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Chase Securities, Inc. ("CSI"), as the
Initial Purchasers. The Old Notes were resold pursuant to Rule 144A under the
Securities Act. The net proceeds of the offering of the Old Notes were applied
to the retirement of the Bridge Facility.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on July 2, 1996 (the "Closing Date")
to DLJ and CSI as Initial Purchasers (the "Initial Purchasers"). The Initial
Purchasers subsequently placed the Old Notes with qualified institutional buyers
in transactions not requiring registration under the Securities Act or
applicable state securities laws, including sales pursuant to Rule 144A under
the Securities Act. As a condition to the sale of the Old Notes, the Company and
the Initial Purchasers entered into the Registration Rights Agreement on the
Closing Date. Pursuant to the Registration Rights Agreement, the Company agreed
that, unless the Exchange Offer is not permitted by applicable law or Commission
policy, it would (i) file with the Commission a Registration Statement under the
Securities Act with respect to the New Notes within 60 days after the Closing
Date, (ii) use its best efforts to cause such Registration Statement to become
effective under the Securities Act within 135 days after the Closing Date, and
(iii) upon effectiveness of the Registration Statement, commence the Exchange
Offer, maintain the effectiveness of the Registration Statement for at least 30
days (or longer if required by applicable law) and deliver to the Exchange Agent
New Notes in the same aggregate principal amount as the Old Notes that were
properly tendered by holders thereof pursuant to the Exchange Offer. A copy of
the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. This description of
the Registration Rights Agreement is qualified in its entirety by reference to
such exhibit. The Registration Statement, of which this Prospectus is a part, is
intended to satisfy certain of the Company's obligations under the Registration
Rights Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to the Expiration Date. As of the date
of this Prospectus, $100 million aggregate principal amount of the Old Notes is
outstanding. This Prospectus, together with the Letter of Transmittal, is first
being sent on or about November 12, 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
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<PAGE>
will have no further obligation to such Holders to provide for the registration
under the Securities Act of the Old Notes held by them. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
See "Risk Factors -- Restrictions Upon Transfer of and Limited Trading Market
for Old Notes."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses; Solicitation of Tenders."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
December 18, 1996, unless the Company extends the Exchange Offer, in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a release to the
Dow Jones News Services prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right at its sole discretion (i) to delay accepting
any Old Notes, (ii) to extend the Exchange Offer, (iii) to terminate the
Exchange Offer and not accept Old Notes not previously accepted if any of the
conditions set forth below under "-- Certain Conditions to the Exchange Offer"
shall have occurred and shall not have been waived by the Company, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (iv) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the Holders. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
Prospectus supplement that will be distributed to all Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
Holders, if the Exchange Offer would otherwise expire during such five to ten
business day period. During any extension of the Expiration Date, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company.
The Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
Interest accrues on the Notes at the rate of 11% per annum and will be
payable in cash semiannually in arrears on each January 1 and July 1, commencing
on January 1, 1997. No interest will be payable on the Old Notes on the date of
the exchange for the New Notes and therefore no interest will be paid thereon to
the Holders at such time.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a beneficial owner thereof as set
forth below and the acceptance by the Company thereof will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and the Letter of
Transmittal. All of the Old Notes are held of record by a nominee of The
Depository Trust Company (the "Depositary").
Except as set forth below, a Holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, (i) certificates for such Old Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely
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<PAGE>
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes into the Exchange Agent's account at the Depositary (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date, or
(iii) the Holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii)
for the account of an Eligible Institution (as defined below). In the event that
a signature on a Letter of Transmittal or a notice of withdrawal, as the case
may be, is required to be guaranteed, such guarantee must be by a firm which is
a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States or
otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act (collectively, "Eligible Institutions"). If Old Notes are
registered in the name of a person other than the person signing the Letter of
Transmittal, the Old Notes surrendered for exchange must be endorsed by, or be
accompanied by, a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered Holder with the signature thereon guaranteed by an
Eligible Institution.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed by
the registered Holder with signature guaranteed by an Eligible Institution or
accompanied by appropriate powers of attorney with signature guaranteed by an
Eligible Institution, in either case signed exactly as the name or names of the
registered Holder or Holders that appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of its authority so to act
must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, (ii) neither the Holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes, (iii) if the Holder is not a
broker-dealer, or is a broker-dealer but will not receive New Notes for its own
account in exchange for Old Notes, neither the Holder nor any such other person
is engaged in or intends to participate in the distribution of such New Notes
and (iv) neither the Holder nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company. If the tendering
Holder is a broker-dealer that will receive New Notes for its own account in
exchange for Old Notes that were acquired as a result of market-making
activities or other trading activities, it will be required to acknowledge that
it will deliver a Prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
DELIVERY OF DOCUMENTS TO THE DEPOSITARY OR THE COMPANY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
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<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right in its
sole discretion to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any Holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer as to any particular Old Notes either
before or after the Expiration Date (including the Letter of Transmittal and
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with the tenders of
Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, and if the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, a properly completed and duly executed Letter of Transmittal
and all other required documents. If any tendered Old Notes are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if
certificates representing Old Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering Holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Old Notes by causing the Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's Automated Tender Offer Program ("ATOP") procedures for transfer.
However, the exchange for the Old Notes so tendered will only be made after
timely confirmation of such book-entry transfer of Old Notes into the Exchange
Agent's account, and timely receipt by the Exchange Agent of an Agent's Message
(as such term is defined in the next sentence) and any other documents required
by the Letter of Transmittal on or prior to the Expiration Date or pursuant to
the guaranteed delivery procedures described below. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility and received by
the Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgement
from a
20
<PAGE>
participant tendering Old Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the Holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates of all physically tendered Old Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing Holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any note of withdrawal must specify the name and number of the account at
the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the Holder thereof without cost to such Holder (or, in the case
of Old Notes tendered by book-entry transfer procedures described above, such
Old Notes will be credited to an account maintained with such Book-Entry
Transfer Facility for the Old Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described under
"Procedures for Tendering Old Notes" above at any time on or prior to the
Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, there shall be threatened, instituted or pending any
action or
21
<PAGE>
proceeding before, or any injunction, order or decree shall have been issued by,
any court or governmental agency or other governmental regulatory or
administrative agency or commission (i) seeking to restrain or prohibit the
making or consummation of the Exchange Offer or any other transaction
contemplated by the Exchange Offer, or assessing or seeking any damages as a
result thereof, or (ii) resulting in a material delay in the ability of the
Company to accept for exchange or exchange some or all of the Old Notes pursuant
to the Exchange Offer; or any statute, rule, regulation, order or injunction
shall be sought, proposed, introduced, enacted, promulgated or deemed applicable
to the Exchange Offer or any of the transactions contemplated by the Exchange
Offer by any government or governmental authority, domestic or foreign, or any
action shall have been taken, proposed or threatened, by any government,
governmental authority, agency or court, domestic or foreign, that in the sole
judgment of the Company might directly or indirectly result in any of the
consequences referred to in clause (i) or (ii) above or, in the sole judgment of
the Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which exceed those described
herein, or would otherwise make it inadvisable to proceed with the Exchange
Offer.
If the Company determines in good faith that any of the conditions are not
met, the Company may (i) refuse to accept any Old Notes and return all tendered
Old Notes to exchanging Holders, (ii) extend the Exchange Offer and retain all
Old Notes tendered prior to the expiration of the Exchange Offer, subject,
however, to the rights of Holders to withdraw such Old Notes (see "-- Withdrawal
Rights") or (iii) waive certain of such unsatisfied conditions with respect to
the Exchange Offer and accept all properly tendered Old Notes which have not
been withdrawn or revoked. If such waiver constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
Prospectus supplement that will be distributed to all Holders.
Holders have certain rights and remedies against the Company under the
Registration Rights Agreement, including liquidated damages of up to $.30 per
week per $1,000 principal amount of Old Notes, should the Company fail to
consummate the Exchange Offer within a certain period of time, notwithstanding a
failure due to the occurrence of any of the conditions stated above. Such
conditions are not intended to modify those rights or remedies in any respect.
The foregoing conditions are for the benefit of the Company and may be
asserted by the Company in good faith regardless of the circumstances giving
rise to such condition or may be waived by the Company in whole or in part at
any time and from time to time in its discretion. The failure by the Company at
any time to exercise the foregoing rights shall not be deemed a wavier of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
EXCHANGE AGENT
U.S. Trust Company of California, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
BY REGISTERED OR CERTIFIED MAIL; BY OVERNIGHT COURIER; OR BY HAND:
U.S. Trust Company of California, N.A.
515 South Flower Street
Suite 2700
Los Angeles, CA 90071
Attention: Dwight Liu
BY FACSIMILE: (213) 488-1258
Attention: Dwight Liu
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
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<PAGE>
FEES AND EXPENSES; SOLICITATION OF TENDERS
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be $305,000 which
includes fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered Holder of the Old Notes
tendered, or if a transfer tax is imposed for any reason other than the exchange
of Old Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering Holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted to the Exchange Agent, the
amount of such transfer taxes will be billed directly to such tendering Holder.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) Holders in any jurisdiction in which the making
of the Exchange Offer or the acceptance thereof would not be in compliance with
the laws of such jurisdiction.
ACCOUNTING TREATMENT
The New Notes will be recorded by the Company at the same carrying value as
the Old Notes, which is face value, as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The costs of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
intend to register the Old Notes under the Securities Act. The Company believes
that, based upon interpretations contained in no action letters issued to third
parties by the staff of the Commission, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such Holders' business and such Holders have no arrangement with any
person to participate in the distribution of such New Notes, and provided,
further, that each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." If any
Holder (other than a broker-dealer
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<PAGE>
described in the preceding sentence) has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such Holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied with.
See "Risk Factors -- Restrictions upon Transfer of and Limited Trading Market
for Old Notes"; and -- "Blue Sky Restrictions; Compliance with State Securities
Laws".
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<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996 and the capitalization of the Company at that date after giving
effect to the Exchange Offer. This table should be read in conjunction with
"Unaudited Pro Forma Condensed Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)
Long-term debt (a).................................................................. $ 100,000 $ 100,000
New credit facility................................................................. 5,421 5,421
------------ ------------
Total long-term debt.............................................................. 105,421 105,421
------------ ------------
Senior preferred stock................................................................ 13,702 13,702
Stockholders' equity (deficit)
Junior preferred stock.............................................................. 138,600 138,600
Warrants (b)........................................................................ 6,500 6,500
Common stock 10,000,000 shares, $.01 par value, authorized; 1,400,000 shares
outstanding........................................................................ 14 14
Additional paid in capital.......................................................... 1,386 1,386
Retained earnings (deficit)......................................................... (218,115) (218,115)
------------ ------------
Total stockholders' equity (deficit).............................................. (71,615) (71,615)
------------ ------------
Total capitalization............................................................ $ 47,508 $ 47,508
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) As of June 30, 1996, the Company had outstanding $100 million under the
Bridge Facility. As of July 2, 1996, the Bridge Facility was repaid in full
using the net proceeds from the sale of the Old Notes and cash on hand.
(b) Warrants to purchase 73,684 shares of Common Stock and 72,947 shares of
Junior Preferred Stock were issued in connection with the Recapitalization.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited PRO FORMA condensed financial data (the "Pro Forma
Financial Data") have been prepared by the Company's management from the
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus. The unaudited PRO FORMA condensed statements of operations for
the fiscal year ended December 31, 1995, and the six months ended June 30, 1996
and 1995 reflect adjustments as if the Recapitalization and the sale of the Old
Notes had been consummated and were effective as of January 1, 1995. The
unaudited PRO FORMA condensed balance sheet as of June 30, 1996 gives effect to
the sale of the Old Notes as if it had occurred on such date.
The financial effects of the Recapitalization and sale of the Old Notes as
presented in the Pro Forma Financial Data are not necessarily indicative of
either the Company's financial position or the results of its operations which
would have been obtained had the Recapitalization and sale of the Old Notes
actually occurred on the dates described above, nor are they necessarily
indicative of the results of future operations. The Pro Forma Financial Data
should be read in conjunction with the notes thereto, which are an integral part
thereof, the financial statements of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
RECAPITALIZATION RECAPITALIZATION
AND SALE OF AND SALE OF
HISTORICAL OLD NOTES OLD NOTES
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................................................ $ 170,671 $ -- $ 170,671
Cost of sales, buying, and occupancy............................................. 123,415 -- 123,415
---------- -------- ----------------
Gross profit..................................................................... 47,256 -- 47,256
Operating expenses............................................................... 32,664 (1,375)(a) 31,289
Deferred compensation expense.................................................... 3,087 (3,087)(b) --
---------- -------- ----------------
Operating income................................................................. 11,505 4,462 15,967
Other (expenses) income:
Interest expense............................................................... (382) (11,176)(c) (11,558)
Interest income................................................................ 14 -- 14
Other.......................................................................... 65 -- 65
---------- -------- ----------------
(303) (11,176) (11,479)
---------- -------- ----------------
Income (loss) before provision for income taxes.................................. 11,202 (6,714) 4,488
Provision for income taxes....................................................... 345 1,592(e) 1,937
---------- -------- ----------------
Net income (loss)................................................................ 10,857 (8,306) 2,551
Preferred stock dividends........................................................ -- (14,034)(f) (14,034)
---------- -------- ----------------
Net income (loss) available for common stockholders.............................. $ 10,857 $ (22,340) $ (11,483)
---------- -------- ----------------
---------- -------- ----------------
PRO FORMA
Historical income before provision for income taxes.............................. $ 11,202
Pro forma provision for income taxes (g)......................................... (6,144)
----------
Pro forma net income............................................................. $ 5,058
----------
----------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
RECAPITALIZATION RECAPITALIZATION
AND SALE OF AND SALE OF
HISTORICAL OLD NOTES OLD NOTES
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................... $ 91,048 $-- $ 91,048
Cost of sales, buying, and occupancy........... 65,249 -- 65,249
---------- -------- --------
Gross profit................................... 25,799 -- 25,799
Operating expenses............................. 18,318 (432)(a) 17,886
Deferred compensation expense.................. 69,892 (69,892)(b) --
---------- -------- --------
Operating income............................... (62,411) 70,324 7,913
Other (expenses) income:
Interest expense............................. (6,046) 232(c) (5,814)
Transaction expenses......................... (6,176) 6,176(d) --
---------- -------- --------
(12,222) 6,408 (5,814)
---------- -------- --------
Income (loss) before provision for income
taxes......................................... (74,633) 76,732 2,099
Provision for income taxes..................... 131 772(e) 903
---------- -------- --------
Net income (loss).............................. (74,764) 75,960 1,196
Preferred stock dividends...................... (962) (6,071)(f) (7,033)
---------- -------- --------
Net income (loss) available for common
stockholders.................................. $(75,726) $ 69,889 $ (5,837)
---------- -------- --------
---------- -------- --------
PRO FORMA
Historical income (loss) before provision for
income taxes.................................. $(74,633)
Pro forma provision for income taxes (g)....... --
----------
Pro forma net income (loss).................... $(74,633)
----------
----------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
RELATED TO THE FOR THE
RECAPITALIZATION RECAPITALIZATION
AND SALE OF AND SALE OF
HISTORICAL OLD NOTES OLD NOTES
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................... $76,888 $-- $ 76,888
Cost of sales, buying, and occupancy........... 55,742 -- 55,742
---------- -------- --------
Gross profit................................... 21,146 -- 21,146
Operating expenses............................. 15,100 (688)(a) 14,412
Deferred compensation expense.................. 1,040 (1,040)(b) --
---------- -------- --------
Operating income............................... 5,006 1,728 6,734
Other (expenses) income:
Interest expense............................. (87) (5,675)(c) (5,762)
---------- -------- --------
(87) (5,675) (5,762)
---------- -------- --------
Income (loss) before provision for income
taxes......................................... 4,919 (3,947) 972
Provision for income taxes..................... 74 344(e) 418
---------- -------- --------
Net income (loss).............................. 4,845 (4,291) 554
Preferred stock dividends...................... -- (7,017)(f) (7,017)
---------- -------- --------
Net income (loss) available for common
stockholders.................................. $ 4,845 $(11,308) $ (6,463)
---------- -------- --------
---------- -------- --------
PRO FORMA
Historical income before provision for income
taxes......................................... $ 4,919
Pro forma provision for income taxes (g)....... (2,562)
----------
Pro forma net income........................... $ 2,357
----------
----------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Represents a reduction in (i) compensation expense historically paid to
Raymond Scherr, the former Chairman of the Board; and (ii) bonuses paid to
certain key executives based upon newly negotiated bonus plans as part of
the Recapitalization.
(b) Represents the elimination of deferred stock compensation expense associated
with the management stock options which have been partially redeemed and
partially exchanged for Junior Preferred Stock as part of the
Recapitalization.
(c) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED --------------------
DECEMBER 31 JUNE 30, JUNE 30,
1995 1995 1996
------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Historical interest expense............................. $ 382 $ 87 $ 6,046
Assumed interest expense on new credit facility for
working capital purposes............................... (183) (74) (126)
Cash interest expense on the Notes at an interest rate
of 11%................................................. (11,000) (5,500) (5,500)
------------- --------- ---------
Total cash interest expense adjustment.................. (10,801) (5,487) 420
Amortization of deferred financing fees
on the Notes........................................... (375) (188) (188)
------------- --------- ---------
Total interest expense adjustment....................... $ (11,176) $ (5,675) $ 232
------------- --------- ---------
------------- --------- ---------
</TABLE>
(d) Represents the elimination of non-recurring transaction expenses which are
directly attributable to the Recapitalization.
(e) Reflects the estimated statutory provision for income taxes assuming the
Company was a "C" corporation, and the increase in net expenses as a result
of the adjustments described in notes (a), (b), (c), and (d) above.
(f) Represents dividends to be paid on the Junior Preferred Stock and the Senior
Preferred Stock.
(g) The Company was an "S" Corporation prior to the consummation of the
Recapitalization on June 5, 1996. The pro forma statement of operations
information reflects adjustments to historical net income (loss) as if the
Company had elected "C" Corporation status for income tax purposes.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------------
ADJUSTMENTS
RELATED TO THE PRO FORMA
SALE OF FOR THE SALE OF
ACTUAL OLD NOTES OLD NOTES
--------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 6,494 $ (3,585)(a) $ 2,909
Accounts receivable........................................... 3,089 -- 3,089
Inventories................................................... 39,595 -- 39,595
Prepaid expenses and other current assets..................... 1,219 -- 1,219
--------- ---------------- ----------------
Total current assets........................................ 50,397 (3,585) 46,812
Property and equipment, net..................................... 14,038 -- 14,038
Other assets.................................................... 931 3,585(a) 4,516
--------- ---------------- ----------------
Total assets.............................................. $ 65,366 $ -- $ 65,366
--------- ---------------- ----------------
--------- ---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 9,130 $ -- $ 9,130
Accrued expenses and other current liabilities................ 8,248 -- 8,248
Revolving line of credit...................................... 5,421 -- 5,421
--------- ---------------- ----------------
Total current liabilities................................... 22,799 -- 22,799
Long term debt.................................................. 100,000 -- 100,000
Long term liabilities........................................... 480 -- 480
--------- ---------------- ----------------
Total liabilities........................................... 123,279 -- 123,279
--------- ---------------- ----------------
Senior preferred stock.......................................... 13,702 -- 13,702
Stockholders' equity (deficit):
Junior preferred stock........................................ 138,600 -- 138,600
Warrants...................................................... 6,500 -- 6,500
Common stock.................................................. 14 -- 14
Additional paid in capital.................................... 1,386 -- 1,386
Retained deficit.............................................. (218,115) -- (218,115)
--------- ---------------- ----------------
Total stockholders' equity (deficit)........................ (71,615) -- (71,615)
--------- ---------------- ----------------
Total liabilities and stockholders' equity (deficit)...... $ 65,366 $ -- $ 65,366
--------- ---------------- ----------------
--------- ---------------- ----------------
</TABLE>
- ------------------------
(a) Represents fees paid on July 2, 1996, for certain financing costs related to
the sale of the Notes and the resultant net increase in other assets.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data set forth below have been derived from the
financial statements of the Company and the related notes thereto. The income
statement data for the years ended December 31, 1993, 1994 and 1995, and the
balance sheet data at December 31, 1994 and 1995 are derived from the financial
statements of the Company, which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this Prospectus. The income
statement data for the six months ended June 30, 1995 and for the six months
ended June 30, 1996 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The income statement data for each of the years
in the two-year period ended October 31, 1992 and the balance sheet data at
October 31 of each of such years are derived from the financial statements of
the Company, which have been audited by Coopers & Lybrand, LLP and are not
included herein. The income statement data for the two-month period ended
December 31, 1992 and the balance sheet data at December 31, 1992 and 1993 are
derived from the financial statements of the Company which have been audited by
Ernst & Young LLP and which are also not included herein. The selected PRO FORMA
income statement data set forth below is for informational purposes only and may
not necessarily be indicative of the results of operations of the Company as
they may be in the future. The following selected financial data should be read
in conjunction with the Company's financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere in this Prospectus.
31
<PAGE>
<TABLE>
<CAPTION>
TWO
YEAR ENDED MONTHS YEAR ENDED SIX MONTHS
OCTOBER 31, ENDED DECEMBER 31, ENDED JUNE 30,
-------------------- DECEMBER 31, ------------------------------- --------------------
1991 1992 1992 1993 1994 1995 1995 1996
--------- --------- --------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $ 74,872 $ 85,592 $ 18,726 $ 97,305 $ 129,039 $ 170,671 $ 76,888 $ 91,048
Cost of sales (a).............. 52,808 60,120 13,333 68,527 92,275 123,415 55,742 65,249
--------- --------- --------------- --------- --------- --------- --------- ---------
Gross profit................. 22,064 25,472 5,393 28,778 36,764 47,256 21,146 25,799
Selling, general and
administration expenses....... 18,896 20,998 3,547 21,889 26,143 32,664 15,100 18,318
Deferred compensation expense
(b)........................... (230) -- 373 1,390 1,259 3,087 1,040 69,892
--------- --------- --------------- --------- --------- --------- --------- ---------
Operating income (loss)........ 3,398 4,474 1,473 5,499 9,362 11,505 5,006 (62,411)
--------- --------- --------------- --------- --------- --------- --------- ---------
Other (expense) income
Interest expense, net........ (702) (457) (49) (271) (252) (368) (87) (6,046)
Transaction expense and
other....................... 59 59 -- 23 45 65 -- (6,176)
--------- --------- --------------- --------- --------- --------- --------- ---------
(643) (398) (49) (248) (207) (303) (87) (12,222)
--------- --------- --------------- --------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes.............. 2,755 4,076 1,424 5,251 9,155 11,202 4,919 (74,633)
Provision for income taxes..... 53 89 39 146 326 345 74 131
--------- --------- --------------- --------- --------- --------- --------- ---------
Net income (loss).............. $ 2,702 $ 3,987 $ 1,385 $ 5,105 $ 8,829 $ 10,857 $ 4,845 $ (74,764)
--------- --------- --------------- --------- --------- --------- --------- ---------
--------- --------- --------------- --------- --------- --------- --------- ---------
PRO FORMA FOR INCOME TAX
PROVISION (C):
Historical income (loss) before
provision for income taxes.... $ 2,755 $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ 4,919 $ (74,633)
Pro forma provision for income
taxes......................... 1,086 1,753 773 2,856 4,478 6,144 2,562 --
--------- --------- --------------- --------- --------- --------- --------- ---------
Pro forma net income (loss).... $ 1,669 $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ 2,357 $ (74,633)
--------- --------- --------------- --------- --------- --------- --------- ---------
--------- --------- --------------- --------- --------- --------- --------- ---------
OPERATING DATA:
Net sales per gross square
foot (d).................... $ 366 $ 407 -- $ 454 $ 518 $ 646 $ 292 $ 320
Net sales growth............. 6.0% 14.3% 18.7% 13.7% 32.6% 32.3% 40.0% 18.4%
Increase in comparable store
sales (e)................... 5.9% 11.5% 18.7% 11.4% 17.3% 23.4% 27.4% 11.8%
Stores open at end of
period...................... 15 15 15 17 20 21 20 24
Inventory turns.............. 3.1x 3.3x 3.4x 3.4x 3.4x 3.7x 3.6x 3.7x
Ratio of earnings to fixed
charges (f)................. 3.7x 5.8x 13.8x 9.1x 11.6x 11.7x 13.7x --
Capital expenditures......... $ 1,192 $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 888 $ 3,523
BALANCE SHEET DATA:
Net working capital.......... $ 10,188 $ 11,923 $ 12,679 $ 10,243 $ 11,468 $ 6,002 $ 6,650 $ 27,598
Property, plant and
equipment, net.............. 8,558 7,888 8,677 10,066 11,642 13,276 11,659 14,038
Total assets................. 28,535 32,082 34,978 37,602 46,900 49,719 45,775 65,366
Total long term and revolving
debt (including current
debt)....................... 8,411 6,103 5,001 3,400 825 -- 8,528 105,421
Senior preferred stock....... -- -- -- -- -- -- -- 13,702
Stockholders' equity
(deficit)................... 12,625 16,612 17,997 18,464 23,424 19,764 18,687 (71,615)
</TABLE>
- ------------------------------
(a) Cost of sales includes buying and occupancy costs.
(b) For the six months ended June 30, 1996, the Company recorded deferred
compensation expense of $69.9 million related to the cancellation and
exchange of management stock options pursuant to the Recapitalization.
After the Recapitalization, these expenses will be non-recurring as the
deferred compensation plan was terminated.
(c) Pro forma provision for income taxes reflects the estimated statutory
provision for income taxes assuming the Company was a "C" corporation.
(d) Net sales per gross square foot does not include new stores opened during
the reporting period. Information for the two month period ended December
31, 1992 is not meaningful.
(e) Compares net sales for the comparable periods.
(f) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one third of lease expense, which management believes
is representative of the interest components of lease expense. Earnings
were insufficient to cover fixed charges by $74.6 million for the six
months ended June 30, 1996.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Guitar Center is the nation's leading retailer of guitars, amplifiers,
percussion instruments, keyboards and pro audio and recording equipment with 28
stores operating in 14 major markets. From 1993 to 1995, Guitar Center's net
sales have grown at a compound annual growth rate of 32.4%, principally due to
comparable store sales growth averaging 17.3% per year and the opening of six
new stores. Guitar Center achieved comparable store net sales growth of 11.4%,
17.3%, 23.4% and 11.8% for the fiscal years ended December 31, 1993, 1994, 1995
and the six months ended June 30, 1996, respectively. These increases were
primarily attributable to increases in unit sales rather than increases in
prices or changes in products mix. Management believes such volume increases are
the result of the continued success of the Company's implementation of its
business strategy, continued strong growth in the music products industry and
increasing consumer awareness of the Guitar Center name.
The Company opened 7 stores in fiscal 1996 and expects to open 8 stores in
each of fiscal 1997 and 1998. In preparation for these additional stores,
management has dedicated a substantial amount of resources over the past several
years to building the infrastructure necessary to support a large, national
chain. For example, the Company has spent $2.9 million during the past three
years on system upgrades to support the storewide integration of a
state-of-the-art management information system. The Company has also established
centralized operating and financial controls and has implemented an extensive
training program to ensure a high level of customer service in its stores.
Management believes that the infrastructure is in place to support its needs for
the foreseeable future, including its expansion plans as described herein.
Guitar Center's expansion strategy includes opening additional stores in
certain of its existing markets and entering new markets. As part of its store
expansion strategy, the Company opened five stores during a 14-month period from
October 1993 through November 1994. Additionally, the Company opened one store
in December 1995 and seven stores in fiscal 1996. The Company will continue to
pursue its strategy of clustering stores in major markets to take advantage of
operating and advertising efficiencies and to build awareness of the Guitar
Center name in new markets. In markets where the Company has pursued its
clustering strategy, mature stores have typically demonstrated net sales growth
rates consistent with the Company average. As the Company enters new markets,
management expects that it will initially incur higher administrative and
advertising costs per store than it currently experiences in established
markets.
The following table sets forth certain historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 29.6 28.5 27.7 27.5 28.3
Selling, general and adminstrative expenses.... 22.5 20.3 19.2 19.6 20.1
----------- ----------- ----------- ----------- -----------
Operating income before deferred compensation
expense....................................... 7.1 8.2 8.5 7.9 8.2
Deferred compensation expense.................. 1.4 0.9 1.8 1.4 76.8
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ 5.7 7.3 6.7 6.5 (68.6)
Interest expense, net.......................... 0.3 0.2 0.1 0.1 6.6
Transaction expenses -- -- -- -- 6.8
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.............. 5.4 7.1 6.6 6.4 (82.0)
Income taxes................................... 0.2 0.3 0.2 0.1 0.1
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. 5.2% 6.8% 6.4% 6.3% (82.1)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
33
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales for the six months ended June 30, 1996 increased 18.4% to $91.0
million from $76.9 million for the six months ended June 30, 1995. This growth
was attributable to an increase of 11.8% in comparable store net sales which
contributed $9.0 million, or 63.8% of the increase. In addition, $5.1 million
was contributed from new store net sales which accounted for 36.2% of the
increase. The increase in comparable store net sales was primarily attributable
to increases in unit sales rather than increases in prices or changes in the mix
of sales between product categories. Such volume increases were primarily the
result of the continued success of the Company's implementation of its business
strategy, continued strong growth in the music products industry and increasing
consumer awareness of Guitar Center stores.
Gross profit for the six months ended June 30, 1996 increased 22.0% to $25.8
million from $21.1 million for the six months ended June 30, 1995. Gross profit
as a percentage of net sales ("gross margin") for the six months ended June 30,
1996 increased to 28.3% from 27.5% in the six months ended June 30, 1995. This
increase in Gross Margin was primarily the result of the introduction and sales
of higher margin high-technology pro audio and recording equipment.
Selling, general and administrative expenses for the six months ended June
30, 1996 increased 21.3% to $18.3 million from $15.1 million for the six months
ended June 30, 1995. As a percentage of net sales, selling, general and
administrative expenses for the six months ended June 30, 1996 increased to
20.1% from 19.6% for the six months ended June 30, 1995. This change reflects an
increase in the number of store employees in anticipation of the continued
strong comparable store sales growth, as well as the incremental cost of
staffing newly opened stores prior to sales fully ramping up. In addition,
increases reflect increases in corporate personnel and management information
systems expenses associated with the Company's planned expansion. Additionally,
the six months ended June 30, 1996 reflect the commencement of operations of
three new stores which were open an average of two months and for which the
selling, general and administrative expenses were higher as a percentage of net
sales.
Deferred compensation expense for the six months ended June 30, 1996
increased to $69.9 million from $1.0 million for the six months ended June 30,
1995. The deferred compensation expense resulted from the purchase and exchange
of management stock options and the cancellation of the Company's prior stock
option program. After the Recapitalization, these expenses will be non-recurring
as the deferred compensation plan was terminated.
The operating loss for the six months ended June 30, 1996 was $62.4 million
compared to operating income of $5.0 million for the six months ended June 30,
1995. Operating income before deferred compensation increased 23.7% to $7.5
million from $6.0 million over the comparable period. As a percentage of net
sales, operating income before deferred compensation for the six months ended
June 30, 1996 increased to 8.2% from 7.9% in the six months ended June 30, 1995.
This increase was primarily attributable to the increase in Gross Margin,
partially offset by an increase in selling, general and administrative expenses.
Interest expense, net for the six months ended June 30, 1996 increased to
$6.0 million from $0.1 million for the six months ended June 30, 1995. This
increase was primarily attributable to the write-off of financing fees of $4.7
million and interest expense of $0.9 million on the Bridge Facility.
Non-recurring transaction costs of $6.2 million related to the
Recapitalization were expensed in the six months ended June 30, 1996.
Net income (loss) for the six months ended June 30, 1996 decreased to
($74.8) million from $4.8 million for the six months ended June 30, 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for fiscal 1995 increased 32.3% to $170.7 million from $129.0
million in fiscal 1994. This growth was attributable to an increase of 23.4% in
comparable store net sales which contributed $28.4 million, or 68.1% of the
increase. In addition, $13.3 million was contributed from new store sales
34
<PAGE>
which accounted for 31.9% of the increase. The increase in comparable store net
sales was primarily attributable to increases in unit sales rather than
increases in prices or changes in the mix of products sold. Such volume
increases were primarily the result of the continued implementation of the
Company's business strategy, continued strong growth in the music products
industry and increasing consumer awareness of Guitar Center stores.
Gross profit for fiscal 1995 increased 28.5% to $47.3 million from $36.8
million in fiscal 1994. Gross margin for fiscal 1995 decreased to 27.7% from
28.5% in fiscal 1994. This decrease in gross margin was primarily the result of
(i) an increase in the proportion of total net sales attributable to lower
margin pro-audio and recording equipment and (ii) the continuation of a sales
program which emphasized volume increases, customer service and market share
over gross margin.
Selling, general and administrative expenses for fiscal 1995 increased 24.9%
to $32.7 million from $26.1 million in fiscal 1994. As a percentage of net
sales, selling, general and administrative expenses for fiscal 1995 decreased to
19.2% from 20.3% in fiscal 1994 reflecting the leveraging of fixed expenses over
greater store net sales.
Deferred compensation expense for fiscal 1995 increased 145.2% to $3.1
million from $1.3 million in fiscal 1994. Deferred compensation relates to
non-cash expenses associated with the Company's prior stock option program.
Operating income after deferred compensation for fiscal 1995 increased 22.9%
to $11.5 million from $9.4 million for fiscal 1994. Operating income before
deferred compensation increased 37.4% to $14.6 million from $10.6 million over
the comparable period. As a percentage of net sales, operating income before
deferred compensation for fiscal 1995 increased to 8.5% from 8.2% for fiscal
1994. This increase was primarily attributable to the decrease in selling,
general and administrative expenses as a percentage of net sales, offset by the
decrease in gross margin.
Interest expense, net for fiscal 1995 increased 46.0% to $0.4 million from
$0.3 million for fiscal 1994. This increase was attributable to increased
borrowings to fund distributions to the Company's former sole stockholder.
Net income for fiscal 1995 increased 23.0% to $10.9 from $8.8 million for
fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales for fiscal 1994 increased 32.6% to $129.0 million from $97.3
million in fiscal 1993. This growth was attributable to an increase of 17.3% in
comparable store sales which contributed $15.9 million, or 50.0% of the
increase. In addition, $15.9 million was contributed from new store sales which
accounted for 50.0% of the increase. The increase in comparable store sales was
primarily attributable to increases in unit sales rather than increases in
prices or the mix of products sold. Such volume increases were primarily the
result of the implementation of the Company's business strategy, continued
strong growth in the music products industry and increasing consumer awareness
of Guitar Center stores.
Gross profit for fiscal 1994 increased 27.7% to $36.8 million from $28.8
million in fiscal 1993. Gross margin for fiscal 1994 decreased to 28.5% from
29.6% in fiscal 1993. This decrease in gross margin was primarily the result of
(i) an increase in the percentage of total net sales attributable to lower
margin pro-audio and recording equipment and (ii) the implementation of a sales
program which emphasized volume increases, customer service and market share
over gross margin.
Selling, general and administrative expenses for fiscal 1994 increased 19.4%
to $26.1 million from $21.9 million in fiscal 1993. As a percentage of net
sales, selling, general and administrative expenses for fiscal 1994 decreased to
20.3% from 22.5% in fiscal 1993, reflecting the leveraging of fixed expenses
over greater store net sales.
Deferred compensation expense for fiscal 1994 decreased 9.4% to $1.3 million
from $1.4 million in fiscal 1993. Deferred compensation relates to non-cash
expenses associated with the Company's prior stock option program.
35
<PAGE>
Operating income after deferred compensation for fiscal 1994 increased 70.2%
to $9.4 million from $5.5 million for fiscal 1993. Operating income before
deferred compensation increased 54.2% to $10.6 million from $6.9 million over
the comparable period. As a percentage of net sales, operating income before
deferred compensation for fiscal 1994 increased to 8.2% from 7.1% for fiscal
1993. This increase was primarily attributable to the decrease in selling,
general and administrative expenses as a percentage of net sales, offset by the
decrease in gross margin.
Interest expense, net for fiscal 1994 remained unchanged at $0.3 million
from fiscal 1993.
Net income for fiscal 1994 increased 72.9% to $8.8 million from $5.1 million
for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Guitar Center's need for liquidity will arise primarily from interest
payable on the indebtedness incurred in connection with the Recapitalization and
the funding of the Company's capital expenditure and working capital
requirements. The Company has no mandatory payments of principal on the Notes
scheduled prior to their final maturity and has no mandatory payments of
principal scheduled under the New Credit Facility for five years. The Company
has historically financed its operations through internally generated funds and
borrowings under its credit facilities.
As of October 4, 1996, under the New Credit Facility, which expires June 1,
2001, the Company had $9.9 million outstanding and approximately $9 million
available for additional borrowings. The interest rate as of such date was
9.75%. See "The New Credit Facility."
For the six months ended June 30, 1996, cash used in operating activities
was $46.5 million. During fiscal 1995, cash provided by operating activities
increased to $16.5 million from $13.6 million in fiscal 1994. The increase in
1995 from 1994 was primarily due to higher net income and more efficient use of
working capital. Cash provided by financing activities was $54.8 million for the
six months ended June 30, 1996, which includes the effects of the
Recapitalization. Cash used in financing activities during fiscal 1995 and 1994
was $15.3 million and $6.4 million, respectively, which consisted primarily of
distributions to the Company's sole stockholder of $14.5 million and $3.9
million for fiscal 1995 and 1994, respectively.
Capital expenditures for fiscal 1995 and 1994 were $3.4 million and $3.3
million, respectively, and included expenditures for store remodeling, computer
hardware and software upgrades as well as leasehold improvements and equipment
for the Company's store expansion. Capital expenditures related to the opening
of new stores and remodels in fiscal 1995 and 1994 were $1.5 million and $1.8
million, respectively. Capital expenditures for the first six months of 1996
were $3.5 million and are expected to aggregate approximately $6.9 million for
all of fiscal 1996 and will be primarily used to fund the opening of additional
stores and management information systems.
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. The Company, which currently
operates 28 stores, has opened seven stores in fiscal 1996 and expects to open
approximately eight stores in each of fiscal 1997 and 1998. Each new store
typically has required approximately $1.5 million for gross inventory, of which
approximately $1.2 million is financed with trade credit for approximately 90
days. Historically, the Company's cost of capital improvements for an average
new store has been approximately $450,000, consisting of leasehold improvements,
fixtures and equipment. Pre-opening costs for new stores have averaged
approximately $50,000 per new store, the majority of which are expensed and the
remaining portion of which are capitalized and amortized over a twelve month
period. Nominal pre-opening costs are incurred for the stores that are
relocated.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the foreseeable future,
including its plans for expansion as described elsewhere herein. The Company's
capital resources and liquidity are expected to be provided by the Company's
cash flow from operations and borrowings under the New Credit Facility.
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The Company operated as an "S" corporation for all reported periods prior to
the Recapitalization. Accordingly, federal taxes were paid at the stockholder
level and the Company paid minimal state income taxes. Upon consummation of the
Recapitalization, the Company eliminated its "S" corporation status and,
accordingly, became subject to federal, state and local income taxes. The
Company anticipates that the impact of the termination of the "S" corporation
and the election of the "C" corporation status on its future operations will be
that additional federal and state income taxes will have to be provided and
charged to the statement of operations. The Company believes, however, that the
cash impact to the Company will be reduced as the Company will no longer make
distributions to its former sole stockholder. See "Unaudited Pro Forma Condensed
Financial Data."
SEASONALITY
The Company's results are not highly seasonal, although, as with most
retailers, sales in the last quarter are typically higher than in other
quarters.
NEW ACCOUNTING POLICIES
Effective January 1, 1996 the Company elected to change certain accounting
policies. The changes include the capitalization of certain pre-opening costs,
MIS development costs, and lease negotiation costs. Such amounts will be
amortized over twelve months for the pre-opening costs, three years for the MIS
development costs and over the life of the lease for lease negotiation costs.
The Company believes these policy changes will more accurately match costs with
their related revenues.
The amounts capitalized during the six months ended June 30, 1996 were not
material to the financial statements. The effect on all prior periods presented
is not material.
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," issued in March 1995 and effective for fiscal years beginning after
December 15, 1995, establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable intangibles
and goodwill. The adoption of SFAS 121 did not have a material impact on the
Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain PRO
FORMA disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company will adopt the provisions for PRO FORMA
disclosure requirements of SFAS 123 in fiscal 1996. The implementation of
Financial Accounting Standards No. 123 did not have a material impact on the
Company's 1996 Financial Statements.
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BUSINESS
COMPANY HISTORY
Guitar Center was founded in 1964 in Hollywood, California. In 1972, the
Company opened its second store in San Francisco to capitalize on the emerging
San Francisco rock 'n roll scene. By this time, Guitar Center's inventory had
been expanded to include drums, keyboards, accessories and pro audio and
recording equipment. Throughout the 1980s, Guitar Center expanded by opening
nine stores in five major markets including Chicago, Dallas and Minneapolis.
Since 1990, the Company has continued its new store expansion and has focused on
building the infrastructure necessary to manage the Company's strategically
planned growth. Current senior management has been with the Company for an
average of 18 years and effectively assumed full operating control in 1987.
Since then, management has focused on developing and realizing its long-term
goal of expanding its position as the leading music product retailer throughout
the United States.
Guitar Center's flagship Hollywood store currently is one of the nation's
largest retail stores of its kind with 33,000 square feet of retail space. The
Hollywood store features one of the largest used and vintage guitar collections
in the United States, attracting buyers and collectors from around the world. In
front of the Hollywood store is the Rock Walk which memorializes over 70 famous
musicians. The Rock Walk attracts several tour buses daily and has helped to
create international recognition of the Guitar Center name.
BUSINESS
Guitar Center is the nation's leading retailer of guitars, amplifiers,
percussion instruments, keyboards and pro audio and recording equipment with 28
stores operating in 14 major markets. Over the past five fiscal years, the
Company's net sales and operating income have grown at compound annual growth
rates of 21.9% and 34.0%, respectively. This growth was principally the result
of strong and consistent comparable store sales growth, averaging 13.9% per year
over the past five fiscal years, and the opening of seven new stores. Same store
sales (stores opened for a full year) for fiscal years 1993, 1994, 1995 and the
six months ended June 30, 1996 were $95.4 million, $113.2 million, $157.5
million and $85.9 million, respectively.
Guitar Center offers a unique retail concept in the music products industry,
combining an interactive, hands-on shopping experience with superior customer
service and a broad selection of brand name, high-quality products at guaranteed
low prices. The Company creates an entertaining and exciting atmosphere in its
stores with bold and dramatic merchandise presentations, highlighted by bright,
multi-colored lighting, high ceilings, music and videos. Management believes
approximately 80% of the Company's sales are to professional and aspiring
musicians who generally view the purchase of music products as a career
necessity. These sophisticated customers rely upon the Company's knowledgeable
and highly trained salespeople to answer technical questions and to assist in
product demonstrations.
The Guitar Center prototype store generally ranges in size from 12,000 to
15,000 square feet (as compared to a typical music products retail store which
averages 3,230 square feet) and is designed to encourage customers to hold and
play instruments. Each store carries an average of 7,000 core SKUs, which
management believes is significantly greater than a typical music products
retail store, and is organized into five departments, each focused on one
product category. These departments cater to a musician's specific product needs
and are staffed by specialized salespeople, many of whom are practicing
musicians. Management believes this retail concept differentiates the Company
from its competitors and encourages repeat business.
Guitar Center stores historically have generated strong and stable operating
results. All of the Company's stores are profitable and have generated positive
comparable store sales growth in each of the past four fiscal years.
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The following summarizes certain key operating statistics of a Guitar Center
store:
<TABLE>
<S> <C>
Average 1995 net sales per square foot......................... $ 646
Average 1995 net sales per store (1)........................... 8,513,000
Average 1995 store-level operating income (1).................. 1,239,000
Average 1995 store-level operating income margin............... 14.6%
</TABLE>
- ------------------------------
(1) Excludes results of the Company's Brea, California store opened in December
1995.
Guitar Center stores have typically generated positive operating income
within the first three months of opening. In addition, based on new store
openings since fiscal 1993, Guitar Center stores have demonstrated high
store-level operating income and store-level operating income margins averaging
approximately $0.6 million and 11.2%, respectively, and sales per square foot
averaging $465, during the first full twelve months of operations.
Management is highly committed to the success of Guitar Center. The
Company's growth strategy is to continue to increase its presence in its
existing markets and to open new stores in strategically selected markets. The
Company will continue to pursue its strategy of clustering stores in major
markets to take advantage of operating and advertising efficiencies and to build
awareness of the Guitar Center name in new markets. The Company has opened a
total of seven stores in fiscal 1996, and expects to open approximately eight
stores in each of fiscal 1997 and fiscal 1998. The Company has committed
substantial resources to building a corporate infrastructure and management
information systems that it believes can support the Company's needs, including
its expansion plans, for the foreseeable future. Guitar Center believes it is
well-positioned to continue to implement its expansion strategy.
For fiscal years ended December 31, 1993, 1994, 1995 and for the six months
ended June 30, 1996, the Company had net income (loss) of $5.1 million, $8.8
million, $10.9 million and ($74.8) million, respectively. The results for the
six months ended June 30, 1996 reflect a recorded deferred compensation expense
of $69.9 million and $10.9 million for transaction costs and financing fees
incurred in connection with the Recapitalization. These expenses are
non-recurring following the Recapitalization.
INDUSTRY OVERVIEW
The United States retail market for music products in 1995 was estimated in
a study by MUSIC USA magazine to be approximately $5.5 billion in net sales,
representing a five year compound annual growth rate of 7.9%. The broadly
defined music products market, according to the National Association of Music
Merchants ("NAMM"), includes retail sales of string and fretted instruments,
sound reinforcement and recording equipment, drums, keyboards, print music,
pianos, organs and school band and orchestral instruments. The music products
market as currently defined by NAMM, however, does not include the significant
used and vintage product markets, or the computer software or apparel market in
which the Company actively participates. According to findings by a Gallup
Survey, as reported by NAMM, there were 62 million amateur musicians in the
United States in 1994, with 62% of households characterized as "player
households," in which someone plays or has played a musical instrument. The
industry is highly fragmented and, according to the MUSIC TRADE study, the
nation's leading five music products retailers (the Company, Sam Ash Music Corp,
Brook Mays/C&S/H&H, Musicians Friend, Inc. and Washington Music Center)
accounted for approximately 7.9% of the industry's net sales in 1994.
Over the past ten years, technological advances in the industry have
resulted in dramatic changes to the nature of music-related products. It is
estimated that nearly 40% of the electronic products sold today were developed
within the last twenty years. Manufacturers have combined computers and micro-
processor technologies with musical equipment to create a new generation of
products capable of high grade sound processing and reproduction. Products
featuring this technology are available in a variety of forms and have broad
applications across most of the Company's music product categories. Most
importantly, rapid technological advances have resulted in the continued
introduction of higher quality products offered at lower prices. For example,
today an individual consumer can much more affordably
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create a home recording studio which interacts with personal computers and is
capable of producing high-quality digital recordings. Until recently, this type
of powerful sound processing capability was prohibitively expensive and was
typically purchased only by professional sound recording studios.
Management believes that an opportunity exists to capitalize on a large
untapped market for musical instruments that is continuously expanding due in
part to various technological advances. Management believes it has demonstrated
an ability to tap into this market by offering a depth and breadth of
merchandise previously unavailable from more traditional retailers and by
increasing consumer awareness with aggressive radio and mail campaigns and
guaranteed low prices.
BUSINESS STRATEGY
The Company's goal is to continue to expand its position as the leading
music products retailer throughout the United States. The principal elements of
the Company's business strategy are as follows:
EXTENSIVE SELECTION OF MERCHANDISE. Guitar Center offers an extensive
selection of brand name music products complemented by lesser known, hard to
find items and unique, vintage equipment. Guitar Center offers an average of
7,000 core SKUs per store, providing a breadth and depth of in-stock items
which management believes is not available from traditional music products
retailers.
HIGHLY INTERACTIVE, MUSICIAN-FRIENDLY STORE CONCEPT. The purchase of
musical instruments is a highly personal decision for musicians. Management
therefore believes that a large part of the Company's success is
attributable to its creative instrument presentations and colorful,
interactive displays which encourage the customer to hold and play
instruments as well as to participate in product demonstrations. Each store
also provides private sound-controlled rooms to enhance the customers'
listening experience while testing various instruments.
EXCEPTIONAL CUSTOMER SERVICE. Exceptional customer service is
fundamental to the Company's operating strategy. Accordingly, the Company
provides extensive training programs for its salespeople, who specialize in
one of the Company's five product categories. Many of the Company's
salespeople are also musicians. With the advances in technology and
continuous new product introductions in the music products industry,
customers increasingly rely on qualified salespeople to offer expert advice
and assist in product demonstrations. Management believes that its emphasis
on training and customer service distinguishes the Company within the
industry and is a critical part of Guitar Center's success.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the low price
leader in each of its markets. Guitar Center underscores its pricing
commitment by offering a 30-day low price guarantee. The Company is
generally among its vendors' largest customers and thereby benefits from
volume purchasing discounts and other terms not available to the typical
music products retailer. Although prices are usually determined on a
regional basis, store managers are trained and authorized to adjust prices
in response to local market conditions.
INNOVATIVE PROMOTIONAL AND MARKETING PROGRAMS. Guitar Center sponsors
innovative promotional and marketing events which include in-store
demonstrations, famous artist appearances and weekend themed sales events
designed to create significant store traffic and exposure. Management
believes these events help the Company to build a loyal customer base and to
encourage repeat business. Since its inception, the Company has compiled a
unique, proprietary database containing information on more than one million
customers. Guitar Center utilizes this database to advertise to select
target customers based on historical buying patterns. The Company believes
the typical music products retailer does not have the resources to support
large-scale promotional events or an extensive advertising program.
EXPANSION STRATEGY. Guitar Center's expansion strategy is to continue
to increase its market share in existing markets and to penetrate new
markets. The Company has opened a total of seven stores in fiscal 1996, and
expects to open approximately eight stores in each of fiscal 1997 and fiscal
1998. In preparation for these additional stores, management has dedicated a
substantial amount
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of its resources over the past several years to building the infrastructure
necessary to support a large national chain. In addition, the Company
believes it has developed a unique and highly effective methodology for
targeting prospective store sites which includes analyzing demographic and
psychographic characteristics of a potential store location.
MERCHANDISING
Guitar Center's merchandising concept differentiates the Company from most
of its competitors. The Company creates an entertaining and exciting atmosphere
in its stores with bold and dramatic merchandise presentations, highlighted by
bright, multi-colored lighting, high ceilings, music and videos. The Company
offers its merchandise at guaranteed low prices and utilizes aggressive
marketing and advertising to attract new customers and maintain existing
customer loyalty. The principal elements of the Company's merchandising
philosophy are as follows:
EXTENSIVE SELECTION OF MERCHANDISE. The Company seeks to maintain a broad
customer appeal by offering high-quality merchandise at multiple price points to
serve musicians ranging from the casual hobbyist to the serious professional
performer. Guitar Center offers five primary product categories: guitars,
amplifiers, percussion instruments, keyboards and pro audio and recording
equipment.
GUITARS. The Company believes that Guitar Center's
electric, acoustic and bass guitar selections are among the deepest and
broadest in the industry. Each store features for sale 300 to 500 guitars on
the "guitar wall" as well as for display many autographed instruments from
world-renowned musicians. Major manufacturers, including Fender, Gibson,
Taylor, Martin, Ovation and Ibanez, are well represented in popular models
and colors. The Company believes it has one of the largest selections of
custom guitars, one-of-a-kind and used/vintage guitars of any retailer.
Prices range from $175 for entry-level guitars to over $50,000 for special
vintage guitars. In addition, the Company has recently expanded its line of
string instruments to include banjos, mandolins and dobros, among others.
The Company also offers an extensive selection of guitar sound processing
units and products which allow the guitar to interface with a personal
computer. The introduction of such equipment has enabled the Company to
serve crossover demand from the traditional guitarist into new
computer-related sound products.
AMPLIFIERS. The Company offers an extensive selection of
electric and bass guitar amplifiers and in addition carries a broad
selection of boutique and vintage amplifiers with prices ranging from $50 to
$3,000. Guitar Center represents most manufacturers, including Marshall,
Fender, Crate, Ampeg and Roland.
PERCUSSION INSTRUMENTS. The Company believes that Guitar
Center is one of the largest retailers of percussion products in the United
States. The Company's offerings range from basic drum kits to free standing
African congos and bongos and other rhythmic and electronic percussion
products with prices ranging from $10 to $10,000. The Company also has a
large selection of vintage and used percussion instruments. Name brands
include Drum Workshop, Remo, Sabian, Pearl, Yamaha, Premier, Tama and
Zildjian. The Company carries an extensive selection of digital drum kits
and hand held digital drum units. The digital units produce a variety of
high quality life-like drum sounds and have broad appeal to musicians.
KEYBOARDS. Guitar Center carries a wide selection of
keyboard products and computer peripheral and software packages with prices
ranging from $150 to $5,000. The Company offers an extensive selection of
software for the professional, hobbyist, studio engineer and the post
production market enthusiast. The product line covers a broad range of
manufacturers including Roland, Korg, Emu and Ensoniq. The Company also
maintains a broad selection of computer related accessories, including sound
cards, sound libraries and composition, sequence and recording software.
PRO AUDIO AND RECORDING EQUIPMENT. Guitar Center's pro
audio and recording equipment division offers products ranging in price from
$100 to $25,000 for musicians at every level, from the casual hobbyist to
the professional recording engineer. Guitar Center's products
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range from recording tape to state-of-the-art digital recorders. The Company
believes it also carries one of the largest pro audio assortment of
professional stage audio equipment for small traveling bands, private clubs
and large touring professional bands. The Company's major brand name
manufacturers include JBL, Panasonic, Sony, Mackie, Tascam and Alesis.
BROAD USED MERCHANDISE SELECTION. Guitar Center offers an extensive
selection of used merchandise, the majority of which derives from instruments
traded in or sold to Guitar Center by customers. The Company believes that its
trade-in policy assists in attracting sales by providing musicians an
alternative form of payment and the convenience of selling an old instrument and
purchasing a new one at a single location. Used products are bought and priced
to sell by store managers who are well trained and knowledgeable in the used
musical instrument market.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the price leader in
each of the markets it serves. The Company is one of the leading retailers in
each of its product categories. As a result, the Company is typically among its
vendors' largest customers, thereby benefitting from volume purchasing discounts
not available to the average music products retailer. To maintain this strategy
of guaranteed low prices, the Company routinely monitors prices in each of its
markets to assure that its prices remain competitive. Although prices are
typically determined on a regional basis, store managers are trained and
authorized to adjust prices in response to local market conditions. The Company
underscores its low price guarantee by providing a cash refund of the price
difference if an identical item is advertised by a competitor at a lower price
within thirty days of the customer's purchase.
DIRECT MARKETING, ADVERTISING AND PROMOTION. The Company's advertising and
promotion strategy is designed to enhance the Guitar Center name and increase
consumer awareness and loyalty. The advertising and promotional campaigns are
developed around "events" designed to attract significant store traffic and
exposure. Guitar Center regularly plans large promotional events including the
Green Tag Sale in March, the Anniversary Sale in August, the Blues Fest in
October and the Guitar-a-thon in December. The Company believes that its special
events have a broad reach as many of them have occurred annually during the past
twenty years. These events are often coordinated with product demonstrations,
interactive displays, clinics and in-store artist appearances.
As Guitar Center enters new markets, it initiates an advertising program,
including mail and radio promotions and other special grand opening activities
designed to accelerate sales volume for each new store. Radio advertising plays
a significant part in the Company's store-opening campaign to generate
excitement and create customer awareness.
Guitar Center maintains a unique and proprietary database containing
information on over one million customers. The Company believes that this
database assists in generating repeat business by targeting customers based on
their purchasing history and by permitting Guitar Center to establish and
maintain personal relationships with its customers. The number of customers in
Guitar Center's database is more than five times the estimated worldwide
circulation of GUITAR PLAYER, one of the industry's most popular magazines.
CUSTOMER SERVICE
Exceptional customer service is fundamental to the Company's operating
strategy. With the rapid changes in technology and continuous new product
introductions, customers depend on salespeople to offer expert advice and to
assist with product demonstrations. Guitar Center believes that its well trained
and highly knowledgeable salesforce differentiates it from its competitors and
is critical to maintaining customer confidence and loyalty. The Company's
employees are typically musicians who are selected and trained to understand the
needs of their customers. Salespeople specialize in one of the Company's five
product categories and begin training on their first day of employment. Sales
and management training programs are implemented on an ongoing basis to maintain
and continually improve the level of customer service and sales support in the
stores. Based on examination results, an employee is given a rating which
determines his or her salary and level of responsibility. Guitar Center believes
that its employee testing program impresses upon its salespeople a sense of
professionalism and reduces employee turnover by providing salespeople with the
opportunity to increase their salary by
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advancing through the certification program. The Company believes that due to
its emphasis on training, it is able to attract and retain well-qualified,
highly motivated salespeople committed to providing superior customer service.
In addition, each salesperson in the keyboards and pro audio and recording
departments is certified by a technical advisory board after satisfactory
completion of an extensive training program.
The Company's customer base consists of (i) the professional or aspiring
musician who makes or hopes to make a living through music and (ii) the amateur
musician or hobbyist who views music as recreation. Management estimates that
professional and aspiring musicians, who view the purchase of musical products
as a career necessity, represent approximately 65% of the Company's customer
base, and account for approximately 80% of the Company's sales. These customers
make frequent visits to a store and develop relationships with the salesforce.
Guitar Center generates repeat business and is successful in utilizing its
unique and proprietary database to market selectively to these customers based
on past buying patterns. In addition, Guitar Center services touring
professionals, providing customized products for musical artists such as
Aerosmith, Stevie Wonder and Van Halen.
STORE OPERATIONS
To facilitate its strategy of accelerated but controlled growth, Guitar
Center has centralized many key aspects of its operations, including the
development of policies and procedures, accounting systems, training programs,
store layouts, purchasing and replenishment, advertising and pricing. Such
centralization effectively utilizes the experience and resources of the
Company's headquarters staff to establish a high level of consistency throughout
all of the Guitar Center stores.
The Company's store operations are led by its Chief Operating Officer and
five regional store managers with each regional manager responsible for
approximately 4 to 8 stores. Store management is comprised of a store manager, a
sales manager, an operations manager, two assistant store managers and five
department managers. Each store also has a warehouse manager and a sales staff
that ranges from 20 to 40 employees.
The Company ensures that store managers are well-trained and experienced
individuals who will maintain the Guitar Center store concept and philosophy.
Each manager completes an extensive training program which instills the values
of operating as a business owner, and only experienced store employees are
promoted to the position of store manager. This strategy has resulted in
developing a group of store managers with an average tenure of approximately
eight years. The Company seeks to encourage responsiveness and entrepreneurship
at each store by providing store managers with a relatively high degree of
autonomy relating to operations, personnel and merchandising. Managers play an
integral role in the selection and presentation of merchandise, as well as the
promotion of the Guitar Center reputation.
The Company views its employees as long-term members of the Guitar Center
team. The Company encourages employee development by providing the salesforce
with extensive training and the opportunity to increase both compensation and
responsibility level through increased product knowledge and performance. The
Company's aggressive growth strategy provides employees with the opportunity to
move into operations, sales and store management positions, which management
believes is not available at most other music retailers. As the Company opens
new stores, key in-store management positions are primarily filled by the
qualified and experienced employees from existing stores. By adopting a
"promotion from within" strategy, Guitar Center maintains a well trained, loyal,
and enthusiastic salesforce that is motivated by the Company's strong
opportunities for advancement. Both Larry Thomas and Marty Albertson, the
Company's Chief Executive Officer and Chief Operating Officer, respectively,
began their careers as salespeople at Guitar Center.
PURCHASING, DISTRIBUTION AND INVENTORY CONTROL
PURCHASING. Guitar Center believes it has excellent relationships with its
vendors and, as the industry's largest volume purchaser, is able to receive
priority shipping and access to its vendors' premium products on favorable
terms. The Company maintains a centralized buying group comprised
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of merchandise managers, buyers and planners. Merchandise managers and buyers
are responsible for the selection and development of product assortments and the
negotiation of prices and terms. The Company uses a proprietary merchandise
replenishment system which automatically analyzes and forecasts sales trends for
each SKU using various statistical models, supporting the buyers by predicting
each store's merchandise requirements. This has resulted in limited "out of
stock" positions.
DISTRIBUTION. Guitar Center products are typically shipped direct from the
manufacturer to individual stores, minimizing handling costs and reducing
freight expense. Management continues to evaluate the cost effectiveness of
operating a distribution center in comparison to a direct ship program and
believes it can implement its growth strategy without a central distribution
center.
INVENTORY CONTROL. Management has invested significant time and resources
in its inventory control systems and believes it has one of the most
sophisticated systems in the music products retail industry. Management believes
the vast majority of music product retailers do not use a computerized inventory
management system. Guitar Center performs cycle inventory counts daily, both to
measure shrinkage and to update the perpetual inventory on a store-by-store
basis. The perpetual inventory is monitored and updated daily with sales,
receipts and transfer information. The Company's shrinkage level is extremely
low, averaging 0.3% of net sales annually over the past three years. Management
attributes this relatively low shrinkage level to its highly sophisticated
system controls and strong corporate culture.
The Company believes that its emphasis on purchasing, distribution and
inventory control has contributed significantly to an increase in inventory
turns from 3.4x in 1993 to 3.7x in 1995.
SITE SELECTION
The Company believes it has developed a unique and, what historically has
been, a highly effective selection criteria to identify prospective store sites.
In evaluating the suitability of a particular location, the Company concentrates
on the demographics of its target customer within a thirty-mile radius as well
as traffic patterns and specific site characteristics such as visibility,
accessibility, traffic volume, shopping patterns and availability of adequate
parking. In addition, the Company utilizes psychographic data which includes
cultural and socioeconomic aspects of the target area such as the number of
theaters, nightclubs, recording studios, universities and white collar and blue
collar workers. Stores are typically located in free-standing locations to
maximize their outside exposure and signage. Due to the fact that the Company's
vendors drop ship merchandise directly to the stores, the Company's expansion
plans are dependent more on the characteristics of the individual store site
than any logistical constraints that would be imposed by a central distribution
facility. The Company is targeting major metropolitan cities with populations in
excess of one million people for new markets.
MANAGEMENT INFORMATION SYSTEMS
Guitar Center has invested significant resources in management information
systems that provide real-time information both by store and by SKU. The systems
have been designed to integrate all major aspects of the Company's business
including sales, gross margins, inventory levels, purchase order management,
automated replenishment and merchandise planning. Guitar Center's highly
sophisticated management information systems provide the Company with the
ability to monitor all critical aspects of store activity on a real-time basis.
Guitar Center's system capabilities include inter-store transactions, vendor
analysis, serial number tracking, inventory analysis and commission sales
reporting. Guitar Center believes that the systems it has developed will enable
the Company to continue to improve customer service and operational efficiency
and support the Company's needs for the foreseeable future.
COMPETITION
The retail market for musical instruments is highly fragmented with the
nation's leading five music products retailers (the Company, Sam Ash Music Corp,
Brook Mays/C&S/H&H, Musicians Friend, Inc. and Washington Music Center)
accounting for approximately 7.9% of the industry's net sales. The Company's
largest competitor, Sam Ash, operates ten stores in the New York City area, and
two more
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stores in the South Florida area. The Company currently has no stores in the New
York City area. The Company competes with many different types of retail stores,
primarily specialty retailers and music product catalogue retailers.
Guitar Center believes that the ability to compete successfully in its
markets is determined by several factors, including breadth and quality of
product selection, pricing, effective merchandise presentation, customer
service, store location and proprietary database marketing programs. Guitar
Center believes it is well positioned to compete on the basis of these factors.
EMPLOYEES
As of June 30, 1996, Guitar Center employed 922 people, of whom 424 were
hourly employees and 498 were salaried. To date, the Company has not experienced
any difficulty in recruiting qualified personnel to manage or staff its stores.
None of the Company's employees is covered by a collective bargaining agreement.
Management believes that the Company enjoys good employee relations.
PROPERTIES
Guitar Center leases all but five of its stores and intends to lease all new
locations. The terms of the store leases are generally for 10 years and
typically allow the Company to renew for two additional five year terms. Most of
the leases require the Company to pay property tax, utilities, common area
maintenance and insurance expenses. The Guitar Center corporate offices consist
of approximately 20,000 square feet. The lease for this space expires in 2001
and provides for a five-year renewal option. The Company believes its corporate
office space, which is located at 5155 Clareton Drive, Agoura Hills, California
91301, is adequate to meet its needs for the foreseeable future.
45
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STORE LOCATIONS
The table below sets forth certain information concerning Guitar Center
stores:
<TABLE>
<CAPTION>
YEAR GROSS SQUARE
STORE OPENED FEET LEASE/OWN
- ------------------------------------------------------------------ --------- ------------ -----------
<S> <C> <C> <C>
SOUTHERN CALIFORNIA
Hollywood....................................................... 1964 33,000 Own
San Diego....................................................... 1973 13,800 Own
Fountain Valley................................................. 1980 13,761 Lease
Sherman Oaks.................................................... 1982 10,860 Own
Covina.......................................................... 1985 14,700 Lease
Lawndale........................................................ 1985 15,376 Lease
San Bernardino.................................................. 1993 10,000 Lease
Brea............................................................ 1995 15,000 Lease
San Marcos...................................................... 1996 15,000 Lease
NORTHERN CALIFORNIA
San Francisco................................................... 1972 13,600 Lease
San Jose........................................................ 1978 10,600 Own
El Cerrito...................................................... 1983 22,000(1) Lease
Pleasant Hill................................................... 1996 11,065 Lease
ILLINOIS
South Chicago................................................... 1979 12,300 Lease
North Chicago................................................... 1981 10,975 Lease
Central Chicago................................................. 1988 9,600 Own
Villa Park...................................................... 1996 12,100 Lease
OHIO
Cleveland....................................................... (2) 15,835 Lease
TEXAS
Dallas.......................................................... 1989 13,399 Lease
Arlington....................................................... 1991 11,126 Lease
South Houston................................................... 1993 15,000 Lease
North Houston................................................... 1994 10,488 Lease
MASSACHUSETTS
Boston.......................................................... 1994 12,000 Lease
Danvers......................................................... 1996 13,953 Lease
MICHIGAN
Detroit......................................................... 1994 10,620 Lease
Southfield...................................................... 1996 12,900 Lease
MINNESOTA
Twin Cities..................................................... 1988 10,202 Lease
FLORIDA
North Miami area................................................ 1996 20,904 Lease
South Miami area................................................ 1996 15,169 Lease
</TABLE>
- ------------------------------
(1) Of the 22,000 square feet, 10,000 square feet consist of a basement and
warehouse space.
(2) To open in the first quarter of 1997.
SERVICE MARKS
The Company has registered the GUITAR CENTER and ROCK WALK service marks
with the United States Patent and Trademark office. The Company believes that
these service marks have become important components in its merchandising and
marketing strategy. The loss of the GUITAR CENTER service mark could have a
material adverse effect on the Company's business.
LEGAL PROCEEDINGS
Guitar Center is not a party to any legal proceedings other than various
claims and lawsuits arising in the normal course of its business which, in the
opinion of the Company's management, are not individually or collectively
material to its business.
46
<PAGE>
MANAGEMENT
The executive officers, directors and key personnel of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Larry Thomas........................... 46 President, Chief Executive Officer and Director
Marty Albertson........................ 43 Executive Vice President, Chief Operating
Officer and Director
Bruce Ross............................. 47 Vice President, Chief Financial Officer and
Secretary
Barry Soosman.......................... 36 Vice President of Corporate Development and
General Counsel
Raymond Scherr......................... 48 Director
David Ferguson......................... 41 Director
Jeffrey Walker......................... 40 Director
Michael Lazarus........................ 41 Director
Steven Burge........................... 40 Director
KEY PERSONNEL
Dave Di Martino........................ 42 Vice President -- Store Development
Richard Pidanick....................... 44 Vice President -- Southern California Regional
Manager
Rodney Barger.......................... 46 Vice President -- Merchandising
David Angress.......................... 46 Vice President -- Merchandising
Andrew Heyneman........................ 34 Vice President -- Marketing
William McGarry........................ 42 Vice President -- Store Administration
</TABLE>
The Company's Bylaws (the "Bylaws") provide for a Board of Directors (the
"Board") consisting of 11 persons. Presently, the Board consists of 7 persons
with 4 vacancies. The Board intends to fill two of the remaining positions by
the end of the fiscal year. The members of the Board were elected pursuant to a
Stockholders Agreement among all of the stockholders of the Company. See
"Certain Transactions -- Terms of the Stockholders Agreement."
LARRY THOMAS has been with Guitar Center since 1977. He has served as a
director since 1984 and has been the Company's President and Chief Executive
Officer since 1992. After working for a year as a salesperson in the San
Francisco, California store, Mr. Thomas became the store's manager. In 1980, Mr.
Thomas became the San Francisco area regional manager. After serving as a
regional manager in California and Illinois for four years, Mr. Thomas assumed
the role of Corporate General Manager and Chief Operating Officer. Mr. Thomas
has been a director of the Company since 1983. Mr. Thomas is currently a member
of the Los Angeles Chapter of the Young Presidents' Organization and is a former
board member of NAMM.
MARTY ALBERTSON has served as Executive Vice President and Chief Operating
Officer since 1990. Mr. Albertson was elected as a director upon consummation of
the Recapitalization. Mr. Albertson joined the Company as a salesperson in 1979.
Mr. Albertson has held various positions of increasing responsibility with the
Company since first joining the Company in 1979. In 1980 he served as the
Company's Advertising Director. In 1984, he became the Company's National Sales
Manager. Thereafter, in 1985, Mr. Albertson became Vice President of Corporate
Development, and then became the Vice President of Sales and Marketing in 1987.
47
<PAGE>
BRUCE ROSS joined the Company in July 1994 as Chief Financial Officer. Prior
to joining the Company, Mr. Ross was Chief Financial Officer of Fred Hayman
Beverly Hills, Inc., a retailer of high end fashion clothing on Rodeo Drive in
California and a wholesaler of men's and women's fragrances. From 1982 to 1990,
Mr. Ross was employed by Hanimex Vivitar Corporation, a worldwide manufacturer
and distributor of photographic products. Mr. Ross served in various capacities
with Hanimex Vivitar in Australia, the United States and Europe. While working
for Hanimex Vivitar in the United States, Mr. Ross was promoted to the position
of Chief Financial Officer in 1986 and Chief Executive Officer for North America
in 1988. Mr. Ross graduated from the University of New South Wales (Australia)
with a degree in Commerce and is an associate of the Institute of Chartered
Accountants.
BARRY SOOSMAN joined the Company in July 1996 as Vice President of Corporate
Development and General Counsel. Mr. Soosman has been a practicing attorney for
twelve years specializing in real estate, commercial and corporate law. Since
1992 and prior to joining the Company, Mr. Soosman had been the outside general
counsel to the Company. Mr. Soosman earned a Bachelor of Science degree in
Business Administration (corporate finance and real estate valuation) with
honors and a Juris Doctorate degree at the University of Southern California. In
June 1996 Mr. Soosman became of counsel to the law firm of Buchalter, Nemer,
Fields & Younger, a Professional Corporation. Mr. Soosman is a former Adjunct
Professor at Southwestern School of Law.
RAYMOND SCHERR became a director in 1978 and served as the Chairman of the
Board from 1990 until consummation of the Recapitalization. Mr. Scherr joined
the Company in 1975 as a salesperson in the Company's San Francisco, California
store. From 1981 through 1990 Mr. Scherr was also the Company's President and
Chief Executive Officer.
DAVID FERGUSON is a general partner of Chase Capital Partners, an affiliate
of Chase Venture Capital Associates, L.P. and Chase Securities Inc. He became a
director of the Company upon consummation of the Recapitalization. Prior to
joining Chase Capital, Mr. Ferguson was a member of the mergers and acquisitions
groups of Bankers Trust New York Corporation and Prudential Securities, Inc. Mr.
Ferguson currently serves as a director of Physical Electronics, Thompson PBE,
Buster Brown Apparel, Logistics Express, Inc., HOB Entertainment, Terrace
Corporation, Airbase Services, Wild Oats Markets, The Bagel Group, Details Inc.
and House of Blues. Mr. Ferguson is a former director of Whitmire Distribution
Corporation, New Mexico Beverage Company and TA Instruments. Mr. Ferguson
received a Bachelor of Arts degree from Loyola College in Baltimore, Maryland
and an M.B.A. degree from The Wharton School of the University of Pennsylvania.
Mr. Ferguson is a certified public accountant.
JEFFREY WALKER is the managing general partner of Chase Capital Partners, an
affiliate of Chase Venture Capital Associates, L.P. and Chase Securities Inc.,
and a senior managing director and member of the Policy Council of Chase
Manhattan Bank. He became a director of the Company upon consummation of the
Recapitalization. Prior to co-founding Chase Capital Partners in 1984, Mr.
Walker worked in the Investment Banking and Finance Divisions of Chemical Bank
and the Audit and Consulting Divisions of Arthur Young & Co. Mr. Walker is a
Certified Public Accountant and a Certified Management Accountant. Mr. Walker
received a Bachelor of Science degree from the University of Virginia and an
M.B.A. degree from the Harvard Business School. Mr. Walker currently serves as a
director of Domain, Six Flags Holdings, 1-800-Flowers, Timothy's Coffee, The
Monet Group, Beylik Drilling, Metroplex, PTN Holdings, Seymour Housewares, Doane
Products and the WPA Theatre and was Vice Chairman of the Board of Education of
Wilton, Connecticut and Vice Chairman of the National Association of Small
Business Investment Corporations.
MICHAEL LAZARUS is a general partner of Weston Presidio Capital II, L.P., a
venture capital firm. From 1986 to 1991, he served as Managing Director and
Director of the Private Placement Department of Montgomery Securities. He became
a director of the Company upon consummation of the Recapitalization. Mr. Lazarus
is currently on the Board of Directors of Just For Feet, Inc., and various
privately held companies.
STEVEN BURGE is a Managing Director with Wells Fargo Small Business
Investment Company, Inc. He became a director of the Company upon consummation
of the Recapitalization. From 1987 through
48
<PAGE>
1995, Mr. Burge was a Managing General Partner of Wedbush Capital Partners, a
private investment fund, and Managing Director, Corporate Finance for Wedbush
Morgan Securities, a regional investment banking firm. Prior to joining Wedbush
Morgan Securities, Mr. Burge held various positions with Wells Fargo Bank.
DAVE DI MARTINO joined the Company in 1972. In 1983, Mr. Di Martino became
the manager of Guitar Center's flagship Hollywood, California store. In 1988,
Mr. Di Martino became Vice President -- Store Development. In 1992, he became
West Coast Regional Manager responsible for all of the Company's West Coast
stores. In 1995, he reassumed the position of Vice President -- Store
Development.
RICHARD PIDANICK joined the Company in 1983 as a salesperson. Mr. Pidanick
was promoted to store manager in 1984, after working in a variety of capacities
and locations for Guitar Center. Mr. Pidanick was promoted in 1990 to District
Manager of the Mid-West and was appointed as the Vice President -- Southern
California Regional Manager in 1996.
RODNEY BARGER joined the Company in 1980 as a salesperson. Mr. Barger was
promoted to a store manager in 1981. In 1989, Mr. Barger was promoted to Western
Regional Sales Manager and then to the corporate office in the position of
Purchasing Director. In 1996, Mr. Barger was promoted to Vice President --
Merchandising. He is responsible for the supervision of purchasing and
merchandising of guitars, drums and accessories.
DAVID ANGRESS joined the Company in January 1996 as Vice President of
Merchandising. Prior to joining the Company, Mr. Angress was Vice President of
Harman Pro., North America where he was responsible for North American marketing
and sales for such brands as JBL, SoundCraft, AKG and worldwide marketing
manager of DBX and Orban. Prior thereto, Mr. Angress was the Vice President and
General Manager of Sound Genesis, a retailer of professional audio equipment.
Mr. Angress has over 20 years of music retailing experience.
ANDREW HEYNEMAN joined the Company in 1983. He has served in a variety of
positions with Guitar Center ranging from a salesperson to a department manager.
In July 1985, Mr. Heyneman was appointed store manager and later promoted to the
corporate office as an advertising director in 1989. In 1996, Mr. Heyneman was
promoted to Vice President -- Marketing.
WILLIAM MCGARRY joined the Company in 1980 as a salesperson. In 1981 he was
promoted to a store manager. In 1985 Mr. McGarry was promoted to Midwest
District Manager. Mr. McGarry became the Company's first Director of Store
Administration in 1986 and was promoted to Vice President -- Store
Administration in 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
As part of the Recapitalization, the Board established two standing
committees, the Audit Committee and the Compensation Committee. The Audit
Committee has responsibility for reviewing and making recommendations regarding
the Company's employment of independent accountants, the annual audit of the
Company's financial statements, and the Company's internal controls, accounting
practices and policies. The members of the Audit Committee are Jeffrey Walker
and Steven Burge. The Compensation Committee has responsibility for determining
the nature and amount of compensation of the management of the Company and
administering the Company's employee benefits (other than the 1996 Performance
Stock Option Plan). The members of the Compensation Committee are Larry Thomas,
Marty Albertson, David Ferguson and Michael Lazarus.
DIRECTOR COMPENSATION
The present members of the Board do not receive compensation for their
services as members of the Board.
49
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid by
the Company for services rendered by the Chief Executive Officer and the
Company's other executive officers during fiscal 1995 (collectively, the "Named
Officers"):
<TABLE>
<CAPTION>
ALL OTHER
COMPENSATION (1)
-----------------
ANNUAL COMPENSATION
-------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- --------------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Larry Thomas............................................. 1995 $ 500,000 $ 285,715 $ 25,645
President and Chief Executive Officer
Marty Albertson.......................................... 1995 $ 375,000 $ 214,285 $ 25,645
Executive Vice President and Chief Operating Officer
Bruce Ross............................................... 1995 $ 180,000 $ 48,060 --
Vice President and Chief Financial Officer
Raymond Scherr (2)....................................... 1995 $ 1,000,000 -- $ 25,645
Chairman of the Board
</TABLE>
- ------------------------
(1) All other compensation consists of contributions made by the Company to its
profit sharing plan on behalf of the Named Officers.
(2) Resigned as the Chairman of the Board effective with the completion of the
Recapitalization.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth, on an aggregated basis, information
regarding securities underlying unexercised options during fiscal 1995 by the
Named Officers. The Company did not grant any stock options to the Named
Officers during fiscal 1995.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
SHARES ACQUIRED ----------------------------- -------------------------------
NAME ON EXERCISE (#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE (1) EXERCISABLE/UNEXERCISABLE (1)(2)
- --------------------------- ----------------- ----------------- ----------------------------- -------------------------------
<S> <C> <C> <C> <C>
Larry Thomas............... -- -- 7,777,800(2) $ 7,390,660
23,333,300(3) $ 19,616,305
Marty Albertson............ -- -- 3,888,800(2) $ 3,695,234
16,851,900(3) $ 14,167,392
Bruce Ross................. -- -- -- --
Raymond Scherr (4)......... -- -- -- --
</TABLE>
- ------------------------
(1) All options listed in the table were exercisable in fiscal 1995. All of the
options listed in the table were exchanged or cancelled in connection with
the Recapitalization. See "The Recapitalization and Related Transactions."
(2) These options were granted in September 1989 at an exercise price of $.0005
per share.
(3) These options were granted in October 1992 at an exercise price of $0.11 per
share.
(4) Resigned as Chairman of the Board effective with the Recapitalization.
EMPLOYMENT AGREEMENTS
Upon consummation of the Recapitalization, the Company entered into a
five-year employment agreement with Larry Thomas and Marty Albertson, and a
three-year employment agreement with Bruce Ross and Barry Soosman (collectively,
the "Employment Agreements"). The Employment Agreements provide Messrs. Thomas,
Albertson, Ross and Soosman (each a "Senior Officer" and collectively, the
"Senior Officers") with base salaries of $500,000, $375,000, $195,000 and
$225,000, respectively. Each
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<PAGE>
Senior Officer is entitled to participate in all insurance and benefit plans
generally available to executives of the Company. In addition to their base
salary, Messrs. Thomas and Albertson will be paid an annual bonus equal to 57.1%
and 42.9%, respectively, of a bonus pool determined at the end of each year, not
to exceed $900,000. The amount of the bonus pool with respect to any fiscal year
will be a percentage ranging from 10% to 30% of the excess of the Company's
actual earnings before interest expense, tax expense, depreciation expense and
amortization expense ("EBITDA") over the Company's target EBITDA (as determined
by the Board). Messrs. Ross and Soosman will receive annual bonuses at the
discretion of the Board. Messrs. Ross and Soosman were granted options under the
Company's Amended and Restated 1996 Performance Stock Option Plan to purchase
8,669 Units, with each Unit consisting of one share of Common Stock and 99/100th
of a share of share of Junior Preferred Stock at an exercise price of $100 per
Unit. These options vest over a three year period. To the extent Units are
available for award under such plan, each of Messrs. Ross and Soosman is
entitled to receive an aggregate of 1.0% of the Units issued at an exercise
price of $100 per Unit.
Under the terms of the Employment Agreements, if the Senior Officer is
terminated without cause or resigns with reasonable justification, the Senior
Officer will be entitled to receive his base salary, annual cash bonus (equal to
the last annual bonus he received prior to termination) and continuation of his
benefits through the term of the agreement. If the Senior Officer is terminated
without cause, all stock options held by the Senior Officer will immediately
vest unless such termination was approved by super majority vote of the Board.
If the Senior Officer's employment is terminated for any other reason, the
executive will be entitled only to his accrued base salary.
Upon consummation of the Recapitalization, the Company entered into a
three-year employment agreement with Mr. Scherr pursuant to which Mr. Scherr
will serve as the chairman and operator of Rock Walk, a division of the Company.
Mr. Scherr's duties will be of a part-time nature, and he will devote only such
time to his duties as he determines in good faith are required. Mr. Scherr will
receive $100,000 per year, which will be allocated among his salary and expense
allowance, as Mr. Scherr determines. Mr. Scherr will be entitled to participate
in all employee medical benefit programs available generally to employees of the
Company. If Mr. Scherr's employment is terminated by the Company without cause,
he will be entitled to receive as severance the cash equivalent of his
compensation package for the remainder of the term of the agreement, not to
exceed $300,000, and continuation of his medical benefits until age 63 1/2.
After his employment agreement expires, Mr. Scherr will continue to be entitled
to medical benefits until age 63 1/2. If Mr. Scherr's employment is terminated
by the Company for cause or upon Mr. Scherr's death, he or his estate will be
entitled to receive his compensation to the extent such amount has accrued
through the date of termination.
MANAGEMENT STOCK OPTION AGREEMENTS
In connection with the Recapitalization, the Company initially granted
options to each of Messrs. Thomas and Albertson to purchase 43,344 shares of
Common Stock at an exercise price of $1.00 per share pursuant to stock option
agreements (the "Management Stock Option Agreements"). The Company amended the
Management Stock Option Agreements to correct a mutual mistake of the parties.
At the time of the Recapitalization, the Company and management agreed that
options should be provided to allow the parties to obtain the right to purchase
an aggregate of 5% of the Company's Common Stock on a fully diluted basis. At
the time of grant, the Management Stock Option Agreements did not contemplate
the conversion of the Company's Junior Preferred Stock into Common Stock in the
event of an initial public offering. As amended, each Management Stock Option
Agreement grants Messrs. Thomas and Albertson options to purchase 43,344 Units,
with each Unit exercisable for one share of Common Stock and 99/100ths of a
share of a share of Junior Preferred Stock (or a total of 43,344 shares of
Common Stock and 42,911 shares of Junior Preferred Stock). The exercise price
for each Unit is $100. The number and class of securities constituting a Unit
are subject to equitable adjustments for stock splits, stock dividends, share
recombinations and other recapitalizations affecting the Common Stock and/or the
Junior Preferred Stock. The effect of such amendments is to require the optionee
to acquire the same combination of Common Stock and Junior Preferred Stock as
was acquired by the Investors in connection with the Recapitalization and adjust
the exercise price for each
51
<PAGE>
Unit to the same price paid by the Investors for such combination of securities.
Each Management Stock Option Agreement represents 2.5% of the Common Stock and
Junior Preferred Stock of the Company on a fully-diluted basis following
completion of the Recapitalization. The term of the options may not exceed the
earlier of ten years or the sale of the Company. Unless accelerated as provided
under the terms of the Management Stock Option Agreements, such options vest in
three equal installments on the seventh, eighth and ninth anniversary of the
date of grant. Options may be exercised only to the extent that they have
vested. The vesting of the options may be accelerated on the occurrence of
certain events including (i) following a public offering in which a prescribed
public float and market capitalization is achieved, (ii) sale of the Company, or
(iii) termination of employment without cause and with good reason (although the
Board of Directors may waive this provision with respect to a termination
without cause upon a super majority vote of the Board). The purchase price of an
option may be paid in cash or a cash equivalent.
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
The Company's Amended and Restated 1996 Performance Stock Option Plan (the
"Plan") was initially adopted by the Board of Directors and approved by its sole
stockholder on June 3, 1996 and became effective on that date. The Plan
initially provided for options to purchase 173,375 shares of Common Stock. The
Company amended the Plan to correct a mutual mistake of the parties. At the time
of the Recapitalization, the Company and Management agreed that options should
be provided under the Plan to allow the purchase of up to 10% of the Company's
Common Stock on a fully diluted basis. At the time the Plan was adopted, the
Plan did not contemplate the conversion of the Company's Junior Preferred Stock
into Common Stock in the event of an initial public offering. The amendment will
make the options awarded under the Plan exercisable for up to 173,374 Units,
with each Unit exercisable for one share of Common Stock and 99/100ths of a
share of a share of Junior Preferred Stock (or a total of 173,374 shares of
Common Stock and 171,640 shares of Junior Preferred Stock). The number and class
of securities constituting a Unit will be subject to equitable adjustments for
stock splits, stock dividends, share recombinations and other recapitalizations
affecting the Common Stock and/or the Junior Preferred Stock. The effect of such
amendments is to require the optionee to acquire the same combination of Common
Stock and Junior Preferred Stock as was acquired by the Investors in connection
with the Recapitalization. After the amendments, the securities available under
the Plan will represent 10% of the Common Stock and Junior Preferred Stock of
the Company on a fully-diluted basis following completion of the
Recapitalization.
GENERAL NATURE OF THE PLAN. Options issued under the Plan may be either
incentive stock options ("Incentive Options") intended to qualify as such under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options ("Non-qualified options"). Options will become
available for issuance pursuant to a performance vesting formula under the Plan.
The Plan shall be administered by a stock option committee (the "Committee"),
which has the power and authority to grant options under the Plan, subject to
the Board's prior approval.
ELIGIBILITY. Options may be granted under the Plan to employees of and
consultants to the Company, or any of its subsidiaries (other than Messrs.
Thomas, Albertson, or any other person serving on the Committee). No options may
be granted to any one person in any one taxable year in excess of 25% of the
options issued or issuable under the Plan. Incentive Options may not be granted
to an employee who owns (as described in Sections 422(b)(6) and 425(d) of the
Code) stock possessing more than 10% of the aggregate voting power of the
Company unless the option price is fixed at less than 110% of the fair market
value (as determined according to the Plan) of the stock on the grant date and
the options are not exercisable later than five years following the grant date.
GRANT OF OPTIONS. Options may be granted under the Plan at any time, from
time to time, prior to the termination of the Plan.
VESTING. Options are deemed granted on the date the Committee approves the
grants. However, in the case of Incentive Options, the grant date may not be
earlier than the date the optionee becomes an employee of the Company or one of
its subsidiaries. The Committee shall determine whether and to
52
<PAGE>
what extent any options are also subject to time vesting based on the optionee's
continued service. The Plan provides for acceleration of time vesting, upon a
sale of the Company or termination of the optionee's relationship with the
Company without cause (as defined in the Plan), or by the optionee with
reasonable justification (as defined in the Plan) or the death of the optionee.
OPTION PRICE AND EXERCISE. An option is exercisable at such times as are
determined on the grant date by the Committee. The purchase price for shares to
be issued to an optionee upon exercise of an option shall be the fair market
value of a share of Common Stock and Junior Preferred Stock on the grant date
(or such other value approved by the Board), provided that the fair market value
of the Junior Preferred Stock may not be less than the liquidation value.
EXPIRATION, TERMINATION, REVOCATION, TRANSFER OF OPTIONS AND
AMENDMENTS. Options granted under the Plan automatically terminate and become
null and void upon the occurrence of certain events. Options granted under the
Plan are not assignable except by will or by the laws of descent and
distribution. The Company shall require any person receiving options to become a
party to the Stockholders Agreement described under the caption "Certain
Transactions -- Terms of the Stockholders Agreement" prior to issuing any
options to such person. The Committee, with the Board's approval, and the prior
written consent of the stockholders as provided in the Stockholders Agreement,
may amend or modify the Plan in any respect, provided however, that approval of
the holders of a majority of Common Stock must be obtained if required by law or
for compliance with federal securities laws or the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Recapitalization, the Company did not have a compensation
committee. In fiscal 1995, compensation decisions for executive officers and
senior management were made by Messrs. Scherr and Thomas. In April 1996, the
Company made a personal loan to Larry Thomas, the Company's President, of $1
million at an annual interest rate of 8.0% to assist Mr. Thomas's purchase of a
personal residence. The loan, excluding accrued interest of $10,000 (which was
forgiven), was repaid concurrently with the Recapitalization.
On February 15, 1996 the Company entered into sale-leaseback transactions
with Raymond Scherr relating to the Company's Arlington, Texas store and North
Chicago, Illinois store. The Arlington, Texas store was sold by the Company to
Mr. Scherr for $935,000. The North Chicago, Illinois store was sold by the
Company to Mr. Scherr for $820,000. The Company leases the Arlington, Texas
store and North Chicago, Illinois store from Mr. Scherr for $7,687 and $8,570
per month, respectively. In October 27, 1995, Mr. Scherr purchased the South
Chicago, Illinois store from the Company's profit sharing plan for $900,000. The
Company leases this store from Mr. Scherr for $8,250 per month. The Company
leases its Covina, California store from Mr. Scherr for $9,900 per month. Under
the leases the Company pays rent, as well as expenses relating to taxes,
insurance and maintenance. Management believes that the terms of these leases
are on the same or similar terms that would be available from an unaffiliated
third party in an arm's length negotiation.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The information in the following table sets forth the ownership of the
Common Stock of the Company by (i) each person who beneficially owns more than
5% of the outstanding shares of the Company's Common Stock; (ii) each executive
officer of the Company; (iii) each director of the Company; and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
stated, each person has sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS(1) NUMBER OF SHARES PERCENT
- --------------------------------------------------------------------------------- --------------------- -----------
<S> <C> <C>
Chase Venture Capital Associates, L.P.(2)........................................ 525,000 37.5%
840 Apollo Street, Suite 223
El Segundo, CA 90245
Wells Fargo Small Business Investment Company.................................... 100,000 7.1%
333 South Grand Avenue
Los Angeles, CA 90071
Weston Presidio Capital II, L.P.................................................. 75,000 5.4%
400 Sansome Street
San Francisco, CA 94111
Raymond Scherr(3)................................................................ 154,950 11.1%
Scherr Living Trust(3)........................................................... 125,250 8.9%
1096 Lakeview Canyon
Westlake Village, CA 91362
Dave Di Martino(4)............................................................... -- --
Di Martino Family Trust.......................................................... 95,542 6.8%
430 LaLoma Road
Pasadena, CA 91105
David Ferguson(5)................................................................ 525,000 37.5%
Jeffrey Walker(6)................................................................ 525,000 37.5%
Michael Lazarus(7)............................................................... 75,000 5.4%
Steven Burge(8).................................................................. -- --
Larry Thomas(9).................................................................. 191,083 13.6%
Marty Albertson(9)............................................................... 123,888 8.85%
Bruce Ross(10)................................................................... * *
Barry Soosman(11)................................................................ 5,000 *
All Executive Officers and Directors as a group (9 persons)...................... 1,074,921 76.80 %
</TABLE>
- ------------------------------
* Represents less than 1% of the issued and outstanding shares.
(1)Unless otherwise indicated, the address is the Company's address at 5155
Clareton Drive, Agoura Hills, CA 91362.
(2)Chase VCA owns and has voting and investment power with respect to 499,800
shares, and has voting power pursuant to a proxy over an additional 25,200
shares.
(3)Mr. Scherr is the co-trustee of the Scherr Trust and shares voting and
investment control over the shares of Common Stock with his spouse Janet
Scherr who is a co-trustee of the trust. Mr. Scherr has a beneficial
interest in the Raymond Scherr Annuity Trust which owns 29,700 shares; his
brother David Scherr is the Trustee and exercises investment and voting
power over these shares.
(4)Dave Di Martino is the trustee of the Di Martino Family Trust and exercises
voting and investment control over the shares of Common Stock held by the
DiMartino Family Trust.
(5)Mr. Ferguson is a general partner of Chase Capital Partners, the general
partner of Chase VCA. Mr. Ferguson does not directly own any Common Stock.
However, as a general partner of Chase Capital Partners, he may be deemed to
share voting and investment control over the shares of Common Stock held by
Chase VCA.
(6)Mr. Walker is the managing general partner of Chase Capital Partners, the
general partner of Chase VCA. Mr. Walker does not directly own any Common
Stock. However, as the managing general partner of Chase Capital Partners,
he may be deemed to share voting and investment control over the shares of
Common Stock held by Chase VCA.
(7)Mr. Lazarus is a general partner of WPC. Mr. Lazarus does not directly own
any Common Stock. However, as a general partner of WPC he can be deemed to
share voting and investment control over the shares of Common Stock held by
WPC.
(8)Mr. Burge is a managing director of WFSB. Mr. Burge does not have or share
voting or investment control over the shares of Common Stock held by WFSB.
(9)Does not include 43,344 shares of Common Stock subject to options to acquire
Units consisting of the right to purchase Common Stock and Junior Preferred
Stock. These Options have not vested as of the date hereof.
(10)Does not include 8,669 shares of Common Stock subject to options to acquire
Units consisting of the right to purchase Common Stock and Junior Preferred
Stock. These options have not vested as of the date hereof.
(11)The Soosman Family Trust of which Mr. Soosman and his spouse are co-trustees
and share voting and investment control owns 5,000 shares of Common Stock.
Does not include 8,669 shares of Common stock subject to options to acquire
Units consisting of the right to purchase Common Stock and Junior Preferred
Stock. These options have not vested as of the date hereof.
54
<PAGE>
CERTAIN TRANSACTIONS
RECAPITALIZATION AND MANAGEMENT
In connection with the Recapitalization, Larry Thomas (i) purchased 191,083
shares of Common Stock for $191,083 cash, (ii) exchanged for cancellation
options to acquire 18,917,192 shares of Common Stock for 189,171.92 shares of
Junior Preferred Stock with a liquidiation value of $18.9 million, and (iii)
exchanged for cancellation 12,193,908 options for $10.6 million cash. Of the
options exchanged, 7,778,800 had an exercise price of $.0005 and 23,333,330 had
an exercise price of $.11 per share. Marty Albertson (i) purchased 127,388
shares of Common Stock for $127,388 cash, (ii) exchanged for cancellation
options to acquire 12,611,441 shares of Common Stock for 126,114.41 shares of
Junior Preferred Stock with a liquidation value of $12.2 million, and (iii)
exchanged for cancellation 8,129,259 options for $7.1 million cash. Of the
options exchanged 3,888,800 had an exercise price of $.0005 and 16,851,900 had
an exercise price of $.11 per share. The Company repurchased 120,000,000 shares
of Common Stock from the Scherr Trust for approximately $113.1 million cash. The
Scherr Trust also exchanged 19,800,000 shares of Common Stock for 198,000 shares
of Junior Preferred Stock with a liquidation value of $19.8 million, and
retained 200,000 shares of Common Stock. The purpose of the Recapitalization was
to transfer control of the Company from its sole stockholder, the Scherr Trust,
to members of management (including Messrs. Thomas and Albertson) and the
Investors. The terms of the Recapitalization including the basis of the purchase
price for shares of Common Stock and the number of shares of Junior Preferred
Stock issued to Messrs. Thomas and Albertson and the Scherr Trust was determined
as a result of arms-length negotiations with the Investors.
EQUITY PURCHASE
In connection with the Recapitalization, pursuant to an Agreement dated as
of May 1, 1996 (the "Investor Agreement"), among the Company, the stockholders
named therein and Chase VCA, WFSB and WPC, the Investors purchased 700,000
shares of the Company's Common Stock and 693,000 shares of the Company's Junior
Preferred Stock for $70.0 million. Chase VCA, one of the Investors, and CSI, an
Initial Purchaser in the sale of the Old Notes, are each wholly owned
subsidiaries of Chase Corporation. Jeffrey Walker, a director of the Company, is
the managing general partner of Chase Capital Partners, the general partner of
Chase VCA. David Ferguson, a director of the Company, is a general partner of
Chase Capital Partners. Messrs. Walker and Ferguson have equity interests in
Chase Capital Partners. Mr. Burge, a director of the Company, is a managing
director of WFSB. Mr. Burge does not have an equity ownership in WFSB. WFSB is
an indirect wholly owned subsidiary of Wells Fargo & Co. ("WFC"), the parent
company of WFB, the lender under the New Credit Facility. Michael Lazarus, a
director of the Company, is a general partner of WPC and has an equity interest
therein. Pursuant to the Investor Agreement, the Scherr Trust and stockholders
holding management positions (the "Management Stockholders") have agreed to
indemnify the Investors for losses incurred in connection with any of the
Company's or its affiliates' misrepresentations or breaches of warranty. The
Investors have agreed to indemnify the Company in substantially the same manner,
with the indemnified amount limited to each Investor's ratable share of such
losses.
TRANSACTIONS WITH AFFILIATES OF DLJ AND CSI
In connection with the Recapitalization, the Company and DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners,
C.V. and DLJ Merchant Banking Funding, Inc. (collectively, the "DLJ Investors"),
all of which may be deemed to be affiliates of DLJ, an Initial Purchaser in the
sale of the Old Notes, entered into (i) a Securities Purchase Agreement (the
"Securities Purchase Agreement"), pursuant to which the Company issued 800,000
shares of its Senior Preferred Stock and Warrants to purchase 73,684 shares of
Common Stock and 72,947 shares of Junior Preferred Stock for an aggregate of $20
million cash; and (ii) a Registration Agreement (the "Registration Agreement"),
pursuant to which each of the DLJ Investors and any future holders of the Senior
Preferred Stock and the Warrants have the right to (a) request inclusion of such
holder's securities in certain registered offerings
55
<PAGE>
of securites by the Company and (b) at any time after the earlier of June 5,
2001 or 180 days after a public offering of the Company's equity securities to
cause the Company to register the resales of the securities held by such
stockholder.
In connection with the Recapitalization, the Company entered into a Bridge
Financing Agreement (the "Bridge Financing Agreement") with DLJ Bridge, an
affiliate of DLJ, and Chemical, pursuant to which DLJ Bridge purchased $51.0
million aggregate principal amount of senior unsecured increasing rate notes for
$51.0 million cash with interest payable at 12.75% per annum. Chemical, loaned
$49.0 million to the Company with interest payable at 12.75% per annum. Chemical
and CSI are both wholly owned subsidiaries of Chase Corporation. The Company
applied the net proceeds of the offering of the Old Notes for which DLJ and CSI
acted as Initial Purchasers to the retirement of the Bridge Facility. In
connection with such issuance, DLJ Bridge and Chemical received customary
commitment and takedown fees and, in connection with the sale of the Old Notes,
DLJ and CSI received customary fees.
NEW CREDIT FACILITY
WFB is acting as lender under the New Credit Facility, and is being paid
customary fees therefor. In addition, the Company has agreed to pay to WFB
promptly upon demand, a fee of $25,000 in consideration for WFB agreeing to
allow the Company to use the proceeds of Revolving Loans (as defined herein) to
make loans to senior management in respect of certain personal income tax
liabilities. See "The New Credit Facility." Effective with the Recapitalization,
WFSB, an indirect wholly owned subsidiary of WFB, owns approximately 7.14% of
the Common Stock of the Company. See "Principal Stockholders."
TERMS OF THE STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Stockholders Agreement (the "Stockholders Agreement") with all of its holders of
Common Stock and Junior Preferred Stock and any other securities exercisable or
exchangeable for or convertible into Common Stock or Junior Preferred Stock,
including Messrs. Thomas and Albertson, the Scherr Trust, and the Investors
(collectively, the "Stockholders"). Until the occurrence of certain events
specified in the Stockholders Agreement, the Stockholders will have certain
rights, including the following: (i) to designate the members of an eleven
person Board of Directors as follows: (A) management (including Messrs. Thomas
and Albertson) will have the right to designate four directors; (B) the Scherr
Trust will have the right to designate one director; (C) the Investors will have
the right to designate four directors; and (D) two members will be independent
directors designated by the Investors subject to the approval of Larry Thomas,
so long as he is the Company's Chief Executive Officer and thereafter of
management; and (ii) to subscribe for a proportional share of certain future
equity issuances by the Company. The Stockholders Agreement will also (i)
prohibit the Company from taking certain actions without the consent of
two-thirds of the members of the Board of Directors, including but not limited
to the adoption of the Company's annual budget, capital expenditures in excess
of $500,000, the issuance of any securities except as pursuant to agreements in
existence on the date of the Stockholders Agreement, the sale of the Company,
and the consummation of an initial public offering; (ii) obligate the Company to
provide certain Stockholders with financial and other information regarding the
Company and with inspection rights; and (iii) subject to certain exceptions,
require Stockholders who propose to transfer equity securities to comply with
certain rights of first refusal and co-sale provisions. In addition, in
connection with certain events of termination of the employment of a Management
Stockholder, the Company and the other Stockholders shall have the right to
purchase the Common Stock of such Management Stockholder at its fair market
value.
STOCKHOLDER REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, the Company entered into a
Registration Rights Agreement (the "Stockholder Registration Rights Agreement")
with all of its holders of Common Stock and any other securities exercisable or
exchangeable for or convertible into Common Stock, including Messrs. Thomas,
Albertson, the Scherr Trust and the Investors (the "Equity Holders"). Under this
agreement, the Equity Holders have the right to require the Company to register
such holders shares at any time in accordance with the requirements of the
Securities Act upon the request of holders of 60.0% of the Common Stock, subject
to the Company's right to delay its obligations upon the occurrence of
56
<PAGE>
specified events. In addition, at such times as the Company chooses to register
shares under the Securities Act, the holders of Common Stock will have the right
to elect to have their shares of Common Stock included therein, subject to
certain limitations. Under the Stockholder Registration Rights Agreement, the
Company has agreed to pay all of the costs associated with registration, except
for discounts and commissions.
RESTRICTED STOCK AGREEMENTS
On June 5, 1996, the Company entered into restricted stock agreements with
each of the Management Stockholders (the "Restricted Stock Agreements"). Under
the terms of the Restricted Stock Agreements, Management Stockholders (including
Messrs. Thomas and Albertson) may not transfer their shares of Junior Preferred
Stock before the earlier of (i) the completion of a Qualified Public Offering,
as defined in the Restricted Stock Agreements, (ii) the sale of the Company; or
(iii) five years from the date of the agreement ("Restricted Period") subject to
certain exemptions. If during the Restricted Period, a Management Stockholder
becomes employed (or has a financial or other interests in) by any business
engaged in the selling of retail musical instruments, pro-audio equipment or
related accessories within the prescribed territory, then the shares of Junior
Preferred Stock held by such Management Stockholder will be automatically
forfeited without consideration, and returned to the Company.
The Restricted Stock Agreement also provides that if, at the end of the
Restricted Period (or at such other time as a Management Stockholder is deemed
for federal income tax purposes to realize compensation income from the receipt
of shares of Junior Preferred Stock) the net proceeds from a sale or redemption
of the Common Stock or Junior Preferred Stock does not equal or exceed an amount
sufficient to discharge such Management Stockholders' tax obligations relating
to such sale or redemption, then the Company will loan to such Management
Stockholder an amount equal to (i) the amount necessary for the Management
Stockholder to pay such tax obligations, as and when such tax obligations shall
become payable by the Management Stockholder, less (ii) the aggregate amount of
net proceeds from the sale or redemption of Common Stock or Junior Preferred
Stock received by the Management Stockholder during the Restricted Period.
Alternatively, the Company may, at its option, repurchase from the Management
Stockholder for cash a number of shares of Junior Preferred Stock sufficient in
amount to allow the Management Stockholder to pay the tax obligations. In the
event the Company provides a loan under the circumstances described above, such
loan will bear interest at an interest rate then being paid by the Company on
its New Credit Facility, and provide for amortization of principal over five
equal annual installments. To secure payment of such loan, the Company may, as a
condition to the loan, require the Management Stockholder to grant a first
priority security interest to the Company in all of the Common Stock and Junior
Preferred Stock then owned by the Management Stockholder. The Management
Stockholder in such case would retain the right to vote such shares,
notwithstanding the grant of the security interest.
TAX INDEMNIFICATION AGREEMENT
In connection with the Recapitalization, the Company entered into a tax
indemnification agreement ("Tax Indemnification Agreement") with Raymond Scherr
pursuant to which the Company has agreed to indemnify Raymond Scherr for any
loss, damage or liability and all expenses incurred, suffered, sustained, or
required to be paid by the Scherr Trust resulting from a determination that the
exchange of the Common Stock held by the Scherr Trust for Junior Preferred Stock
is not treated as a tax-free transaction under Section 368(a)(1)(E) of the Code.
The Management Stockholders have agreed to individually reimburse the Company on
a pro rata basis for any amounts paid to Mr. Scherr by the Company as required
by the Tax Indemnification Agreement, provided, however, that the aggregate
amount reimbursed by the Management Stockholders shall not exceed $5 million.
57
<PAGE>
SUBCHAPTER S DISTRIBUTIONS
The Company elected to be taxed as a "S" corporation from 1988 through the
consummation of the Recapitalization. The Scherr Trust, as the sole stockholder,
received for 1993, 1994, 1995 and the six months ended June 30, 1996 aggregate
"S" corporation distributions of $4.6 million, $3.9 million, $14.5 million and
$29.8 million, respectively.
SCHERR BOARD REPRESENTATION LETTER
On June 5, 1996, the Company entered into an agreement with Raymond Scherr
in which the Company agreed that subsequent to the termination of the
Stockholders Agreement by reason of a Qualified Public Offering so long as Mr.
Scherr owns 5% or more of the Common Stock on a fully diluted basis, the Company
will nominate or cause the nomination of Mr. Scherr to the Board of Directors
(and include Scherr in any proxy statement and related materials used in
connection with an election of directors) and otherwise use its best efforts to
cause his election at each annual meeting or special meeting relating to the
election of directors of the Company. The Company's obligations under this
agreement will terminate if Mr. Scherr suffers a disability or commits certain
acts (as described in the agreement).
MANAGEMENT TRANSACTIONS
The Company paid the law firm of Soosman & Associates, of which Barry
Soosman was a partner, $40,000, $70,000, and $120,000 for legal fees in calendar
years 1993, 1994 and 1995, respectively.
58
<PAGE>
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The New
Notes will be issued pursuant to an indenture (the "Indenture"), dated as of
July 2, 1996, by and between Guitar Center Management Company, Inc. (the
"Company") and U.S. Trust Company of California, N.A., as trustee (the
"Trustee"). The Old Notes were also issued pursuant to the Indenture. The
following summaries of certain provisions of the Notes and the Indenture are
summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the Notes and the Indenture.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to them in the Indenture. Wherever particular provisions of the
Indenture are referred to in this summary, such provisions are incorporated by
reference as a part of the statements made and such statements are qualified in
their entirety by such reference. The Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
The Notes are senior, unsecured, general obligations of the Company, limited
in aggregate principal amount to $100 million. The Notes are issuable only in
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes will mature on July 1, 2006. The Notes will bear interest at the
rate per annum stated on the cover page hereof from the date of issuance or from
the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on January 1 and July 1 of each year,
commencing January 1, 1997, to the Persons in whose names such Notes are
registered at the close of business on the December 15 or June 15 immediately
preceding such Interest Payment Date. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York. At
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at the addresses set forth upon the registry books of
the Company. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Until otherwise designated by the Company, the Company's office or agency will
be the corporate trust office of the Trustee presently located at the office of
the Trustee in the Borough of Manhattan, The City of New York.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Notes prior to July 1,
2001 (other than out of the Net Cash Proceeds of an Initial Public Equity
Offering, as described in the following paragraph). The Notes will be redeemable
for cash at the option of the Company, in whole or in part, at any time on or
after July 1, 2001, upon not less than 30 days nor more than 60 days notice to
each Holder of Notes, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing July 1 of the years indicated below, in each case (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------- ------------
<S> <C>
2001.................................................................. 105.500%
2002.................................................................. 103.667%
2003.................................................................. 101.833%
2004 and thereafter................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to July 1, 1999, upon an Initial Public
Equity Offering for cash, up to 33 1/3% of the original aggregate principal
amount of the Notes may be redeemed at the option of the Company within 60 days
of such Initial Public Equity Offering, on not less than 30 days, but not more
59
<PAGE>
than 60 days, notice to each Holder of the Notes to be redeemed, with cash from
the Net Cash Proceeds of such Initial Public Equity Offering, at 110% of
principal amount (subject to the right of Holders of record on a Record Date to
receive interest due on an Interest Payment Date that is on or prior to such
Redemption Date), together with accrued and unpaid interest to the date of
redemption; PROVIDED, HOWEVER, that immediately following such redemption not
less than 66 2/3% of the original aggregate principal amount of the Notes
remains outstanding.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part of such
Holder's Notes (PROVIDED that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control Purchase
Date") that is no later than 35 Business Days after the occurrence of such
Change of Control, at a cash price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof, together with (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such repurchase date) accrued and
unpaid interest to the Change of Control Purchase Date. The Change of Control
Offer shall be made within 10 Business Days following a Change of Control and
shall remain open for 20 Business Days following its commencement (the "Change
of Control Offer Period"). Upon expiration of the Change of Control Offer
Period, the Company promptly shall purchase all Notes properly tendered in
response to the Change of Control Offer.
As used herein, a "Change of Control" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act
of 1934, as amended), other than any person or group comprised solely of the
Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Investors; or (b) a
sale or transfer of all or substantially all of the assets of the Company to any
person or group (other than any group consisting solely of the Investors or
their Affiliates) has been consummated; or (c) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election was approved by a vote of a majority of the directors then still in
office, who either were directors at the beginning of such period or whose
election or nomination for the election was previously so approved) cease for
any reason to constitute a majority of the directors of the Company, as the case
may be, then in office, other than as a result of election and removal of
directors pursuant to the terms of the Senior Preferred Stock as in effect on
the Issue Date or the Stockholders Agreement as in effect on the Issue Date
governing the election and removal of directors.
60
<PAGE>
As used herein, "Investors" means (i) Chase Venture Capital Associates,
L.P., CB Capital Investors, Inc., Weston Presidio Capital II, L.P., Wells Fargo
Small Business Investors Company, Inc. and any Person controlled by or under
common control with any of the foregoing but not Persons controlling any of the
foregoing, other than those Persons controlling the Investors as of the date the
shares of Senior Preferred Stock are first issued and (ii) the other holders of
the Company's Common Stock (including Larry Thomas, and Marty Albertson and the
Scherr Trust) all of whom are party to the Stockholders Agreement as in effect
on June 5, 1996, members of their immediate families and trusts for their sole
benefit.
A transaction in which the Company is sold or its assets are transferred to
any person or group of persons who is or are Investors will not constitute a
Change of Control, thus Holders would not receive the benefit of the Change of
Control provisions in the event of such transaction. The Investors as a group
own 700,000 shares of Common Stock and 693,000 shares of Junior Preferred Stock
of the Company with a liquidation value of $69.3 million. On or before the
Change of Control Purchase Date, the Company will (i) accept for payment Notes
or portions thereof properly tendered pursuant to the Change of Control Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the Change of Control
Purchase Price (together with accrued and unpaid interest) of all Notes so
tendered and (iii) deliver to the Trustee Notes so accepted together with an
Officers' Certificate listing the Notes or portions thereof being purchased by
the Company. The Paying Agent promptly will pay the Holders of Notes so accepted
an amount equal to the Change of Control Purchase Price (together with accrued
and unpaid interest), and the Trustee promptly will authenticate and deliver to
such Holders a new Note equal in principal amount to any unpurchased portion of
the Note surrendered; PROVIDED, that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. Any Notes not so accepted will
be delivered promptly by the Company to the Holder thereof. The Company publicly
will announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date. Any Note (or a portion
thereof) accepted for payment pursuant to the Change of Control Offer (and duly
paid on the Change of Control Purchase Date) will cease to accrue interest after
the Change of Control Purchase Date. There can be no assurance that the Company
would have available sufficient funds to repurchase the Notes in the event of a
Change of Control.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules and regulations promulgated thereunder and all other
applicable federal and state securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth below in this covenant, the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, issue, assume, guaranty, incur, become directly or indirectly liable
with respect to (including as a result of an Acquisition), or otherwise become
responsible for, contingently or otherwise (individually and collectively, to
"incur" or, as appropriate, an "incurrence"), any Indebtedness or any
Disqualified Capital Stock (including Acquired Indebtedness), other than
Permitted Indebtedness.
Notwithstanding the foregoing, if (i) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect on a PRO FORMA basis to, such incurrence of Indebtedness or Disqualified
Capital Stock and (ii) on the date of such incurrence (the "Incurrence Date"),
the Consolidated Coverage Ratio of the Company for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a PRO FORMA
basis to such incurrence of such Indebtedness
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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 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.
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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 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
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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 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.
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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 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
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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.
RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK
The Indenture provides that the Company will not sell, and will not permit
any of its Subsidiaries to issue or sell, any Equity Interests of any Subsidiary
of the Company to any Person other than the Company or a Wholly Owned Subsidiary
of the Company, except for Equity Interests with no preferences or special
rights or privileges and with no redemption or prepayment provisions.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder within 15 days after it is or
would have been (if it were subject to such reporting obligations) required to
file such with the Commission, annual and quarterly financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission, if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including, with respect
to annual information only, a report thereon by the Company's certified
independent public accountants as such would be required in such reports to the
Commission, and, in each case, together with a management's discussion and
analysis of financial condition and results of operations which would be so
required and, to the extent permitted by the Exchange Act or the Commission (if
it were subject to such reporting obligations), file with the Commission the
annual, quarterly and other reports which it is or would have been required to
file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes due
and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of the principal, or premium, if
any,
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on the Notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation, payment
of the Change of Control Purchase Price or the Asset Sale Offer Price, or
otherwise, (iii) the failure by the Company or any Subsidiary to observe or
perform any other covenant or agreement contained in the Notes or the Indenture
and, subject to certain exceptions, the continuance of such failure for a period
of 60 days after written notice is given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate principal
amount of the Notes outstanding, (iv) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any of its Subsidiaries, (v) a
default in any issue of Indebtedness of the Company or any of its Subsidiaries
with an aggregate principal amount in excess of $5 million, which default (a) is
caused by failure to pay principal of, or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided therein on the
date of such default, or (b) results in the acceleration of payment of such
Indebtedness prior to its express maturity and (vi) final unsatisfied judgments
not covered by insurance aggregating in excess of $5 million, at any one time
rendered against the Company or any of its Subsidiaries and not stayed, bonded
or discharged within 60 days. The Indenture provides that if a Default occurs
and is continuing, the Trustee must, within 90 days after the occurrence of such
default, give to the Holders notice of such default; PROVIDED, that the Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any
Subsidiary), then in every such case, unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the Holders of
25% in aggregate principal amount of the Notes then outstanding, by notice in
writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, premium, if any, and accrued
and unpaid interest thereon to be due and payable immediately. If an Event of
Default specified in clause (iv), above, relating to the Company or any
Subsidiary occurs, all principal and accrued interest thereon will be
immediately due and payable on all outstanding Notes without any declaration or
other act on the part of the Trustee or the Holders. The Holders of a majority
in aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-payment of
the principal of, premium, if any, and interest on the Notes which have become
due solely as a result of such acceleration have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
in the payment of principal of or interest on any Note not yet cured or a
default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Notes, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by, and the
Indenture shall cease to be of further effect as to, all outstanding Notes,
except as to (i) rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due from the trust funds; (ii) the Company's obligations with respect to such
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust; (iii) the rights, powers,
trust,
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duties, and immunities of the Trustee, and the Company's obligations in
connection therewith; and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have its
obligations released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, U.S. legal tender, noncallable U.S. government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such Notes on the
stated date for payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such Notes, and the
Holders of Notes must have a valid, perfected, exclusive security interest in
such trust; (ii) in the case of the Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by the Internal Revenue Service, a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to such Trustee confirming
that the Holders of such Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under the Indenture or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee
an Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of such Notes over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; and (vii) the Company
shall have delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that the conditions precedent provided for in, in the case
of the Officers' Certificate, (i) through (vi) and, in the case of the opinion
of counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company under
the Indenture will be revived and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any supplemental indenture or modify the rights of the Holders; PROVIDED, that
no such modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of any Note, or reduce the
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principal amount thereof or the rate (or extend the time for payment) of
interest thereon or any premium payable upon the redemption thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the provisions (including the defined terms used therein) regarding the
right of the Company to redeem the Notes or the provisions (including the
defined terms used therein) of the "Repurchase of Notes at the Option of the
Holder Upon a Change of Control" covenant in a manner adverse to the Holders, or
(ii) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or (iii) modify any of the
waiver provisions, except to increase any required percentage or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the Holder of each outstanding Note affected thereby, or (iv)
cause the Notes to become subordinate in right of payment to any other
Indebtedness.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company or any
successor entity shall have any personal liability in respect of the obligations
of the Company under the Indenture or the Notes by reason of his or its status
as such stockholder, employee, officer or director.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any Person existing at the time such Person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with or otherwise
acquired by the Company or one of its Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"AFFILIATE" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, PROVIDED that, with respect to ownership of the Company and its
Subsidiaries, a beneficial owner of 10% or more of the total voting power
normally entitled to vote in the election of directors, managers or trustees, as
applicable, shall for such purposes be deemed to constitute control.
"ANCILLARY DOCUMENTS" means the amendment to the Company's Articles of
Incorporation creating the Junior Preferred Stock, the Restricted Stock
Agreements, the Shareholders Agreement, the Shareholder Registration Rights
Agreement, the Employment Agreements, the Management Stock Option Agreements and
the Plan.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of (a) the
product of the number of years from the date of determination to the date or
dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" has the meaning attributed to it in
Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue Date),
whether or not applicable, except that a "Person" shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time.
"BORROWING BASE" means at any time the sum of (i) 75% of Eligible
Receivables, plus (ii) 65% of Eligible Inventory.
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"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"CAPITALIZED LEASE OBLIGATION" means rental or other payment obligations
under a lease of real or personal property that are required to be capitalized
for financial reporting purposes in accordance with GAAP, and the amount of
Indebtedness represented by such obligations shall be the capitalized amount of
such obligations, as determined in accordance with GAAP.
"CASH EQUIVALENT" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation of
any domestic commercial bank of recognized standing having capital and surplus
in excess of $500 million and commercial paper issued by others rated at least
A-2 or the equivalent thereof by Standard & Poor's Corporation or at least P-2
or the equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition and (iii) investments in
money market accounts substantially all of whose assets comprise securities of
the types described in clauses (i) and (ii) above.
"CONSOLIDATED COVERAGE RATIO" of any Person as of the date of the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
(the "Transaction Date") means the ratio, on a PRO FORMA basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; PROVIDED that for purposes of
this definition, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall be
assumed to have occurred on the first day of such Reference Period, and (iv) the
Consolidated Fixed Charges of such Person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a PRO FORMA basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
Person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that either (i) has the effect of fixing the
interest rate on the date of computation, in which case such fixed rate (whether
higher or lower) shall be used or (ii) has the effect of capping the interest
rate on the date of computation, in which case such capped rate (if lower) shall
be used.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
Consolidated Net Income of such Person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of (i) Consolidated Income Tax Expense,
(ii) Consolidated Depreciation and Amortization Expense, PROVIDED that
Consolidated Depreciation and Amortization Expense of a Subsidiary that is not a
Wholly Owned Subsidiary shall only proportionately be added to the extent of the
proportionate equity interest of the Company in
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such Subsidiary, (iii) Consolidated Fixed Charges, (iv) all other non-cash
charges, less the amount of all cash payments made by such Person or any of its
Subsidiaries during such period to the extent such payments relate to non-cash
charges that were added back in determining Consolidated EBITDA for such period
or any prior period, and (v) for periods including and prior to June 5, 1996,
salary paid to Raymond Scherr as Chairman of the Company (to the extent such
salary reduced Consolidated Net Income).
"CONSOLIDATED FIXED CHARGES" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to bankers'
acceptances and letters of credit financings and currency and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period, and
(b) the amount of cash dividends paid or scheduled to be paid by such Person or
any of its Consolidated Subsidiaries in respect of Preferred Stock (other than
by Subsidiaries of such Person to such Person or such Person's Wholly Owned
Subsidiaries). For purposes of this definition, (x) interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or a
Subsidiary of such Person of an obligation of another Person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP), plus, without
duplication and only to the extent not already included in net income, cash
dividends received by the Company from Unrestricted Subsidiaries (not in excess
of the Company's or such Subsidiary's proportionate share of the equity interest
therein) for such period, adjusted to exclude (only to the extent included in
computing such net income (or loss) and without duplication): (a) all gains and
losses which are either extraordinary (as determined in accordance with GAAP) or
are either unusual or nonrecurring (including any gain or loss from the sale or
other disposition of assets outside the ordinary course of business or from the
issuance or sale of any Capital Stock), (b) the net income, if positive, of any
Person, other than a Wholly Owned Subsidiary, in which such Person or any of its
Consolidated Subsidiaries has an interest, except to the extent of the amount of
any dividends or distributions actually paid in cash to such Person or a Wholly
Owned Subsidiary of such Person during such period, but in any case not in
excess of such Person's PRO RATA share of such Person's net income for such
period, (c) the net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, (d)
the net income, if positive, of any of such Person's Consolidated Subsidiaries
to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Consolidated
Subsidiary, and (e) the effect of non-cash charges resulting solely from the
issuance and/or lapse of substantial risk of forfeiture of Junior Preferred
Stock issued to members of the Company's management in connection with and at
the time of the Recapitalization.
"CONSOLIDATED NET WORTH" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to preferred stock of such Person) and its Consolidated
Subsidiaries, as would be shown on the consolidated balance sheet of such Person
prepared in accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity), (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of such Person and
its Consolidated Subsidiaries, and (b) amounts included in such stockholders'
equity resulting from upward revaluations and other write-ups in the book value
of assets of such Person or a Consolidated Subsidiary of such Person subsequent
to the Issue Date.
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"CONSOLIDATED SUBSIDIARY" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of June 5, 1996,
between the Company and Wells Fargo Bank, N.A., and all refundings,
refinancings, amendments, modifications, replacements (solely with institutional
lenders of national reputation) and supplements thereto.
"DISQUALIFIED CAPITAL STOCK" means (a), except as set forth in (b), with
respect to any Person, any Equity Interest of such Person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time would
be, required to be redeemed or repurchased (including at the option of the
Holder thereof) by such Person or any of its Subsidiaries, in whole or in part,
on or prior to the Stated Maturity of the Notes and (b) with respect to any
Subsidiary of such Person (including with respect to any Subsidiary of the
Company), any Equity Interest other than any common equity with no preference,
privileges, or redemption or repayment provisions.
"ELIGIBLE INVENTORY" means the book value of all inventory owned by the
Company and its Subsidiaries as would be reportable on a consolidated balance
sheet prepared in accordance with GAAP .
"ELIGIBLE RECEIVABLES" means the face amount of all accounts receivable
owned by the Company and its Subsidiaries as would be reportable on a
consolidated balance sheet in compliance with GAAP.
"EQUITY INTEREST" of any Person means any shares, interests, warrants,
options, participations or other equivalents (however designated) in such
Person's equity, and shall in any event include any Capital Stock issued by, or
partnership interests in, such Person.
"EVENT OF LOSS" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"EXEMPTED AFFILIATE TRANSACTION" means (i) compensation paid to officers and
directors of the Company pursuant to the Ancillary Documents as in effect on the
date the shares of Senior Preferred Stock were first issued, (ii) any loans or
advances by the Company to employees of the Company or a subsidiary of the
Company in the ordinary course of business and in furtherance of the Company's
business, in an aggregate amount not to exceed $1 million at any one time
outstanding, (iii) transactions expressly contemplated by the Transaction
Documents (including, without limitation, the repurchase of shares of Junior
Preferred Stock and Common Stock held by employees), (iv) transactions with
employees of the Company (including but not limited to compensation arrangements
or loans and advances not referred to in clause (i) or (ii) that have been
approved by the Board of Directors, including a majority of the disinterested
directors, as being in the best interests of the Company) and (v) transactions
between or among the Company and one or more of its Wholly Owned Subsidiares and
between or among the Company's Wholly Owned Subsidiaries.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company outstanding on the
Issue Date after giving effect to the redemption of the Bridge Facility.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"INDEBTEDNESS" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such any Person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of
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the purchase price of any property or services, except (other than accounts
payable or other obligations to trade creditors (not the result of borrowed
money) which have remained unpaid for greater than 90 days past their original
due date) those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable (including trade payables due within 12
months representing special terms offered by vendors in connection with new
store openings, "special buy" situations or promotional situations) to trade
creditors (which in no event provide for payment more than 12 months after
delivery of goods or provision of services), (iv) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks, (v) relating to
any Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such Person with respect to any letter of credit;
(b) all net obligations of such Person under Interest Swap and Hedging
Obligations; (c) all liabilities and obligations of others of the kind described
in the preceding clause (a) or (b) that such Person has guaranteed or that is
otherwise its legal liability, or which are secured by any assets or property
(limited, in such case, to the lesser of the amount of such Indebtedness or the
fair market value of such assets or property) of such Person, and all
obligations to purchase, redeem or acquire any Equity Interests; (d) any and all
deferrals, renewals, extensions, refinancing and refundings (whether direct or
indirect) of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (a), (b) or (c), or this
clause (d), whether or not between or among the same parties; and (e) all
Disqualified Capital Stock of such Person (measured at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends). For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value to be determined in good faith by the
board of directors of the issuer (or managing general partner of the issuer) of
such Disqualified Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act as a consequence of which the Common Stock of the
Company is listed on a national securities exchange or quoted on the national
market system of NASDAQ.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any Person in any other Person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (b) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); (c) other than guarantees of Indebtedness of the
Company to the extent permitted by the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," the entering into by
such Person of any guarantee of, or other credit support or contingent
obligation with respect to, Indebtedness or other liability of such other
Person; (d) the making of any capital contribution by such Person to such
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other Person; and (e) the designation by the Board of Directors of the Company
of any person to be an Unrestricted Subsidiary. The Company shall be deemed to
make an Investment in an amount equal to the fair market value (as reasonably
determined in good faith by the Board of Directors) of the net assets of any
Subsidiary (or, if neither the Company nor any of its Subsidiaries has
theretofore made an Investment in such Subsidiary, in an amount equal to the
Investments being made), at the time that such subsidiary is designated an
Unrestricted Subsidiary, and any property transferred to an Unrestricted
Subsidiary from the Company or a Subsidiary shall be deemed an Investment valued
at its fair market value (as reasonably determined in good faith by the Board of
Directors) at the time of such transfer.
"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"LIEN" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired (excluding any option, warrant, right to purchase or
other similar right with respect to Qualified Capital Stock).
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary) expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less (i) the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its Subsidiaries in connection with such Asset Sale and (ii)
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against (a) any liabilities associated with the property or assets
disposed of in such Asset Sale, and (b) the after-tax cost of any
indemnification payments (fixed and contingent) attributable to the seller's
indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such Asset Sale (but excluding any payments,
which by the terms of the indemnities will not be made prior to the Stated
Maturity of the Notes).
"PERMITTED INDEBTEDNESS" means any of the following:
(a) Indebtedness incurred by the Company to any Wholly Owned Subsidiary,
and any Wholly Owned Subsidiary may incur Indebtedness to any other
Wholly Owned Subsidiary or to the Company; PROVIDED that, in the case of
Indebtedness of the Company, such obligations shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the
Notes and the date of any event that causes such Subsidiary no longer to be
a Wholly Owned Subsidiary shall be an Incurrence Date;
(b) Indebtedness incurred by the Company evidenced by the Notes and
represented by the Indenture up to the amounts specified therein as
of the date thereof;
(c) Purchase Money Indebtedness (including any Indebtedness issued to
refinance, replace or refund such Indebtedness so long as such
Indebtedness is secured only by the assets that secured the Indebtedness so
refinanced, replaced or refunded on a non-recourse basis) incurred by the
Company and its Subsidiaries on or after the Issue Date, PROVIDED that (i)
the aggregate amount of such Indebtedness incurred on or after the Issue
Date and outstanding at any time pursuant to this paragraph (c) (including
Indebtedness issued so to refinance, replace or refund) shall not exceed $5
million, and (ii) in each case, such Indebtedness when incurred shall not
constitute less than 50% nor more than 100% of the cost (determined in
accordance with GAAP) to the Company of the property so purchased or leased;
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(d) Refinancing Indebtedness incurred by the Company with respect to any
Indebtedness or Disqualified Capital Stock, as applicable, incurred
as permitted by the Debt Incurrence Ratio contained in the "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"
covenant or as described in clause (b) of this definition or described in
this clause (d) or Existing Indebtedness (after giving effect to the
repayment of the Bridge Facility);
(e) Indebtedness incurred pursuant to the Credit Agreement (including any
Indebtedness issued to refinance, refund or replace such
Indebtedness); provided that, after giving effect to any such incurrence,
the aggregate principal amount of such Indebtedness then outstanding does
not exceed the greater of (i) $25 million and (ii) the Borrowing Base, which
such amount (in the case of (i) or (ii)) shall be reduced by the amount of
any Indebtedness outstanding pursuant to the Credit Agreement retired with
Net Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset
Sale;
(f) Disqualified Capital Stock issued as in-kind dividends on the Senior
Preferred Stock or accretion to the liquidation value thereof
pursuant to the instrument governing the terms of such capital stock as such
instrument was in effect on the Issue Date; and
(g) unsecured Indebtedness incurred by the Company (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate amount outstanding at any time (including any Indebtedness issued
to refinance, replace, or refund such Indebtedness) of up to $10 million.
"PERMITTED INVESTMENT" means Investments in (a) any of the Notes; (b) Cash
Equivalents; and (c) intercompany indebtedness to the extent permitted under
clause (a) of the definition of "Permitted Indebtedness."
"PERMITTED LIEN" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business,
PROVIDED that (i) the underlying obligations are not overdue for a period of
more than 30 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds,
deposits in connection with the purchase of real property, and other obligations
of a like nature incurred in the ordinary course of business; (e) easements,
rights-of-way, zoning, similar restrictions and other similar encumbrances or
title defects which, singly or in the aggregate, do not in any case materially
detract from the value of the property subject thereto (as such property is used
by the Company or any of its Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (f) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with respect
thereto; (g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security legislation; (h) Liens securing the Notes; (i) Liens securing
Indebtedness of a Person existing at the time such Person becomes a Subsidiary
or is merged with or into the Company or a Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, PROVIDED that such
Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any property or assets other than property or assets acquired in such
transaction; (j) Liens arising from Purchase Money Indebtedness permitted to be
incurred under clause (c) of the definition of "Permitted Indebtedness,"
PROVIDED such Liens relate only to the property which is subject to such
Purchase Money Indebtedness and PROVIDED, FURTHER, that cross-collateralization,
creation of "collateral pools" or similar arrangements involving solely Purchase
Money Indebtedness and the assets serving as collateral therefor shall be
Permitted Liens; (k) leases or subleases granted to other Persons in the
ordinary course of business not materially interfering with the conduct of the
business of the Company or any of its Subsidiaries or
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materially detracting from the value of the relative assets of the Company or
any Subsidiary; (l) Liens arising from precautionary Uniform Commercial Code
financing statement filings regarding operating leases entered into by the
Company or any of its Subsidiaries in the ordinary course of business; (m) Liens
securing Refinancing Indebtedness incurred to refinance any Indebtedness that
was previously so secured in a manner no more adverse to the Holders of the
Notes than the terms of the Liens securing such refinanced Indebtedness
(provided that any Refinancing Indebtedness with respect to the Credit Agreement
need not have any limitation on when such Liens are granted or perfected),
PROVIDED that the Indebtedness secured is not increased, except to finance
accrued interest and the expenses of such refinancing, and the lien is not
extended to any additional assets or property; (n) Liens in favor of the Company
only; and (o) Liens imposed pursuant to the terms of the Credit Agreement.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of such Person to any
seller or other Person (i) incurred solely to finance the acquisition (including
in the case of a Capitalized Lease Obligation only, the lease) of any real or
personal tangible property which, in the reasonable good faith judgment of the
Board of Directors of the Company, is directly related to a Related Business of
the Company, (ii) which is incurred within 90 days of such acquisition, and
(iii) is secured only by assets so financed.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Equity Interests or Indebtedness of the
Company with the Net Cash Proceeds received by the Company from the
substantially concurrent sale of Qualified Capital Stock or any exchange of
Qualified Capital Stock for any Capital Stock or Indebtedness.
"REFERENCE PERIOD" with regard to any period means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference including accrued dividends
thereon, of the Indebtedness or Disqualified Capital Stock so Refinanced and
(ii) if such Indebtedness being Refinanced was issued with an original issue
discount, the accreted value thereof (as determined in accordance with GAAP) at
the time of such Refinancing; PROVIDED that (A) Refinancing Indebtedness
incurred by any Subsidiary of the Company shall only be used to Refinance
outstanding Indebtedness or Disqualified Capital Stock of such Subsidiary, (B)
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness or Disqualified Capital Stock to be so refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior, if
applicable, to the rights of Holders of the Notes than was the Indebtedness or
Disqualified Capital Stock to be refinanced and (C) Refinancing Indebtedness
shall have a final stated maturity or redemption date, as applicable, no earlier
than the final stated maturity or redemption date, as applicable, of the
Indebtedness or Disqualified Capital Stock to be so refinanced.
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than investments in Permitted Investments.
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"RESTRICTED PAYMENT" means, with respect to any Person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such Person or any parent or Subsidiary of such Person, (b) any payment on
account of the purchase, redemption or other acquisition or retirement for value
of Equity Interests of such Person or any Subsidiary or parent of such Person,
(c) other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness, any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness, directly or
indirectly, by such Person or a parent or Subsidiary of such Person prior to the
scheduled maturity, any scheduled repayment of principal, or scheduled sinking
fund payment, as the case may be, of such Indebtedness and (d) any Restricted
Investment by such Person; PROVIDED, HOWEVER, that the term "Restricted Payment"
does not include (i) any dividend, distribution or other payment on or with
respect to Capital Stock of an issuer to the extent payable solely in shares of
Qualified Capital Stock of such issuer; or (ii) any dividend, distribution or
other payment to the Company by any of its Subsidiaries.
"STATED MATURITY," when used with respect to any Note, means July 1, 2006.
"STOCKHOLDERS AGREEMENT" means the agreement dated as of June 5, 1996, among
the Company and the stockholders listed on the various schedules thereto, as in
effect on the Issue Date.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company that is
subordinated in right of payment to the Notes in any respect.
"SUBSIDIARY," with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such Person, by such
Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, (ii) any other Person (other than a corporation) in
which such Person, one or more Subsidiaries of such Person, or such Person and
one or more Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest, or (iii) a
partnership in which such Person or a Subsidiary of such Person is, at the time,
a general partner. Notwithstanding the foregoing, an Unrestricted Subsidiary
shall not be a Subsidiary of the Company or of any Subsidiary of the Company.
Unless the context requires otherwise, Subsidiary means each direct and indirect
Subsidiary of the Company.
"TRANSACTION DOCUMENTS" means the Investor Agreement, the Bridge Financing
Agreement, the Securities Purchase Agreement, the Registration Agreement, the
Tax Indemnification Agreement, and the Ancillary Documents, in each case as such
documents are in effect on the date shares of Senior Preferred Stock are first
issued.
"UNRESTRICTED SUBSIDIARY" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); PROVIDED that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving PRO FORMA effect to such designation would there exist a Default or Event
of Default and (iii) any Investment therein shall not be prohibited by the
"Limitation on Restricted Payments" covenant. The Board of Directors of the
Company may designate any Unrestricted Subsidiary to be a Subsidiary, PROVIDED
that (i) no Default or Event of Default is existing or will occur as a
consequence thereof and (ii) immediately after giving effect to such
designation, on a PRO FORMA basis, the Company could incur at least $1.00 of
Indebtedness pursuant to the Debt Incurrence Ratio in the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock." Each
such designation shall be evidenced by filing with the Trustee a certified copy
of the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"WHOLLY OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more Wholly Owned Subsidiaries of the
Company.
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes initially will be issued in the
form of one or more registered Notes in global form (the "Global Notes"). Each
Global Note will be deposited on the date of the consummation of the Exchange
Offer with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary.
The Depositary is (i) a limited-purpose trust company organized under the
New York Banking Law; (ii) a member of the Federal Reserve System; (iii) a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code; and (iv) a "clearing agency" registered pursuant to Section 17A of the
Exchange Act. The Depositary holds securities that its participating
organizations (collectively, the "Participants") deposit with the Depositary.
The Depositary also facilitates the settlement of transactions in such
securities between Participants, such as transfers and pledges in deposited
securities through electronic computerized book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. The rules applicable to the
Depositary and its Participants are on file with the SEC. QIBs may elect to hold
Notes purchased by them through the Depositary. QIBs who are not Participants
may beneficially own securities held by or on behalf of the Depositary only
through Participants or Indirect Participants. Persons who are not QIBs may not
hold Notes through the Depositary.
The Company expects that pursuant to procedures established by the
Depositary, upon deposit of the Global Note, the Depositary will credit the
accounts of Participants with an interest in the Global Note, and ownership of
the Notes evidenced by the Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of Participants), the Participants and
the Indirect Participants. The laws of some states require that certain persons
take physical delivery in definitive form of securities that they own and that
security interests in negotiable instruments can only be perfected by delivery
of certificates representing the instruments. Consequently, the ability to
transfer Notes or to pledge the Notes as collateral will be limited to such
extent. For certain other restrictions on the transferability of the Notes, see
"Notice to Investors."
So long as the Depositary or its nominee is the registered owner of a Global
Note, the Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Securities, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a person having a beneficial
interest in Notes represented by a Global Note to pledge such interest to
persons or entities that do not participate in the Depositary's system, or to
otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Accordingly, each Holder owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such Holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such Holder owns its interest, to exercise any rights of a holder
under the Indenture or such Global Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
Holders of Notes or a Holder that is an owner of a beneficial interest in a
Global Note desires to take any action that the Depositary, as the holder of
such Global Note, is entitled to take, the Depositary would authorize the
Participants to take such action and the Participants would authorize Holders
owning through such Participants to take such action or would otherwise act
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upon the instructions of such Holders. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the Depositary
or its nominee on the applicable record date will be payable by the Trustee to
or at the direction of the Depositary or its nominee in its capacity as the
registered holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of the Depositary. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days; or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depositary of
its Global Note, Certificated Securities will be issued to each person that the
Depositary identifies as the beneficial owner of the Notes represented by the
Global Note. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee, exchange
such beneficial interest for Certificated Securities. Upon any such issuance,
the Trustee is required to register such Certificated Securities in the name of
such person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and the Company and the Trustee may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company will have no responsibility for the
performance by the Depositary or its Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and liquidated
damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Depositary. With respect to Notes represented by
Certificated Securities, the Company will make all payments of principal,
premium, if any, interest and liquidated damages, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are expected to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds. No assurance can be given as to the effect, if any,
of settlement in immediately available funds on trading activity in the Notes.
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THE NEW CREDIT FACILITY
GENERAL. The Company has entered into a credit agreement (the "New Credit
Facility") with WFB. The New Credit Facility provides for a $25 million
revolving credit facility, including a sub-limit for letters of credit of $10
million. The facility expires on June 1, 2001. Capitalized terms used in this
description that are not defined herein have the meaning given to such terms in
the New Credit Facility.
AVAILABILITY. Borrowings under the New Credit Facility are subject to a
borrowing base limit equal to 80% of Eligible Receivables plus 70% of Eligible
Inventory minus, at all times prior to the occurrence of the Collateral
Perfection Date, Trade Payables.
SECURITY. Indebtedness of the Company under the New Credit Facility is
currently unsecured. Upon the occurrence of certain events including (i) an
Event of Default or (ii) the failure by the Company to maintain certain ratios,
at the option of WFB, the New Credit Facility will be secured by a security
interest in certain assets and properties of the Company, including accounts
receivable, inventory, trademarks, copyrights, patents and general intangibles,
and all products and proceeds of any of the foregoing.
INTEREST. Indebtedness under the New Credit Facility bears interest at a
rate based (at the Company's option) upon (i) in the case of Prime Rate Loans,
the Prime Rate plus a maximum margin of 1.50% (subject to reduction depending on
the ratio of Funded Debt to EBITDA); and (ii) in the case of Eurodollar Rate
Loans, the Eurodollar Rate for one, two, three, six, nine or twelve months, plus
a maximum margin of 3.00% (subject to reduction depending on the ratio of Funded
Debt to EBITDA).
MATURITY. The New Credit Facility will mature on June 1, 2001. Loans made
pursuant to the New Credit Facility may be borrowed, repaid and reborrowed from
time to time until such maturity date, subject to the satisfaction of certain
conditions on the date of any such borrowing.
REVOLVING CREDIT FACILITY FEES. The Company is required to pay WFB a
facility fee of $250,000, of which $50,000 was paid and $50,000 is payable at
the end of each fiscal year of the Company (beginning at the end of fiscal year
1996); PROVIDED that upon termination or cancellation of the New Credit
Facility, the Company must pay in full the outstanding balance of the $250,000
facility fee. In addition, the Company has agreed to pay to WFB promptly upon
demand, a fee of $25,000 in consideration for WFB agreeing to allow the Borrower
to use the proceeds of Revolving Loans to make loans to senior management in
respect of certain personal income tax liabilities. The Company is also required
to pay to WFB a commitment fee based on the average daily unused portion of the
committed undrawn amount of the New Credit Facility during the preceding quarter
equal to a maximum of 0.375% per annum (subject to reduction depending on the
ratio of Funded Debt to EBITDA), payable in arrears on a quarterly basis. In
addition to a nominal issuance fee for each letter of credit issued, the Company
is required to pay to WFB a letter of credit fee based on the aggregate unpaid
face amount of outstanding letters of credit equal to a maximum of 3.00%
(subject to reduction depending on the ratio of Funded Debt to EBITDA), payable
in arrears on a quarterly basis.
CONDITIONS TO EXTENSIONS OF CREDIT. The obligation of WFB to make loans or
extend letters of credit after the Closing Date will be subject to the
satisfaction of certain customary conditions including, but not limited to, the
absence of a default or event of default under the New Credit Facility, all
representations and warranties under the New Credit Facility being true and
correct in all material respects, and that there has been no material adverse
change in the Company's properties or business.
COVENANTS. The New Credit Facility requires the Company to meet certain
financial tests, including a maximum Funded Debt to EBITDA ratio, a minimum Debt
Service Coverage Ratio, a minimum level of profit, a minimum quarterly increase
in Tangible Net Worth and a minimum EBITDA. The New Credit Facility also
contains covenants which, among other things, will limit the incurrence of
additional indebtedness, the nature of the business of the Company, leases of
assets, ownership of subsidiaries, dividends, limitations on capital
expenditures, transactions with affiliates, asset sales, acquisitions, mergers
and consolidations, loans and investments, liens and encumbrances and other
matters customarily restricted in such agreements. The New Credit Facility
contains additional covenants which will
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require the Company to maintain its existence and rights and franchises, to
maintain its properties, to maintain insurance on such properties, to provide
certain information to WFB, including financial statements, notices and reports
and to permit inspections of the books and records of the Company and its
subsidiaries, to comply with applicable laws, including environmental laws and
ERISA, to pay taxes and contractual obligations and to use the proceeds of the
Revolving Loans to finance in part the Recapitalization, and for working capital
and other general corporate purpose.
EVENTS OF DEFAULT. Events of Default under the New Credit Facility contains
events of default customary for working capital facilities, including payment
defaults, breach of representations, warranties and covenants (subject to
certain cure periods), cross-default to other indebtedness in excess of $2
million, certain events of bankruptcy and insolvency, breach of ERISA covenants,
judgment defaults in excess of $2 million and the occurrence of a Change of
Control.
INDEMNIFICATION. Under the New Credit Facility, the Company has agreed to
indemnify WFB and related persons from and against any and all Losses
(including, without limitation, the reasonable fees and disbursements of
counsel) that may be incurred by or asserted against any such indemnified party
(a) in any way relating to the Loan Documents, the Recapitalization, or the use
or intended use of the proceeds of the New Credit Facility; (b) in connection
with any investigation, litigation or other proceeding relating to the
foregoing; or (c) in any way relating to or arising out of any Environmental
Claims; PROVIDED, HOWEVER, that the Company is not liable for any such Losses
resulting from such indemnified party's own gross negligence or willful
misconduct.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, $0.01 par value per share ("Common Stock") and 10,000,000 shares
of Preferred Stock, $0.01 par value per share ("Preferred Stock"). The following
summary description relating to the capital stock does not purport to be
complete. Reference is made to the Certificate of Incorporation of the Company
(the "Certificate") and the Bylaws of the Company ("Bylaws"), which are filed as
exhibits to the Registration Statement of which this Prospectus forms a part,
for a detailed description of the provisions thereof summarized below.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may from
time to time be declared by the Board of Directors of the Company out of funds
legally available therefor. Holders of Common Stock are entitled to one vote per
share on all matters on which the holders of Common Stock are entitled to vote
and do not have any cumulative voting rights. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding Preferred Stock. The outstanding
shares of Common Stock are fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to any series of Preferred
Stock which the Company may issue in the future.
WARRANTS
In connection with the Recapitalization, the Company granted a warrant for
the purchase of shares of the Common Stock and the Junior Preferred Stock of the
Company (collectively, the "Warrants") to each of the DLJ Investors. The
Warrants are exercisable for Common Stock and Junior Preferred Stock, at an
exercise price of $0.01 per share and expire on June 5, 2006.
So long as any of the Warrants are outstanding, the amount of Common Stock
and the amount of Junior Preferred Stock obtainable pursuant to the Warrants
shall be subject to change or adjustment according to the anti-dilution
provisions of the Warrants.
If pursuant to the terms of the Junior Preferred Stock, all or a portion of
the shares of Junior Preferred Stock are converted to Common Stock, the amount
of Common Stock issuable pursuant to the Warrants shall be increased by the
number of shares of Common Stock that the holders of the Warrants would have
received immediately prior to the conversion, and the number of shares of Junior
Preferred Stock issuable pursuant to the Warrants shall be decreased by the
number of shares of Junior Preferred Stock which would have been converted into
Common Stock had the Warrants been exercised immediately prior to the
conversion.
PREFERRED STOCK
The Certificate authorizes the issuance of up to 10,000,000 shares of
Preferred Stock. The Board of Directors is authorized to provide for the
issuance of Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference, and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up, or both. In addition, any such shares of the Preferred Stock may have class
or series voting rights.
THE SENIOR PREFERRED STOCK
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock with an initial aggregate liquidation value of $20.0
million. All outstanding shares of Senior Preferred Stock are fully paid and
nonassessable.
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RANKING. The Senior Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, ranks senior to the Junior
Preferred Stock and the Common Stock.
DIVIDENDS. The holders of the shares of Senior Preferred Stock are entitled
to receive, when, as and if declared by the Board, out of funds legally
available for the payment of dividends, dividends accruing at the rate of 14%
per annum. Such dividends are payable quarterly on each of March 15, June 15,
September 15 and December 15 of each year, beginning June 15, 1996 (each such
date, a "Dividend Payment Date"). On or prior to June 15, 2002 (the "Cash Pay
Date"), dividends shall not be payable in cash to holders of Senior Preferred
Stock but shall, whether or not declared, accrete to the Liquidation Value (as
defined in the Certificate) of the Senior Preferred Stock compounded on each
Dividend Payment Date; provided, however, that the majority of the holders of
outstanding Senior Preferred Stock may request that all dividends required to be
paid on shares of Senior Preferred Stock be paid in kind through the issuance of
additional shares of Senior Preferred Stock ("Additional Shares"). The
Additional Shares shall be identical to all other shares of Senior Preferred
Stock, except with respect to Liquidation Value.
OPTIONAL REDEMPTION. The Company may, at its option, to the extent that
funds are legally available for such payment, redeem, prior to June 15, 1999, in
whole or in part, shares of Senior Preferred Stock at a redemption price equal
to 103% of the Liquidation Value if such redemption shall occur before June 15,
1997, or 106% of the Liquidation Value if the redemption occurs on or after June
15, 1997 to and including June 15, 1999, without interest; PROVIDED, HOWEVER,
that an initial public offering shall have occurred and the aggregate redemption
price of the Senior Preferred Stock does not exceed the net proceeds received by
the Company in the initial public offering.
The Company may, at its option, on and after June 15, 1999, to the extent
the Company shall have funds legally available for such payment, redeem shares
of Senior Preferred Stock, at any time in whole, or from time to time in part,
at redemption prices per share in cash set forth in the table below, together
with accrued and unpaid cash dividends thereon to the date fixed for redemption,
without interest:
<TABLE>
<CAPTION>
YEAR
BEGINNING PERCENTAGE OF
JUNE 15, LIQUIDATION VALUE
----------- ---------------------
<S> <C>
1999................................................... 110%
2000................................................... 108
2001................................................... 106
2002................................................... 104
2003................................................... 102
2004 and thereafter.................................... 100
</TABLE>
MANDATORY REDEMPTION. To the extent the Company shall have funds legally
available therefor, on June 15, 2008, the Company shall redeem all outstanding
shares of Senior Preferred Stock at a redemption price equal to the aggregate
Liquidation Value, without interest.
In addition, to the extent the Company shall have funds legally available
therefor, the Company shall offer, within five days following a Change of
Control to redeem all shares of Senior Preferred Stock no later than 45 days
following a Change of Control of the Company at a redemption price per share
equal to 101% of the Liquidation Value, without interest.
As used herein, "Change in Control" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act
of 1934, as amended), other than any person or group comprised solely of the
Initial Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Initial Investors;
(b) a sale or transfer of all or substantially all of the assets of the Company
to any person or group (other than any group consisting solely of the Initial
Investors) has been consummated; or (c) during any period of two consecutive
years, individuals who at the beginning of such period
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constituted the Board of Directors of the Company (together with any new
directors whose election was approved by a vote of a majority of the directors
then still in office, who either were directors at the beginning of such period
or whose election or nomination for the election was previously so approved)
cease for any reason to constitute a majority of the directors of the Company,
as the case may be, then in office, other than as a result of election and
removal of directors pursuant to the provisions of the Senior Preferred Stock
contained in the Certificate, the Bridge Financing Agreement or the Stockholders
Agreement governing the election and removal of directors.
"Initial Investors" means the Investors and the other securityholders of the
Company party to the Stockholders Agreement on the date the shares of Senior
Preferred Stock were first issued, (y) as to any Stockholder (as defined in the
Stockholders Agreement) that is an individual, any Permitted Transferee thereof
described in clause (i) or (iii) of the definition of Permitted Transferee
contained in the Stockholders Agreement and (z) any Person (as defined in the
Stockholders Agreement) controlled by or under common control with any of the
Investors but not Persons controlling any of the Investors, other than those
Persons controlling the Investors as of the date the shares of Senior Preferred
Stock were first issued. For purposes of the foregoing, "controlling, controlled
by or under common control with" as applied to any Person, means the ability,
through the ownership of voting securities to control the management and
policies of such Person.
VOTING RIGHTS. Holders of the Senior Preferred Stock have no voting rights
with respect to any matters except as provided by law or as set forth in the
Certificate. Such Certificate provides that in the event that (i) dividends on
the Senior Preferred Stock are in arrears and unpaid for six consecutive
quarterly periods after the Cash Pay Date; (ii) for any reason (including the
reason that funds are not legally available for redemption), the Company shall
have failed to discharge any mandatory redemption obligation; or (iii) the
Company shall have failed to provide a notice within the time period required by
a redemption pursuant to a Change of Control (each of the foregoing, a "Voting
Trigger"), the Board will be increased by two directors and the holders of the
Senior Preferred Stock, together with the holders of shares of every other
series of preferred stock of the Company with like rights to vote for the
election of two additional directors, voting as a class, will be entitled to
elect two directors to the expanded Board of Directors. Such voting rights will
continue until the Company shall have fulfilled its obligations that gave rise
to a Voting Trigger.
The Certificate provides that, without the consent of the holders of at
least sixty percent (60%) of the outstanding shares of Senior Preferred Stock,
the Company will not (i) liquidate, dissolve, wind-up or otherwise discontinue
its business unless immediately prior thereto, the Company redeems all
outstanding shares of Senior Preferred Stock; (ii) amend, alter or repeal any
provision of its Certificate, so as to adversely affect the preferences, rights
or powers of the Senior Preferred Stock, PROVIDED, certain charges will require
the approval of each holder of Senior Preferred Stock; (iii) create, authorize
or issue any class of stock or security convertible into such stock ranking
prior to, or on a parity with, the Senior Preferred Stock, or increase the
authorized number of shares of any such class or series, or reclassify any
authorized stock of the Company into any such prior or parity shares; or (iv)
merge or consolidate with or into or transfer all or substantially all of its
assets (in one transaction or a series of related transactions) to any person
unless (x) immediately prior thereto, the Company redeems all outstanding shares
of Senior Preferred Stock or (y) (A) the company surviving such merger or
consolidation or to which the properties and assets of the Company are
transferred shall be a corporation organized and existing under the laws of any
state of the United States or the District of Columbia; (B) the Senior Preferred
Stock shall be converted into, or exchanged for, and shall become shares of such
successor or resulting company, having in respect of such successor or resulting
company substantially the same powers, preferences and relative participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, that the Senior Preferred Stock had immediately prior to
such transaction; and (C) immediately after giving effect to such transaction on
a PRO FORMA basis, the Consolidated Net Worth (as defined in the Certificate) of
the surviving entity is at least equal to the Consolidated Net Worth of the
Company immediately prior to such transaction.
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<PAGE>
JUNIOR PREFERRED STOCK
In connection with the Recapitalization, the Company issued 1,386,000 shares
of Junior Preferred Stock. All outstanding shares of Junior Preferred Stock are
fully paid and nonassessable. Each outstanding share of Junior Preferred Stock
has a liquidation preference of $100.00.
RANKING. The Junior Preferred Stock ranks junior to the Senior Preferred
Stock and senior to the Common Stock, with respect to dividend rights and rights
on liquidation, winding up and dissolution.
DIVIDENDS. The holders of the Junior Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor and to the extent permitted by the terms of the
Senior Preferred Stock, dividends on each share of Junior Preferred Stock
accruing on a daily basis at the rate of 8% per annum on the sum of the
liquidation preference thereof plus accumulated but unpaid dividends thereon. To
the extent not paid on March 31, June 30, September 30 and December 31 of each
year, beginning June 30, 1996 (each such date, a "Dividend Payment Date"), all
dividends which have accrued on a share of Junior Preferred Stock during the
three-month period ending upon each such Dividend Payment Date shall be, and
remain accumulated until paid.
OPTIONAL REDEMPTION. Subject to the rights and restrictions contained in
senior securities, the Company may, at its option, redeem, to the extent that
funds are legally available therefor, in whole or in part, shares of Junior
Preferred Stock at a redemption price per share equal to the Liquidation Value
(as defined in the Certificate), plus accrued and unpaid dividends thereon to
the date fixed for redemption, without interest.
MANDATORY REDEMPTION. Subject to the rights and restrictions contained in
senior securities, at the option of the holders of Junior Preferred Stock, the
following amounts of Junior Preferred Stock are subject to mandatory redemption
(subject to contractual and other restrictions with respect thereto and to the
legal availability of funds therefor) within 45 days of an initial public
offering of the Company's Common Stock (an "IPO") resulting in a Market
Capitalization (as defined in the Certificate) of more than $500 million, at a
redemption price per share equal to 100% of the Liquidation Value, plus all
accrued and unpaid cash dividends thereon to the date of redemption, without
interest:
(i)
If the IPO results in a Market Capitalization of the Company of less
than $750 million but more than or equal to $500 million, the Company
shall redeem up to 25% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption;
(ii)
If the IPO results in a Market Capitalization of the Company of less
than $1 billion but more than or equal to $750 million, the Company
shall redeem up to 50% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption; and
(iii)
If the IPO results in a Market Capitalization of the Company of more
than or equal to $1 billion, the Company shall redeem up to 100% of
the outstanding shares of Junior Preferred Stock held by each holder of such
shares who requests redemption.
In addition, to the extent the Company shall have funds legally available
therefor, the Company shall offer to redeem all shares of Junior Preferred Stock
no later than 45 days following a Change of Control of the Company at a
redemption price equal to 100% of the Liquidation Value, plus accrued and unpaid
cash dividends to the date fixed for redemption, without interest.
"Change of Control" means such time as: (a) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act of 1934, as
amended), other than any person or group comprised principally of the Initial
Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Initial Investors;
(b) a sale or transfer of all or substantially all of the assets of the Company
to any person or group (other than any group consisting principally of the
Initial Investors) has been consummated; or (c) during any period of two
consecutive years occurring after an initial Public Offering, individuals who
85
<PAGE>
at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election was approved by a vote
of a majority of the directors then still in office, who either were directors
at the beginning of such period or whose election or nomination for the election
was previously so approved) cease for any reason to constitute a majority of the
directors of the Company, as the case may be, then in office, other than as a
result of election and removal of directors pursuant to the provisions of the
Senior Preferred Stock contained in the Certificate, the Bridge Financing
Agreement or the Stockholders Agreement governing the election and removal of
directors.
"Initial Investors" means the Investors and the other securityholders of the
Company party to the Stockholders Agreement on the date the shares of Junior
Preferred Stock were first issued, (y) as to any Stockholder (as defined in the
Stockholders Agreement) that is an individual, any Permitted Transferee thereof
described in clause (i) or (iii) of the definition of Permitted Transferee
contained in the Stockholders Agreement and (z) any Person (as defined in the
Stockholders Agreement) controlled by or under common control with any of the
Investors but not Persons controlling any of the Investors other than those
persons controlling the Investors as of the date the shares of Junior Preferred
Stock were first issued. For purposes of the foregoing, "controlling, controlled
by or under common control with" as applied to any Person, means the ability,
through the ownership of voting securities, to control the management and
policies of such Person.
CONVERSION. In the event the Company intends to consummate an IPO, the
holders of sixty percent (60%) of the outstanding Junior Preferred Stock may
require the Company to convert on a PRO RATA basis all or any portion of the
outstanding Junior Preferred Stock into shares of Common Stock, such conversion
to occur automatically upon the closing of an IPO. Each share of Junior
Preferred Stock shall be converted into a number of shares of Common Stock equal
to (x) the Liquidation Value per share, plus accrued and unpaid dividends 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
Certificate. The Certificate provides that, without the consent of the holders
of sixty percent (60%) of the outstanding shares of Junior Preferred Stock, the
Company will not (i) liquidate, dissolve, wind-up or otherwise discontinue its
business unless contemporaneous therewith the Company redeems all outstanding
shares of Junior Preferred Stock; (ii) amend, alter or repeal any provision of
its Certificate, so as to adversely affect the preferences, rights or powers of
the Junior Preferred Stock; (iii) create, authorize or issue any additional
class of stock or security convertible into such stock ranking prior to, or on a
parity with, the Junior Preferred Stock, or increase the authorized number of
shares of any existing class or series, or reclassify any authorized stock of
the Company into any such prior or parity shares; or (iv) merge or consolidate
with or into or transfer all or substantially all of its assets (in one
transaction or a series of related transactions), to any person unless (x)
contemporaneous therewith the Company redeems all outstanding shares of Junior
Preferred Stock or (y) (A) the company surviving such merger or consolidation or
to which the properties and assets of the Company are transferred shall be a
corporation organized and existing under the laws of any state of the United
States or the District of Columbia; (B) the Junior Preferred Stock shall be
converted into or exchanged for and shall become shares of such successor or
resulting company, having in respect of such successor or resulting company
substantially the same powers, preferences and relative participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereof, that the Junior Preferred Stock had immediately prior to such
transaction; and (C) immediately after giving effect to such transaction on a
PRO FORMA basis, the Consolidated Net Worth (as defined in the Certificate) of
the surviving entity is at least equal to the Consolidated Net Worth of the
Company immediately prior to such transaction.
LIMITATION ON DIRECTOR AND OFFICER LIABILITY
The Certificate provides that, to the fullest extent permitted by the
Delaware Law, directors and officers of the Company shall not be liable to the
Company or its stockholders for monetary damages for acts or omissions as a
director or officer. Under the Delaware Law, a director's or officer's liability
to the
86
<PAGE>
Company or its stockholders may not be limited or eliminated (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) with respect to certain unlawful dividend
payments, stock redemptions or repurchases or (iv) for any transaction from
which the director or officer derived an improper personal benefit. This
provision, in effect, eliminates the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages from a director or officer for breach of his or her fiduciary
duty of care as a director or officer, except in the situations set forth in
clauses (i) through (iv) above. In addition, the Certificate does not alter the
liability of directors and officers under federal securities laws, and does not
limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach in a director's or officer's duty of care. The Certificate requires the
Company to indemnify and advance indemnification expenses on behalf of all
directors and officers of the Company to the fullest extent permitted by law.
The Bylaws also require the Company to indemnify and advance indemnification
expenses to the Company's officers and directors.
The Company has entered into indemnification agreements with its directors
and executive officers. Such agreements require the Company, among other things,
(i) to indemnify its officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers provided
such persons acted in good faith and in a manner reasonably believed to be in
the best interests of the Company and, with respect to any criminal action, had
no cause to believe their conduct was unlawful; (ii) to advance the expenses
actually and reasonably incurred by its officers and directors as a result of
any proceeding against them as to which they could be indemnified; and (iii) to
obtain directors' and officers' insurance if available on reasonable terms.
There is no action or proceeding pending or, to the knowledge of the Company,
threatened which may result in a claim for indemnification by any director,
officer, employee or agent of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Notes offered
hereby, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
OTHER ATTRIBUTES OF THE STOCK OF THE COMPANY
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the right of its stockholders. Certain provisions of the
California Corporations Code become applicable to a corporation incorporated
outside of California, however, if (i) the corporation transacts intrastate
business in California and the average of its California property, payroll and
sales factors (as defined in the California Revenue and Taxation Code) with
respect to it is more than 50% during its latest fiscal year, (ii) more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California and (iii) the corporation is not otherwise
exempt. An exemption is provided if the corporation has outstanding securities
(i) listed on the New York Stock Exchange or the American Stock Exchange, or
(ii) qualified for trading as a national market security on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") if such
corporation has at least 800 holders of its equity securities as of the record
date of its most recent annual meeting of stockholders (a "Listed Corporation").
Since approximately 50% the Company's activities occur in California,
certain provisions of California corporate law may apply to the Company, as
described above.
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<PAGE>
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets these tests and is not exempt
include, without limitation, those provisions relating to the stockholders'
right to cumulative votes in elections of directors (cumulative voting is
mandatory under California law), and the Company's ability to indemnify its
officers, directors and employees (which is more limited in California than in
Delaware). Notwithstanding the foregoing, a corporation may provide for a
classified board of directors, or eliminate cumulative voting, or both if it is
a Listed Corporation.
FEDERAL INCOME TAX CONSIDERATIONS
There will be no Federal income tax consequences to Holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer and a Holder will have the
same adjusted basis and holding period in the New Notes as the Old Notes
immediately before the exchange. There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a Broker-Dealer (a "Participating Broker-Dealer") in connection with
the resale of New Notes received in exchange for Old Notes where such Old Notes
were acquired as a result of market-making activities or other trading
activities. Each such Participating Broker-Dealer that participates in the
Exchange Offer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Notes. The Company has agreed that for a period of
180 days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer for use in connection
with any such resale. In addition, until , 1996, all dealers
effecting transactions in the New Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-Dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
Participating Broker-Dealer and/or the purchasers of any such New Notes. Any
Participating Broker-Dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a Prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
This Prospectus has been prepared for use in connection with the Exchange
Offer and may be used by CSI and DLJ in connection with the offers and sales
related to market-making transactions in the Notes. CSI and DLJ may act as
principals or agents in such transactions. Such sales will be made at prices
related to prevailing market prices at the time of sale. The Company will not
receive any of the
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<PAGE>
proceeds of such sales. CSI and DLJ have no obligation to make a market in the
Notes and may discontinue its market-making activities at any time without
notice, at its sole discretion. The Company has agreed to indemnify CSI and DLJ
against certain liabilities, including liabilities under the Securities Act of
1933, and to contribute to payments which CSI and DLJ might be required to make
in respect thereof.
Chase VCA, an affiliate of CSI, owns 499,800 shares of the Company's Common
Stock and 494,802 of the Company's Junior Preferred Stock, representing 35.70%
of each such class of securities issued and outstanding. In addition, Chase VCA
has a proxy to exercise the voting rights with respect to an additional 25,200
shares. Messrs. David Ferguson and Jeffrey Walker, who serve as directors of the
Company, are general partners of Chase Capital Partners, the general partner of
Chase VCA, an affiliate of CSI and may be deemed to share voting and investment
control over the shares of Common Stock held by Chase VCA. CSI acted as an
initial purchaser in connection with the offering of the Old Notes. In addition,
Chemical, an affiliate of CSI was a lender of a portion of a Bridge Facility
extended to the Company in June 1996 which was repaid, in part with the proceeds
of the offering of the Old Notes.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon by
Buchalter, Nemer, Fields & Younger, a Professional Corporation.
EXPERTS
The financial statements of Guitar Center Management Company, Inc. at
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
In connection with the Recapitalization, Ernst & Young LLP was replaced on
July 24, 1996 by KPMG Peat Marwick LLP as the Company's independent certified
public accountants. The decision to change accountants was approved by the
Company's Board of Directors. The reports of Ernst & Young LLP on the Company's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
of the Company's financial statements for each of the two fiscal years ended
December 31, 1995, and the subsequent interim period ended July 24, 1996, there
were no disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make reference to the matter in their
report.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1. File No.
333-10491, (the "Registration Statement") under the Securities Act with respect
to the New Notes offered hereby. As used herein, the term "Registration
Statement" means the initial Registration Statement and any and all amendments
thereto. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company, the Notes and the Exchange Offer,
reference is hereby made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and in each
instance, reference is made to the copy of such contract or documents filed as
an exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington D.C. 20549 and at certain regional offices
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<PAGE>
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.
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GUITAR CENTER MANAGEMENT COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets as of June 30, 1995 and 1996 (unaudited)................... F-2
Condensed Statements of Operations for the six months ended June 30, 1995
and 1996 (unaudited)..................................................... F-3
Condensed Statements of Stockholders' Equity (Deficit) as of June 30, 1996
(unaudited).............................................................. F-4
Condensed Statements of Cash Flows for the six months ended June 30, 1995
and 1996 (unaudited)..................................................... F-5
Notes to Condensed Financial Statements (unaudited)....................... F-6
Report of Independent Auditors............................................ F-10
Balance Sheets as of December 31, 1994 and 1995........................... F-11
Statements of Income for the years ended December 31, 1993, 1994 and
1995..................................................................... F-12
Statements of Stockholder's Equity for the years ended December 31, 1993,
1994 and 1995............................................................ F-13
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995..................................................................... F-14
Notes to Financial Statements............................................. F-15
</TABLE>
F-1
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 40 $ 6,494
Accounts receivable, less allowance for doubtful accounts of $200 (1995) and $100
(1996)............................................................................. 1,596 3,089
Inventories......................................................................... 31,193 39,595
Prepaid expenses and other current assets........................................... 599 1,219
--------- ------------
Total current assets.................................................................. 33,428 50,397
Property and equipment, net........................................................... 11,659 14,038
Goodwill, net of accumulated amortization of $145 (1995) and $160 (1996).............. 455 440
Other assets.......................................................................... 233 491
--------- ------------
Total assets.......................................................................... $ 45,775 $ 65,366
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................................... $ 7,135 $ 9,130
Accrued expenses and other current liabilities...................................... 11,115 8,248
Current portion of long-term debt................................................... 8,528 5,421
--------- ------------
Total current liabilities............................................................. 26,778 22,799
Other long-term liabilities........................................................... 310 480
Long-term debt........................................................................ -- 100,000
Senior preferred stock, aggregate liquidating preference of $20,190; authorized
4,250,000 shares, issued and outstanding 800,000 shares.............................. -- 13,702
Stockholder's equity:
Junior preferred stock.............................................................. -- 138,600
Warrants............................................................................ -- 6,500
Common stock, no par value; authorized 2,500,000 shares issued and outstanding
1,400,000 at June 30, 1995 authorized 10,000,000 shares, issued and outstanding
1,400,000 at June 30, 1996......................................................... 4,987 1,400
Additional paid in capital.......................................................... -- (10,249)
Retained earnings (deficit)......................................................... 13,700 (207,866)
--------- ------------
Total stockholder's equity (deficit).................................................. 18,687 (71,615)
--------- ------------
Total liabilities and stockholder's equity............................................ $ 45,775 $ 65,366
--------- ------------
--------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1995 1996
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net sales.............................................................................. $ 76,888 $ 91,048
Cost of goods sold, buying and occupancy............................................... 55,742 65,249
--------- -----------
Gross profit........................................................................... 21,146 25,799
Selling, general and administrative expenses........................................... 15,100 18,318
Deferred compensation expense.......................................................... 1,040 69,892
--------- -----------
Operating income (loss)................................................................ 5,006 (62,411)
Interest expense, net.................................................................. 87 6,046
Transaction expenses................................................................... -- 6,176
--------- -----------
Income (loss) before income taxes...................................................... 4,919 (74,633)
Income taxes........................................................................... 74 131
--------- -----------
Net income (loss)...................................................................... $ 4,845 $ (74,764)
--------- -----------
--------- -----------
Pro forma data:
Income (loss) before taxes........................................................... $ 4,919 $ (74,633)
Pro forma tax provision.............................................................. 2,562 --
--------- -----------
Pro forma net income (loss).......................................................... $ 2,357 $ (74,633)
---------
---------
Senior and junior preferred stock dividends............................................ (962)
Pro forma net loss applicable to common stockholder.................................... $ (75,595)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL JUNIOR RETAINED
COMMON PAID IN PREFERRED EARNINGS
STOCK CAPITAL WARRANTS STOCK (DEFICIT) TOTAL
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1995............ $ 4,987 $ -- $ -- $ -- $ 14,776 $ 19,763
S Corporation cash distributions........ -- -- -- -- (28,057) (28,057)
S Corporation non-cash distributions.... -- -- -- -- (1,753) (1,753)
Redemption of prior sole stockholder
interest............................... (4,787) -- -- 19,800 (128,115) (113,102)
Reclassification of prior S Corporation
deficit................................ -- (10,249) -- -- 10,249 --
Issuance of equity to management........ 500 -- -- 49,500 -- 50,000
Issuance of equity to new investors..... 700 -- -- 69,300 -- 70,000
Issuance of warrants.................... -- -- 6,500 -- -- 6,500
Net losses.............................. -- -- -- -- (74,764) (74,764)
Undeclared dividend on senior preferred
stock.................................. -- -- -- -- (190) (190)
Accretion of senior preferred stock..... -- -- -- -- (12) (12)
----------- ----------- ----------- ---------- ----------- -----------
Balance at June 30, 1996................ $ 1,400 $ (10,249) $ 6,500 $ 138,600 $ (207,866) $ (71,615)
----------- ----------- ----------- ---------- ----------- -----------
----------- ----------- ----------- ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1995 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................................... $ 4,845 $ (74,764)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 878 1,014
Deferred compensation -- repurchase of options....................................... -- 49,500
Changes in operating assets and liabilities:
Accounts receivable................................................................ (70) (1,127)
Inventories........................................................................ (2,541) (8,317)
Prepaid expenses................................................................... (187) (560)
Other assets....................................................................... (86) (190)
Accounts payable................................................................... (3,271) (3,483)
Accrued expenses and other current liabilities..................................... (834) (8,831)
Other long-term liabilities........................................................ 14 217
--------- ------------
Net cash used in operating activities.................................................. (1,252) (46,541)
INVESTING ACTIVITIES
Purchases of property and equipment.................................................... (888) (3,523)
--------- ------------
Net cash used in investing activities.................................................. (888) (3,523)
FINANCING ACTIVITIES
Principal repayment of note payable.................................................... (825) --
Net proceeds from revolving line of credit............................................. 8,528 5,421
Proceeds from issuance of long-term debt............................................... -- 100,000
Distribution of prior stockholder interests............................................ -- (113,102)
Issuance of common stock............................................................... -- 1,200
Issuance of junior preferred stock..................................................... -- 69,300
Issuance of senior preferred stock..................................................... -- 13,500
Issuance of warrants................................................................... -- 6,500
Distributions to stockholder........................................................... (9,582) (28,057)
--------- ------------
Net cash provided by (used in) financing activities.................................... (1,879) 54,762
--------- ------------
Net (decrease) increase in cash and cash equivalents................................... (4,019) 4,698
Cash and cash equivalents at beginning of period....................................... 4,059 1,796
--------- ------------
Cash and cash equivalents at end of period............................................. $ 40 $ 6,494
--------- ------------
--------- ------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
In 1996, the Company entered two sale leaseback transactions with its former
sole stockholder aggregate $1,753,000
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of management, the accompanying condensed financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Guitar Center
Management Company, Inc., a California corporation ("Guitar Center" or the
"Company") as of June 30, 1996, the results of operations and cash flows for the
six months ended June 30, 1996 and 1995. On November 1, 1996, the Company
reincorporated from California to Delaware and changed its name to Guitar
Center, Inc.
The results of operations for the first six months of 1996 are not
necessarily indicative of the results to be expected for the full year.
2. NEW ACCOUNTING POLICIES
Effective January 1, 1996 the Company elected to change certain accounting
policies. The changes include the capitalization of certain pre-opening costs,
management information systems development costs, and lease negotiation costs.
Such amounts will be amortized over twelve months for the pre-opening costs,
three years for the management information systems development costs and over
the life of the lease for lease negotiation costs. The Company believes these
policy changes will more accurately match costs with their related revenues.
The amounts capitalized during the six months ended June 30, 1996 were not
material to the financial statements. The effect on all prior periods presented
is not material.
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," issued in March 1995 and effective for fiscal years beginning after
December 15, 1995, establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable intangibles
and goodwill. The adoption of SFAS 121 did not have a material impact on the
Company's financial position or results of operations. The Company assesses the
recoverability of its intangible assets by determining whether the amortization
of those balances can be recovered through projected undiscounted future cash
flows. The amount of the impairment, if any, is measured based on projected
discounted future cash flows using a discount rate reflecting the Company's
average cost of capital.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain PRO
FORMA disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company will adopt the provisions for PRO FORMA
disclosure requirements of SFAS 123 in fiscal 1996. The implementation of
Financial Accounting Standards No. 123 did not have a material impact on the
Company's 1996 Financial Statements.
3. PRO FORMA DATA
Pro forma information has been provided to reflect the estimated statutory
provision for income taxes assuming the Company had been taxed as a C
corporation.
4. RECAPITALIZATION
On June 5, 1996, Guitar Center consummated a series of transactions to
effect the recapitalization of the Company (the "Recapitalization"). Members of
management purchased 500,000 shares of the Company's Common Stock for $.5
million cash and received 495,000 shares of 8% Junior Preferred Stock in
exchange for the cancellation of outstanding options exercisable for Common
Stock. The Company's former sole stockholder received 198,000 shares of Junior
Preferred Stock in exchange for Common Stock. New investors purchased 700,000
shares of Common Stock and 693,000 shares of Junior Preferred Stock for $70.0
million cash, and 800,000 shares of 14% Senior Preferred Stock and Warrants for
an aggregate $20 million cash. The Warrants are exchangeable for 73,684 shares
of Common Stock and 72,947 shares of Junior Preferred Stock. The Company
repurchased shares of Common Stock from the former sole stockholder for $113.1
million cash, and canceled certain options for Common Stock held by management
in exchange for $27.9 million cash. The former sole shareholder retained 200,000
shares of Common Stock in the Recapitalization. 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-6
<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.
In connection with the Recapitalization, the Company incurred transaction
costs of approximately $10.9 million, which consists of $6.2 million of sellers
transaction costs and $4.7 million in fees paid to finance the Bridge Facility.
These amounts have been charged to transaction expenses and interest expense,
net, respectively, in the six months ended June 30, 1996 condensed statement of
operations. In addition, on July 2, 1996, in connection with the sale of the
Notes, approximately $3.6 million in fees was paid and will be recorded as an
other asset and amortized over the term of the related debt.
5. STOCK OPTION PLANS
In connection with the Recapitalization the Company granted to certain
employees options to purchase 146,762 units consisting of 146,762 shares of
Common Stock and 145,294 shares of Junior Preferred stock at an exercise price
of $100 per option. The Company has an additional 113,301 units remaining
available for grant. The option agreements of Larry Thomas and Marty Albertson
contain provisions whereby in the event of certain initial public offering
transactions, the options will immediately vest.
6. DEBT
In connection with the Recapitalization, the Company borrowed $100 million
under increasing rate notes (the Bridge Facility). Financing fees of $4.7
million were paid and charged to the statement of operations during June 1996.
On July 2, 1996, the Bridge Facility was repaid with the proceeds from the sale
of 11% Senior Notes due 2006 and cash on hand. The Senior Notes are unsecured
and pay interest on a semi-annual basis.
In addition, the Company entered into a $25 million unsecured revolving line
of credit. The line expires in June 2001. The revolving line of credit bears
interest at various rates based on the prime lending rate (8.25% at June 30,
1996) plus 1.5% or the Eurodollar rate (5.5% at June 30, 1996) plus 3.0%. A fee
of .375% is assessed on the unused portion of the facility with interest due
monthly. At June 30, 1996, the Company had $5.4 million outstanding under the
revolving line of credit.
7. INCOME TAXES
In connection with the Recapitalization, the Company terminated its S
Corporation election and converted to a C Corporation for income tax purposes.
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset and
liability method of SFAS 109, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Management
determined that a substantial valuation allowance was necessary due to the
increased leverage of the Company and its effect on future taxable income.
8. PREFERRED STOCK
REDEEMABLE SENIOR PREFERRED STOCK AND WARRANTS
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock with an initial aggregate liquidation value of $20.0
million.
Dividends on the Senior Preferred Stock accrue at a rate of 14%. Such
dividends are payable quarterly on each of March 15, June 15, September 15 and
December 15, beginning June 15, 1996. On or prior to June 15, 2002, dividends
shall not be payable in cash to holders, but shall, whether or not declared,
accrete to the liquidation value
F-7
<PAGE>
8. PREFERRED STOCK (CONTINUED)
of the Senior Preferred Stock compounded on each dividend payment date. Under
certain circumstances the holders can elect to receive additional shares of the
Senior Preferred Stock in lieu of accreting to the liquidation value.
The Company may, at its option, to the extent that funds are legally
available for such payment, redeem, prior to June 15, 1999, in whole or in part,
shares of Senior Preferred Stock at a redemption price equal to 103% of the
Liquidation Value if such redemption shall occur before June 15, 1997, or 106%
of the Liquidation Value if the redemption occurs on or after June 15, 1997 to
and including June 15, 1999, without interest; PROVIDED, HOWEVER, that an
initial public offering shall have occurred and the aggregate redemption price
of the Senior Preferred Stock does not exceed the net proceeds received by the
Company in the initial public offering.
The Company may, at its option, on and after June 15, 1999, to the extent
the Company shall have funds legally available for such payment, redeem shares
of Senior Preferred Stock, at any time in whole, or from time to time in part,
at redemption prices per share in cash set forth in the table below, together
with accrued and unpaid cash dividends thereon to the date fixed for redemption,
without interest:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR BEGINNING JUNE 15, LIQUIDATION VALUE
----------- -------------------
<S> <C>
1999.............................. 110%
2000.............................. 108
2001.............................. 106
2002.............................. 104
2003.............................. 102
2004 and thereafter............... 100
</TABLE>
The Senior Preferred stock is mandatorially redeemable on June 15, 2008 at a
redemption price equal to the aggregate liquidation value plus all accrued and
unpaid cash dividends.
Holders of the Senior Preferred Stock have no voting rights with respect to
any matters except as provided by law or as set forth in the Company's
Certificate of Incorporation. Such Certificate of Determination provides that in
the event that (i) dividends on the Senior Preferred Stock are in arrears and
unpaid for six consecutive quarterly periods after June 15, 2002; (ii) for any
reason (including the reason that funds are not legally available for
redemption), the Company shall have failed to discharge any mandatory redemption
obligation; or (iii) the Company shall have failed to provide a notice within
the time period required by a redemption pursuant to a Change of Control (each
of the foregoing, a "Voting Trigger"), the Board will be increased by two
directors and the holders of the Senior Preferred Stock, together with the
holders of shares of every other series of preferred stock of the Company with
like rights to vote for the election of two additional directors, voting as a
class, will be entitled to elect two directors to the expanded Board of
Directors. Such voting rights will continue until the Company shall have
fulfilled its obligations that gave rise to a Voting Trigger.
The Senior Preferred Stock with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks senior to Junior Preferred Stock
and the Common Stock.
In connection with the issuance of the Senior Preferred Stock the holders
received detachable warrants (in addition to the Senior Preferred Stock) for the
aggregate $20.0 million paid. The warrants are exchangeable for 73,684 shares of
Common Stock and 72,947 shares of Junior Preferred Stock.
The market value of the warrants at issuance was deemed to be $6.5 million
with the Senior Preferred Stock valued at $13.5 million. The Senior Preferred
stock will accrete to its redemption value ($20.0 million) using the effective
interest method through its mandatory redemption date of June 15, 2008. The
carrying amount of the Senior Preferred Stock will be adjusted periodically for
both the above noted accretion as well as by amounts representing dividends not
currently declared or paid, but which will be payable under the mandatory
redemption features.
JUNIOR PREFERRED STOCK
The Company has authorized the issuance of up to 1,500,000 shares of Junior
Preferred Stock.
In connection with the Recapitalization 1,386,000 shares of Junior Preferred
Stock were issued. Each outstanding share of Junior Preferred Stock has a
liquidating preference of $100.00. Dividends accrue at a rate of 8% per annum on
the sum of the liquidation preference plus accumulated but unpaid dividends
thereon.
F-8
<PAGE>
8. PREFERRED STOCK (CONTINUED)
The Junior Preferred Stock ranks junior to the Senior Preferred Stock and
senior to the Common Stock, with respect to dividend rights and rights on
liquidation.
The Company may be required to mandatorily redeem all or a portion of the
Junior Preferred Stock under certain conditions. Specifically, the Company would
be required to redeem within 45 days of an initial public offering (IPO)
resulting in a market capitalization of more than $500 million, at a redemption
price per share equal to 100% of the liquidating value plus all accrued and
unpaid cash dividends as follows:
(i)
If the IPO results in a market capitalization of the Company of less
than $750 million but more than or equal to $500 million, the Company
shall redeem up to 25% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption;
(ii)
If the IPO results in a market capitalization of the Company of less
than $1 billion but more than or equal to $750 million, the Company
shall redeem up to 50% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who request redemption; and
(iii)
If the IPO results in a market capitalization of the Company of more
than or equal to $1 billion, the Company shall redeem up to 100% of
the outstanding shares of Junior Preferred Stock held by each holder of such
shares who requests redemption.
In the event the Company intends to consummate an IPO, the holders of sixty
percent (60%) of the outstanding Junior Preferred Stock may require the Company
to convert on a PRO RATA basis all or any portion of the outstanding Junior
Preferred Stock into shares of Common Stock, such conversion to occur
automatically upon the closing of an IPO. Each share of Junior Preferred Stock
shall be converted into a number of shares of Common Stock equal to (x) the
Liquidation Value per share plus accrued and unpaid dividends thereon to the
date of conversion, without interest, divided by (y) the offering price per
share of Common Stock in such IPO, with any fractional shares being redeemed by
the Company for cash.
Accumulated but unpaid dividends on the Junior and Senior Preferred Stock
aggregated $950,000 as of June 30, 1996.
F-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Guitar Center Management Company, Inc.
We have audited the accompanying balance sheets of Guitar Center Management
Company, Inc. as of December 31, 1995 and 1994, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Guitar Center Management
Company, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
March 6, 1996, except for Note 10, as to which
the date is June 6, 1996.
F-10
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 4,058,928 $ 1,796,126
Accounts receivable, less allowance for doubtful accounts of $200,000 (1994)
and (1995).................................................................. 1,525,571 1,962,085
Employee notes............................................................... 39,755 81,996
Inventories (NOTE 2)......................................................... 28,651,731 31,277,531
Prepaid expenses............................................................. 372,323 576,613
-------------- ---------------
Total current assets........................................................... 34,648,308 35,694,351
Property and equipment, net (NOTE 3)........................................... 11,642,270 13,276,106
Goodwill, net of accumulated amortization of $137,448 (1994) and $152,443
(1995)........................................................................ 462,326 447,331
Other assets................................................................... 147,176 300,826
-------------- ---------------
Total assets................................................................... $ 46,900,080 $ 49,718,614
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................. $ 10,405,733 $ 12,613,356
Accrued liabilities (NOTE 9)................................................. 5,608,370 7,160,745
Deferred compensation (NOTE 7)............................................... 4,821,000 7,908,000
Merchandise advances......................................................... 1,519,775 2,009,867
Current portion of long-term debt (NOTE 4)................................... 825,000 --
-------------- ---------------
Total current liabilities...................................................... 23,179,878 29,691,968
Other long-term liabilities.................................................... 296,239 262,940
Commitments (NOTE 5)
Stockholder's equity (NOTE 7):
Common stock, no par value; authorized 2,500,000 shares, issued and
outstanding 1,400,000....................................................... 4,987,299 4,987,299
Retained earnings............................................................ 18,436,664 14,776,407
-------------- ---------------
Total stockholder's equity..................................................... 23,423,963 19,763,706
-------------- ---------------
Total liabilities and stockholder's equity..................................... $ 46,900,080 $ 49,718,614
-------------- ---------------
-------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales................................................... $ 97,305,125 $ 129,038,608 $ 170,671,199
Cost of goods sold.......................................... 68,527,340 92,274,181 123,415,007
---------------- ---------------- ----------------
Gross profit................................................ 28,777,785 36,764,427 47,256,192
Selling, general and administrative expenses................ 21,888,971 26,143,498 32,663,845
Deferred compensation expense............................... 1,389,933 1,259,000 3,087,000
---------------- ---------------- ----------------
Operating income............................................ 5,498,881 9,361,929 11,505,347
Interest income............................................. 33,886 14,344 13,978
Interest expense............................................ (304,461) (266,343) (382,357)
Other income................................................ 22,531 44,534 65,034
---------------- ---------------- ----------------
Income before income taxes.................................. 5,250,837 9,154,464 11,202,002
Income taxes................................................ 146,142 325,676 344,750
---------------- ---------------- ----------------
Net income.................................................. $ 5,104,695 $ 8,828,788 $ 10,857,252
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Pro forma data (unaudited) (NOTE 11):
Income before taxes....................................... $ 5,250,837 $ 9,154,464 $ 11,202,002
Pro forma income taxes.................................... 2,856,000 4,478,000 6,144,000
---------------- ---------------- ----------------
Pro forma net income...................................... $ 2,394,837 $ 4,676,464 $ 5,058,002
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1992................................... $ 4,987,299 $ 13,010,010 $ 17,997,309
Net income................................................... -- 5,104,695 5,104,695
Distributions to stockholder................................. -- (4,637,751) (4,637,751)
------------- ---------------- ----------------
Balance at December 31, 1993................................... 4,987,299 13,476,954 18,464,253
Net income................................................... -- 8,828,788 8,828,788
Distributions to stockholder................................. -- (3,869,078) (3,869,078)
------------- ---------------- ----------------
Balance at December 31, 1994................................... 4,987,299 18,436,664 23,423,963
Net income................................................... -- 10,857,252 10,857,252
Distributions to stockholder................................. -- (14,517,509) (14,517,509)
------------- ---------------- ----------------
Balance at December 31, 1995................................... $ 4,987,299 $ 14,776,407 $ 19,763,706
------------- ---------------- ----------------
------------- ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-13
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1993 1994 1995
-------------- -------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 5,104,695 $ 8,828,788 $ 10,857,252
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 1,243,618 1,488,043 1,801,652
(Gain) loss on sale of fixed assets...................... -- 85,380 (3,641)
Changes in operating assets and liabilities:
Accounts receivable.................................... 145,472 937,326 (436,515)
Inventories............................................ (6,392,025) (4,700,890) (2,625,800)
Prepaid expenses....................................... 247,131 11,817 (204,289)
Other assets........................................... 52,695 29,840 (153,650)
Accounts payable....................................... 2,714,798 2,138,914 2,207,623
Accrued liabilities.................................... 297,478 2,870,497 1,552,375
Deferred compensation.................................. 1,389,933 1,259,000 3,087,000
Merchandise advances................................... 201,362 349,150 490,092
Other long-term liabilities............................ -- 296,239 (33,299)
-------------- -------------- ----------------
Net cash provided by operating activities.................. 5,005,157 13,594,104 16,538,800
INVESTING ACTIVITIES
Proceeds from sale of assets............................... -- 142,510 15,000
Purchases of property and equipment........................ (2,618,031) (3,276,757) (3,431,852)
Employee notes............................................. (872) (38,883) (42,241)
-------------- -------------- ----------------
Net cash used in investing activities...................... (2,618,903) (3,173,130) (3,459,093)
FINANCING ACTIVITIES
Principal repayments of long-term debt..................... (1,600,728) (2,575,000) (825,000)
Proceeds from revolving bank facilities.................... -- 8,220,438 39,905,718
Repayments of revolving bank facilities.................... -- (8,220,438) (39,905,718)
Repayment of stockholder loans............................. (845,790) -- --
Distributions to stockholder............................... (4,637,751) (3,869,078) (14,517,509)
-------------- -------------- ----------------
Net cash used in financing activities...................... (7,084,269) (6,444,078) (15,342,509)
-------------- -------------- ----------------
Net (decrease) increase in cash and cash equivalents....... (4,698,015) 3,976,896 (2,262,802)
Cash and cash equivalents at beginning of year............. 4,780,047 82,032 4,058,928
-------------- -------------- ----------------
Cash and cash equivalents at end of year................... 82,032 $ 4,058,928 $ 1,796,126
-------------- -------------- ----------------
-------------- -------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 303,214 $ 291,975 $ 357,120
-------------- -------------- ----------------
-------------- -------------- ----------------
Income taxes........................................... $ 152,853 $ 111,319 $ 346,438
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-14
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Guitar Center Management Company, Inc. (the Company) operates a chain of
retail stores dba "Guitar Center" which sell high quality musical instruments
primarily guitars, keyboard, percussion and pro-audio equipment. At December 31,
1995, the Company operated 21 stores in major cities throughout the United
States with approximately 50% of the stores located in California.
INVENTORIES
Inventories, including used merchandise and vintage guitars, are valued at
the lower of cost or market using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets;
generally five years for furniture and fixtures, computer equipment and
vehicles, 15 years for buildings and 15 years or the life of the lease,
whichever is less, for leasehold improvements. Maintenance and repair costs are
expensed as they are incurred, while renewals and betterments are capitalized.
STORE PREOPENING COSTS
The Company charges preopening costs to operations in the month a new store
opens.
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expense included in the statements of income for the years ended December 31,
1993, 1994 and 1995, is $3,264,931, $4,236,010 and $4,128,157, respectively.
MERCHANDISE ADVANCES
Merchandise advances represent primarily layaway deposits which are recorded
as a liability pending consummation of the sale when the full purchase price is
received from the customer and outstanding gift certificates which are recorded
as a liability until redemption by the customer.
REVENUE RECOGNITION
Revenue is recognized at the time of sale, net of a provision for estimated
returns.
INCOME TAXES
Effective November 1, 1988, the Company elected to be taxed as a Subchapter
S corporation. This election generally requires the individual stockholder
rather than the Company to pay federal income taxes on the Company's earnings.
California, and certain other states in which the Company does business,
impose a minimum tax on Subchapter S corporate income, which is reflected as
income taxes on the statements of income.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired resulting from a business combination and is being
amortized on a straight-line basis over 40 years.
RENT EXPENSE
The Company leases certain store locations under operating leases that
provide for annual payments that increase over the life of the leases. The
aggregate of the minimum annual payments are expensed on a straight-line basis
over the term of the related lease without consideration of renewal
F-15
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
option periods. The amount by which straight-line rent expense exceeds actual
lease payment requirements in the early years of the leases is accrued as
deferred minimum rent and reduced in later years when the actual cash payment
requirements exceed the straight-line expense.
CONCENTRATION OF CREDIT RISK
The Company's deposits are with various high quality financial institutions.
Customer purchases are transacted using generally cash or credit cards. In
certain instances, the Company grants credit for larger purchases, generally to
professional musicians, under normal trade terms. Trade accounts receivable were
approximately $194,000 and $212,000 at December 31, 1994 and 1995, respectively.
Credit losses have historically been within management's expectations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, the Company considers all highly liquid investments that are both readily
convertible into cash and mature within 90 days of their date of purchase to be
cash equivalents.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain PRO
FORMA disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to adopt the provisions for PRO
FORMA disclosure requirements of SFAS 123 in fiscal 1996.
2. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
Major goods............................................................ $ 18,286,968 $ 19,593,966
Associated accessories................................................. 5,550,883 5,951,514
Vintage guitars........................................................ 1,604,166 2,072,005
Used merchandise....................................................... 1,673,266 1,940,326
General accessories.................................................... 1,536,448 1,719,720
-------------- ---------------
$ 28,651,731 $ 31,277,531
-------------- ---------------
-------------- ---------------
</TABLE>
Major goods includes the major product lines including stringed merchandise,
percussion, keyboards and pro-audio equipment. Associated accessories are
comprised of accessories to major goods. General accessories includes other
merchandise such as apparel, cables and books.
F-16
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
Land................................................................... $ 2,630,770 $ 2,880,770
Buildings.............................................................. 7,456,930 9,075,458
Transportation equipment............................................... 288,703 494,557
Furniture and fixtures................................................. 4,647,740 5,837,736
Leasehold improvements................................................. 2,287,309 2,416,092
Construction in progress............................................... 1,228,508 1,200,595
-------------- ---------------
18,539,960 21,905,208
Less accumulated depreciation.......................................... 6,897,690 8,629,102
-------------- ---------------
$ 11,642,270 $ 13,276,106
-------------- ---------------
-------------- ---------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Noncollateralized term note payable, interest at 7.54% due in monthly
installments of $75,000 plus interest, with unpaid principal and interest due
through May 29, 1995......................................................... $ 825,000 $ --
----------- -----------
825,000 --
Less current portion.......................................................... 825,000 --
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
The Company also has available a noncollateralized revolving line of credit
in the amount of $10,000,000 which is available through September 1, 1996. The
revolving line of credit bears interest at three-quarter percent below the prime
rate, or at LIBOR plus 1% at the Company's option, with interest due monthly. At
December 31, 1995, the Company did not have any outstanding borrowings under the
revolving line of credit.
In addition, the Company has available a noncollateralized term loan
facility of $10,000,000 which is available through September 1, 1996. The term
loan facility bears interest at one-quarter percent below the prime rate with
interest due monthly. At December 31, 1995, the Company did not have any
outstanding borrowings under the term loan agreement.
Under the terms of the term loan and revolving line of credit agreements,
the Company is subject to various financial and other covenants. The Company was
in compliance with such covenants at December 31, 1995.
5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its office and several retail store facilities under
various operating leases which expire at varying dates through June 2006.
Generally, the agreements contain provisions which require the Company to pay
for normal repairs and maintenance, property taxes and insurance.
Through October 17, 1995, the Company leased from its Profit Sharing Plan
two properties at a total monthly rental of $19,988. On October 17, 1995, the
leases with the Company were cancelled for fees totaling $227,408. One of the
properties was then purchased by the Company for $500,000, a price determined by
an independent fiduciary. The other property was re-leased by the Company
through
F-17
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
2005 from a related party-in-interest at a monthly rental of $8,250. The Company
leases one additional property through 2001 from a related party-in-interest at
a monthly rental of $9,900. The total rent expense recorded for related party
leases totaled $229,714, $237,900 and $291,824 in 1993, 1994 and 1995,
respectively.
The total minimum rental commitment at December 31, 1995, under operating
leases, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
- -------------------------------------------------------------------- --------------
<S> <C>
1996................................................................ $ 2,438,123
1997................................................................ 2,811,872
1998................................................................ 2,880,432
1999................................................................ 2,777,958
2000................................................................ 2,718,558
Thereafter.......................................................... 12,338,070
--------------
$ 25,965,013
--------------
--------------
</TABLE>
The total rental expense included in the statements of income for the years
ended December 31, 1993, 1994 and 1995 is $1,035,129, $1,803,698 and $1,985,401,
respectively.
6. PROFIT SHARING PLAN
The Company has a Profit Sharing Plan (the Plan) which covers substantially
all employees who meet a minimum employment requirement. The Company's board of
directors can elect to contribute up to 15% of the participants' compensation
for any plan year, subject to a maximum of $30,000 per participant. During the
Plan years ended October 31, 1995 and 1994, the Company declared total
contributions of $1,272,025 and $1,003,128, respectively, which is included in
accrued liabilities. In addition, $177,787 of assets, included in the Plan,
which had been forfeited by terminated employees was reallocated to
participants.
7. STOCK OPTION PLAN
The Company has granted stock options to certain key employees. At December
31, 1995, stock options to purchase 814,074 shares of common stock at prices
ranging from $.05 to $11.23 per share were outstanding and exercisable. In
certain situations, such as the termination, death or disability of the
employee, the Company is required to repurchase the stock options based on a
defined formula as set forth in the stock purchase agreement.
The deferred compensation liability of $7,908,000 at December 31, 1995
represents the difference between the defined formula price and the option price
on all stock options accrued annually as deferred compensation expense for any
increase in the spread between the two prices.
8. SALE-LEASEBACK TRANSACTIONS
On February 15, 1996, the Company entered into two sale-leaseback
transactions with a related party-in-interest. The combined sale amount for the
two properties was $1,753,000 resulting in a $3,587 net gain for the Company.
The two properties are leased back from the related party-in-interest through
2006 for a combined monthly rental of $16,258. The Company also entered into two
additional leases subsequent to year end with unrelated parties for a combined
monthly rental of $31,310. These four leases are reflected in the total minimum
rental commitment in Note 5.
F-18
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. OTHER FINANCIAL INFORMATION
Accrued Expenses
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Wages, salaries and benefits....................................................... $ 1,582,081 $ 2,217,546
Sales tax payable.................................................................. 1,460,167 1,666,157
Profit sharing accrual............................................................. 1,003,128 1,271,738
Other.............................................................................. 1,562,994 2,005,304
------------- -------------
$ 5,608,370 $ 7,160,745
------------- -------------
------------- -------------
</TABLE>
10. SUBSEQUENT EVENTS
On June 5, 1996, Guitar Center consummated a series of transactions to
effect a recapitalization of the Company which resulted in (i) the issuance of
common stock, junior preferred stock, and senior preferred stock, (ii) the
incurrence of senior unsecured increasing rate indebtedness ("Bridge Facility"),
(iii) the repurchase of a substantial portion of common stock held by the sole
stockholder, and (iv) cancellation of options to purchase common stock held by
certain members of management. The Company repaid in full its existing credit
facility, and entered into a new $25 million credit facility with Wells Fargo
Bank, N.A. The Company expects to offer $100,000,000 of senior notes in a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended. The proceeds of the offering will be used to repay the
Bridge Facility.
11. PRO FORMA DATA (UNAUDITED)
Pro forma information has been provided to reflect the estimated statutory
provision for income taxes assuming the Company had been taxed as a C
corporation.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPEOPLE OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary................................................................. 3
Risk Factors............................................................ 12
The Recapitalization and Related Transactions........................... 16
The Exchange Offer...................................................... 17
Capitalization.......................................................... 25
Unaudited Pro Forma Condensed Financial Data............................ 26
Selected Historical Financial Data...................................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 33
Business................................................................ 38
Management.............................................................. 47
Principal Stockholders.................................................. 54
Certain Transactions.................................................... 55
Description of Notes.................................................... 59
The New Credit Facility................................................. 80
Description of Capital Stock............................................ 82
Federal Income Tax Considerations....................................... 88
Plan of Distribution.................................................... 88
Legal Matters........................................................... 89
Experts................................................................. 89
Available Information................................................... 90
Index to Financial Statements........................................... F-1
</TABLE>
--------------
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
GUITAR CENTER, INC.
$100,000,000
11% SENIOR NOTES DUE 2006
-----------------
PROSPECTUS
-----------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Exchange Offer are as follows:
<TABLE>
<CAPTION>
EXPENSE AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
The Commission's Registration Fee................................................. $ 34,483
Printing Expenses................................................................. 63,000
Legal Fees and Expenses........................................................... 100,000
Accounting Fees and Expenses...................................................... 85,000
Exchange Agent Fees............................................................... 2,000
Miscellaneous Expenses............................................................ 20,000
----------
Total......................................................................... $ 304,483
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Certificate of Incorporation of the Company eliminates the liability of
the Company's directors for monetary damages arising from a breach of their
fiduciary duties to the Company and its stockholders, to the extent permitted by
the Delaware General Corporation Law. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by applicable law. The Company has
entered into indemnification agreements with its directors and executive
officers containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. Such agreements require the Company, among other things, (i) to
indemnify its officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers provided such
persons acted in good faith and in a manner reasonably believed to be in the
best interests of the Company and, with respect to any criminal action, had no
cause to believe their conduct was unlawful; (ii) to advance the expenses
actually and reasonable incurred by its officers and directors as a result of
any proceeding against them as to which they could be indemnified; and (iii) to
obtain directors' and officers' insurance if available on reasonable terms.
There is no action or proceeding pending or, to the knowledge of the Company,
threatened which may result in a claim for indemnification by any director,
officer, employee or agent of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Recapitalization the following transactions were
effectuated: (i) members of the Company's management purchased 500,000 shares of
Common Stock for $500,000 in cash, (ii) holders of outstanding options to
purchase 49,500,000 shares of Common Stock exchanged such options for 495,000
shares of Junior Preferred Stock, (iii) the holder of 19,800,000 shares of
Common Stock exchanged such shares for 198,000 shares of Junior Preferred Stock,
(iv) the DLJ Investors purchased 800,000 shares of Senior Preferred Stock and
Warrants to purchase 73,864 shares of Common Stock and 72,947 shares of Junior
Preferred Stock for $20.0 million in cash, (v) the Investors purchased 700,000
shares of Common Stock and 693,000 shares of Junior Preferred Stock for $70.0
million cash, and (vi) DLJ Bridge purchased $51.0 million aggregate principal
amount of senior unsecured increasing rate notes for $51.0 million in cash. The
Company believes that the securities issued in each of these transactions were
issued in a private offering in accordance with Section 4(2) of the Securities
Act.
On July 2, 1996, the Company sold an aggregate of $100 million principal
amount of Old Notes to DLJ and CSI. (severally, the "Initial Purchasers"). The
Company believes this offering was exempt from registration under Section 4(2)
of the Securities Act. The Initial Purchasers resold an aggregate of $100
million principal amount of Old Notes to Qualified Institutional Investors
(within the meaning of Rule 144A under the Securities Act ("Rule 144A")) in
transactions meeting the requirements of Rule 144A.
On November 1, 1996 the Company reincorporated in the State of Delaware
through a statutory merger with its parent company, Guitar Center Management
Company, Inc. (GCMI). The sole purpose of the merger was to reincorporate the
Company. Each outstanding share of Common Stock, Senior Preferred Stock and
Junior Preferred Stock of GCMI was converted automatically into shares of the
Company's Common Stock, Senior Preferred Stock and Junior Preferred Stock,
respectively. This transaction was exempt from the registration provisions of
Section 5 of the Securities Act pursuant to Rule 145(a)(c).
II-1
<PAGE>
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1* The Company's Certificate of Incorporation
3.2 Amendment to Certificate of Incorporation
3.3* The Company's Bylaws
4.1* Indenture, dated as of July 2, 1996 by and between the Company and U.S. Trust Company of California as
trustee
4.2* Form of Restricted Stock Agreements dated as of May 1, 1996 between the Company and certain members of
management
4.3* Warrants (1-4) dated June 5, 1996, for the purchase of shares of Common Stock and Junior Preferred
Stock issued to certain investors
5.1* Opinion of Buchalter, Nemer, Fields & Younger, a Professional Corporation, as to the enforceability of
the notes offered hereby
10.1* Recapitalization Agreement, dated May 1, 1996 by and among the Company, CVCA, WPC, WFSBIC, and the
stockholders named therein
10.2* Registration Rights Agreement, dated June 5, 1996, among the Company and its stockholders
10.3* Tax Indemnification Agreement, dated as of May 1, 1996, by and among the Company, Ray Scherr, and the
individuals identified on the signature pages thereto
10.5* Employment Agreement dated June 5, 1996, between the Company
and Lawrence Thomas
10.6* Employment Agreement dated June 5, 1996, between the Company
and Marty Albertson
10.7* Employment Agreement dated June 5, 1996, between the Company and Bruce Ross
10.8* Employment Agreement dated June 5, 1996, between the Company and Raymond Scherr
10.9* Form of Indemnification Agreement dated June 5, 1996, between the Company
and certain members of management
10.10* Securities Purchase Agreement dated June 5, 1996, by and among the Company
and the parties named therein
10.11* Registration Agreement dated June 5, 1996, among the Company
and the parties named therein
10.12* Credit Agreement dated June 5, 1996, between the Company
and Wells Fargo Bank, N.A.
10.13* Revolving Promissory Note dated June 5, 1996, issued by the Company in favor of Wells Fargo Bank, N.A.
in the principal amount of $25,000,000
10.14* Security Agreement dated June 5, 1996, between the Company and Wells Fargo, N.A.
10.15* Registration Rights Agreement, dated July 2, 1996, by and among the Company, CSI and DLJ
10.16* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Lawrence Thomas
10.17* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Marty Albertson
10.18* Employment Agreement dated June 5, 1996, between the Company and Barry Soosman
10.19* Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
10.20 Amended and Restated 1996 Performance Stock Option Plan
10.21* Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the Company and
Larry Thomas
10.22* Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the Company and
Marty Albertson
10.23* Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Bruce Ross
10.24 Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Barry Soosman
11.1* Computation of Earnings to Fixed Charges
16.1 Letter re: change in certifying accountant
23.2 Consent of Ernst & Young LLP, independent auditors
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
23.4* Consent of Buchalter, Nemer, Fields & Younger, a Professional Corporation
(included in Exhibit 5)
24.1* Power of Attorney (included on page II-4)
25.1* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
99.1* Letter of Transmittal
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules
No schedules for which provision is made in the applicable accounting
regulations of the Commission are required under the applicable instructions or
are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out the Securities Act
may be permitted to directors, officers or controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by registrant of expenses incurred or paid
by a directors, officer or controlling person of the registrant in the
successful defense in any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will by governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California on this 29th day of October 1996.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By: /s/ LARRY THOMAS
-------------------------------------------
Name: Larry Thomas
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------ --------------------
<S> <C> <C> <C>
/s/ LARRY THOMAS President, Chief Executive
------------------------------------------ Officer and Director October 29, 1996
Larry Thomas [Principal Executive Officer]
Vice President, Chief
/s/ BRUCE ROSS Financial Officer and
------------------------------------------ Secretary [Principal October 29, 1996
Bruce Ross Financial and Accounting
Officer]
/s/ MARTY ALBERTSON Executive Vice President,
------------------------------------------ Chief Operating Officer and October 29, 1996
Marty Albertson Director
------------------------------------------ Director October , 1996
Raymond Scherr
/s/ DAVID FERGUSON*
------------------------------------------ Director October 29, 1996
David Ferguson
------------------------------------------ Director October , 1996
Jeffrey Walker
/s/ MICHAEL LAZARUS*
------------------------------------------ Director October 29, 1996
Michael Lazarus
------------------------------------------ Director October , 1996
Steven Burge
*By /s/ BRUCE ROSS
--------------------------------------
Bruce Ross
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
3.1* The Company's Certificate of Incorporation
3.2 The Company's Bylaws
3.3* The Company's Bylaws
4.1* Indenture, dated as of July 2, 1996 by and between the Company and U.S. Trust Company of
California as trustee
4.2* Form of Restricted Stock Agreements dated as of May 1, 1996 between the Company and certain
members of management
4.3* Warrants (1-4) dated June 5, 1996, for the purchase of shares of Common Stock and Junior
Preferred Stock issued to certain investors
5.1* Opinion of Buchalter, Nemer, Fields & Younger, a Professional Corporation, as to the
enforceability of the Notes offered hereby
10.1* Recapitalization Agreement, dated May 1, 1996 by and among the Company, CVCA, WPC, WFSBIC, and
the stockholders named therein
10.2* Registration Rights Agreement, dated June 5, 1996, among the Company and its stockholders
10.3* Tax Indemnification Agreement, dated as of May 1, 1996, by and among the Company, Ray Scherr,
and the individuals identified on the signature pages thereto
10.4* The Company's 1996 Stock Option Plan dated June 3, 1996 and Amendment No. 1
10.5* Employment Agreement dated June 5, 1996, between the Company
and Lawrence Thomas
10.6* Employment Agreement dated June 5, 1996, between the Company
and Marty Albertson
10.7* Employment Agreement dated June 5, 1996, between the Company and Bruce Ross
10.8* Employment Agreement dated June 5, 1996, between the Company and Raymond Scherr
10.9* Form of Indemnification Agreement dated June 5, 1996, between the Company
and certain members of management
10.10* Securities Purchase Agreement dated June 5, 1996, by and among the Company
and the parties named therein
10.11* Registration Agreement dated June 5, 1996, among the Company
and the parties named therein
10.12* Credit Agreement dated June 5, 1996, between the Company
and Wells Fargo Bank, N.A.
10.13* Revolving Promissory Note dated June 5, 1996, issued by the Company in favor of Wells Fargo
Bank, N.A. in the principal amount of $25,000,000
10.14* Security Agreement dated June 5, 1996, between the Company and Wells Fargo, N.A.
10.15* Registration Rights Agreement, dated July 2, 1996, by and among the Company, CSI and DLJ
10.16* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Lawrence
Thomas
10.17* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Marty
Albertson
10.18 Employment Agreement dated June 5, 1996 between the Company and Barry Soosman
10.19* Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
10.20 Amended and Restated 1996 Performance Stock Option Plan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.21* Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the
Company and Larry Thomas
10.22* Amendment No. 1 to Management Stock Option Agreement, dated October 15, 1996, between the
Company and Marty Albertson
10.23* Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Bruce
Ross
10.24 Amendment No. 1 to Employment Agreement, dated October 15, 1996, between the Company and Barry
Soosman
11.1* Computation of Earnings to Fixed Charges
16.1 Letter re: change in certifying accountant
23.2 Consent of Ernst & Young LLP, independent auditors
23.4* Consent of Buchalter, Nemer, Fields & Younger, a Professional Corporation
(included in Exhibit 5)
24.1* Power of Attorney (included on page II-4)
25.1* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
99.1* Letter of Transmittal
</TABLE>
- ------------------------
* Previously filed
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
GUITAR CENTER, INC.
Before Payment of Capital
Pursuant to Section 241 of Title 8 of the Delaware Code of 1953, as
amended,
I, the undersigned, being the Sole Incorporator of Guitar Center,
Inc., a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DO HEREBY CERTIFY:
FIRST: That at a meeting of the Sole Incorporator of Guitar
Center, Inc., duly held and convened, resolutions were adopted setting forth
a proposed amendment to the Certificate of Incorporation of said corporation
and declaring said amendment advisable.
"RESOLVED, that the Certificate of Incorporation of the Corporation
be, and it hereby is, amended by changing Article IV, Subpart B, 8% Junior
Preferred Stock, Section 1 and Section 7 thereof as follows:
Section 1 of Subpart B shall read as follows:
`1. NUMBER AND DESIGNATION. 1,765,000 shares of the Preferred
Stock of the Corporation shall be designated as 8% Junior Preferred Stock,
par value $.01 (the "Junior Preferred Stock").'
Section 7 of Subpart B shall read as follows:
`7. CONVERSION UPON AN INITIAL PUBLIC OFFERING.
a. In the event the Corporation intends to consummate an
Initial Public Offering, the holders of at least sixty percent (60%) of all
shares of Junior Preferred Stock may demand (which demand shall be binding
upon all holders of Junior Preferred Stock) that the Corporation convert all
or any portion of the shares of Junior Preferred Stock then outstanding into
Common Stock, such conversion to occur automatically upon the closing of an
Initial Public Offering. The Corporation shall notify the holders of Junior
Preferred Stock, not less than 20 nor more than 60 days prior to the filing
of a "red herring" preliminary prospectus intended to be distributed publicly
to commence marketing of its common stock, of its intention to consummate an
Initial Public Offering. The requisite
<PAGE>
holders of Junior Preferred Stock must demand conversion within 10 days after
delivery of the Corporation's notice (or within such longer period permitted
by the Corporation and set forth in the Corporation's notice). In the event
that less than all outstanding shares of Junior Preferred Stock are being
converted, the shares to be converted shall be selected pro rata (with any
fractional shares being rounded to the nearest whole share) according to the
number of whole shares held by each holder of the Junior Preferred Stock.
Each share of Junior Preferred Stock being converted shall convert into such
number of shares of Common Stock as is equal to the Junior Preferred
Liquidation Value per share, plus accrued and unpaid dividends to the date of
conversion, without interest, divided by the offering price of a share of
Common Stock in the Initial Public Offering, with any fractional shares being
redeemed by the Corporation for cash.
b. In the case of a conversion pursuant to Section 7(a) of
Subpart B hereof, from and after the conversion date, dividends on such
shares of Junior Preferred Stock as the holder elects to cause the
Corporation to convert shall cease to accrue, and all rights of the holders
thereof as holders of Junior Preferred Stock shall cease. Upon surrender in
accordance with said notice of the certificates for any shares so converted
(properly endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such share shall
be converted by the Corporation in accordance with the provisions of this
Section 7. In case fewer than all the shares represented by any such
certificate are converted, a new certificate shall be issued representing the
unconverted shares without cost to the holder thereof.'"
SECOND: That no part of the capital of said corporation having
been paid, this certificate is filed pursuant to Section 241 of Title 8 of
the Delaware Code, as amended.
IN WITNESS WHEREOF, I have duly executed this Certificate of
Amendment this __ day of October, 1996.
_______________________________
Bruce L. Ross,
Incorporator
<PAGE>
GUITAR CENTER MANAGEMENT COMPANY, INC.
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the GUITAR CENTER MANAGEMENT COMPANY, INC. AMENDED AND
RESTATED 1996 PERFORMANCE STOCK OPTION PLAN (the "Plan") is (i) to further the
growth and success of GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "Company"), and its Subsidiaries (as hereinafter defined) by
enabling employees of, or consultants to, the Company or any of its Subsidiaries
to acquire Units consisting of the Company's Common Stock and Junior Preferred
Stock, thereby increasing their personal interest in such growth and success,
and (ii) to provide a means of rewarding outstanding performance by such persons
to the Company and/or its Subsidiaries. Options granted under the Plan (the
"Options") may be either "incentive stock options" ("ISOs"), intended to qualify
as such under the provisions of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified stock options ("NSOs"). In this
Plan, the terms "Parent" and "Subsidiary" mean "Parent Corporation" and
"Subsidiary Corporation," respectively, as such terms are defined in Sections
424(e) and (f) of the Code. Unless the context otherwise requires, any ISO or
NSO is referred to in this Plan as an "Option." This Plan amends and restates
the Company's 1996 Performance Stock Option Plan as originally adopted on June
3, 1996 and as amended as of July 1, 1996.
2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below:
"AFFILIATE" has the meaning ascribed thereto in the Stockholders
Agreement.
"BOARD" has the meaning set forth in Section 3(a) hereof.
"CALCULATED CORPORATE VALUE" (a) in connection with any EBITDA
Determination means, as at any Measurement Date, an amount equal to the
difference (if any and if positive) between (a) the product of (x) EBITDA for
the immediately preceding twelve calendar months prior to a Vesting Date TIMES
(y) 12.1, MINUS (b) as of the Measurement Date, the sum of (x) all Debt of the
Company (net of all of the Company's available cash) PLUS (y) the aggregate
liquidation preference (including accrued but unpaid dividends) of all
outstanding preferred stock of the Company
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(other than the Junior Preferred Stock); and (b) in connection with any Sale of
the Company means (i) if such Sale of the Company involves a Sale of all the
Common Stock, Common Stock Equivalents, Junior Preferred Stock and Junior
Preferred Stock Equivalents of the Company, the value of the consideration paid
by the purchaser in the Sale of the Company attributed to the Company's Common
Stock, Common Stock Equivalents, Junior Preferred Stock and Junior Preferred
Stock Equivalents; and (ii) if such Sale of the Company involves a Sale of less
than all of the Common Stock, Common Stock Equivalents, Junior Preferred Stock
and Junior Preferred Stock Equivalents of the Company, the sum of (A) the value
of the consideration paid by the purchaser in the Sale of the Company
attributable to the Company's Common Stock, Common Stock Equivalents, Junior
Preferred Stock and Junior Preferred Stock Equivalents actually purchased in
such Sale of the Company, plus (B) the product of the Imputed Value Per Share
and the shares of Common Stock and Common Stock Equivalents not purchased in the
Sale of the Company, plus (C) the aggregate liquidation value of, plus accrued
and unpaid dividends on, all outstanding shares of Junior Preferred Stock
immediately after the Sale of the Company not sold to the purchaser in the Sale
of the Company. Calculated Corporate Value will be calculated on a consolidated
basis and shall be determined in good faith by the Board. For the avoidance of
doubt, no amounts shall be included in the calculation of Calculated Corporate
Value if such amounts were included in the calculation of the Cumulative
Adjustment Amount.
"CAUSE" has the meaning ascribed thereto in the Stockholders
Agreement.
"CODE" has the meaning set forth in Section 1.
"COMMITTEE" has the meaning set forth in Section 3(a) hereof.
"COMMON STOCK" means the Company's Common Stock, without par value.
"COMMON STOCK EQUIVALENTS" has the meaning ascribed thereto in the
Stockholders Agreement; provided that in computing the Calculated Corporate
Value in connection with a Sale of the Company, shall exclude any Common Stock
Equivalents not exercisable immediately prior to such Sale of the Company.
"COMPANY" has the meaning set forth in Section 1 hereof.
"CORPORATE VALUE TARGET" has the meaning set forth in Section 7.
2
<PAGE>
"CUMULATIVE ADJUSTMENT AMOUNT" shall mean, as of any Vesting Date, the
cumulative amount (without duplication) of the following payments from the date
immediately following the Effective Date through and including such Vesting
Date: (x) all payments received by the Company in consideration of the issuance
after the date hereof of its Common Stock and Junior Preferred Stock or any
options or warrants to acquire Common Stock and/or Junior Preferred Stock, minus
(y) all dividends and other distributions made or declared by the Company with
respect to its Common Stock and Junior Preferred Stock plus all payments by the
Company in consideration of the purchase or redemption of its Common Stock
and/or Junior Preferred Stock or options or warrants to acquire Common Stock
and/or Junior Preferred Stock. The value of any payment which is made with
consideration other than cash shall equal its fair market value, as determined
in good faith by the Board.
"DEBT" has the meaning ascribed thereto in the Stockholders Agreement.
"DISQUALIFYING DISPOSITION" has the meaning set forth in Section 17
hereof.
"EBITDA" has the meaning ascribed thereto in the Stockholders
Agreement.
"EFFECTIVE DATE" means June 3, 1996.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"IMPUTED VALUE PER SHARE" means the Board's good faith determination
of the value of the consideration paid by a purchaser in a Sale of the Company
attributed to one share of Common Stock (minus, in the cases of any Common Stock
Equivalents, the additional consideration payable to the Company upon the
exercise, conversion or exchange therefor).
"INVOLUNTARY TERMINATION" has the meaning set forth in Section 8(a)
hereof.
"ISOS" has the meaning set forth in Section 1 hereof.
"JUNIOR PREFERRED STOCK" means the Company's 8% Junior Preferred
Stock.
"JUNIOR PREFERRED STOCK EQUIVALENTS" means the right to acquire,
whether or not immediately exercisable, one share of Junior Preferred Stock,
whether evidenced by an option, warrant, convertible security or other
instrument or agreement; provided that in computing the Calculated Corporate
Value in connection with a Sale of the Company, shall exclude any Junior
Preferred
3
<PAGE>
Stock Equivalents not exercisable immediately prior to such Sale of the Company.
"NASDAQ" has the meaning set forth in Section 6(b)(i) hereof.
"NSOS" has the meaning set forth in Section 1 hereof.
"NOTICE" has the meaning set forth in Section 10(b) hereof.
"OPTION" has the meaning set forth in Section 1 hereof.
"OPTION AGREEMENT" has the meaning set forth in Section 5(b) hereof.
"OPTIONED UNITS" has the meaning set forth in Section 10(b)(ii)
hereof.
"OPTIONEES" has the meaning set forth in Section 5(a)(i).
"PERSON" has the meaning ascribed thereto in the Stockholders
Agreement.
"PLAN" has the meaning set forth in Section 1 hereof.
"PUBLIC OFFERING" has the meaning ascribed thereto in the Stockholders
Agreement.
"REASONABLE JUSTIFICATION" has the meaning ascribed thereto in the
Stockholders Agreement.
"REQUISITE APPROVAL" means a determination by either (i) the President
of the Company or (ii) all but one of the members of the Board holding such
positions when the Requisite Approval was obtained, excluding, however, any
members of the Board designated pursuant to Section 10(a)(i) of the Stockholders
Agreement, that a termination of the Optionee's employment without Cause should,
for purposes of this Agreement, be treated as a Termination For Cause.
"REQUISITE STOCKHOLDER SHARES" has the meaning ascribed thereto in the
Stockholders Agreement.
"RESERVED UNITS" means, at any time, an aggregate of 173,375 Units.
"RULE 16B-3" has the meaning set forth in Section 3(a) hereof.
4
<PAGE>
"SALE OF THE COMPANY" has the meaning ascribed thereto in the
Stockholders Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCKHOLDERS AGREEMENT" means the stockholders agreement dated as of
June 5, 1996 and as hereafter amended from time to time, among the Company and
the stockholders of the Company named therein.
"TERMINATION DATE" means the earlier to occur of the tenth anniversary
of the Effective Date or the consummation of a Sale of the Company.
"TERMINATION FOR CAUSE" has the meaning set forth in Section 8(a)
hereof.
"TERMINATION OF RELATIONSHIP" means (a) if the Optionee is an employee
of the Company or any Subsidiary, the termination of the Optionee's employment
by the Company and its Subsidiaries for any reason and (b) if the Optionee is a
consultant to the Company or any Subsidiary, the termination of the Optionee's
consulting relationship with the Company and its Subsidiaries for any reason.
"UNAVAILABLE UNITS" has the meaning set forth in Section 7(f).
"UNITS" means a strip of securities initially constituting one share
of Common Stock and 99/100th of a share of Junior Preferred Stock, in each case
as may be adjusted pursuant to Section 11 hereof. For purposes of this
Agreement, a single Unit shall be both a Common Stock Equivalent and 99/100ths
of a Junior Preferred Stock Equivalent.
"UNITS AVAILABLE FOR AWARD" means the Reserved Units, if any, which
vest in accordance with Section 7 of this Plan.
"VESTING DATES" means the dates specified as such in Section 7(c)
hereof.
3. ADMINISTRATION OF THE PLAN
(a) UNIT OPTION COMMITTEE
The Plan shall be administered by a committee of two directors (the
"Committee") which Committee shall have the power and authority to grant Options
under the Plan subject to the prior approval of a majority of the Board of
Directors of the
5
<PAGE>
Company (the "Board"); PROVIDED, HOWEVER, that, so long as it shall be required
to comply with Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and
Exchange Commission (the "SEC") under the Exchange Act in order to permit
executive officers and directors of the Company to be exempt from the provisions
of Section 16(b) of the Exchange Act with respect to transactions effected
pursuant to the Plan, each of such persons, at the effective date of his or her
appointment to the Committee and at all times thereafter while serving on the
Committee, shall be a "non-employee director" within the meaning of Rule 16b-3.
At all times the Committee shall be comprised of two of the members of the Board
selected pursuant to Section 10(a)(i) of the Stockholders Agreement.
(b) PROCEDURES
The Committee shall adopt such rules and regulations as it shall deem
appropriate concerning the holding of meetings and the administration of the
Plan. The entire Committee shall constitute a quorum and the actions of the
entire Committee present at a meeting, or actions approved in writing by the
entire Committee, shall be the actions of the Committee.
(c) INTERPRETATION
Except as may otherwise be expressly reserved to the Board as provided
herein, and, with respect to any Option, except as may otherwise be provided in
the Option Agreement evidencing such Option, the Committee shall have all powers
with respect to the administration of the Plan, including the interpretation of
the provisions of the Plan and any Option Agreement (as defined in Section
5(b)), and all decisions of the Board or the Committee, as the case may be,
shall be conclusive and binding on all participants in the Plan.
4. ELIGIBILITY
(a) GENERAL
Options may be granted under the Plan only to persons who are
employees of, or consultants to, the Company or any of its Subsidiaries on the
date of grant. Options granted to consultants shall be NSOs. Options granted
to employees of the Company or any of its Subsidiaries shall be, in the
discretion of the Committee, either ISOs or NSOs on the date of grant (provided
that the Committee must obtain Board approval to issue ISOs prior to a Qualified
Public Offering).
6
<PAGE>
(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 424(b)(6) and 425(d) of the Code), stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company or of its Parent, if any, or any of its Subsidiaries, unless
(A) the Option Price (as defined in Section 6(a)) of the shares of
Common Stock and Junior Preferred Stock subject to such ISO is fixed
at not less than 110% of the Fair Market Value on the date of grant
(as determined in accordance with Section 6(b)) of such shares and (B)
such ISO by its terms is not exercisable after the expiration of five
years from the date it is granted;
(ii) no Option may be granted to (A) Larry Thomas or
Marty Albertson or (B) any other Person serving on the Committee for
so long as such Person serves on the Committee; and
(iii) no Options may be granted to any Person in any
one taxable year of the Company in excess of 25% of the Options issued
or issuable under the Plan.
5. GRANT OF OPTIONS
(a) GENERAL
Options may be granted under the Plan at any time and from time to
time on or prior to the Termination Date. Subject to the provisions of the
Plan, the Committee shall have plenary authority, in its sole discretion, to
determine:
(i) the persons (from among the class of persons
eligible to receive Options under the Plan) to whom Options shall be
granted (the "Optionees");
(ii) the time or times at which Options shall be
granted; and
(iii) the number of Units Available for Award subject
to each Option.
7
<PAGE>
(b) OPTION AGREEMENTS
Each Option granted under the Plan shall be designated as an ISO or an
NSO and shall be subject to the terms and conditions applicable to ISOs and/or
NSOs (as the case may be) set forth in the Plan. Each Option shall specify the
number of Units Available for Award for which such Option shall be exercisable
and the exercise price for each such Units Available for Award. In addition,
each Option shall be evidenced by a written agreement (an "Option Agreement"),
in substantially the form of EXHIBIT A for an ISO and EXHIBIT B for an NSO, with
such changes thereto as are consistent with the Plan as the Committee shall deem
appropriate. Each Option Agreement shall be executed by the Company and the
Optionee.
(c) TIME VESTING. The Committee shall determine whether and to what
extent any Options which are exercisable for Units Available for Award are also
subject to time vesting based upon the Optionee's continued service to the
Company and its Subsidiaries; provided that vesting provisions must be on a
basis of no more than five years and provided further that if an Agreement
contains time vesting provisions, such vesting provisions will automatically be
subject to acceleration of time vesting upon death of the optionee, a Sale of
the Company or a termination of Optionee's employment relationship with the
Company by the Company without Cause (unless such termination was accompanied
by the Requisite Approval) or by the Optionee with Reasonable Justification.
An option may only be exercised to the extent it has time vested pursuant to
such Option Agreement.
(d) NO EVIDENCE OF EMPLOYMENT OR SERVICE
Nothing contained in the Plan or in any Option Agreement shall confer
upon any Optionee any right with respect to the continuation of his or her
employment by or service with the Company or any of its Subsidiaries or
interfere in any way with the right of the Company or any such Subsidiary
(subject to the terms of any separate agreement to the contrary) at any time to
terminate such employment or service, with or without cause and with or
without notice or to increase or decrease the compensation of the Optionee
from the rate in existence at the time of the grant of an Option.
(e) DATE OF GRANT
The date of grant of an Option under this Plan shall be the date as of
which the Committee approves the grant; PROVIDED, HOWEVER, that in the case of
an ISO, the date of grant shall in no event be earlier than the date as of which
the Optionee becomes an employee of the Company or one of its Subsidiaries.
8
<PAGE>
(f) UNITS
Options shall be granted to purchase a specified number of the
Reserved Units which become Units Available for Award. No Option shall be
granted for Reserved Units that are not Units Available for Award. Options may
only be exercisable for whole Units. Once a Unit is exercised, the securities
constituting a Unit shall be detachable from each other.
6. OPTION PRICE
(a) GENERAL
The price (the "Option Price") at which each Unit Available for Award
may be purchased shall be the Fair Market Value (or such lesser amount (but not
less than 85% of the Fair Market Value) approved by the Board) of the shares of
Common Stock and Junior Preferred Stock that constitute a Unit on the date of
the grant (as determined in accordance with Section 6(b)); PROVIDED, HOWEVER,
that in the case of an ISO, such Option Price shall in no event be less than
100% (or 110% if Section 4(b)(i) hereof is applicable) of the Fair Market Value
on the date of grant (as determined in accordance with Section 6(b)) of the
shares of Common Stock and Junior Preferred Stock that constitute a Unit and
provided further that no NQSO with an exercise price less than 110% of the Fair
Market Value may be granted to an employee who owns, directly or indirectly,
stock possessing more than 10% of the total combined voting power.
(b) DETERMINATION OF FAIR MARKET VALUE
Subject to the requirements of Section 422 of the Code regarding
ISO's, for purposes of the Plan, the "Fair Market Value" of shares of Common
Stock or Junior Preferred Stock shall be equal to:
(i) if such shares are publicly traded, (x) the
closing price on the business day immediately preceding the date of
grant if any trades were made on such business day and such
information is available, otherwise the average of the last bid and
asked prices on the business day immediately preceding the date of
grant, in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotations System
("NASDAQ") or (y) if such shares are then traded on a national
securities exchange, the closing price on the business day immediately
preceding the date of grant, if any trades were made on such business
day and such information is available, otherwise the average of the
high and low prices on the business day immediately preceding the
9
<PAGE>
date of grant, on the principal national securities exchange on which it is
so traded; or
(ii) if there is no public trading market for such
shares, the fair value of such shares on the date of grant as
reasonably determined in good faith by the Committee (with the consent
of a majority of the Board) after taking into consideration all
factors which it deems appropriate, including, without limitation,
recent sale and offer prices of such shares in private transactions
negotiated at arms' length; provided that the Fair Market Value of a
share of Junior Preferred Stock shall not be less than its liquidation
value per share.
Notwithstanding anything contained in the Plan to the contrary, all
determinations pursuant to Section 6(b)(ii) shall be made without regard to any
restriction other than a restriction which, by its terms, will never lapse.
(c) REPRICING OF NSOS
Subsequent to the date of grant of any NSO, the Committee may, at its
discretion and with the written consent of the Optionee and the prior approval
of the Board, establish a new Option Price for such NSO so as to increase or
decrease the Option Price of such NSO.
7. PERFORMANCE VESTING OF UNITS
(a) Each Option granted pursuant to the Plan shall be exercisable for
a specified number of the Reserved Units which become Units Available for Award
in accordance with this Section 7.
(b) On the Effective Date, 35% of the Reserved Units shall
automatically become Units Available for Award.
(c) On each Vesting Date prior to the consummation of a Sale of the
Company, or as promptly thereafter as practical, the Committee and the Board
shall jointly calculate (with the assistance of the Company's independent public
accountants) the Company's Calculated Corporate Value. If the Calculated
Corporate Value is equal to or greater than the Corporate Value Target for such
fiscal year as set forth below, then a number of Reserved Units shall
immediately become Units Available for Award pursuant to the following table:
Number of Reserved Units
that Become Units
Vesting Date Corporate Value Target Available for Award
------------ ---------------------- ------------------------
10
<PAGE>
12/31/97 $249,530,000* 20% of Reserved Units
12/31/98 $362,023,000* 20% of Reserved Units
12/31/99 $498,643,000* 20% of Reserved Units
12/31/2000 $660,230,000* 5% of Reserved Units
(d) If on any Vesting Date the Calculated Corporate Value is less
than the Corporate Value Target no Units shall then vest, but the number of
Units which were available for vesting at such time shall be included in the
number of Units available for vesting on the next Vesting Date.
(e) In connection with any Sale of the Company, the Board shall
calculate (with the assistance of the Company's independent public accountants)
the Company's Calculated Corporate Value and shall compare such calculations to
the Corporate Value Targets listed in Section 7(c). Based upon such
comparisons, the following number of Reserved Units shall become Units Available
for Award: such number of Reserved Units that would have become Units Available
for Award had such Calculated Corporate Value been achieved on the first date
indicated above with a lower Corporate Value Target than the Calculated
Corporate Value minus the number of Reserved Units previously designated Units
Available for Award. For purposes of illustration, if the Calculated Corporate
Value in connection with a Sale of the Company is $365 million and the
Cumulative Adjustment Amount at such time is zero, then 70% of the Reserved
Units would have become Units Available for Award (the 12/31/98 Vesting Date has
a Corporate Value Target lower than the Calculated Corporate Value). Assuming
that only 30% of the Reserved Units had previously become Units Available for
Award, an additional 40% of the Reserved Units become Units Available for Award.
(f) Immediately prior to the occurrence of a Sale of the Company,
each Unit Available for Award which is not subject to purchase upon the exercise
of previously granted Options shall be allocated by the Committee. After a Sale
of the Company, all Reserved Units that are not then Units Available for Award
shall be cancelled and no additional Options shall be issued pursuant to this
Plan.
(g) If upon the occurrence of the Company's initial Public Offering,
all of the Reserved Units are not Units Available for Award (the "Unavailable
Units"), then none of the Unavailable Units shall be available under this Plan
(I.E., they will never become Units Available for Award) and all of the
Unavailable Units shall be included in a successor stock option plan pursuant to
Section 15(c) of the Stockholders' Agreement.
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<PAGE>
(h) In the event the Company or its Subsidiaries makes any capital
expenditures, or consummates any merger or acquisition (whether of assets or
stock or other interests) or other extraordinary transactions, in each case, not
contemplated by the assumptions to the projections upon which the Corporate
Value Targets are based (copies of which projections are in the possession of
the Company's chief financial officer), the Board will determine in good faith
the appropriate PRO RATA adjustments which are required to be made to the
Corporate Value Targets to reflect the anticipated increase in the Company's
EBITDA after such expenditures or the consummation of such transaction which
determination shall be binding on all participants in the Plan.
8. AUTOMATIC TERMINATION OF OPTION
(a) Each Option granted under the Plan shall automatically terminate
and shall become null and void and be of no further force or effect upon the
first to occur of the following:
(i) (A) in the case of an ISO, the tenth anniversary of the date
on which such Option is granted or, in the case of any ISO granted to a
person described in Section 4(b)(i), the fifth anniversary of the date on
which such ISO is granted and (B) in the case of a NSO, the tenth
anniversary on which such Option is granted;
(ii) within 90 days after the date that the Optionee ceases to be
an employee of the Company or any of it Subsidiaries (other than as a
result of an Involuntary Termination (as defined in clause (iii) below)) or
a Termination For Cause (as defined in clause (iv) below));
(iii) within 365 days after the date that the Optionee ceases to
be an employee of the Company or any of its Subsidiaries, if such
termination is due to such Optionee's death or permanent and total
disability (within the meaning of Section 22(e) (3) of the Code) (an
"Involuntary Termination");
(iv) within 30 days if the Optionee ceases to be an employee of
the Company or any of its Subsidiaries, if such termination is determined
by the Committee to be for Cause (a "Termination For Cause"); and
(v) simultaneously with the consummation of a Sale of the
Company if prior to such time the Optionees are given the opportunity to
exercise their Options with respect to all Units Available for Award.
(b) The Committee shall have the power to determine
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<PAGE>
what constitutes a Termination For Cause for purposes of the Plan, and the date
upon which such Termination For Cause shall occur. All such determinations
shall be final and conclusive and binding upon the Optionee.
(c) Any Units Available for Award that are not acquired as a result
of an Option expiring without being fully exercised shall be available for award
by the Committee to another eligible person.
9. LIMITATIONS ON ISOS; NOTICE TO OPTIONEES GRANTED ISOS
In accordance with Section 422(d) of the Code, to the extent that the
aggregate Fair Market Value of all stock with respect to which incentive stock
options are exercisable for the first time by such Optionee during any calendar
year (under all plans of the Company and its subsidiaries) exceeds $100,000,
such ISOs shall be treated as NSOs.
Under certain circumstances, the exercise of an ISO may disqualify the
holder from recovering the favorable tax benefits ISOs offer. For example, ISO
tax treatment is currently not available if (i) an ISO is exercised within one
year of its date of grant or (ii) if the shares issuable upon exercise of an ISO
are sold within two years of the grant date of such ISO. Therefore, the Company
recommends that each Optionee holding an ISO consult with a competent tax
advisor before taking any action with respect to his or her ISOs.
10. PROCEDURE FOR EXERCISE
(a) PAYMENT
At the time an Option is granted under the Plan, the Committee shall,
in its discretion, specify one or more of the following forms of payment which
may be used by an Optionee upon exercise of his Option:
(i) cash or personal or certified check payable to
the Company in an amount equal to the aggregate Option Price of the
shares with respect to which the Option is being exercised;
(ii) stock certificates (in negotiable form)
representing shares of Common Stock having a Fair Market Value on the
date of exercise (as determined in accordance with Section 6(b) as if
the date of exercise were the date of grant) equal to the aggregate
Option Price of the shares with respect to which the Option is being
exercised;
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(iii) vested Options to purchase Units Available for
Award, valued for such purposes at the Fair Market Value per Unit on
the date of exercise (as determined in accordance with Section 6(b) as
if the date of exercise were the date of grant), net of the exercise
price for each such share; or
(iv) a combination of the methods set forth in clauses
(i), (ii) and (iii).
(b) NOTICE
An Optionee (or other person, as provided in Section 12(b)) may
exercise an Option (for the Units Available for Award represented thereby)
granted under the Plan in whole or in part (but for the purchase of whole Units
only), as provided in the Option Agreement evidencing his Option, by delivering
a written notice (the "Notice") to the Secretary of the Company. The Notice
shall state:
(i) that the Optionee elects to exercise the Option;
(ii) the number of Units with respect to which the
Option is being exercised (the "Optioned Units");
(iii) the method of payment for the Optioned Units
(which method must be available to the Optionee under the terms of his
or her Option Agreement);
(iv) the date upon which the Optionee desires to
consummate the purchase (which date must be prior to the termination
of such Option);
(v) a copy of any election filed or intended to be
filed by the Optionee with respect to such Optioned Units pursuant to
Section 83(b) of the Code; and
(vi) such further provisions consistent with the Plan
as the Committee may from time to time require.
The exercise date of an Option shall be the date on which the Company
receives the Notice from the Optionee. Such Notice shall also contain, to the
extent such Optionee is not then a party to the Stockholders Agreement, a
Management Stockholder Joinder Agreement (as defined in the Stockholders
Agreement).
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(c) ISSUANCE OF CERTIFICATES
The Company shall issue stock certificates in the name of the Optionee
(or such other person exercising the Option in accordance with the provisions of
Section 12(b)) for the shares of securities purchased upon exercise of an Option
as soon as practicable after receipt of the Notice and payment of the aggregate
Option Price for such shares; provided that the Company may elect to not issue
any fractional shares upon the exercise of any Options (determining the
fractional shares after aggregating all shares issuable to a single holder as a
result of an exercise of an Option for more than one Unit) and in lieu of
issuing such fractional shares, shall pay the Optionee the Fair Market Value
thereof. Neither the Optionee nor any person exercising an Option in accordance
with the provisions of Section 12(b) shall have any privileges as a stockholder
of the Company with respect to any shares of stock subject to an Option granted
under the Plan until the date of issuance of stock certificates pursuant to this
Section 10(c).
11. ADJUSTMENTS
(a) CHANGES IN CAPITAL STRUCTURE
If the Common Stock and/or Junior Preferred Stock is changed by reason
of a stock split, reverse stock split or stock combination, stock dividend or
distribution, or recapitalization, including, without limitation, a conversion
of the Junior Preferred Stock into Common Stock pursuant to the Company's
Certificate of Determination of Preferences of 8% Junior Preferred Stock, or
converted into or exchanged for other securities as a result of a merger,
consolidation or reorganization, the Board shall make such adjustments in the
number and class of shares of stock constituting a Unit as shall be necessary to
preserve to an Optionee rights substantially proportionate to his rights
existing immediately prior to such transaction or event (but subject to the
limitations and restrictions on such rights). The exercise price for each Unit
shall not change notwithstanding any change to the number and class of shares of
stock constituting a Unit. Notwithstanding anything contained in the Plan to
the contrary, in the case of ISOs, no adjustment under this Section 11(a) shall
be appropriate if such adjustment (i) would constitute a modification, extension
or renewal of such ISOs within the meaning of Sections 422 and 424 of the Code,
and the regulations promulgated by the Treasury Department thereunder, or (ii)
would, under Section 422 of the Code and the regulations promulgated by the
Treasury Department thereunder, be considered as the adoption of a new plan
requiring stockholder approval. This Plan reflects the occurrence of a 100-for-
one stock split of the Company's Common Stock which is to become effective
immediately after the closing under the Stock
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Purchase Agreement dated May 1, 1996 among the Company and the other parties
thereto.
(b) SPECIAL RULES
The following rules shall apply in connection with Section 11(a)
above:
(i) no adjustment shall be made for cash dividends
or the issuance to stockholders of rights to subscribe for additional
shares of Common Stock, Junior Preferred Stock or other securities;
and
(ii) any adjustments referred to in Section 11(a)
shall be made by the Board in its sole discretion and shall, absent
manifest error, be conclusive and binding on all persons holding any
Options granted under the Plan.
(c) EXAMPLES
The following examples illustrate the adjustments that would be made
pursuant to Sections 11(a) and 11(b). The examples assume that the initial
exercise price of a Unit was $100
(i) Assume all outstanding shares of the Junior
Preferred Stock are converted into shares of Common Stock pursuant to
Section 7 of the Company's Certificate of Determination of Preferences
of 8% Junior Preferred Stock. Assume each share of Junior Preferred
Stock is converted into 10 shares of Common Stock. Then pursuant to
this Section 11, each Unit shall be exercisable for 10.9 shares of
Common Stock ((99/100 shares of Junior Preferred Stock X 10) + 1 share
of Common Stock). The exercise price of each Unit shall remain $100.
(ii) Assume the Company consummates a 2:1 Common
Stock split. Then pursuant to this Section 11, each Unit shall be
exercisable for 2 shares of Common Stock and 99/100ths of a share of
Junior Preferred Stock. The exercise price of each Unit shall remain
$100.
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12. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES
(a) COMPLIANCE WITH SECURITIES LAWS
No Options shall be granted under the Plan, and no securities shall
be issued and delivered upon the exercise of Options granted under the Plan,
unless and until the Company and/or the Optionee shall have complied with all
applicable Federal or state registration, listing and/or qualification
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
The Committee in its discretion may, as a condition to the exercise of
any Option granted under the Plan, require an Optionee (i) to represent in
writing that the securities received upon exercise of an Option are being
acquired for investment and not with a view to distribution and (ii) to make
such other representations and warranties as are deemed appropriate by the
Company. Stock certificates representing securities acquired upon the exercise
of Options that have not been registered under the Securities Act shall, if
required by the Committee, bear the following legend and such additional legends
as may be required by the Option Agreement evidencing a particular Option:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR
QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THE SHARES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED,
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT OR AN OPINION OF
COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT."
(b) NONASSIGNABILITY OF OPTION RIGHTS
No Option granted under this Plan shall be assignable or otherwise
transferable by the Optionee, except by will or by the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by the Optionee. If an Optionee dies, his or her Options shall thereafter
be exercisable, during the period specified in Section 8(a) or the applicable
Option Agreement (as the case may be), by his or her executors or administrators
to the full extent (but only to such extent) to which such Options were
exercisable by the Optionee at the time of his or her death.
Before issuing any shares upon exercise of Options to any person who
is not already a party to the Stockholders Agreement, the Company shall obtain,
in appropriate form, an executed Management Stockholder Joinder Agreement from
such
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person unless a Qualified Public Offering (as defined in the Stockholders
Agreement) shall have already occurred.
13. EFFECTIVE DATE OF PLAN
This Plan shall become effective on the date of its adoption by the
Board; PROVIDED, HOWEVER, that no option shall be exercisable by an Optionee
unless and until the Plan shall have been approved by the stockholders of the
Company in accordance with the provisions of its Articles of Incorporation and
By-laws, which approval shall be obtained by a simple majority vote of
stockholders, voting either in person or by proxy, at a duly held stockholders'
meeting, or by written consent, within 12 months before or after the adoption of
the Plan by the Board.
14. TERMINATION OF THE PLAN
No Options may be granted after the Termination Date.
15. AMENDMENT OF PLAN
The Plan may be modified or amended in any respect by the Committee
with the prior approval of the Board and the prior written consent of the
holders of the Requisite Stockholder Shares; PROVIDED, HOWEVER, that the
approval of the holders of a majority of the votes that may be cast by all of
the holders of shares of common stock of the Company entitled to vote (voting
together as a single class, with each such holder entitled to cast one vote per
share held by such holder) shall be obtained prior to any such amendment
becoming effective if such approval is required by law or is necessary to comply
with regulations promulgated by the SEC under Section 16(b) of the 1934 Act or
with Section 422 of the Code or the regulations promulgated by the Treasury
Department thereunder.
16. CAPTIONS
The use of captions in this Plan is for convenience. The captions are
not intended to provide substantive rights.
17. DISQUALIFYING DISPOSITIONS
If securities acquired by exercise of an ISO granted under this Plan
are disposed of within two years following the date of grant of the ISO or one
year following the issuance of the securities to the Optionee (a "Disqualifying
Disposition"), the holder of such securities shall, immediately prior to such
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Disqualifying Disposition, notify the Company in writing of the date and terms
of such Disqualifying Disposition and provide such other information regarding
the Disqualifying Disposition as the Company may reasonably require.
18. WITHHOLDING TAXES
Whenever under the Plan securities are to be delivered by an Optionee
upon exercise of an NSO, the Company shall be entitled to require as a condition
of delivery that the Optionee remit or, in appropriate cases, agree to remit
when due, an amount sufficient to satisfy all current or estimated future
Federal, state and local withholding tax and employment tax requirements
relating thereto. At the time of a Disqualifying Disposition, the Optionee
shall remit to the Company in cash the amount of any applicable Federal, state
and local withholding taxes and employment taxes.
19. OTHER PROVISIONS
Each Option granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Committee,
in its sole discretion. Notwithstanding the foregoing, each ISO granted under
the Plan shall include those terms and conditions which are necessary to qualify
the ISO as an "incentive stock option" within the meaning of Section 422 of the
Code and the regulations thereunder and shall not include any terms or
conditions which are inconsistent therewith.
20. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall
include the plural form, the masculine gender shall include the feminine
gender, and vice-versa, as the context requires.
21. GOVERNING LAW
All questions concerning the construction, interpretation and validity
of this Plan and the instruments evidencing the Options granted hereunder shall
be governed by and construed and enforced in accordance with the domestic laws
of the State of California, without giving effect to any choice or conflict of
law provision or rule (whether in the State of California or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of California. In furtherance of the foregoing, the
internal law
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of the State of California will control the interpretation and construction of
this Plan, even if under such jurisdiction's choice of law or conflict of law
analysis, the substantive law of some other jurisdiction would ordinarily apply.
22. SECURITIES EXCHANGE ACT COMPLIANCE
In order to satisfy the conditions of paragraph (b) of Rule 16b-3, the
Company shall furnish in writing to the holders of record of the securities
entitled to vote for the Plan substantially the same information concerning the
Plan which would be required by the rules and regulations in effect under
Section 14(a) of the 1934 Act at the time such information is furnished, as if
proxies to be voted with respect to the approval or disapproval of the Plan were
then being solicited, on or prior to the date of the first annual meeting of
security holders held subsequent to the later of (a) the first registration of
an equity security under Section 12 of the 1934 Act or (b) the acquisition of an
equity security for which exemption is claimed. The Company will use its
commercially reasonable efforts to cause the exemption from Section 16 of the
1934 Act afforded by such Rule 16b-3 to be available at the time the Company has
a class of equity securities registered under Section 12 of the 1934 Act.
23. SUCCESSOR AND ASSIGNS; REINCORPORATION
Should the Company merge with another corporation for the sole purpose
of reincorporating the Company into Delaware the surviving corporation of
such merger shall assume all obligations under this agreement and any reference
to the Company herein shall refer to such surviving corporation.
24. FINANCIAL STATEMENTS
The Company shall provide all Optionees under the Plan with financial
statements of the Company at least annually. Such financial statements shall
include, at a minimum, an income statement, balance sheet and cash flow
statement for the Company.
As adopted by the Board of Directors of GUITAR CENTER MANAGEMENT
COMPANY, INC. on June 3, 1996 and amended and restated as of October 15, 1996 to
take effect as of June 3, 1996.
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AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement made the 5th day of June,
1996 (the "Agreement"), between Guitar Center Management Company, Inc., a
California corporation (the "Company"), and Barry Soosman (the "Executive") is
entered into this 15th day of October 1996.
WHEREAS, the Company has amended its 1996 Performance Stock Option Plan
(the "Plan");
WHEREAS, material provisions of the Agreement relate to the Executive's
rights to receive options issued pursuant to the Plan;
WHEREAS, the parties wish to amend the Agreement in order to set forth
provisions consistent with the intent of the Agreement and to modify certain
provisions relating to the grant of options under the Plan;
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Section 3(e) of the Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"(e) the Company shall issue Executive options to acquire
units for the purchase of shares of Common Stock and Junior
Preferred Stock as described in the amounts and on the dates
set forth on Exhibit A hereto."
<PAGE>
Section 2. Exhibit A to the Agreement is hereby deleted in its entirety
and the following is hereby inserted in lieu thereof and shall constitute
Exhibit A to the Agreement:
"Exhibit A
Defined terms used herein, but not defined herein,
shall have the meaning ascribed to them in the attached
Employment Agreement or the Company's Amended and Restated
1996 Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached
Agreement, the Company shall grant Executive an option to
acquire 8,669 Units pursuant to the Plan with the Units to vest
1/3 after one year, 2/3 after two years, 100% after 3 years.
2. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/97 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
3,000 of such Units Available for Award with the Units to
vest 1/2 after one year and 100% after two years.
3. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/98 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
2,000 of
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such Units Available for Award with the Units to vest 100%
after one year.
4. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/30/99 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
3,668 of such Units Available for Award with the Units to
vest immediately upon grant.
5. If any Reserved Units become Units Available for
Award pursuant to Section 7(e) of the Plan and Executive is
still employed by the Company at such time, the Company
shall grant to Executive an option to acquire that number of
such Units Available for Award equal to (x) the lesser of
8,669 or 10% of such Units Available for Award MINUS (y) the
number of Units Available for Award that were subject to the
options issued pursuant to paragraphs 2, 3 and 4 above.
6. Any share numbers referred to in this Exhibit A shall
be subject to adjustment as contemplated by Section 11 of the
Plan.
7. All options issued pursuant to this Agreement
shall be exercisable for $100 per Unit.
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8. All options issued pursuant to this Agreement
prior to the Company's initial public offering shall be
NQOs."
Section 3. This Amendment shall be effective as of June 5, 1996.
Section 4. Except as provided for in this Amendment Number 1 all of the
provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Number 1 to the Agreement.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By
--------------------------------------------
Name:
--------------------------------
Title:
--------------------------------
-------------------------------------------
BARRY SOOSMAN
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October 28, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlmen:
We have read the Experts Sections on page 89 of the Amendment No. 2 to
the S-1 Registration Statement dated October 31, 1996, of Guitar Center
Management Company, Inc. and are in agreement with the statements contained
in the second paragraph therein.
/s/ ERNST & YOUNG LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Selected
Historical Financial Data" and "Experts" and to the use of our report dated
March 6, 1996, except for Note 10, as to which the date is June 6, 1996, in the
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-10491) and
related Prospectus of Guitar Center Management Company, Inc. dated October 31,
1996.
/s/ ERNST & YOUNG LLP
Los Angeles, California
October 28, 1996
