<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or organization)
</TABLE>
------------------------
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(818) 735-8800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
BRUCE ROSS
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
GUITAR CENTER, 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>
Anthony J. Richmond Nicholas P. Saggese
Latham & Watkins Skadden, Arps, Slate, Meagher & Flom
633 West Fifth Street, Suite 4000 LLP
Los Angeles, California 90071 300 South Grand Avenue
(213) 485-1234 Los Angeles, California 90071
(213) 687-5000
</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, as amended (the "Securities Act"), 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
under the Securities Act, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
NUMBER OF SHARES PROPOSED MAXIMUM
TO PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value....... 7,762,500 $16.00 $124,200,000 $37,636
</TABLE>
(1) Includes 1,012,500 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee.
------------------------------
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, 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>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 31, 1997
6,750,000 SHARES
[LOGO]
GUITAR CENTER, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $14.00 and $16.00. For factors to be considered
in determining the initial public offering price, see "Underwriting."
Application has been made to have the Company's Common Stock approved for
quotation on the Nasdaq National Market under the symbol "GTRC."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
---------------------
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.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share.............. $ $ $
Total (3).............. $ $ $
</TABLE>
- ------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 1,012,500 shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Company
will be $ , $ and $ , respectively. See "Underwriting."
------------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES DAIN BOSWORTH CHASE SECURITIES INC.
Incorporated
--------------------------
The date of this Prospectus is , 1997.
<PAGE>
Photographs depicting the interior of a Guitar Center, 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."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS. EXCEPT WHERE OTHERWISE SPECIFIED, INFORMATION IN THIS
PROSPECTUS REGARDING THE SALE OF THE COMMON STOCK, $.01 PAR VALUE (THE "COMON
STOCK"), OFFERED HEREBY (THE "OFFERING") GIVES EFFECT TO THE FOLLOWING EVENTS:
(I) A 100-TO-1 STOCK SPLIT EFFECTUATED ON JUNE 5, 1996; (II) THE REINCORPORATION
OF THE COMPANY FROM A CALIFORNIA TO A DELAWARE CORPORATION, EFFECTUATED ON
OCTOBER 11, 1996; (III) A 2.582-TO-1 STOCK SPLIT EFFECTUATED ON JANUARY 15,
1997; AND (IV) THE MANDATORY CONVERSION OF EACH OUTSTANDING SHARE OF 8% JUNIOR
PREFERRED STOCK, $.01 PAR VALUE (THE "JUNIOR PREFERRED STOCK"), OF THE COMPANY
UPON CONSUMMATION OF THIS OFFERING INTO 6.667 SHARES OF COMMON STOCK AS
DESCRIBED UNDER "DESCRIPTION OF CAPITAL STOCK -- PREFERRED STOCK -- JUNIOR
PREFERRED STOCK" (THE "JUNIOR PREFERRED STOCK CONVERSION"). UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
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 U.S.
markets as of December 31, 1996, including, among others, areas in or near Los
Angeles, San Francisco, Chicago, Miami, Houston, Dallas, Detroit, Boston and
Minneapolis. From fiscal 1990 through fiscal 1995, the Company's net sales and
operating income have grown at compound annual 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 such five-year
period, and the opening of seven new stores.
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 approximately 3,200 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, after being open for at least twelve
months, have been profitable in each of the past five fiscal years.
The following summarizes certain key operating statistics of a Guitar Center
store and is based upon the 20 stores operated by the Company in 1995 (which
excludes the Company's Brea, California store opened in December 1995):
<TABLE>
<S> <C>
Average 1995 net sales per square foot......................... $ 661
Average 1995 net sales per store............................... 8,486,000
Average 1995 store-level operating income (1).................. 1,239,000
Average 1995 store-level operating income margin (1)........... 14.6%
</TABLE>
- ------------------------
(1) Store level operating income includes individual store revenue and expenses
plus allocated rebates, cash discounts and purchasing department salaries
(based upon individual store sales).
3
<PAGE>
Guitar Center stores have typically generated positive operating income
within the first three months of opening. In addition, based on stores which
have opened since fiscal 1993 and operated for at least 14 months, Guitar Center
stores have demonstrated high store-level operating income and store-level
operating income margins averaging approximately $0.6 million and 11.5%,
respectively, and sales per square foot averaging $498, 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 TRADES magazine to be approximately $5.5 billion in net sales,
representing a five-year compound annual growth rate of 7.9%. Products currently
offered by Guitar Center include categories of products which account for
approximately $4.1 billion of this market, representing a five-year compound
annual growth rate of 9.0%. The industry is highly fragmented with the nation's
leading five music products retailers (as measured by the number of stores
operated by such retailers) accounting for approximately 8.4% of the industry's
estimated net sales in 1995. Furthermore, approximately 90% of the industry's
estimated 8,200 retailers operate only one or two stores. The Company believes
it benefits from several advantages relative to smaller competitors, including
volume purchasing discounts, centralized operations and financial controls,
advertising economies and the ability to offer an extremely broad and deep
selection of merchandise.
For the fiscal years ended December 31, 1993, 1994, 1995 and for the nine
months ended September 30, 1996 the Company recorded net income (loss) of $5.1
million, $8.8 million, $10.9 million and ($74.1) million, respectively. The
results for the nine months ended September 30, 1996 reflect non-recurring
deferred compensation expense of $69.9 million and $11.2 million for transaction
costs and financing fees incurred in connection with the Recapitalization (as
defined herein).
BUSINESS STRATEGY
EXPANSION STRATEGY. Guitar Center's expansion strategy is to continue to
increase its market share in existing markets and to penetrate strategically
selected new markets. The Company plans to continue pursuing its strategy of
clustering stores in major markets to take advantage of operating and
advertising efficiencies and to enhance awareness of the Guitar Center name in
new markets. The Company opened seven stores in fiscal 1996, and currently
anticipates opening approximately eight stores in each of fiscal 1997 and 1998.
In preparation for this expansion, management has dedicated substantial
resources over the past several years to building the infrastructure and
management information systems necessary to support a large national chain. In
addition, the Company believes that it has developed a methodology for targeting
prospective store sites which includes analyzing demographic and psychographic
characteristics of potential store locations. Management also believes that
there may be attractive opportunities to expand by selectively acquiring
existing music products retailers.
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. The average 7,000 core SKUs offered per
Guitar Center store provide 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. Each Guitar Center
store contains creative instrument presentations and colorful, interactive
displays which encourage the customer to hold and play instruments as well as to
participate in product demonstrations. In addition, private sound-controlled
rooms enhance a customer's listening experience while testing various
instruments.
EXCEPTIONAL CUSTOMER SERVICE. The Company conducts 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.
4
<PAGE>
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
that these events help the Company build a loyal customer base and encourage
repeat business. Since its inception, the Company has compiled a unique,
proprietary database containing information on more than one million customers.
This database enables Guitar Center to advertise to select target customers
based on historical buying patterns.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the low price leader
in each of its markets which is underscored by a 30-day low price guarantee. The
Company's size permits it to take advantage of volume discounts for large orders
and other vendor supported programs. Although prices are usually determined on a
regional basis, store managers are trained and authorized to adjust prices in
response to local market conditions.
EXPERIENCED AND MOTIVATED MANAGEMENT TEAM. The executive officers and key
managers have an average of 11 years with the Company. In addition, upon
consummation of this Offering and the application of the net proceeds therefrom,
executive officers and key managers will beneficially own approximately 19.4% of
the Company's outstanding Common Stock.
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, Chase Venture Capital Associates,
L.P. ("Chase Ventures") and an affiliated entity, Wells Fargo Small Business
Investment Company, Inc. ("Wells Fargo") and Weston Presidio Capital II, L.P.
("Weston Presidio"). Chase Ventures, Wells Fargo and Weston Presidio are
collectively referred to herein as the "Investors." See "The Recapitalization
and Related Transactions."
FORWARD LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Forward-looking statements can
be identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "anticipate," "estimate," "continue," "plans," "intends" or
other similar terminology. See "Risk Factors."
The Company is a Delaware corporation with its principal executive offices
located at 5155 Clareton Drive, Agoura Hills, California 91301, and its
telephone number is (818) 735-8800.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............ 6,750,000 shares
Common Stock to be outstanding after
the Offering (1)(2).................. 18,509,607 shares
Proposed Nasdaq National Market
Symbol............................... GTRC
Use of proceeds........................ The net proceeds of the Offering: (i) redeem at a
premium, and pay all accrued and unpaid interest
with respect to, an aggregate of approximately
$33.3 million principal amount of the Company's 11%
Senior Notes due 2006 (approximately $37.9
million); (ii) redeem at a premium, and pay all
accrued and unpaid dividends with respect to, all
of the outstanding shares of the Company's 14%
Senior Preferred Stock, $.01 par value (the "Senior
Preferred Stock"), having an original aggregate
liquidation value of $20.0 million (approximately
$22.9 million); and (iii) redeem approximately
1,138,000 shares of Common Stock held by certain
executive officers and other employees of the
Company (approximately $16.0 million) (the
"Management Tax Redemption"). The balance will be
used for general corporate purposes (including the
repayment of amounts outstanding under the 1996
Credit Facility (as defined herein) which are
expected to be approximately $6.0 million at the
consummation of this Offering). See "Use of
Proceeds."
</TABLE>
- ------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Gives effect to the Junior Preferred Stock Conversion. See "Description of
Capital Stock -- Preferred Stock -- Junior Preferred Stock." Excludes: (i)
outstanding employee stock options for the purchase of 1,509,752 shares of
Common Stock (at an exercise price per share of $10.89), none of which are
exercisable as of the date of this Prospectus; and (ii) outstanding Warrants
(as defined herein) for the purchase of 676,566 shares of Common Stock (at
an exercise price per share of $0.01), all of which are exercisable as of
the date of this Prospectus. See "Management -- Management Stock Option
Agreements; -- 1996 Performance Stock Option Plan" and "Certain Transactions
-- Transactions with DLJ and Chase Securities." Also excludes 875,000 shares
of Common Stock reserved for issuance under the 1997 Plan (as defined
herein), none of which have been granted as of the date of this Prospectus.
See "Management -- 1997 Equity Participation Plan."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The financial data 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 nine-month periods ended September
30, 1995 and September 30, 1996 are derived from the unaudited condensed
financial statements which, in the opinion of management, include all
adjustments necessary 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 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,"
"Selected Historical Financial Data," "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 herein.
<TABLE>
<CAPTION>
FISCAL YEAR TWO MONTHS FISCAL YEAR NINE MONTHS ENDED
ENDED OCTOBER ENDED ENDED
31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
---------------- ------------ --------------------------- -----------------
1991 1992 1992 1993 1994 1995 1995 1996
------- ------- ------------ ------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND STORE AND INVENTORY OPERATING DATA)
<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 $119,950 $145,409
Gross profit.................................... 22,064 25,472 5,393 28,778 36,764 47,256 33,001 41,072
Selling, general and administrative expenses.... 18,896 20,998 3,547 21,889 26,143 32,664 23,439 29,521
Deferred compensation expense (1)............... (230) -- 373 1,390 1,259 3,087 2,060 69,892
Operating income (loss)......................... 3,398 4,474 1,473 5,499 9,362 11,505 7,502 (58,341)
Non recurring transaction expense............... -- -- -- -- -- -- -- (6,481)
Net income (loss)............................... 2,702 3,987 1,385 5,105 8,829 10,857 7,134 (74,066)
PRO FORMA FOR INCOME TAX PROVISION: (2)
Historical income (loss) before provision for
income taxes................................... $ 2,755 $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ 7,243 $(73,927)
Pro forma provision for income taxes............ 1,086 1,753 773 2,856 4,478 6,144 4,000 --
------- ------- ------------ ------- -------- -------- ------- --------
Pro forma net income (loss)..................... $ 1,669 $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ 3,243 $(73,927)
------- ------- ------------ ------- -------- -------- ------- --------
------- ------- ------------ ------- -------- -------- ------- --------
Pro forma net income (loss) per common share.... $ 0.26 $ (3.79)
-------- --------
-------- --------
Weighted average shares outstanding (3)......... 19,512 19,512
-------- --------
-------- --------
OPERATING DATA:
Net sales per gross square foot (4)............. $ 366 $ 429 -- $ 478 $ 546 $ 661 $ 455 $ 522
Stores open at end of period.................... 15 15 15 17 20 21 20 28
Net sales growth................................ 6.0% 14.3% 18.7% 13.7% 32.6% 32.3% 38.1% 21.2%
Increase in comparable store sales (5).......... 5.9% 11.5% 18.7% 11.4% 17.3% 23.4% 26.7% 10.3%
Inventory turns................................. 3.1x 3.3x 3.4x 3.4x 3.4x 3.7x 3.7x 3.5x
Capital expenditures............................ $ 1,192 $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 1,521 $ 5,279
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
FISCAL YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
------------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA DATA: (6)
Net sales............................................. $ 170,671 $ 119,950 $ 145,409
Operating income...................................... 15,967 10,593 11,983
Net income............................................ 4,720 2,719 3,514
Net income per share.................................. $ 0.24 $ 0.14 $ 0.18
Weighted average shares outstanding (3)............... 19,512 19,512 19,512
</TABLE>
FOOTNOTES APPEAR ON FOLLOWING PAGE.
7
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------
HISTORICAL AS ADJUSTED (7)
----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 52 $ 6,732
Net working capital...................................... 23,318 40,839
Total assets............................................. 73,545 79,066
Total long term and revolving debt (including current
maturities)............................................. 109,930 66,667
Senior preferred stock................................... 14,442 --
Junior preferred stock................................... 138,600 --
Warrants................................................. 6,500 6,500
Stockholders' equity (deficit)........................... (71,657) (7,520)
</TABLE>
- ------------------------------
(1) For the nine months ended September 30, 1996, the Company recorded a
non-recurring deferred compensation expense of $69.9 million related to the
cancellation and exchange of management stock options pursuant to the
Recapitalization. See "The Recapitalization and Related Transactions."
(2) Pro forma provision for income taxes reflects the estimated statutory
provision of 43% for income taxes assuming the Company was a "C"
corporation.
(3) Weighted average shares outstanding assumes that: (i) the Common Stock
offered hereby, the Common Stock issuable pursuant to the Junior Preferred
Stock Conversion and the Common Stock issuable upon the exercise of the
Warrants (and common stock equivalents) were outstanding during each of the
periods presented and (ii) the Common Stock to be redeemed pursuant to the
Management Tax Redemption was not outstanding during any of the periods
presented. See "Management -- Management Stock Option Agreements; -- 1996
Performance Stock Option Plan," "Certain Transactions -- Transactions with
Affiliates of DLJ and Chase Securities; -- Management Tax Redemption" and
"Description of Capital Stock -- Preferred Stock -- Junior Preferred
Stock."
(4) 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.
(5) Compares net sales for the comparable periods, excluding net sales
attributable to stores not open for 14 months.
(6) The pro forma data reflect adjustments as if the Recapitalization, the
Junior Preferred Stock Conversion, the sale of the Senior Notes and the
application of the estimated net proceeds of this Offering to redeem all of
the shares of Senior Preferred Stock, approximately $33.3 million aggregate
principal amount of the Senior Notes and shares of Common Stock in the
Management Tax Redemption had been consummated and were effective as of
January 1, 1995.
(7) The pro forma balance sheet data give effect to the Junior Preferred Stock
Conversion and the application of the estimated net proceeds of this
Offering to redeem all of the shares of Senior Preferred Stock,
approximately $33.3 million aggregate principal amount of the Senior Notes
and shares of Common Stock in the Management Tax Redemption, as if such
transactions had been consummated and were effective on such date.
8
<PAGE>
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING SPECIFIC INVESTMENT CONSIDERATIONS. 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.
AGGRESSIVE GROWTH STRATEGY
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. The Company, which operated 28
stores as of December 31, 1996, opened seven stores in fiscal 1996 and expects
to open approximately eight stores in each of fiscal 1997 and fiscal 1998, which
represents 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 1996 the Company had not
opened more than four new stores for any twelve-month period for the prior three
fiscal years. See "Business -- Properties." 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 management and
financial resources, the adaptation of its distribution and other operational
and management information systems to such sites, the ability and willingness 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.
The Company's expansion strategy includes clustering stores in each of its
markets which has, in certain instances, resulted in some transfer of sales from
existing stores to new locations. There can be no assurance that the opening of
one or more new stores in a market area containing an existing store or stores
will not reduce the sales and profitability level of any of the stores in such
market area. 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 existing
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 management information systems in connection
with the Company's planned expansion, there can be no assurance that the Company
will adequately anticipate all of the changing demands which its expanding
operations will impose on such systems. The failure by the Company to identify
and respond to such demands may have an adverse effect on the Company's results
of operations, financial condition, business and prospects.
The Company also believes that there may be attractive opportunities to
expand by selectively acquiring existing music product retailers. The Company
regularly considers and evaluates potential acquisition candidates in new and
existing market areas, which transactions may involve the payment by the Company
of cash or securities (including equity securities), or a combination of the
foregoing. As of the date of this Prospectus, the Company has no existing
agreements or commitments with respect to any such acquisitions. Accordingly,
there can be no assurance that the Company will be able to identify suitable
acquisition candidates available for sale at reasonable prices or consummate any
acquisitions. Further, acquisitions may involve a number of special risks,
including diversion of management's attention, the inability to integrate
successfully any acquired business, the incurrence of legal liabilities and
unanticipated events or circumstances, some or all of which could have a
material adverse effect on the Company's results of operations, financial
condition, business and prospects. See "Business."
DEPENDENCE ON SUPPLIERS
The Company's business and its expansion plans are dependent to a
significant degree upon its suppliers. As it believes is customary in the
industry, 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
9
<PAGE>
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 acceptable prices or at all. Specifically, the establishment of
additional stores in existing markets and the penetration of new markets is
dependent to a significant extent on the willingness of vendors to supply those
additional retail stores, of which there can be no assurance. As the Company
continues to expand, the inability or unwillingness of a supplier to supply some
or all of its merchandise to the Company in one or more markets could have a
material adverse effect on the Company's results of operations, financial
condition, business and prospects.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
Historically, the Company's sales growth has resulted in large part 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, competition, economic conditions, consumer
trends, retail sales, music trends, changes in the Company's merchandise mix,
distribution of products, transfer of sales to new locations, timing of
promotional events 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 growth was 24.4%, 30.1%, 25.5%
and 16.3% in the first, second, third and fourth quarters of fiscal 1995,
respectively, and 14.5%, 9.3% and 7.6% in the first, second and third quarters
of fiscal 1996, respectively. The Company does not expect comparable store sales
to continue to increase at historical rates, and there can be no assurance that
comparable store sales will not decrease in the future. As is the case with many
specialty retailers, the Company's comparable store sales results could cause
the price of the Common Stock to fluctuate substantially. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the services of Larry Thomas, its President and Chief Executive
Officer, and Marty Albertson, its Executive Vice President and Chief Operating
Officer, as well as on 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 amounts of $5.0
million and $3.5 million, respectively. See "Management." Historically, when
filling its senior operations, sales and store management positions, the Company
has generally followed a policy of "promotion from within." The success of the
Company's growth strategy will also depend on its ability to promote existing
well-trained store personnel to senior management and to retain such employees,
as well as on its ability to attract and retain new employees who have the skill
and expertise to manage the Company's business. Any inability to hire, retain
and promote such personnel could have a material adverse effect on the Company's
results of operations, financial condition, business and prospects. See
"Business -- Customer Service" and "Management."
COMPETITION
The retail 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, the adoption by competitors
of innovative store formats and retail sales methods 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 results of operations,
financial condition, business and prospects. See "Business -- Competition."
POTENTIAL CONSEQUENCES OF SIGNIFICANT LEVERAGE; RECENT LOSS
After giving effect to this Offering and the application of the estimated
net proceeds therefrom, the Company will continue to have significant financial
leverage. On a PRO FORMA basis after giving effect to this Offering, as of
September 30, 1996, the Company would have had approximately $66.7 million of
10
<PAGE>
outstanding long-term indebtedness, its ratio of total long-term debt to total
capitalization would have been approximately 113% and it would have had a
stockholders' deficit of approximately $7.5 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 Common Stock, including the following: (i)
the Company may not generate sufficient cash to service its debt obligations;
(ii) the Company's ability to obtain financing for future working capital needs
or other purposes may be limited; (iii) a significant 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 1996 Credit Facility and the indenture
under which the Senior Notes were issued, 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. See
"Description of Certain Indebtedness."
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 to meet such obligations. In the event the Company's operating cash flow
is not sufficient to fund the Company's expenditures or to service its debt, the
Company may be required to raise additional financing through capital
contributions, the refinancing of all or part of its indebtedness or sales of
its assets. There can be no assurance that the Company will be able to obtain
any such additional financing or effect satisfactory refinancings or asset sales
on favorable terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
For the nine months ended September 30, 1996, the Company had a net loss of
$74.1 million. The results for such period reflect non-recurring deferred
compensation expense of $69.9 million and $11.2 million for transaction costs
and financing fees incurred in connection with the Recapitalization. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
As of September 30, 1996, 13 of the Company's stores were located in
California and generated 55.9% and 54.4% of the Company's net sales for fiscal
1995 and the nine months ended September 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 and are subject to
other regional risks, including the risk of seismic activity. The Company does
not maintain earthquake insurance. See "Business -- Properties."
IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS; CHANGING CONSUMER PREFERENCES
The Company's business is sensitive to consumer spending patterns, which in
turn are subject to, among other things, 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 deterioration in economic conditions in one or more of the markets in which
the Company's stores are concentrated could have a material adverse effect on
the Company's results of operations, business and prospects. 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 results of operations, financial
condition, business and prospects.
BENEFITS OF THIS OFFERING TO CERTAIN EXISTING STOCKHOLDERS
In connection with the conversion of management's shares of Junior Preferred
Stock upon completion of this Offering, a significant amount of non-cash income
will be deemed to have been earned by certain
11
<PAGE>
employees of the Company who are also stockholders of the Company (including
Larry Thomas and Marty Albertson) for federal and state income tax purposes
(whether or not such employees have received any cash with respect to the
underlying stock). In February 1997, the Company entered into agreements with
Larry Thomas, Marty Albertson and certain other senior employees pursuant to
which the Company agreed to effect the Management Tax Redemption to provide
sufficient cash to such employees to finance a portion of such federal and state
income tax obligations. Pursuant to the terms of the Management Tax Redemption,
the Company will use approximately $16.0 million of the proceeds from this
Offering to redeem for cash that number of shares of Common Stock calculated by
dividing the amount of such proceeds by the initial public offering price less
the net underwriting discount (E.G., approximately 1,138,000 shares of Common
Stock, assuming an initial public offering price of $15.00 per share). Pursuant
to the Management Tax Redemption, Larry Thomas and Marty Albertson will receive
approximately $4.5 million and $3.0 million, respectively. Affiliates of
Donaldson, Lufkin & Jenrette Securities Corporation, an underwriter in this
Offering ("DLJ"), own all of the outstanding shares of Senior Preferred Stock
and will receive approximately $22.9 million of the proceeds from this Offering
in connection with the redemption of such shares. See "Use of Proceeds,"
"Certain Transactions -- Management Tax Redemption" and "Description of Capital
Stock -- Preferred Stock -- Senior Preferred Stock."
OWNERSHIP OF THE COMPANY; ANTI-TAKEOVER PROVISIONS
After giving effect to this Offering and the Management Tax Redemption, the
Company's executive officers and key managers, on the one hand, and the
Investors, on the other hand, will beneficially own 19.4% and 33.5%,
respectively, of the outstanding Common Stock. Therefore, after giving effect to
this Offering and the Management Tax Redemption, such stockholders will, if
considered together, beneficially own shares of Common Stock representing
approximately 52.9% of the voting power entitled to vote in matters affecting
stockholders generally and thereby will continue to be able to control the
election of the Board of Directors and will be able to influence significantly
the affairs of the Company if they were to act together. See "Principal
Stockholders" and "Certain Transactions."
Provisions of the Company's Certificate of Incorporation, as in effect
immediately following the consummation of this Offering (the "Certificate of
Incorporation"), and the Company's Amended and Restated Bylaws, as in effect
immediately following the consummation of this Offering (the "Bylaws"), as well
as provisions of Delaware General Corporation Law, may have the effect of
delaying or preventing transactions involving a change of control of the
Company, including transactions in which stockholders might receive a
substantial premium for their shares over then current market prices, and may
limit the ability of stockholders to approve transactions that they deem to be
in their best interest. For example, under the Certificate of Incorporation, the
Board of Directors of the Company is authorized to issue one or more classes of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), having such
designations, rights and preferences as may be determined by the Board. Upon
completion of this Offering, the Company will not have any shares of Preferred
Stock outstanding. Further issuances of Preferred Stock, while providing the
Company with flexibility in connection with general corporate purposes, may,
among other things, have an adverse effect on the rights of holders of Common
Stock. Stockholders have no right to take action by written consent and are not
permitted to call special meetings of stockholders. Any amendment of the Bylaws
by the stockholders or certain provisions of the Certificate of Incorporation
requires the affirmative vote of at least 66 2/3% of the shares of voting stock
then outstanding. See "Description of Capital Stock -- Certain Anti-takeover
Effects; -- Section 203 of the Delaware General Corporation Law."
POSSIBLE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following this Offering could adversely affect the market price of the
Common Stock. Upon completion of this Offering, the Company will have an
aggregate of 18,509,607 shares of Common Stock outstanding assuming no exercise
of the Underwriters' over-allotment option and no exercise of outstanding
options and warrants. The 6,750,000 shares of Common Stock sold in this Offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless such shares
are held by "affiliates" of the Company, as that term is defined under the
Securities Act and the regulations promulgated thereunder.
The remaining 11,759,607 shares of Common Stock (the "Restricted Shares")
are subject to restrictions under the Securities Act. Holders of such Restricted
Shares have registration rights with
12
<PAGE>
respect to all of such shares, and 11,464,239 of such shares are subject to
lock-up agreements pursuant to which the holders thereof have agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of this Prospectus without the prior written consent of Goldman, Sachs &
Co. In addition, holders of the outstanding Warrants for the purchase of 676,566
shares of Common Stock have registration rights with respect to such shares, and
all of such Warrants (including the shares issuable thereunder) are also subject
to 180-day lock-up agreements. Following this Offering, the Company intends to
file a registration statement on Form S-8 under the Securities Act to register
the 713,782 shares of Common Stock issuable upon the exercise of options granted
under the 1996 Plan (as defined herein), the 875,000 shares of Common Stock
reserved for issuance under the 1997 Plan and the 397,985 shares of Common Stock
issuable upon the exercise of options granted to each of Messrs. Thomas and
Albertson. See "Management -- Management Stock Option Agreements; -- 1996
Performance Stock Option Plan; -- 1997 Equity Participation Plan," "Certain
Transactions -- Registration Rights," and "Shares Eligible for Future Sale."
DILUTION
Purchasers of the shares of Common Stock in the Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares from the initial public offering price. See "Dilution."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE; NO
DIVIDENDS
Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops subsequent to this Offering, that it will be maintained. The
initial public offering price of the Common Stock will be established by
negotiation among the Company and the representatives of the Underwriters. See
"Underwriting" for factors considered in determining the initial public offering
price. The market price of the shares of Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors, including announcements by its competitors. In addition, the
stock market in recent years has experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of particular companies. These fluctuations, as well as a shortfall
in sales or earnings compared to public market analysts' expectations, changes
in analysts' recommendations or projections, and general economic and market
conditions, may adversely affect the market price of the Common Stock. Since the
Recapitalization, the Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any such cash dividends in the foreseeable
future. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements, relating to,
among other things, future results of operations, growth plans, sales, gross
margin and expense trends, capital requirements and general industry and
business conditions applicable to the Company. These forward-looking statements
are based largely on the Company's current expectations and are subject to a
number of risks and uncertainties. Actual results could differ materially from
these forward-looking statements. In addition to the other risks described
elsewhere in this "Risk Factors" discussion, important factors to consider in
evaluating such forward-looking statements include changes in external
competitive market factors, changes in the Company's business strategy or an
inability to execute its strategy due to unanticipated changes in the music
products industry or the economy in general, the emergence of new or growing
specialty retailers of music products and various other competitive factors that
may prevent the Company from competing successfully in existing or future
markets. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Prospectus will in fact be
realized.
13
<PAGE>
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. The Recapitalization included the following transactions: (i)
members of the Company's management purchased 1,291,000 shares of Common Stock
for $0.5 million in 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 127,809,000 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 51,123,600 shares of Common Stock;
(iv) the Investors purchased 1,807,400 shares of Common Stock and 693,000 shares
of Junior Preferred Stock for $70.0 million in cash; (v) the DLJ Investors (as
defined herein) purchased 800,000 shares of Senior Preferred Stock, with an
aggregate liquidation value of $20.0 million, and warrants (the "Warrants") to
purchase 190,252 shares of Common Stock and 72,947 shares of Junior Preferred
Stock, for an aggregate purchase price of $20.0 million in 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 309,840,000 shares of Common Stock
from the Scherr Trust for approximately $113.1 million in cash; (viii) the
Company cancelled options to purchase 82,384,907 shares of Common Stock held by
certain members of management in exchange for approximately $27.9 million in
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
$11.2 million. See "Certain Transactions."
In connection with the Recapitalization, the Company granted options for the
purchase of 43,344 units (a unit consisting of 2.582 shares of Common Stock,
after giving effect to the stock splits described in this paragraph, and
99/100ths of a share of Junior Preferred Stock (each, a "Unit")) at an exercise
price of $100 per Unit to each of Larry Thomas, its President and Chief
Executive Officer, and Marty Albertson, its Executive Vice President and Chief
Operating Officer and adopted the 1996 Plan for the benefit of the Company's key
employees. See "Management -- Management Stock Option Agreements; -- 1996
Performance Stock Option Plan." 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. Immediately following the Recapitalization, the Company effected a
100-to-1 stock split. On October 11, 1996, the Company reincorporated from a
California corporation to a Delaware corporation and changed the par value of
its Common Stock, Senior Preferred Stock and Junior Preferred Stock. On January
15, 1997, the Company effectuated a 2.582-to-1 stock split. Upon the
consummation of the Offering, each share of Junior Preferred Stock will
automatically convert into 6.667 shares of Common Stock, and all outstanding
shares of Senior Preferred Stock will be redeemed, at a premium, with a portion
of the net proceeds from this Offering. See "Description of Capital Stock --
Preferred Stock" and "Use of Proceeds." After giving effect to the Offering, the
Junior Preferred Stock Conversion and the Management Tax Redemption, the
Investors, the Scherr Trust (and affiliated family trusts) and the Company's
executive officers and key managers will beneficially own approximately 33.5%,
9.3% and 19.4% of the Common Stock, respectively, of the outstanding shares of
Common Stock. See "Principal Stockholders."
Upon the effectiveness of the Recapitalization, the Company entered into a
$25 million revolving credit facility (the "1996 Credit Facility") with Wells
Fargo Bank, N.A. ("Wells Fargo Bank"). See "Description of Certain Indebtedness
- -- The 1996 Credit Facility." On July 2, 1996 the Company issued in a private
placement an aggregate of $100 million of 11% Senior Notes due 2006 (the
"Original Senior Notes") to DLJ and Chase Securities, Inc. ("Chase Securities"),
as the Initial Purchasers. The proceeds of the offering of the Original Senior
Notes were applied to the retirement of the Bridge Facility. The Original Senior
Notes were resold by the Initial Purchasers pursuant to Rule 144A under the
Securities Act ("Rule 144A") and were later exchanged for a new series of 11%
Senior Notes due 2006 (the "Senior
14
<PAGE>
Notes") in an exchange offer registered under the Securities Act which was
consummated in December 1996. The Senior Notes are substantially identical to
the Original Senior Notes (except that the Senior Notes are not restricted for
federal securities law purposes). Approximately $33.3 million principal amount
of Senior Notes will be redeemed, at a premium, with a portion of the net
proceeds from this Offering. See "Description of Certain Indebtedness -- The
Senior Notes" and "Use of Proceeds."
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $92.4 million ($106.6 million if the Underwriters' over-allotment
option is exercised in full), after deducting the Company's estimated costs of
the Offering and assuming an initial public offering price of $15.00 per share
of Common Stock. Of such net proceeds, (i) approximately $37.9 million will be
used to redeem at a premium, and to pay all accrued and unpaid interest with
respect to, an aggregate of approximately $33.3 million principal amount of
Senior Notes pursuant to the optional redemption provisions of the Senior Notes;
(ii) approximately $22.9 million will be used to redeem at a premium, and to pay
all accrued and unpaid dividends with respect to, all of the outstanding shares
of Senior Preferred Stock; (iii) approximately $16.0 million will be used to
redeem in the Management Tax Redemption approximately 1,138,000 shares of Common
Stock held by certain executive officers and other employees of the Company; and
(iv) the balance of approximately $15.6 million will be used for general
corporate purposes (including the repayment of amounts outstanding under the
1996 Credit Facility which are expected to be approximately $6.0 million at the
consummation of this Offering). See "Description of Certain Indebtedness -- The
Senior Notes," "Description of Capital Stock -- Preferred Stock -- Senior
Preferred Stock," and "Certain Transactions -- Management Tax Redemption."
DIVIDEND POLICY
The Company currently intends to retain any earnings to provide funds for
the operation and expansion of its business and for the servicing and repayment
of indebtedness and does not intend to pay cash dividends on the Common Stock in
the foreseeable future. Under the terms of the indenture governing the Senior
Notes, the Company is not permitted to pay any dividends on the Common Stock
unless certain financial ratio tests and other conditions are satisfied. In
addition, the 1996 Credit Facility contains certain covenants which, among other
things, limit the payment of cash dividends on the capital stock of the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness." Any determination to pay cash dividends on the Common Stock in
the future will be at the sole discretion of the Company's Board of Directors.
15
<PAGE>
DILUTION
As of September 30, 1996, the net tangible book deficit of the Company, as
adjusted to give effect to the Junior Preferred Stock Conversion was $(75.6)
million, or $(5.88) per share of Common Stock outstanding. Net tangible book
deficit per share is determined by dividing the tangible net worth of the
Company (total assets less intangible assets and total liabilities) by the
number of shares of Common Stock outstanding after giving effect to the Junior
Preferred Stock Conversion. Without taking into account any changes in such net
tangible book deficit after September 30, 1996, other than to give effect to the
issuance of the 6,750,000 shares of Common Stock at an assumed initial public
offering price of $15.00 per share and the anticipated application of the net
proceeds therefrom, the PRO FORMA net tangible book deficit of the Company as of
September 30, 1996 would have been approximately $(10.3) million, or $(0.56) per
share. This amount represents an immediate reduction in net tangible book
deficit of $5.32 per share to current stockholders and an immediate dilution of
$15.56 per share to new stockholders. Dilution to new stockholders is determined
by subtracting the net tangible book deficit per share after this Offering from
the initial public offering price per share. The following table illustrates
this per share dilution.
<TABLE>
<CAPTION>
Assumed initial public offering price per share (1).............. $ 15.00
<S> <C> <C>
Net tangible book deficit per share as of September 30, 1996,
as adjusted................................................... $ (5.88)
Increase in net tangible book deficit per share attributable to
sale of Common Stock.......................................... 5.32
---------
PRO FORMA net tangible book deficit per share after giving effect
to this Offering (2)............................................ (0.56)
---------
Dilution in net tangible book value per share to new investors
(3)............................................................. $ 15.56
---------
---------
</TABLE>
The following table summarizes, on a PRO FORMA basis as of September 30,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors for the shares of Common Stock offered hereby.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- ----------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 12,856,000(4) 66% $ 140,002,000 58% $ 10.89
New stockholders................... 6,750,000 34 101,250,000 42 15.00
------------- ----- ---------------- ----- -----------
Total.......................... 19,606,000(4) 100.0% $ 241,252,000 100.0%
------------- ----- ---------------- -----
------------- ----- ---------------- -----
</TABLE>
- ------------------------
(1) Before deducting the estimated underwriting discounts and commissions and
the estimated expenses of this Offering payable by the Company.
(2) Does not give effect to the issuance of 676,566 shares reserved for issuance
upon the exercise of the Warrants (at an exercise price per share of $0.01)
and the issuance of 1,350,554 shares issuable upon the exercise of employee
stock options (at an exercise price per share of $10.89), which were
outstanding as of September 30, 1996. See "Management -- Management Stock
Option Plans; -- 1996 Performance Stock Option Plan."
(3) Dilution is determined by subtracting PRO FORMA tangible book value per
share from the assumed initial public offering price paid by a new investor
for one share of Common Stock.
(4) Includes shares to be repurchased in the Management Tax Redemption. See
"Certain Transactions -- Management Tax Redemption."
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1996 and the as adjusted capitalization of the Company at that
date after giving effect to this Offering and the application of a portion of
the estimated net proceeds therefrom to redeem all outstanding shares of the
Senior Preferred Stock and a portion of the Senior Notes and to redeem shares of
Common Stock in the Management Tax Redemption, as described under "Use of
Proceeds." This table 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" and the financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)
Senior Notes........................................................................ $ 100,000 $ 66,667
1996 credit facility................................................................ 9,930 --
------------ ------------
Total long-term debt.............................................................. 109,930 66,667
------------ ------------
Senior preferred stock................................................................ 14,442 --
Stockholders' equity (deficit)
Junior preferred stock (1).......................................................... 138,600 --
Warrants............................................................................ 6,500 6,500
Common stock 55,000,000 shares, $.01 par value, authorized; shares
outstanding, actual; 18,468,288 shares outstanding, as
adjusted (1)....................................................................... 36 185
Additional paid-in capital.......................................................... (8,885) 206,021
Retained earnings (deficit)......................................................... (207,908) (220,226)
------------ ------------
Total stockholders' equity (deficit).............................................. (71,657) (7,520)
------------ ------------
Total capitalization............................................................ $ 52,715 $ 59,147
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Under the terms of the Junior Preferred Stock, upon the consummation of the
Offering each share of Junior Preferred Stock will be converted
automatically into 6.667 shares of Common Stock. Also excludes shares
issuable upon the exercise of outstanding employee stock options and
outstanding Warrants. See "Description of Capital Stock -- Preferred Stock
-- Junior Preferred Stock."
17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data 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 nine-month periods ended
September 30, 1995 and September 30, 1996 are derived from the unaudited
condensed financial statements which, in the opinion of management, include all
adjustments necessary 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 selected 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 selected historical and PRO FORMA financial data
should be read in conjunction with "The Recapitalization and Related
Transactions," "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 herein.
<TABLE>
<CAPTION>
NINE
MONTHS
FISCAL YEAR ENDED TWO ENDED
MONTHS FISCAL YEAR ENDED SEPTEMBER
OCTOBER 31, ENDED DECEMBER 31, 30,
-------------------- DECEMBER 31, ------------------------------- ---------
1991 1992 1992 1993 1994 1995 1995
--------- --------- --------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE AND INVENTORY OPERATING DATA)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................................... $ 74,872 $ 85,592 $ 18,726 $ 97,305 $ 129,039 $ 170,671 $ 119,950
Cost of goods sold (1)......................... 52,808 60,120 13,333 68,527 92,275 123,415 86,949
--------- --------- --------------- --------- --------- --------- ---------
Gross profit................................. $ 22,064 $ 25,472 $ 5,393 $ 28,778 $ 36,764 $ 47,256 $ 33,001
Selling, general and administrative expenses... 18,896 20,998 3,547 21,889 26,143 32,664 23,439
Deferred compensation expense (2).............. (230) -- 373 1,390 1,259 3,087 2,060
--------- --------- --------------- --------- --------- --------- ---------
Operating income (loss)........................ $ 3,398 $ 4,474 $ 1,473 $ 5,499 $ 9,362 $ 11,505 $ 7,502
--------- --------- --------------- --------- --------- --------- ---------
Other (expense) income
Interest expense, net........................ (702) (457) (49) (271) (252) (368) (259)
Transaction expense and other expenses....... 59 59 -- 23 45 65 --
--------- --------- --------------- --------- --------- --------- ---------
$ (643) $ (398) $ (49) $ (248) $ (207) $ (303) $ (259)
--------- --------- --------------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes......................................... 2,755 4,076 1,424 5,251 9,155 11,202 7,243
Provision for income taxes..................... 53 89 39 146 326 345 109
--------- --------- --------------- --------- --------- --------- ---------
Net income (loss).............................. $ 2,702 $ 3,987 $ 1,385 $ 5,105 $ 8,829 $ 10,857 $ 7,134
--------- --------- --------------- --------- --------- --------- ---------
--------- --------- --------------- --------- --------- --------- ---------
PRO FORMA FOR INCOME TAX PROVISION (3):
Historical income (loss) before provision for
income taxes.................................. $ 2,755 $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ 7,243
Pro forma provision for income taxes........... 1,086 1,753 773 2,856 4,478 6,144 4,000
--------- --------- --------------- --------- --------- --------- ---------
Pro forma net income (loss).................... $ 1,669 $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ 3,243
--------- --------- --------------- --------- --------- --------- ---------
--------- --------- --------------- --------- --------- --------- ---------
Pro forma net income per common share.......... $ 0.26
---------
---------
Weighted average common shares outstanding
(4)........................................... 19,512
---------
---------
OPERATING DATA:
Net sales per gross square foot (5)............ $ 366 $ 429 -- $ 478 $ 546 $ 661 $ 455
Net sales growth............................... 6.0% 14.3% 18.7% 13.7% 32.6% 32.3% 38.1%
Increase in comparable store sales (6)......... 5.9% 11.5% 18.7% 11.4% 17.3% 23.4% 26.7%
Stores open at end of period................... 15 15 15 17 20 21 20
Inventory turns................................ 3.1x 3.3x 3.4x 3.4x 3.4x 3.7x 3.7x
Capital expenditures........................... $ 1,192 $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 1,521
BALANCE SHEET DATA:
Net working capital............................ $ 10,188 $ 11,923 $ 12,679 $ 10,243 $ 11,468 $ 6,002 $ 9,752
Property, plant and equipment, net............. 8,558 7,888 8,677 10,066 11,642 13,276 11,847
Total assets................................... 28,535 32,082 34,978 37,602 46,900 49,719 45,743
Total long term and revolving debt (including
current debt)................................. 8,411 6,103 5,001 3,400 825 -- 7,052
Senior preferred stock......................... -- -- -- -- -- -- --
Junior preferred stock......................... -- -- -- -- -- -- --
Stockholders' equity (deficit)................. 12,625 16,612 17,997 18,484 23,424 19,764 22,302
<CAPTION>
1996
---------
<S> <C>
INCOME STATEMENT DATA:
Net sales...................................... $ 145,409
Cost of goods sold (1)......................... 104,337
---------
Gross profit................................. $ 41,072
Selling, general and administrative expenses... 29,521
Deferred compensation expense (2).............. 69,892
---------
Operating income (loss)........................ $ (58,341)
---------
Other (expense) income
Interest expense, net........................ (9,105)
Transaction expense and other expenses....... (6,481)
---------
$ (15,586)
---------
Income (loss) before provision for income
taxes......................................... (73,927)
Provision for income taxes..................... 139
---------
Net income (loss).............................. $ (74,066)
---------
---------
PRO FORMA FOR INCOME TAX PROVISION (3):
Historical income (loss) before provision for
income taxes.................................. $ (73,927)
Pro forma provision for income taxes........... --
---------
Pro forma net income (loss).................... $ (73,927)
---------
---------
Pro forma net income per common share.......... $ (3.79)
---------
---------
Weighted average common shares outstanding
(4)........................................... 19,512
---------
---------
OPERATING DATA:
Net sales per gross square foot (5)............ $ 522
Net sales growth............................... 21.2%
Increase in comparable store sales (6)......... 10.3%
Stores open at end of period................... 28
Inventory turns................................ 3.5x
Capital expenditures........................... $ 5,279
BALANCE SHEET DATA:
Net working capital............................ $ 23,318
Property, plant and equipment, net............. 15,262
Total assets................................... 73,545
Total long term and revolving debt (including
current debt)................................. 109,930
Senior preferred stock......................... 14,442
Junior preferred stock......................... 138,600
Stockholders' equity (deficit)................. (71,657)
</TABLE>
FOOTNOTES APPEAR ON FOLLOWING PAGE.
18
<PAGE>
FOOTNOTES TO TABLE ON PREVIOUS PAGE.
- ----------------------------------
(1) Cost of goods sold includes buying and occupancy costs.
(2) For the nine months ended September 30, 1996, the Company recorded a
non-recurring deferred compensation expense of $69.9 million related to the
cancellation and exchange of management stock options pursuant to the
Recapitalization. See "The Recapitalization and Related Transactions."
(3) Pro forma provision for income taxes reflects the estimated statutory
provision for income taxes assuming the Company was a "C" corporation.
(4) Weighted average shares outstanding assumes that: (i) the Common Stock
offered hereby, the Common Stock issuable pursuant to the Junior Preferred
Stock Conversion and the Common Stock issuable upon the exercise of the
Warrants (and common stock equivalents) were outstanding during each of the
periods presented, and (ii) the Common Stock to be redeemed pursuant to the
Management Tax Redemption was not outstanding during any of the periods
presented. See "Management -- Management Stock Option Agreements; -- 1996
Performance Stock Option Plan," "Certain Transactions -- Transactions with
Affiliates of DLJ and Chase Securities; -- Management Tax Redemption" and
"Description of Capital Stock -- Preferred Stock -- Junior Preferred
Stock."
(5) 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.
(6) Compares net sales for the comparable periods, excluding net sales
attributable to stores not open for 14 months.
19
<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 nine months ended September 30,
1996 and September 30, 1995 reflect adjustments as if the Recapitalization, the
Junior Preferred Stock Conversion, the sale of the Senior Notes and the
application of a portion of the estimated net proceeds of this Offering to
redeem all outstanding shares of Senior Preferred Stock, a portion of the Senior
Notes and shares of Common Stock in the Management Tax Redemption had been
consummated and were effective as of January 1, 1995. The unaudited PRO FORMA
condensed balance sheet as of September 30, 1996 gives effect to the Junior
Preferred Stock Conversion and the application of the estimated net proceeds of
this Offering as if they had occurred on such date.
The financial effects of the Recapitalization and this Offering 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 this Offering 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."
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA FOR THE
RELATED TO THE FOR THE ADJUSTMENTS RECAPITALIZATION,
RECAPITALIZATION RECAPITALIZATION RELATED THE SALE OF THE
AND THE SALE OF AND THE SALE OF TO THE SENIOR NOTES
HISTORICAL THE SENIOR NOTES THE SENIOR NOTES OFFERING AND THE OFFERING
---------- ---------------- ---------------- ------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 170,671 $ -- $ 170,671 $ -- $ 170,671
Cost of sales, buying, and occupancy....... 123,415 -- 123,415 -- 123,415
---------- -------- ---------------- ------------ ----------------
Gross profit............................... $ 47,256 $ -- $ 47,256 $ -- $ 47,256
Operating expenses......................... 32,664 (1,375)(1) 31,289 31,289
Deferred compensation expense.............. 3,087 (3,087)(2) -- -- --
---------- -------- ---------------- ------------ ----------------
Operating income........................... $ 11,505 $ 4,462 $ 15,967 $ -- $ 15,967
Other (expenses) income:
Interest expense......................... (382) (11,176)(3) (11,558) 3,792(4) (7,766)
Interest income.......................... 14 -- 14 -- 14
Other.................................... 65 -- 65 -- 65
---------- -------- ---------------- ------------ ----------------
$ (303) $ (11,176) $ (11,479) $ 3,792 $ (7,687)
---------- -------- ---------------- ------------ ----------------
Income (loss) before provision for income
taxes..................................... 11,202 (6,714) 4,488 3,792 8,280
Provision for income taxes................. 345 1,592(6) 1,937 1,623(6) 3,560
---------- -------- ---------------- ------------ ----------------
Net income (loss).......................... $ 10,857 $ (8,306) $ 2,551 $ 2,169 $ 4,720
Preferred stock dividends.................. -- (14,034)(7) (14,034) 14,034(8) --
---------- -------- ---------------- ------------ ----------------
Net income (loss) available for common
stockholders.............................. $ 10,857 $ (22,340) $ (11,483) $ 16,203 $ 4,720
---------- -------- ---------------- ------------ ----------------
---------- -------- ---------------- ------------ ----------------
PRO FORMA
Historical income before provision for
income taxes.............................. $ 11,202
Pro forma provision for income taxes (9)... (6,144)
----------
Pro forma net income....................... $ 5,058
----------
----------
Pro forma net income per common share
(10)...................................... $ 0.26 $ 0.24
---------- ----------------
---------- ----------------
Weighted average common shares outstanding
(11)...................................... 19,512 19,512
---------- ----------------
---------- ----------------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA FOR THE
RELATED TO THE FOR THE ADJUSTMENTS RECAPITALIZATION,
RECAPITALIZATION RECAPITALIZATION RELATED THE SALE OF THE
AND THE SALE OF AND THE SALE OF TO THE SENIOR NOTES
HISTORICAL THE SENIOR NOTES THE SENIOR NOTES OFFERING AND THE OFFERING
---------- ---------------- ---------------- ----------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 145,409 $-- $145,409 $-- $145,409
Cost of sales, buying, and occupancy.... 104,337 -- 104,337 -- 104,337
---------- -------- ---------------- ----------- -----------------
Gross profit............................ $ 41,072 $-- $ 41,072 $-- $41,072
Operating expenses...................... 29,521 (432)(1) 29,089 -- 29,089
Deferred compensation expense........... 69,892 (69,892)(2) -- -- --
---------- -------- ---------------- ----------- -----------------
Operating income........................ $ (58,341) $ 70,324 $ 11,983 $-- $11,983
Other (expenses) income:
Interest expense...................... (9,105) 443(3) (8,662) 2,844(4) (5,818)
Transaction expenses.................. (6,481) 6,481(5) -- -- --
---------- -------- ---------------- ----------- -----------------
$ (15,586) $ 6,924 $ (8,662) $ 2,844 $(5,818)
---------- -------- ---------------- ----------- -----------------
Income (loss) before provision for
income taxes........................... (73,927) 77,248 3,321 2,844 6,165
Provision for income taxes.............. 139 1,289(6) 1,428 1,223(6) 2,651
---------- -------- ---------------- ----------- -----------------
Net income (loss)....................... $ (74,066) $ 75,959 $ 1,893 $ 1,621 $ 3,514
Preferred stock dividends............... (4,499) (6,051)(7) (10,550) 10,550(8) --
---------- -------- ---------------- ----------- -----------------
Net income (loss) available for common
stockholders........................... $ (78,565) $ 69,908 $ (8,657) $12,171 $ 3,514
---------- -------- ---------------- ----------- -----------------
---------- -------- ---------------- ----------- -----------------
PRO FORMA
Historical income (loss) before
provision for income taxes............. $ (73,927)
Pro forma provision for income taxes
(9).................................... --
----------
Pro forma net income (loss)............. $ (73,927)
----------
----------
Pro forma net income per common share
(10)................................... $ (3.79) $ 0.18
---------- -----------------
---------- -----------------
Weighted average common shares
outstanding (11)....................... 19,512 19,512
---------- -----------------
---------- -----------------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA FOR THE
RELATED TO THE FOR THE ADJUSTMENTS RECAPITALIZATION,
RECAPITALIZATION RECAPITALIZATION RELATED THE SALE OF THE
AND THE SALE OF AND THE SALE OF TO THE SENIOR NOTES
HISTORICAL THE SENIOR NOTES THE SENIOR NOTES OFFERING AND THE OFFERING
---------- ---------------- ---------------- ----------- ------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 119,950 $-- $119,950 $-- $119,950
Cost of sales, buying, and occupancy.... 86,949 -- 86,949 -- 86,949
---------- -------- ---------------- ----------- ----------
Gross profit............................ $ 33,001 $-- $ 33,001 $-- $33,001
Operating expenses...................... 23,439 (1,031)(1) 22,408 -- 22,408
Deferred compensation expense........... (2,060) (2,060)(2) -- -- --
---------- -------- ---------------- ----------- ----------
Operating income........................ $ 7,502 $ 3,091 $ 10,593 $-- $10,593
Other (expenses) income:
Interest expense...................... (259) (8,407)(3) (8,666) 2,844(4) 5,822
---------- -------- ---------------- ----------- ----------
$ (259) $ (8,407) $ (8,666) $ 2,844 $ 5,822
---------- -------- ---------------- ----------- ----------
Income (loss) before provision for
income taxes........................... 7,243 (5,316) 1,927 2,844 4,771
Provision for income taxes.............. 109 720(6) 829 1,223(6) 2,052
---------- -------- ---------------- ----------- ----------
Net income (loss)....................... $ 7,134 $ (6,036) $ 1,098 $ 1,621 $ 2,719
Preferred stock dividends............... -- 10,526(7) 10,526 (10,526)(8) --
---------- -------- ---------------- ----------- ----------
Net income (loss) available for common
stockholders........................... $ 7,134 $(16,562) $ (9,428) $12,147 $ 2,719
---------- -------- ---------------- ----------- ----------
---------- -------- ---------------- ----------- ----------
PRO FORMA
Historical income before provision for
income taxes........................... $ 7,243
Pro forma provision for income taxes
(9).................................... (4,000)
----------
Pro forma net income.................... $ 3,243
----------
----------
Pro forma net income per common share
(10)................................... $ 0.17 $ 0.14
---------- ----------
---------- ----------
Weighted average common shares
outstanding (11)....................... 19,512 19,512
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(1) 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 new bonus plans adopted as part of the
Recapitalization.
(2) Represents the elimination of deferred stock compensation expense associated
with the management stock options which were partially redeemed and
partially exchanged for Junior Preferred Stock as part of the
Recapitalization.
(3) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED --------------------------------
DECEMBER 31 SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Historical interest expense.................... $ 382 $ 259 $ 9,105
Assumed interest expense on new credit facility
for working capital purposes.................. (183) (135) (131)
Cash interest expense on the Senior Notes at an
interest rate of 11%.......................... (11,000) (8,250) (8,250)
------------- ------- -------
Total cash interest expense adjustment......... $ (10,801) $ (8,126) $ 724
Amortization of deferred financing fees
on the Senior Notes........................... (375) (281) (281)
------------- ------- -------
Total interest expense adjustment.............. $ (11,176) $ (8,407) $ 443
------------- ------- -------
------------- ------- -------
</TABLE>
(4) The interest expense adjustment relating to this Offering is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED --------------------------------
DECEMBER 31 SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense relating to borrowings under
Senior Notes repaid........................... $ 3,667 $ 2,750 $ 2,750
Amortization of deferred financing fees under
Senior Notes repaid........................... 125 94 94
------------- ------- -------
Interest expense adjustment.................... $ 3,792 $ 2,844 $ 2,844
------------- ------- -------
------------- ------- -------
</TABLE>
(5) Represents the elimination of non-recurring transaction expenses which are
directly attributable to the Recapitalization.
(6) 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 (1), (2), (3), (4) and (5) above.
(7) Represents accrued dividends on the Senior Preferred Stock and the Junior
Preferred Stock.
(8) Preferred stock dividends include the difference between the liquidation
value of the Senior Preferred Stock and the financial statement value for
all periods presented. For pro forma financial statement purposes, the
Senior Preferred Stock is assumed to be redeemed during the period and the
Junior Preferred Stock is deemed to be converted into Common Stock.
(9) 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.
(10)Pro forma net income (loss) per common share has been computed by dividing
pro forma net income (loss), after reduction for preferred stock dividends,
by the weighted average number of shares outstanding.
(11)Weighted average shares outstanding assumes that: (i) the 6,750,000 shares
of Common Stock offered hereby, the Common Stock issuable upon exercise of
the Warrants (and common stock equivalents) and the Junior Preferred Stock
Conversion are outstanding during each of the periods presented, and (ii)
the Common Stock to be redeemed pursuant to the Management Tax Redemption
was not outstanding during any of the periods presented.
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------------------------
ADJUSTMENTS
RELATED TO THE PRO FORMA
ACTUAL OFFERING FOR THE OFFERING
--------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 52 $ 6,680 $ 6,732
Accounts receivable........................................... 3,288 -- 3,288
Inventories................................................... 48,465 -- 48,465
Prepaid expenses and other current assets..................... 1,709 -- 1,709
--------- -------------- ----------------
Total current assets........................................ $ 53,514 $ 6,680 $ 60,194
Property and equipment, net..................................... 15,262 -- 15,262
Other assets.................................................... 4,769 (1,159)(1) 3,610
--------- -------------- ----------------
Total assets.............................................. $ 73,545 $ 5,521 $ 79,066
--------- -------------- ----------------
--------- -------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 9,754 $ -- $ 9,754
Accrued expenses and other current liabilities................ 10,512 (911)(1) 9,601
Revolving line of credit...................................... 9,930 (9,930)(2) --
--------- -------------- ----------------
Total current liabilities................................... $ 30,196 $ (10,841) $ 19,355
Long term debt.................................................. 100,000 (33,333)(1) 66,667
Long term liabilities........................................... 564 -- 564
--------- -------------- ----------------
Total liabilities........................................... $ 130,760 $ (44,174) $ 86,586
--------- -------------- ----------------
Senior preferred stock.......................................... 14,442 (14,442)(4) --
Stockholders' equity (deficit):
Junior preferred stock........................................ 138,600 (138,600)(7) --
Warrants...................................................... 6,500 -- 6,500
Common stock.................................................. 36 149(5) 185
Additional paid in capital.................................... (8,885) 214,906(6) 206,021
Retained deficit.............................................. (207,908) (12,318)(8) (220,226)
--------- -------------- ----------------
Total stockholders' equity (deficit)........................ $ (71,657) $ 64,137 $ (7,520)
--------- -------------- ----------------
Total liabilities and stockholders' equity (deficit)...... $ 73,545 $ 5,521 $ 79,066
--------- -------------- ----------------
--------- -------------- ----------------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet data.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
(1) Upon consummation of this Offering, approximately 33.3% of the Senior Notes
will be redeemed, which will result in the proportionate reduction of
long-term debt and the related unamortized financing costs and accrued
interest.
(2) Represents the application of a portion of the net proceeds of this Offering
to repay the line of credit under the 1996 Credit Facility.
(3) Represents payroll taxes to be paid by the Company upon conversion of
management's Junior Preferred Stock to Common Stock.
(4) Represents the application of a portion of the net proceeds of this Offering
to redeem the Senior Preferred Stock.
(5) Represents the adjustments to Common Stock as follows:
<TABLE>
<CAPTION>
Net proceeds from this Offering.................................. $ 68
<S> <C>
Conversion of Junior Preferred Stock............................. 81(7)
---------
$ 149
---------
---------
</TABLE>
(6) Represents adjustments to Additional Paid in Capital as follows:
<TABLE>
<CAPTION>
Net proceeds from the Offering................................... $ 92,348
<S> <C>
Conversion of Junior Preferred Stock............................. 138,519(7)
Redemption of Common Stock....................................... (15,961)
---------
$ 214,906
---------
---------
</TABLE>
(7) Represents the conversion of the Junior Preferred Stock to Common Stock in
conjunction with this Offering.
(8) Represents the adjustments to retained earnings as follows:
<TABLE>
<CAPTION>
Premium on redemption of Senior Preferred Stock.................. $ (627)(11)
<S> <C>
Premium on redemption of 33.3% of the Senior Notes............... (3,333)(9)
Write-off of a portion of deferred financing costs on Senior
Notes........................................................... (1,159)(1)
Dividend on Senior Preferred Stock............................... (6,456)(10)
Payroll taxes.................................................... (743)(3)
---------
$ (12,318)
---------
---------
</TABLE>
(9) Represents the 10% premium to be paid to redeem a portion of the Senior
Notes.
(10)Represents the difference between the amount of the Senior Preferred Stock
as reported on the Financial Statements to be redeemed and its liquidation
value.
(11)Represents the premium to be paid to redeem the Senior Preferred Stock.
25
<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 as of December 31, 1996. From 1993 to 1995,
Guitar Center's net sales grew 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 10.3% for the fiscal years ended December 31,
1993, 1994, 1995 and the nine months ended September 30, 1996, respectively.
These increases were primarily attributable to increases in unit sales rather
than increases in prices or changes in product 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 does not expect comparable store sales to continue to increase at
historical rates.
The Company opened seven stores in fiscal 1996 and presently 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
resources over the past several years to building the infrastructure necessary
to support a large, national chain. For example, the Company spent $2.9 million
from January 1, 1993 to December 31, 1995 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 immediately foreseeable future, including its
present 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 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 some markets where the Company has pursued its
clustering strategy, there has been some transfer of sales from certain existing
stores to new locations. Generally, however, mature stores have 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.
26
<PAGE>
The following table sets forth certain historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 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 28.2
Selling, general and administrative expenses... 22.5 20.3 19.2 19.5 20.3
----------- ----------- ----------- ----------- -----------
Operating income before deferred compensation
expense....................................... 7.1 8.2 8.5 8.0 7.9
Deferred compensation expense.................. 1.4 0.9 1.8 1.7 48.0
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ 5.7 7.3 6.7 6.3 (40.1)
Interest expense, net.......................... 0.3 0.2 0.1 0.3 6.2
Transaction expenses........................... -- -- -- -- 4.5
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.............. 5.4 7.1 6.6 6.0 (50.8)
Income taxes................................... 0.2 0.3 0.2 0.1 0.1
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. 5.2% 6.8% 6.4% 5.9% (50.9)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales of the Company increased to $145.4 million for the nine months
ended September 30, 1996 from $120.0 million for the comparable period in 1995,
representing a 21.2% increase. This growth was attributable to an increase of
10.3% in comparable store net sales which contributed $12.3 million, or 48.4% of
the increase. In addition, $13.1 million was contributed from new store net
sales which accounted for 51.6% 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 nine months ended September 30, 1996 increased to $41.1
million from $33.0 million for the comparable period in 1995, representing a
24.5% increase. Gross margin for the nine months ended September 30, 1996
increased to 28.2% from 27.5% in the nine months ended September 30, 1995. This
increase in gross margin was primarily the result of the introduction and sales
of higher margin products within the high-technology pro audio and recording
equipment category.
Selling, general and administrative expenses for the nine months ended
September 30, 1996 increased to $29.5 million from $23.4 million for the
comparable period in 1995, representing a 25.9% increase. As a percentage of net
sales, selling, general and administrative expenses for the nine months ended
September 30, 1995 increased to 20.3% from 19.5% for the nine months ended
September 30, 1995. This change reflects an increase in the number of store
employees in anticipation of continued comparable store sales growth, as well as
the incremental cost of staffing newly opened stores prior to those stores
operating at full volume. During the nine months ended September 30, 1996, seven
new stores commenced operation and were open an average of three and one-half
months. In addition, the increase in selling, general and administrative
expenses reflects increases in corporate personnel and management information
systems expenses associated with the Company's planned expansion.
Deferred compensation expenses for the nine months ended September 30, 1996
increased to $69.9 million from $2.1 million for the nine months ended September
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 as a component of the Recapitalization. These expenses are
nonrecurring, as the deferred compensation plan was terminated at the time of
the Recapitalization. See "The Recapitalization and Related Transactions."
27
<PAGE>
The operating loss for the nine months ended September 30, 1996 was $58.3
million compared to operating income of $7.5 million for the nine months ended
September 30, 1995. Operating income before deferred compensation increased
20.8% to $11.6 million from $9.6 million in the comparable periods. As a
percentage of net sales, operating income before deferred compensation for the
nine months ended September 30, 1996 decreased to 7.9% from 8.0% in the nine
months ended September 30, 1995. This decrease was primarily attributable to the
increase in selling, general and administrative expenses partially offset by the
increase in gross margin.
Interest expense, net, for the nine months ended September 30, 1996
increased to $9.1 million from $0.3 million for the nine months ended September
30, 1995. This increase was attributable to the write-off of financing fees of
$4.7 million, interest expense of $0.9 million on the Bridge Facility and
interest expense on the Senior Notes for three months.
Non-recurring transaction costs of $6.5 million related to the
Recapitalization were expensed in the nine months ended September 30, 1996.
Net income (loss) for the nine months ended September 30, 1996 decreased to
($74.1) million from $7.1 million for the nine months ended September 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 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.
28
<PAGE>
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% of the increase.
In addition, $15.8 million was contributed from new store sales which accounted
for 50% 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.
Operating income after deferred compensation for fiscal 1994 increased 70.2%
to $9.4 million from $5.5 million for fiscal 1993. Operating income before
deferred compensation increased 54.2% to $10.6 million from $6.9 million over
the comparable period. As a percentage of net sales, operating income before
deferred compensation for fiscal 1994 increased to 8.2% from 7.1% for fiscal
1993. This increase was primarily attributable to the decrease in selling,
general and administrative expenses as a percentage of net sales, offset by the
decrease in gross profit as a percentage of net sales.
Interest expense, net for fiscal 1994 remained unchanged at $0.3 million
from fiscal 1993.
Net income for fiscal 1994 increased 72.9% to $8.8 million from $5.1 million
for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Guitar Center's need for liquidity will arise primarily from interest
payable on the indebtedness incurred in connection with the Recapitalization and
the funding of the Company's capital expenditure and working capital
requirements. The Company has no mandatory payments of principal on the Senior
Notes prior to their final maturity in 2006 and has no mandatory payments of
principal scheduled under the 1996 Credit Facility until the expiration of such
facility in 2001. The Company has historically financed its operations through
internally generated funds and borrowings under its credit facilities.
As of January 15, 1997, the Company had $5.2 million outstanding and
approximately $19.8 million available for additional borrowing under the 1996
Credit Facility. The interest rate as of such date was 9.75% on prime rate based
borrowings and 8.40% on Eurodollar rate based borrowings. The agreement
underlying the 1996 Credit Facility expires June 1, 2001 and includes certain
restrictive covenants which, among other things, require the Company to maintain
certain financial ratios. The Company was in compliance with all such
requirements as of September 30, 1996.
For the nine months ended September 30, 1996, cash used in operating
activities was $51.7 million. During the nine months ended September 30, 1995,
cash provided by operating activities was $3.6 million. Cash provided by
financing activities was $55.7 million for the nine months ended September 30,
1996, which includes the effects of the Recapitalization. Cash used in financing
activities during the nine months ended September 30, 1995 was $6.1 million
which consisted primarily of distributions to the Company's former sole
stockholder of $12.4 million in connection with the Recapitalization.
29
<PAGE>
Capital expenditures totaled $5.3 million for the nine months ended
September 30, 1996. The Company's capital expenditures related to the opening of
new stores, management information systems and store remodels.
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. The Company, which operated 28
stores as of September 30, 1996, seven of which were opened in fiscal 1996, and
presently expects to open approximately eight stores in each of fiscal 1997 and
1998. Each new store typically has required approximately $1.7 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.
The Company believes that there may be attractive opportunities to expand by
selectively acquiring existing music product retailers. The Company regularly
considers and evaluates potential acquisition candidates in new and existing
market areas, which transactions may involve the payment by the Company of cash
or securities (including equity securities), or a combination of the foregoing.
As of the date of this Prospectus, the Company has no existing agreements or
commitments with respect to any such acquisitions. There can be no assurance
that the Company will be able to identify suitable acquisition candidates
available for sale at reasonable prices or consummate any acquisitions.
Management believes that, following the consummation of this Offering, the
Company will have adequate capital resources and liquidity to meet its borrowing
obligations, fund all required capital expenditures and pursue its business
strategy for at least the next twelve months, including its present 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 1996 Credit Facility. Depending on market conditions,
the Company may also incur additional indebtedness or issue equity securities.
There can be no assurance that such additional capital, if and when required,
will be available on terms acceptable to the Company, if at all.
In December 1996, Chase Ventures, Wells Fargo and Weston Presidio granted
Investor Options to purchase an aggregate of 277,195 shares of Common Stock at a
purchase price of $4.33 per share to certain officers and key managers of the
Company. Under generally accepted accounting principles, the Company will be
required to record a non-cash, non-recurring compensation charge of
approximately $2.0 million in the fourth quarter of 1996 with an offsetting
increase to stockholders equity. The Company is not a party to this agreement
and has not, and will not, incur any obligation in connection with such options.
See "Certain Transactions -- Options Granted by Certain Investors to Certain
Members of Management."
INCOME TAXES
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
Statements of Operations."
SEASONALITY
The Company's results are not highly seasonal, although, as with most
retailers, sales in the fourth quarter are typically higher than in other
quarters.
30
<PAGE>
NEW ACCOUNTING POLICIES
Effective January 1, 1996 the Company elected to change certain accounting
policies. The changes include the capitalization of certain pre-opening costs,
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 nine months ended September 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 has adopted the provisions for PRO FORMA
disclosure requirements of SFAS 123 in fiscal 1996. The implementation of
Financial Accounting Standards No. 123 had no impact on the Company's 1996
Financial Statements.
INFLATION
The Company believes that the relatively moderate rates of inflation
experienced in recent years have not had a significant impact on its nets sales
or profitability.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements relating to,
among other things, future results of operations, growth plans, sales, gross
margin and expense trends, capital requirements and general industry and
business conditions applicable to the Company. These forward-looking statements
are based largely on the Company's current expectations and are subject to a
number of risks and uncertainties. Actual results could differ materially from
these forward-looking statements. Important factors to consider in evaluating
such forward-looking statements include changes in external competitive market
factors, change in the Company's business strategy or an inability to execute
its strategy due to unanticipated changes in the music products industry or the
economy in general, the emergence of new or growing specialty retailers of music
products and various competitive factors that may prevent the Company from
competing successfully in existing or future markets. In light of these risks
and uncertainties, many of which are described in greater detail in "Risk
Factors," there can be no assurance that the forward-looking statements
contained in this Prospectus will in fact be realized. See "Risk Factors."
31
<PAGE>
BUSINESS
COMPANY HISTORY
Guitar Center was founded in 1964 in Hollywood, California. In 1972, the
Company opened its second store in San Francisco to capitalize on the emerging
San Francisco rock 'n roll scene. By this time, Guitar Center's inventory had
been expanded to include drums, keyboards, accessories and pro audio and
recording equipment. Throughout the 1980s, Guitar Center expanded by opening
nine stores in five major markets including Chicago, Dallas and Minneapolis.
Since 1990, the Company has continued its new store expansion and has focused on
building the infrastructure necessary to manage the Company's strategically
planned growth. Current executive officers and key managers have been with the
Company for an average of 11 years and two of such executive officers (the
Company's President and Chief Executive Officer and the Company's Executive Vice
President and Chief Operating Officer) 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 products
retailer throughout the United States.
Guitar Center's flagship Hollywood store currently is one of the nation's
largest and best-known retail stores of its kind with 33,000 square feet of
retail space. The Hollywood store features one of the largest used and vintage
guitar collections in the United States, attracting buyers and collectors from
around the world. In front of the Hollywood store is the Rock Walk which
memorializes over 70 famous musicians. The Rock Walk attracts several tour buses
daily and has helped to create international recognition of the Guitar Center
name.
BUSINESS
Guitar Center is the nation's leading retailer of guitars, amplifiers,
percussion instruments, keyboards and pro audio and recording equipment with 28
stores operating in 14 major U.S. markets as of December 31, 1996, including,
among others, areas in or near Los Angeles, San Francisco, Chicago, Miami,
Houston, Dallas, Detroit, Boston and Minneapolis. From fiscal 1990 through
fiscal 1995, 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 such five-year period, and the opening of seven
new stores. Comparable store sales (stores opened for at least 14 months) for
fiscal 1993, 1994, 1995 and the nine months ended September 30, 1996 were $95.4
million, $113.2 million, $157.5 million, and $132.3 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 approximately 3,200 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, after being open for at least twelve
months, have been profitable in each of the past five fiscal years.
32
<PAGE>
The following summarizes certain key operating statistics of a Guitar Center
store and is based upon the 20 stores operated by the Company in 1995 (which
excludes the Company's Brea, California store opened in December 1995):
<TABLE>
<S> <C>
Average 1995 net sales per square foot......................... $ 661
Average 1995 net sales per store............................... 8,486,000
Average 1995 store-level operating income (1).................. 1,239,000
Average 1995 store-level operating income margin (1)........... 14.6%
</TABLE>
- ------------------------
(1) Store level operating income includes individual store revenue and expenses
plus allocated rebates, cash discounts and purchasing department salaries
(based upon individual store sales).
Guitar Center stores have typically generated positive operating income
within the first three months of opening. In addition, based on stores which
have opened since fiscal 1993 and operated for at least 14 months, Guitar Center
stores have demonstrated high store-level operating income and store-level
operating income margins averaging approximately $0.6 million and 11.5%,
respectively, and sales per square foot averaging $498, during the first full
twelve months of operations.
Management is highly committed to the success of Guitar Center. Upon
consummation of this Offering and the transactions contemplated thereby,
executive officers and key managers will beneficially own approximately 19.4% of
the Company's outstanding Common Stock. 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 opened a total of seven stores in fiscal 1996, and
presently 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 nine months
ended September 30, 1996, the Company had net income (loss) of $5.1 million,
$8.8 million, $10.9 million and ($74.1) million, respectively. The results for
the nine months ended September 30, 1996 reflect a non-recurring deferred
compensation expense of $69.9 million and $11.2 million for transaction costs
and financing fees incurred in connection with the Recapitalization.
INDUSTRY OVERVIEW
The United States retail market for music products in 1995 was estimated in
a study by MUSIC TRADES magazine to be approximately $5.5 billion in net sales,
representing a five year compound annual growth rate of 7.9%. The broadly
defined music products market, according to the National Association of Music
Merchants ("NAMM"), includes retail sales of string and fretted instruments,
sound reinforcement and recording equipment, drums, keyboards, print music,
pianos, organs and school band and orchestral instruments. Products currently
offered by Guitar Center include categories of products which account for
approximately $4.1 billion of this market, representing a five-year compound
annual growth rate of 9.0%. The music products market as currently defined by
NAMM, however, does not include the significant used and vintage product
markets, or the computer software or apparel market in which the Company
actively participates. According to findings by a 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 with the nation's leading five music
products retailers, as measured by the number of stores operated by such
retailers (I.E, the Company, Sam Ash Music Corp, Brook Mays/C&S/H&H, Fletcher
Music Center and Musicians Friend, Inc.), accounting for approximately 8.4% of
the industry's estimated $5.5 billion in net sales in 1995. Furthermore, ninety
percent of the industry's estimated 8,200 retailers operate only one or two
stores. A typical music products store averages
33
<PAGE>
approximately 3,200 square feet and generates an average of approximately $0.6
million in annual net sales. In contrast, a Guitar Center store generally
averages between 12,000 and 15,000 square feet and generates an average of
approximately $7.7 million in annual net sales.
Over the past ten years, technological advances in the industry have
resulted in dramatic changes to the nature of music-related products. It is
estimated that nearly 40% of the electronic products sold today were developed
within the last twenty years. Manufacturers have combined computers and micro-
processor technologies with musical equipment to create a new generation of
products capable of high grade sound processing and reproduction. Products
featuring this technology are available in a variety of forms and have broad
applications across most of the Company's music product categories. Most
importantly, rapid technological advances have resulted in the continued
introduction of higher quality products offered at lower prices. For example,
today an individual consumer can much more affordably create a home recording
studio which interacts with personal computers and is capable of producing
high-quality digital recordings. Until recently, this type of powerful sound
processing capability was prohibitively expensive and was typically purchased
only by professional sound recording studios.
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
Management's goal is to continue to expand Guitar Center's position as the
leading music products retailer throughout the United States. The principal
elements of the Company's business strategy are as follows:
EXPANSION STRATEGY. Guitar Center's expansion strategy is to continue
to increase its market share in existing markets and to penetrate
strategically selected markets. The Company opened a total of seven stores
in fiscal 1996, and currently anticipates opening approximately eight stores
in each of fiscal 1997 and fiscal 1998. In preparation for this expansion,
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
methodology for targeting prospective store sites which includes analyzing
demographic and psychographic characteristics of a potential store location.
See "-- Site Selection." Management also believes there may be attractive
opportunities to expand by selectively acquiring existing music products
retailers. As of the date of this Prospectus, the Company has no existing
agreements or commitments with respect to any acquisition.
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. The average 7,000 core SKUs
offered per Guitar Center store provide 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 a customer's
listening experience while testing various instruments.
EXCEPTIONAL CUSTOMER SERVICE. Exceptional customer service is
fundamental to the Company's operating strategy. Accordingly, the Company
conducts 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
34
<PAGE>
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.
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. This database enables Guitar Center 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.
GUARANTEED LOW PRICES. Guitar Center endeavors to be the low price
leader in each of its markets, as underscored by its 30-day low price
guarantee. The Company's size permits it to take advantage of volume
discounts for large orders and other vendor supported programs. Although
prices are usually determined on a regional basis, store managers are
trained and authorized to adjust prices in response to local market
conditions.
EXPERIENCED AND MOTIVATED MANAGEMENT TEAM. The executive officers and
key managers have an average of 11 years with the Company. In addition, upon
consummation of this Offering and the application of the net proceeds
therefrom, executive officers and key managers will beneficially own
approximately 19.4% of the Company's outstanding Common Stock. See
"Management" and "Principal Stockholders."
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" and also displays 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,
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.
35
<PAGE>
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 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 and its size permits it to take advantage of
volume discounts for large orders and other vendor supported programs. 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.
36
<PAGE>
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 one million.
CUSTOMER SERVICE
Exceptional customer service is fundamental to the Company's operating
strategy. With the rapid changes in technology and continuous new product
introductions, customers depend on salespeople to offer expert advice and to
assist with product demonstrations. Guitar Center believes that its well trained
and highly knowledgeable salesforce differentiates it from its competitors and
is critical to maintaining customer confidence and loyalty. The Company's
employees are typically musicians who are selected and trained to understand the
needs of their customers. Salespeople specialize in one of the Company's five
product categories and begin training on their first day of employment. Sales
and management training programs are implemented on an ongoing basis to maintain
and continually improve the level of customer service and sales support in the
stores. Based on examination results, an employee is given a rating which
determines his or her salary and level of responsibility. Guitar Center believes
that its employee testing program impresses upon its salespeople a sense of
professionalism and reduces employee turnover by providing salespeople with the
opportunity to increase their salary by advancing through the certification
program. The Company believes that due to its emphasis on training, it is able
to attract and retain well-qualified, highly motivated salespeople committed to
providing superior customer service. In addition, each salesperson in the
keyboards and pro audio and recording departments is certified by a technical
advisory board after satisfactory completion of an extensive training program.
The Company's customer base consists of (i) the professional or aspiring
musician who makes or hopes to make a living through music and (ii) the amateur
musician or hobbyist who views music as recreation. Management estimates that
professional and aspiring musicians, who view the purchase of musical products
as a career necessity, represent approximately 65% of the Company's customer
base, and account for approximately 80% of the Company's sales. These customers
make frequent visits to a store and develop relationships with the salesforce.
Guitar Center generates repeat business and is successful in utilizing its
unique and proprietary database to market selectively to these customers based
on past buying patterns. In addition, Guitar Center services touring
professionals, providing customized products for musical artists such as
Aerosmith, Stevie Wonder and Van Halen.
STORE OPERATIONS
To facilitate its strategy of accelerated but controlled growth, Guitar
Center has centralized many key aspects of its operations, including the
development of policies and procedures, accounting systems, training programs,
store layouts, purchasing and replenishment, advertising and pricing. Such
centralization effectively utilizes the experience and resources of the
Company's headquarters staff to establish a high level of consistency throughout
all of the Guitar Center stores.
The Company's store operations are led by its Chief Operating Officer and
five regional store managers with each regional manager responsible for
approximately four to eight 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. As a result of this strategy, the
average tenure of the store managers is 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.
37
<PAGE>
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 salespersons at Guitar Center.
PURCHASING, DISTRIBUTION AND INVENTORY CONTROL
PURCHASING. Guitar Center believes it has excellent relationships with its
vendors and, as one of the industry's largest volume purchasers, is able to
receive priority shipping and access to its vendors' premium products on
favorable terms. The Company maintains a centralized buying group comprised of
merchandise managers, buyers and planners. Merchandise managers and buyers are
responsible for the selection and development of product assortments and the
negotiation of prices and terms. The Company uses a proprietary merchandise
replenishment system which automatically analyzes and forecasts sales trends for
each SKU using various statistical models, supporting the buyers by predicting
each store's merchandise requirements. This has resulted in limited "out of
stock" positions.
The Company's business and its expansion plans are dependent to a
significant degree upon its vendors. As it believes is customary in the
industry, the Company does not have any long-term supply contracts with its
vendors. See "Risk Factors -- Dependence on Suppliers."
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 Company's shrinkage level has historically been very low which
management attributes 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 as well as traffic patterns and
specific site characteristics such as visibility, accessibility, traffic volume,
shopping patterns and availability of adequate parking. 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. See "-- Store
Locations."
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
38
<PAGE>
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 immediately
foreseeable future.
COMPETITION
The retail market for musical instruments is highly fragmented with the
nation's leading five music products retailers accounting for approximately 8.4%
of the industry's net sales in 1995. The Company's largest competitor, Sam Ash,
operates ten stores in the New York City area and two 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. Customer
satisfaction is paramount to Guitar Center's operating strategy and the Company
believes that providing knowledgeable and friendly customer service gives it a
competitive advantage. The store environment is designed to be an entertaining
and exciting environment in which to shop. In an effort to exceed customer
expectations, Guitar Center stores provide a number of services not generally
offered by most competitors, including the ability to hold and use merchandise,
product demonstrations and extensive product selection. Salespeople are highly
trained and specialize in one of the Company's five product areas. Salespeople
are certified by an outside technical advisory board, based on extensive
training and product knowledge testing. The Company believes that this
certification process has increased the professionalism of its employees while
reducing turnover. Customers are encouraged to help themselves to the displayed
instruments or to seek the assistance of the professional salespeople.
Certain factors, however, could materially and adversely affect the
Company's ability to compete successfully in its markets, including the
expansion by the Company into new markets in which its competitors are already
established, competitors' expansion into markets in which the Company is
currently operating, the adoption by competitors of innovative store formats and
retail sales methods or the entry into the Company's market by competitors with
substantial financial or other resources. See "Risk Factors -- Competition."
EMPLOYEES
As of December 31, 1996, Guitar Center employed approximately 1,010 people,
of whom approximately 480 were hourly employees and approximately 530 were
salaried. To date, the Company has been able to recruit qualified personnel to
manage or staff its stores. None of the Company's employees are 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 presently 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. Guitar Center leases its
corporate offices of approximately 20,000 square feet, which are located at 5155
Clareton Drive, Agoura Hills, California 91301. Due to the Company's expansion
which has included the hiring of new corporate and administrative personnel, the
Company is currently evaluating whether to lease additional space in a nearby
location. The Company believes that sufficient additional space is available on
reasonable terms.
39
<PAGE>
STORE LOCATIONS
The table below sets forth certain information concerning Guitar Center
stores:
<TABLE>
<CAPTION>
APPROXIMATE
YEAR GROSS SQUARE
STORE OPENED FEET LEASE/OWN
- ------------------------------------------------------------------- --------- -------------- -----------
<S> <C> <C> <C>
ARIZONA
Phoenix.......................................................... (1) 13,900 Lease
Tempe............................................................ (1) 12,500 Lease
SOUTHERN CALIFORNIA
Hollywood........................................................ 1964 30,600 Own
San Diego........................................................ 1973 13,500 Own
Fountain Valley.................................................. 1980 13,700 Lease
Sherman Oaks..................................................... 1982 10,900 Own (2)
Covina........................................................... 1985 15,400 Lease
Lawndale......................................................... 1985 15,700 Lease
San Bernardino................................................... 1993 9,500 Lease
Brea............................................................. 1995 14,900 Lease
San Marcos....................................................... 1996 14,900 Lease
NORTHERN CALIFORNIA
San Francisco.................................................... 1972 11,900 Lease
San Jose......................................................... 1978 14,200 Own
El Cerrito....................................................... 1983 21,300(3) Lease
Pleasant Hill.................................................... 1996 11,300 Lease
FLORIDA
North Miami area................................................. 1996 22,300 Lease
South Miami area................................................. 1996 14,700 Lease
ILLINOIS
South Chicago.................................................... 1979 11,300 Lease
North Chicago.................................................... 1981 10,400 Lease
Central Chicago.................................................. 1988 8,700 Own
Villa Park....................................................... 1996 15,000 Lease
MASSACHUSETTS
Boston........................................................... 1994 12,600 Lease
Danvers.......................................................... 1996 14,600 Lease
Natick........................................................... (1) 15,500 Lease
MICHIGAN
Detroit.......................................................... 1994 10,100 Lease
Southfield....................................................... 1996 13,600 Lease
MINNESOTA
Twin Cities...................................................... 1988 9,500 Lease
OHIO
Cleveland........................................................ 1997 15,800 Lease
TEXAS
Dallas........................................................... 1989 12,700 Lease
Arlington........................................................ 1991 9,700 Lease
South Houston.................................................... 1993 14,700 Lease
North Houston.................................................... 1994 10,300 Lease
</TABLE>
- ------------------------
(1) Presently expected to open in the first half of 1997.
(2) The Company presently expects to relocate the store it operates in Sherman
Oaks from a location it owns to a new leased location.
(3) Of the 21,300 square feet, 10,000 square feet consist of a basement and
warehouse space.
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.
40
<PAGE>
MANAGEMENT
The executive officers, directors and key managers of the Company are as
follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
NAME AGE POSITION WITH THE COMPANY
- ---------------------- --- ------------------------------------------------ -------------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Larry Thomas.......... 47 President, Chief Executive Officer and Director 19
Marty Albertson....... 43 Executive Vice President, Chief Operating 17
Officer and Director
Bruce Ross............ 48 Vice President, Chief Financial Officer and 3
Secretary
Barry Soosman......... 37 Vice President of Corporate Development and 1
General Counsel
Raymond Scherr........ 48 Director --
David Ferguson(1)..... 41 Director --
Jeffrey Walker(2)..... 41 Director --
Michael Lazarus(1).... 41 Director --
Steven Burge(2)....... 40 Director --
KEY MANAGERS
Dave Di Martino....... 42 Vice President -- Store Development 24
Richard Pidanick...... 44 Vice President -- Southern California Regional 13
Manager
Rodney Barger......... 46 Vice President -- Merchandising 16
David Angress......... 47 Vice President -- Merchandising 1
Greg Bennett.......... 45 Vice President -- Merchandising --
Andrew Heyneman....... 35 Vice President -- Marketing 13
William McGarry....... 43 Vice President -- Store Administration 16
Mark Laughlin......... 37 Vice President -- Information Services 6
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
The Bylaws provide for a Board of Directors (the "Board") consisting of 9
persons. Presently, the Board consists of 7 persons with 2 vacancies. The
present members of the Board were elected pursuant to a Stockholders Agreement
(as defined herein) among all of the stockholders of the Company. All material
terms of the Stockholders Agreement, including provisions relating to the
designation of directors, will terminate upon consummation of this Offering. See
"Certain Transactions -- Terms of the Stockholders Agreement."
The principal occupations and positions for the past five years, and in
certain cases prior years, of the executive officers, directors and key
personnel named above are as follows:
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
41
<PAGE>
California and Illinois for four years, Mr. Thomas assumed the role of Corporate
General Manager and Chief Operating Officer. 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
and has held various positions of increasing responsibility with the Company
since such time. In 1980, he served as the Company's Advertising Director. In
1984, he became the Company's National Sales Manager. Thereafter, in 1985, Mr.
Albertson became Vice President of Corporate Development, and then became the
Vice President of Sales and Marketing in 1987.
BRUCE ROSS joined the Company in July 1994 as Chief Financial Officer. Prior
to joining the Company, Mr. Ross was Chief Financial Officer of Fred Hayman
Beverly Hills, Inc., a retailer of high end fashion clothing on Rodeo Drive in
California and a wholesaler of men's and women's fragrances. From 1982 to 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, the sole
general partner of Chase Ventures and an affiliate of Chase Securities. 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 Thompson PBE and
Wild Oats Markets, Inc. and various privately held companies. 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,
and a senior managing director and member of the Policy Council of The Chase
Manhattan Bank. He became a director of the Company in 1996. 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 various privately
held companies and was Vice Chairman of the National Association of Small
Business Investment Companies.
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
42
<PAGE>
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 of Wells Fargo. He became a director of
the Company upon consummation of the Recapitalization. From 1987 through 1995,
Mr. Burge was a Managing General Partner of Wedbush Capital Partners, a private
investment fund, and was an executive in the Corporate Finance Department of
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, Vintage and Used Products.
DAVID ANGRESS joined the Company in January 1996 as Vice President --
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.
GREG BENNETT joined the Company in September 1996 as Vice President --
Merchandising. Prior to joining the Company, Mr. Bennett was Director of
Marketing at Washburn International, where he was responsible for the marketing
services for Washburn Guitars, Sound Tech and Oscar Schmidt. Prior thereto, Mr.
Bennett was Marketing Director of Gibson Guitars. Mr. Bennett has over 20 years
of experience in the music industry.
ANDREW HEYNEMAN joined the Company in 1983. He has served in a variety of
positions with Guitar Center ranging from salesperson to 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.
MARK LAUGHLIN joined the Company in 1991 as Director of Information
Services. In 1997, he was promoted to Vice President -- Information Services.
Prior to joining Guitar Center, Mr. Laughlin was an Information Services manager
for Clothestime, and originally began his career in accounting at Arthur
Andersen & Co. Mr. Laughlin has an M.B.A.
BOARD OF DIRECTORS
The Certificate of Incorporation and Bylaws provide that directors shall be
elected by a plurality vote, with no cumulative voting, at each annual meeting
of stockholders. Each elected director shall hold office until his resignation
or removal and until his successor shall have been duly elected and qualified.
Presently, the Board consists of seven persons with two vacancies. The current
members of the Board
43
<PAGE>
were elected pursuant to the Stockholders Agreement. All material terms of the
Stockholders Agreement, including provisions relating to the designation of
directors, will terminate upon consummation of this Offering. See "Certain
Transactions -- Terms of the Stockholders Agreement." In connection with the
Recapitalization, the Company agreed that, following this Offering and so long
as Mr. Scherr owns 5% or more of the Common Stock on a fully diluted basis, the
Company would nominate or cause the nomination of Mr. Scherr to the Board (and
include Mr. 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. See "-- Scherr Board Representation
Letter."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has two standing committees, the Audit Committee and the
Compensation Committee. The Audit Committee has responsibility for reviewing and
making recommendations regarding the Company's employment of independent
accountants, the annual audit of the Company's financial statements, and the
Company's internal controls, accounting practices and policies. The members of
the Audit Committee are Jeffrey Walker and Steven Burge. The Compensation
Committee has responsibility for determining the nature and amount of
compensation of the management of the Company and for administering the
Company's employee benefit plans (including the 1996 Plan and the 1997 Plan).
Upon consummation of this Offering, the members of the Compensation Committee
will be David Ferguson and Michael Lazarus.
DIRECTOR COMPENSATION
The members of the Board do not presently receive compensation for their
services as members of the Board, but are reimbursed for their reasonable
out-of-pocket expenses arising from attendence at meetings of the Board of
Directors or committees thereof or in respect of related Company business. After
the consummation of this Offering, non-employee members of the Board will be
paid $ per month as compensation for serving on the Board, $ for
attendance at each meeting of the Board, and $ for attendance at each
meeting of a committee of the Board, and all directors will be reimbursed for
reasonable out-of-pocket expenses arising from attendance at any Board or
committee meetings. The 1997 Plan will also provide for the grant of options to
certain non-employee directors. Specifically, each non-employee director
initially elected to the Board after this Offering automatically will be granted
an option to purchase 15,000 shares of Common Stock on the date of such initial
election, and each non-employee director automatically will be granted an option
to purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders at which such director is re-elected to the Board, provided such
annual meetings is not less than 120 days after initial appointment to the
Board. All options granted to non-employee directors will have a per share
exercise price equal to fair market value of a share of Common Stock on the date
of grant. See "-- 1997 Equity Participation Plan."
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and each of the four other highest paid executive
officers of the Company (collectively, including the Chief Executive Officer,
the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ($) -----------------
------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION ($)(1) OPTIONS/SAR#(2) COMPENSATION ($)(3)
- ------------------------ --------- ---------- --------- -------------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Larry Thomas............ 1996 $ 500,000 -- $ 10,660,728(4) 397,985 $ 11,250
President and Chief 1995 500,000 $ 285,715 -- -- 25,645
Executive Officer
Marty Albertson......... 1996 $ 375,000 -- $ 7,107,146(4) 397,985 $ 11,250
Executive Vice 1995 375,000 $ 214,285 -- -- 25,645
President and Chief
Operating Officer
Bruce Ross.............. 1996 $ 195,000 (5) -- 79,599 $ 11,250
Vice President and 1995 180,000 $ 48,060 -- -- --
Chief Financial Officer
Barry Soosman........... 1996 $ 112,500 (5) -- 79,599 --
Vice President of 1995 -- -- -- -- --
Corporate Development
and General Counsel
Raymond Scherr (6)...... 1996 $ 529,885 -- -- -- $ 11,250
Chairman and Operator 1995 1,000,000 -- -- -- 25,645
of Rock Walk, a
division of the Company
</TABLE>
- ------------------------------
(1) Excludes perquisites and other personal benefits, securities or property
aggregating less than $50,000 or 10% of the total annual salary and bonus
reported for each Named Officer.
(2) The securities underlying the options are shares of Common Stock. For a
description of terms pertaining to such options and other information
relating thereto, see "-- Employment Agreements; -- Management Stock Option
Agreements; -- 1996 Performance Stock Option Plan."
(3) All other compensation consists of contributions made by the Company to its
profit sharing plan on behalf of each Named Officer.
(4) Other annual compensation consists of cash compensation received by such
Named Officer in connection with the Recapitalization and related
transactions. Excludes restricted shares of Junior Preferred Stock received
by such Named Officer upon the cancellation of employee stock options in
connection with the Recapitalization that will be converted into Common
Stock in connection with this Offering. See "The Recapitalization and
Related Transactions" and "Description of Capital Stock -- Preferred Stock
-- Junior Preferred Stock."
(5) The bonus of such Named Officer will be calculated in connection with the
preparation of the Company's financial statements for the fiscal year ended
December 31, 1996.
(6) Resigned as the Chairman of the Board effective with the completion of the
Recapitalization.
During the periods indicated above, none of the Named Officers received any
awards under any long-term incentive plan, and the Company does not have a
pension plan.
EMPLOYMENT AGREEMENTS
Upon consummation of the Recapitalization, the Company entered into a
five-year employment agreement with each of Larry Thomas and Marty Albertson, a
three-year employment agreement with Bruce Ross and a three and one-half year
employment agreement with Barry Soosman (collectively, as amended to date, the
"Employment Agreements"). The Employment Agreements provide Messrs. Thomas,
Albertson, Ross and Soosman (each a "Senior Officer" and collectively, the
"Senior
45
<PAGE>
Officers") with base salaries of $500,000, $375,000, $195,000 and $225,000,
respectively. Each Senior Officer is entitled to participate in all insurance
and benefit plans generally available to executives of the Company. In addition
to their base salary, Messrs. Thomas and Albertson will be paid an annual bonus
equal to 57.14% and 42.86%, 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. Pursuant to their employment agreements, each of
Messrs. Ross and Soosman have been granted options under the Company's 1996 Plan
to purchase 79,599 shares of Common Stock at an exercise price of $10.89 per
share. Of such options, one-half vest at the end of five years subject to
acceleration upon the attainment of certain performance events and one-half vest
ratably over a three-year period.
Under the terms of each Employment Agreement, if a Senior Officer is
terminated without cause or resigns with reasonable justification, such 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. With certain exceptions, if a Senior
Officer is terminated without cause, all stock options held by such Senior
Officer will immediately vest. If a Senior Officer's employment is terminated
for any other reason, he will be entitled only to his accrued base salary
through the date of termination.
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 ($100,000) 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 granted options (each,
a "Management Option") to each of Messrs. Thomas and Albertson to purchase
397,985 shares of Common Stock at an exercise price of $10.89 per share pursuant
to stock option agreements (the "Management Stock Option Agreements"). Unless
terminated or accelerated, each Management Option will vest in three equal
installments in 2003, 2004 and 2005 and will terminate upon the first to occur
of: (i) June 5, 2005; (ii) the consummation of a Company Sale (as defined in the
Management Stock Option Agreements); or (iii) the termination, either
voluntarily or for cause, of the employment of such executive officer with the
Company. The vesting of each Management Option will be accelerated: (a) if there
is a "Significant Public Float" of the Common Stock (as defined) and if the
Company's "Calculated Corporate Value" (which, in general, equals the market
value of the fully diluted shares of Common Stock based on the closing sales
price of the Common Stock on a national exchange or the Nasdaq National Market)
exceeds approximately $280 million, subject to adjustment; (b) if there is a
Company Sale and the consideration paid for the Company exceeds certain target
values set forth in the Management Stock Option Agreements; or (c) if the
executive officer's employment is terminated by the Company without cause or by
such executive officer with reasonable justification. Following the consummation
of this Offering, the Company intends to file a registration statement on Form
S-8 under the Securities Act to register the shares of Common Stock issuable
upon exercise of such options.
46
<PAGE>
OTHER OPTION ARRANGEMENTS
Chase Ventures, Wells Fargo and Weston Presidio granted options (the
"Investor Options") to purchase an aggregate of 277,195 shares of Common Stock
at a purchase price of $4.33 per share to certain officers and key managers of
the Company. Each grant of an Investor Option is, to the extent possible, deemed
to be granted by each Investor to each member of management in the same ratio as
granted by each Investor (I.E., 75.00% by Chase Ventures, 14.29% by Wells Fargo
and 10.71% by Weston Presidio). Included in the Investor Options are options to
purchase 109,725 shares of Common Stock that were granted to each of Messrs.
Thomas and Albertson and 3,847 shares of Common Stock that were granted to each
of Messrs. Ross and Soosman. The Investor Options were granted in December 1996,
are presently exercisable and will expire on December 30, 2001. The Company is
not a party to this agreement and has not, and will not, incur any obligation in
connection with such options. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Transactions -- Options Granted by Certain Investors to
Certain Members of Management."
1996 PERFORMANCE STOCK OPTION PLAN
The Company's 1996 Performance Stock Option Plan was adopted by the Board of
Directors and approved by its sole stockholder on June 3, 1996 and became
effective on that date. The Board of Directors and the stockholders approved an
Amended and Restated 1996 Performance Stock Option Plan in October 1996 (as
amended to date, the "1996 Plan"). The principal purposes of the 1996 Plan are
to provide incentives for officers, employees and consultants of the Company and
its subsidiaries through granting of options, thereby stimulating their personal
and active interest in the Company's development and financial success, and
inducing them to remain in the Company's employ. Following consummation of this
Offering, no further grants of options will be made under the 1996 Plan.
The principal features of the 1996 Plan are summarized below, but the
summary is qualified in its entirety by reference to the 1996 Plan, which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
GENERAL NATURE OF THE PLAN. Options issued under the 1996 Plan may be
either incentive stock options ("Incentive Options") intended to qualify as such
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
or non-qualified stock options ("Non-qualified options").
The 1996 Plan provides for the issuance of options to purchase units (each
Unit consisting of 2.582 shares of Common Stock and 99/100ths of a share of
Junior Preferred Stock) (the "Units"). As of the date of this Prospectus, the
Company has issued options to purchase 77,737 Units, at an exercise price of
$100 per Unit, under the 1996 Plan. After giving effect to the Junior Preferred
Stock Conversion, an option to purchase one Unit will, pursuant to the
anti-dilution provisions thereof, become an option to purchase 9.182 shares of
Common Stock. Giving effect to the Junior Preferred Stock Conversion, as of the
date of this Prospectus, the Company will have outstanding under the 1996 Plan
options to purchase 713,782 shares of Common Stock, at an exercise price of
$10.89 per share (no shares of which are currently exercisable or will be
exercisable within 60 days of March 1, 1997). The Company will not issue any
additional options under the 1996 Plan after the consummation of this Offering.
The 1996 Plan is administered by the Compensation Committee, which has the power
and authority to grant options under the 1996 Plan, subject to the Board's prior
approval.
ELIGIBILITY. Options may be granted under the 1996 Plan to employees of and
consultants to the Company, or any of its subsidiaries (other than Larry Thomas,
Marty Albertson, or any other person serving on the Compensation 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 1996 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 least than 110% of the fair
market value (as determined according to the 1996 Plan) of the stock on the
grant date and the options are not exercisable later than five years following
the grant date.
47
<PAGE>
GRANT OF OPTIONS. Options may be granted under the 1996 Plan at any time,
from time to time, prior to the termination of the 1996 Plan. Each option grant
will be set forth in a separate agreement with the person receiving the grant
and will indicate the type, terms and conditions of the option grant.
VESTING. Options are deemed granted on the date the Compensation 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 Compensation Committee shall determine whether
and to what extent any options are also subject to time vesting based on the
optionee's continued service. The 1996 Plan generally 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 1996 Plan), or by
the optionee with reasonable justification (as defined in the 1996 Plan) or
death.
OPTION PRICE AND EXERCISE. An option is exercisable at such times as are
determined on the grant date by the Compensation Committee. The purchase price
for shares to be issued to an optionee upon exercise of an option shall be the
fair market value of a share of Common Stock on the grant date (or such lesser
amount approved by the Board, but not less than 85% of the fair market value of
a share of Common Stock).
EXPIRATION, TERMINATION, REVOCATION, TRANSFER OF OPTIONS AND
AMENDMENTS. Options granted under the 1996 Plan are not assignable except by
will or by the laws of descent and distribution. The Compensation Committee,
with the Board's approval, may amend or modify the 1996 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.
REGISTRATION STATEMENT ON FORM S-8. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register the
shares of Common Stock issuable under the 1996 Plan, as of the consummation of
this Offering.
OPTION GRANTS IN 1996; AGGREGATE OPTION EXERCISES IN 1996; 1996 YEAR-END OPTION
VALUES
In 1996, the Company granted to certain directors, officers and employees of
the Company (including Messrs. Ross and Soosman) options to purchase 554,584
shares of Common Stock at a purchase price of $10.89 per share under the 1996
Plan and, pursuant to separate arrangements, granted to each of Messrs. Thomas
and Albertson options to purchase 397,985 shares of Common Stock at a purchase
price of $10.89 per share. Pursuant to the requirements of their respective
employment agreements, the Company has also granted to each of Messrs. Ross and
Soosman options to purchase an additional 79,599 shares of Common Stock at a
purchase price of $10.89 per share under the 1996 Plan. See "-- Director
Compensation," "-- Employment Agreements," "-- Management Stock Option
Agreements," "-- 1996 Performance Stock Option Plan" and "-- 1997 Equity
Participation Plan."
48
<PAGE>
Set forth below is a table describing the options granted by the Company to
each of the Named Officers during the year ended December 31, 1996:
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS/ PRICE APPRECIATION
UNDERLYING SARS GRANTED TO EXERCISE OR FOR OPTION TERM (2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/ SHARE) DATE 5% ($) 10% ($)
- ------------------------- -------------- --------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry Thomas............. 397,985 29.5% $ 10.89 2006 $ 2,725,880 $ 6,907,917
Marty Albertson.......... 397,985 29.5 10.89 2006 2,725,880 6,907,917
Bruce Ross............... 79,599 5.9 10.89 2006 545,189 1,381,615
Barry Soosman............ 79,599 5.9 10.89 2006 545,189 1,381,615
Raymond Scherr........... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The securities underlying the options are shares of Common Stock. No SARs
were granted in fiscal 1996. For a description of terms pertaining to such
options and other information relating thereto, see "-- Employment
Agreements; -- Management Stock Option Agreements; -- 1996 Performance Stock
Option Plan."
(2) The potential realizable value assumes a rate of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
The following table sets forth, on an aggregated basis, information
regarding securities underlying unexercised options during the year ended
December 31, 1996 by the Named Officers.
AGGREGATED OPTION EXERCISES IN 1996; YEAR END OPTION VALUES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END (1)(#) FISCAL YEAR-END ($)
----------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Larry Thomas..................................... -- 397,985(2) -- $ 1,635,718(2)
Marty Albertson.................................. -- 397,985(2) -- 1,635,718(2)
Bruce Ross....................................... -- 79,599 -- 327,152
Barry Soosman.................................... -- 79,599 -- 327,152
Raymond Scherr................................... -- -- -- --
</TABLE>
- ------------------------
(1) The securities underlying the options are shares of Common Stock. For a
description of terms pertaining to such options and other information
relating thereto, see "-- Employment Agreements; -- Management Stock Option
Agreements; -- 1996 Performance Stock Option Plan."
(2) The options granted to Messrs. Thomas and Albertson are subject to future
vesting which may be accelerated upon the attainment by the Company of
certain performance hurdles based on market capitalization and other
factors. See " -- Management Stock Option Agreements."
49
<PAGE>
1997 EQUITY PARTICIPATION PLAN
The Company's 1997 Equity Participation Plan (the "1997 Plan") was adopted
by the Board of Directors and approved by the stockholders in January 1997. The
principal purposes of the 1997 Plan are to provide incentives for officers,
employees and consultants of the Company and its subsidiaries through granting
of options, restricted stock, stock appreciation rights, dividend equivalent
performance awards and deferred stock awards (collectively, "Awards"), thereby
stimulating their personal and active interest in the Company's development and
financial success, and inducing them to remain in the Company's employ. In
addition to Awards made to officers, employees or consultants, the 1997 Plan
permits the granting of options ("Director Options") to the Company's
non-employee directors.
The Company will not grant any options under the 1997 Plan prior to the
consummation of this Offering.
Under the 1997 Plan, not more than 875,000 shares of Common Stock (or the
equivalent in other equity securities) are authorized for issuance upon exercise
of options, stock appreciation rights ("SARs") and other Awards, or upon vesting
of restricted or deferred stock awards. Furthermore, the maximum number of
shares which may be subject to options or stock appreciation rights granted
under the 1997 Plan to any individual in any calendar year cannot exceed
150,000.
The principal features of the 1997 Plan are summarized below, but this
summary is qualified in its entirety by reference to the 1997 Plan, which is
filed as an exhibit to the registration statement of which this Prospectus is a
part.
ADMINISTRATION. The Compensation Committee will administer the 1997 Plan
with respect to grants to employees or consultants of the Company and the full
Board will administer the 1997 Plan with respect to Director Options. The
Compensation Committee will consist of at least two members of the Board, each
of whom is a "non-employee director" for purposes of Rule 16b-3 ("Rule 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
with respect to options and SAR's which are intended to constitute
performance-based compensation under Section 162(m) of the Code ("Section
162(m)"), an "outside director" for the purposes of Section 162(m). Subject to
the terms and conditions of the 1997 Plan, the Board or Compensation Committee
has the authority to select the persons to whom Awards are to be made, to
determine the number of shares to be subject thereto and the terms and
conditions thereof, and to make all other determinations and to take all other
actions necessary or advisable for the administration of the 1997 Plan.
Similarly, the Board has discretion to determine the terms and conditions of
Director Options and to interpret and administer the 1997 Plan with respect to
Director Options. The Compensation Committee (and the Board) are also authorized
to adopt, amend and rescind rules relating to the administration of the 1997
Plan.
ELIGIBILITY. Options, SARs, restricted stock and other Awards under the
1997 Plan may be granted to individuals who are then officers or other employees
of the Company or any of its present or future subsidiaries based upon the
determination of the Compensation Committee. Such Awards also may be granted to
consultants of the Company selected by the Board or Compensation Committee for
participation in the 1997 Plan. Non-employee directors of the Company may be
granted NQSOs (as defined herein) by the Board.
GRANT OF AWARDS. The 1997 Plan provides that the Compensation Committee may
grant or issue stock options, SARs, restricted stock, deferred stock, dividend
equivalents, performance awards, stock payments and other stock related
benefits, or any combination thereof. Each Award will be set forth in a separate
agreement with the person receiving the Award and will indicate the type, terms
and conditions of the Award as determined by the Compensation Committee.
NONQUALIFIED STOCK OPTIONS ("NQSOS") will provide for the right to
purchase Common Stock at a price not less than the fair market value on the date
of grant, and usually will become exercisable (in the discretion of the Board or
Compensation Committee) in one or more installments after the grant date,
subject to the participant's agreement to continue in the employ of the Company
for at least one year (or
50
<PAGE>
shorter period as fixed in a written agreement) and/or subject to the
satisfaction of individual or Company performance targets established by the
Board or Compensation Committee. NQSOs may be granted for up to a ten-year term
specified by the Board or Compensation Committee and the exercise price thereof
must be not less than the fair market value of the underlying Common Stock on
the date of grant. The Compensation Committee may extend the term of any
outstanding option in connection with any termination of employment or
consultancy of the optionee or amend any condition or term of such option
relating to such termination. Notwithstanding the foregoing, options may not be
repriced after issuance.
INCENTIVE STOCK OPTIONS ("ISOS"), will be designed to comply with the
provisions of the Code and will be subject to certain restrictions contained in
the Code. Among such restrictions, ISOs must have an exercise price not less
than the fair market value of a share of Common Stock on the date of grant, may
only be granted to employees, must expire within a specified period of time
following the Optionee's termination of employment, and must be exercised within
the ten years after the date of grant; but may be subsequently modified to
disqualify them from treatment as ISOs. In the case of an ISO granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all classes of stock of the Company, the 1997 Plan provides that
the exercise price must be at least 110% of the fair market value of a share of
Common Stock on the date of grant and the ISO must expire no later than the
fifth anniversary of the date of its grant. Any option granted may be modified
by the Compensation Committee to disqualify such option from ISO treatment.
RESTRICTED STOCK may be sold to participants and made subject to such
restrictions as may be determined by the Board or Compensation Committee.
Restricted stock, typically, may be repurchased by the Company at the original
purchase price if the conditions or restrictions are not met. In addition, under
certain circumstances, the Company may repurchase the restricted stock upon
termination of employment at a cash price equal to the price paid by the
grantee. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and will
receive dividends prior to the time when the restrictions lapse.
DEFERRED STOCK may be awarded to participants, typically without payment
of consideration, but subject to vesting conditions based on continued
employment or on performance criteria established by the Board or Compensation
Committee. Like restricted stock, deferred stock may not be sold, or otherwise
transferred or hypothecated, until vesting conditions are removed or expire.
Unlike restricted stock, deferred stock will not be issued until the deferred
stock award has vested, and recipients of deferred stock generally will have no
voting or dividend rights prior to the time when vesting conditions are
satisfied.
STOCK APPRECIATION RIGHTS may be granted in connection with stock
options or other Awards, or separately. SARs granted by the Board or
Compensation Committee in connection with stock options or other awards
typically will provide for payments to the holder based upon increases in the
price of Common Stock over the exercise price of the related option or other
Awards, but alternatively may be based upon criteria such as book value. Except
as required by Section 162(m) with respect to an SAR intended to qualify as
performance-based compensation as described in Section 162(m), there are no
restrictions specified in the 1997 Plan on the exercise of SARs or the amount of
gain realizable therefrom, although restrictions may be imposed by the Board or
Compensation Committee in the SAR agreements. The Board or Compensation
Committee may elect to pay SARs in cash or in Common Stock or in a combination
of both.
DIVIDEND EQUIVALENTS represent the value of the dividends per share, if
any, paid by the Company, calculated with reference to the number of shares
covered by the stock options, SARs or other Awards held by the participant.
Dividend equivalents will be converted into cash or additional shares of Common
Stock as determined by the Compensation Committee.
PERFORMANCE AWARDS may be granted by the Board or Compensation Committee
on an individual or group basis. Generally, these Awards will be based upon
specific performance targets and may be
51
<PAGE>
paid in cash or in Common Stock or in a combination of both. Performance Awards
may include "phantom" stock Awards that provide for payments based upon
increases in the price of the Company's Common Stock over a predetermined
period.
STOCK PAYMENTS may be authorized by the Board or Compensation Committee
in the form of shares of Common Stock or an option or other right to purchase
Common Stock as part of a deferred compensation arrangement in lieu of all or
any part of compensation, including bonuses, that would otherwise be payable in
cash to the key employee or consultant. Such payments will be determined by the
Compensation Committee based on specific performance criteria.
Generally, in addition to the payment of any purchase price as
consideration for the issuance of an Award, the grantee must agree to remain in
the employ of or to consult for, the Company for at least one year after such
Award is issued. In addition, under the terms of the 1997 Plan Awards are
exercisable or payable only while the grantee is an employee or consultant of
the Company. However, under certain conditions, the Committee may determine that
any such award may be exercisable or paid subsequent to termination of
employment.
DIRECTOR OPTIONS will be granted to the Company's non-employee directors
under the 1997 Plan at a per share price not less than the fair market value of
a share of Common Stock on the date of grant. Following the consummation of this
Offering and after giving effect to the Junior Preferred Stock Conversion, (i) a
person who is initially elected to the Board and who is a non-employee director
at the time of such initial election automatically will be granted a Director
Option to purchase 15,000 shares of Common Stock on the date of such initial
election, and (ii) a person who is re-elected to the Board and who is a
non-employee director at the time of such re-election automatically shall be
granted a Director Option to purchase 5,000 shares of Common Stock on the date
of each annual meeting of stockholders at which such director is re-elected to
the Board. Notwithstanding the foregoing, (A) no grant shall be made to a
non-employee director pursuant to the foregoing clause (i) if: (x) an affiliate
of such non-employee director served on the Board within the twelve-month period
prior to the initial election of such non-employee director or (y) such
non-employee director is an employee of the Company who subsequently retires
from the Company and remains on the Board, and (B) no grant shall be made to a
non-employee director pursuant to the foregoing clause (ii) if such non-employee
director was initially elected to the Board within 120 days of such annual
meeting of stockholders. Director Options granted to non-employee directors will
vest over a three-year period. Although the Board presently has an intention to
grant only Director Options to non-employee directors, the Board may grant other
stock options or Awards to non-employee directors in accordance with the
provisions of the 1997 Plan.
The 1997 Plan may be amended, suspended or terminated at any time by the
Board or the Compensation Committee. However, the maximum number of shares that
may be sold or issued under the 1997 Plan may not be increased without approval
of the Company's stockholders.
SECURITIES LAWS AND FEDERAL INCOME TAXES
SECURITIES LAWS. The 1997 Plan is intended to conform to the extent
necessary with all provisions of the Securities Act and the Exchange Act and any
and all regulations and rules promulgated by the Securities and Exchange
Commission thereunder, including without limitation Rule 16b-3. The 1997 Plan
will be administered, and options will be granted and may be exercised, only in
such a manner as to conform to such laws, rules and regulations. To the extent
permitted by applicable law, the 1997 Plan and options granted thereunder shall
be deemed amended to the extent necessary to conform to such laws, rules and
regulations.
GENERAL FEDERAL TAX CONSEQUENCES. Under current federal laws, in
general, recipients of awards and grants of nonqualified stock options, stock
appreciation rights, restricted stock, deferred stock, dividend equivalents,
performance awards and stock payments under the 1997 Plan are taxable under
Section 83 of the Code upon their receipt of Common Stock or cash with respect
to such awards or grants and, subject to Section 162(m), the Company will be
entitled to an income tax deduction with respect to the amounts taxable to such
recipients. Under Sections 421 and 422 of the Code, recipients of ISOs are
generally not taxable on their receipt of Common Stock upon their exercises of
ISOs if the ISOs
52
<PAGE>
and option stock are held for certain minimum holding periods and, in such
event, the Company is not entitled to income tax deductions with respect to such
exercises. Participants in the 1997 Plan will be provided with additional
information regarding the tax consequences relating to the various types of
awards and grants under the plan.
SECTION 162(m) LIMITATION. In general, under Section 162(m), income tax
deductions of publicly-held corporations may be limited to the extent total
compensation (including base salary, annual bonus, stock option exercises and
non-qualified benefits paid) for certain executive officers exceeds $1 million
(less the amount of any "excess parachute payments" as defined in Section 280G
of the Code) in any one year. However, under Section 162(m), the deduction limit
does not apply to certain "performance-based compensation" established by an
independent compensation committee which is adequately disclosed to, and
approved by, stockholders. In particular, stock options and SARs will satisfy
the "performance-based compensation" exception if the awards are made by a
qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any person within a specified period and the compensation
is based solely on an increase in the stock price after the grant date (I.E.,
the option exercise price is equal to or greater than the fair market value of
the stock subject to the award on the grant date). Under a Section 162(m)
transition rule for compensation plans of corporations which are privately held
and which become publicly held in an initial public offering, the 1997 Plan will
not be subject to Section 162(m) until the earlier of (i) a material
modification of the 1997 Plan; (ii) the issuance of all employer stock and other
compensation that has been allocated under the 1997 Plan; or (iii) the first
meeting of stockholders at which directors are to be elected that occurs after
December 31, 1999 (the "Transition Date"). After the Transition Date, rights or
awards granted under the 1997 Plan, other than options and SARs, will not
qualify as "performance-based compensation" for purposes of Section 162(m)
unless such rights or awards are granted or vest upon preestablished objective
performance goals, the material terms of which are disclosed to and approved by
the stockholders of the Company. Thus, the Company expects that such other
rights or awards under the 1997 Plan will not constitute "performance-based
compensation" for purposes of Section 162(m).
The Company has attempted to structure the 1997 Plan in such a manner that,
after the Transition Date, subject to obtaining stockholder approval for the
1997, the remuneration attributable to stock options and SARs which meet the
other requirements of Section 162(m) will not be subject to the $1,000,000
limitation. The Company has not, however, requested a ruling from the IRS or an
opinion of counsel regarding this issue.
REGISTRATION STATEMENT ON FORM S-8. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register the
shares of Common Stock reserved for issuance under the 1997 Plan.
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. Following the
Recapitalization, Messrs. Thomas, Albertson, Ferguson and Lazarus served on the
Compensation Committee. Upon consummation of this Offering, Messrs. Thomas and
Albertson will resign from the Compensation Committee. In April 1996, the
Company made a personal loan to Larry Thomas, the Company's President, of $1
million at an annual interest rate of 8.0% to assist Mr. Thomas's purchase of a
personal residence. The loan, excluding accrued interest of $10,000 (which was
forgiven), was repaid concurrently with the Recapitalization.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The information in the following table sets forth the ownership of the
Common Stock, as of January 15, 1997, of the Company by (i) each person who, to
the knowledge of the Company, beneficially owns more than 5% of the outstanding
shares of Common Stock; (ii) each Named Officer; (iii) each director of the
Company; and (iv) all directors and executive officers of the Company, as a
group. As of January 15, 1997, the Company had 12,895,460 shares of Common Stock
outstanding and, to the knowledge of the Company, there were 32 holders of
Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
------------------------------------------------
PRIOR TO THE OFFERING AFTER THE OFFERING (3)
---------------------- ------------------------
NUMBER OF NUMBER OF
NAME AND ADDRESS (2) SHARES PERCENT SHARES PERCENT
- ----------------------------------------------------------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Chase Venture Capital Associates, L.P. (4)....................... 4,381,270 34.0 4,381,270 24.8%
380 Madison Avenue, 12th Floor
New York, NY 10017
Wells Fargo Small Business Investment Company (4)................ 878,581 6.8 878,581 5.0
333 South Grand Avenue
Los Angeles, CA 90071
Weston Presidio Capital II, L.P. (4)............................. 658,990 5.1 658,990 3.7
400 Sansome Street
San Francisco, CA 94111
Raymond Scherr (5)............................................... 1,710,148 13.3 1,710,148 9.2
David Ferguson (6)............................................... -- -- -- --
Jeffrey Walker (6)............................................... -- -- -- --
Michael Lazarus (7).............................................. -- -- -- --
Steven Burge (8)................................................. -- -- -- --
Larry Thomas (9)................................................. 1,864,257 14.5 1,545,686 8.3
Marty Albertson (10)............................................. 1,247,267 9.7 1,034,891 5.6
Bruce Ross (11).................................................. 3,847 * 3,847 *
Barry Soosman (12)............................................... 49,757 * 49,757 *
Dave DiMartino (13).............................................. 881,113 6.8 566,452 3.1
All Executive Officers and Directors as a group (9 persons)
(5)-(12)........................................................ 5,529,243 42.9 4,906,934 26.5
</TABLE>
- ------------------------
* Represents less than 1% of the issued and outstanding shares.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants which are currently exercisable, or will become
exercisable within 60 days of March 1, 1997, are deemed outstanding for
computing the percentage of the person or entity holding such securities but
are not outstanding for computing the percentage of any other person or
entity. Except as indicated by footnote, and subject to the community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. The information set forth in the table
assumes that the Underwriters' over-allotment option is not exercised and
has been adjusted to reflect the effects of the conversion of all
outstanding shares of Junior Preferred Stock into Common Stock upon the
consummation of this Offering. See "Description of Capital Stock --
Preferred Stock -- Junior Preferred Stock."
(2) Unless otherwise indicated, the address for each person is the Company's
address at 5155 Clareton Drive, Agoura Hills, CA 91362.
(3) Gives effect to the Management Tax Redemption. See "Use of Proceeds" and
"Certain Transaction -- Management Tax Redemption."
(4) Excludes Investor Options granted by Chase Ventures, Wells Fargo and Weston
Presidio to certain members of management for the purchase of 207,894,
39,611 and 29,660 shares of Common Stock, respectively. See "Certain
Transactions -- Options Granted by Certain Investors to Certain Members of
Management."
54
<PAGE>
(5) Represents: (i) 1,150,046 of shares of Common Stock held by the Scherr Trust
for which Mr. Scherr and his spouse serve as co-trustees and share voting
and investment control over such shares of Common Stock; (ii) 275,460 shares
of Common Stock held in trust for the benefit of Mr. Scherr and his son for
which Mr. Scherr's brother serves as trustee and exercises voting and
investment control; (iii) 275,460 shares of Common Stock held in trust for
the benefit of Mr. Scherr's spouse and daughter for which Mr. Scherr's
brother serves as trustee and exercises voting and investment control; and
(iv) 9,182 shares of Common Stock held by Mr. Scherr's brother. The address
of each such person is 1096 Lakeview Canyon, Westlake Village, CA 91362. Mr.
Ray Scherr disclaims beneficial ownership of the shares held in trust for
the benefit of his wife and daughter and held by David Scherr.
(6) Neither Mr. Walker nor Mr. Ferguson own any Common Stock. Messrs. Walker and
Ferguson are the Managing General Partner and a General Partner,
respectively, of Chase Capital Partners, a New York general partnership, and
the sole general partner of Chase Ventures and an affiliate of Chase
Securities. Each of Messrs. Walker and Ferguson disclaims beneficial
ownership of the shares owned by Chase Ventures except to the extent of his
pecuniary interest therein arising from his general partnership interest
therein.
(7) Mr. Lazarus does not directly own any Common Stock. However, as a general
partner of Weston Presidio, he may be deemed to share voting and investment
control over the shares of Common Stock held by Weston Presidio. Mr. Lazarus
disclaims beneficial ownership of the shares held by Weston Presidio.
(8) Mr. Burge does not own any Common Stock. However, as a managing director of
Wells Fargo, he may be deemed to share voting or investment control over the
shares of Common Stock owned by Wells Fargo. Mr. Burge disclaims beneficial
ownership of the shares held by Wells Fargo.
(9) Includes 109,725 shares of Common Stock issuable upon the exercise of an
Investor Option granted to Mr. Thomas by the Investors. See "Certain
Transactions -- Options Granted by Certain Investors to Certain Members of
Management."
(10)Includes: (i) 53,099 shares of Common Stock held in trust for the benefit of
Mr. Albertson and one of his children for which Mr. Albertson serves as
trustee; (ii) 53,099 shares of Common Stock held in trust for the benefit of
Mr. Albertson's spouse and one of his children for which Mr. Albertson
serves as trustee; and (iii) 109,725 shares of Common Stock issuable upon
the exercise of an Investor Option granted to Mr. Albertson by the
Investors. See "Certain Transactions -- Options Granted by Certain Investors
to Certain Members of Management."
(11)Represents 3,847 shares of Common Stock issuable upon the exercise of an
Investor Option granted to Mr. Ross by the Investors. See "Certain
Transactions -- Options Granted by Certain Investors to Certain Members of
Management."
(12)Represents: (i) 45,910 shares of Common Stock held by the Soosman Family
Trust with respect to which Mr. Soosman and his spouse serve as co-trustees
and share voting and investment control; and (ii) 3,847 shares of Common
Stock issuable upon the exercise of an Investor Option granted to Mr.
Soosman by the Investors. See "Certain Transactions -- Options Granted by
Certain Investors to Certain Members of Management."
(13)Represents: (i) 877,266 shares of Common Stock (prior to this Offering) and
562,605 shares of Common Stock (after this Offering) that are held by the
DiMartino Family Trust with respect to which Mr. DiMartino serves as trustee
and exercises voting and investment control; and (ii) 3,847 shares of Common
Stock issuable upon the exercise of an Investor Option granted to Mr.
DiMartino by the Investors. See "Certain Transactions -- Options Granted by
Certain Investors to Certain Members of Management." The address of such
person is 430 Laloma Road, Pasadena, CA 91105.
55
<PAGE>
CERTAIN TRANSACTIONS
MANAGEMENT TRANSACTIONS
In April 1996, the Company made a personal loan to Larry Thomas, the
Company's President, of $1 million at an annual interest rate of 8.0% 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 August 1995, Mr. Scherr purchased the South Chicago,
Illinois store from the Company's profit sharing plan for $900,000. The Company
leases this store from Mr. Scherr for $8,250 per month. The Company leases its
Covina, California store from Mr. Scherr for $9,900 per month. All of the leases
are on a triple net basis pursuant to which the Company pays rent, as well as
expenses relating to taxes, insurance and maintenance. Management believes that
the terms of these leases are on the same or similar terms that would be
available from an unaffiliated third party in an arm's length negotiation.
The Company paid the law firm of Soosman & Associates, of which Barry
Soosman was a partner, $70,000, $120,000 and $160,000 for legal fees in 1994,
1995 and 1996, respectively.
RECAPITALIZATION AND TRANSACTIONS WITH MANAGEMENT
On June 5, 1996, the Company consummated a series of transactions to effect
the Recapitalization pursuant to which control of the Company was transferred
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.
In connection with the Recapitalization, Larry Thomas (i) purchased 493,376
shares of Common Stock at a purchase price of $1.00 per share in cash; (ii)
purchased 189,171.92 shares of Junior Preferred Stock (with an initial
liquidation value of $100 per share) in exchange for the cancellation of options
to acquire 48,844,190 shares of Common Stock; and (iii) received $10.6 million
in cash upon the cancellation of options for the purchase of 31,484,670 shares
of Common Stock. The options exchanged had a weighted average exercise price of
$0.003 per share.
In connection with the Recapitalization, Marty Albertson (i) purchased
328,916 shares of Common Stock at a purchase price of $1.00 per share in cash;
(ii) purchased 126,114.41 shares of Junior Preferred Stock (with an initial
liquidation value of $100 per share) in exchange for the cancellation of options
to acquire 32,562,741 shares of Common Stock; (iii) received $7.1 million in
cash upon the cancellation of options for the purchase of 20,989,747 shares of
Common Stock. The options exchanged had a weighted average exercise price of
$0.003 per share.
In connection with the Recapitalization, the Company repurchased 309,840,000
shares of Common Stock from the Scherr Trust for approximately $113.1 million in
cash. The Scherr Trust also exchanged 51,123,600 shares of Common Stock for
198,000 shares of Junior Preferred Stock (with an initial liquidation value of
$19.8 million) and retained 516,400 shares of Common Stock.
In connection with the Recapitalization, the Company granted options to each
of Messrs. Thomas and Albertson to purchase 397,985 shares of Common Stock at an
exercise price of $10.89 per share pursuant to the Management Stock Option
Agreements. All such options granted to Messrs. Thomas and Albertson are subject
to future vesting which may be accelerated upon the attainment by the
56
<PAGE>
Company of certain performance hurdles based on market capitalization and other
factors. See "Management -- Management Stock Option Agreements." Following the
consummation of this Offering, the Company intends to file a registration
statement on Form S-8 under the Securities Act to register the issuance of
Common Stock upon exercise of such options.
The Company granted certain registration rights to Messrs. Thomas and
Albertson and the Scherr Trust. See "-- Registration Rights."
TRANSACTIONS WITH THE INVESTORS
In connection with the Recapitalization, the Investors purchased the
following equity securities of the Company for an aggregate purchase price of
$70.0 million in cash: (i) Chase Ventures and an affiliate purchased 1,355,550
shares of Common Stock and 519,750 shares of Junior Preferred Stock; (ii) Wells
Fargo purchased 258,200 shares of Common Stock and 99,000 shares of Junior
Preferred Stock; and (iii) Weston Presidio purchased 193,650 shares of Common
Stock and 74,250 shares of Junior Preferred Stock.
Chase Ventures is an affiliate of Chase Securities. Jeffrey Walker, a
director of the Company, is the managing general partner of Chase Capital
Partners, the general partner of Chase Ventures. 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 Wells Fargo. Wells Fargo is an
indirect wholly owned subsidiary of Wells Fargo & Co., the parent company of
Wells Fargo. Mr. Burge does not have an equity interest in Wells Fargo or Wells
Fargo & Co. Michael Lazarus, a director of the Company, is a general partner of
Weston Presidio and has an equity interest therein.
In connection with the Recapitalization, the Scherr Trust and stockholders
holding management positions (the "Management Stockholders") have agreed to
indemnify the Investors and the DLJ Investors for losses incurred in connection
with any misrepresentations or breaches of warranty by the Company or its
affiliates. The Investors and the DLJ Investors (as defined herein) 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 CHASE SECURITIES
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock and Warrants to purchase 190,252 shares of Common
Stock and 72,947 shares of Junior Preferred Stock (for an aggregate of $20
million in cash) to 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. The Company granted certain registration rights to the DLJ
Investors. See "-- Registration Rights."
In connection with the Recapitalization, the Company entered into a Bridge
Facility with DLJ Bridge, an affiliate of DLJ, and Chemical, an affiliate of
Chase Securities, pursuant to which DLJ Bridge purchased $51.0 million aggregate
principal amount of senior unsecured increasing rate notes for $51.0 million in
cash with interest payable at 12.75% per annum, and Chemical loaned $49.0
million in cash to the Company with interest payable at 12.75% per annum. The
Company applied the net proceeds of the offering of the Senior Notes, for which
DLJ and Chase Securities acted as Initial Purchasers, to the retirement of the
Bridge Facility. DLJ and Chase Securities are also acting as underwriters in
this Offering. In connection with such transactions, DLJ Bridge, Chemical, DLJ
and Chase Securities received customary fees.
1996 CREDIT FACILITY
Effective with the Recapitalization, Wells Fargo, an affiliate of Wells
Fargo Bank, purchased approximately 7.14% of the then outstanding Common Stock.
See "Principal and Selling Stockholders." Wells Fargo Bank is acting as lender
under the 1996 Credit Facility and is being paid customary fees therefor. In
addition, the Company has agreed to pay to Wells Fargo Bank, promptly upon
demand, a fee of
57
<PAGE>
$25,000 in consideration for Wells Fargo Bank agreeing to allow the Company to
use the proceeds of Revolving Loans to make loans to senior management in
respect of certain personal income tax liabilities. See "Description of Certain
Indebtedness -- The 1996 Credit Facility."
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"). The Stockholders have certain rights under
the Stockholders Agreement, including rights to designate the members of the
Board of Directors and subscribe for a proportional share of certain future
equity issuances by the Company. The Stockholders Agreement also prohibits the
Company from taking certain actions without the consent of two-thirds of the
members of the Board of Directors, and includes certain transfer restrictions.
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. Upon consummation of this Offering, all of the foregoing
provisions of the Stockholders Agreement will terminate, and the only provisions
remaining in effect require the Stockholders to comply with the provisions of
the Securities Act governing transfers of unregistered equity securities.
REGISTRATION RIGHTS
The Company granted: (i) to the Investors and certain members of management,
including Messrs. Thomas and Albertson and the Scherr Trust, the right to cause
the Company to register such holders' shares of equity securities at any time
upon the request of holders of at least 60.0% of the equity securities held by
such holders; and (ii) to the DLJ Investors and any future holders of Senior
Preferred Stock and Warrants the right to cause the Company to register the
equity securities held by such holders on one occasion commencing 180 days
following the date of this Prospectus, in each case in accordance with the
requirements of the Securities Act and subject to the Company's right to delay
its obligations upon the occurrence of specified events. In addition, all of
such holders have the right to include their shares of equity securities in any
registration of equity securities effected by the Company, including this
Offering, subject to certain limitations. The Company has agreed to pay all
costs associated with any such registrations, except for underwriters' discounts
and commissions.
RESTRICTED STOCK AGREEMENTS
In connection with the Recapitalization, certain members of management
(including Messrs. Thomas and Albertson) agreed not to transfer their shares of
Junior Preferred Stock before the earlier of (i) the completion of a "Qualified
Public Offering" (as defined therein); (ii) the sale of the Company; or (iii)
June 2001, subject to certain exemptions. All such transfer restrictions will
terminate upon consummation of this Offering.
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 individually agreed to 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 may not exceed $5 million.
58
<PAGE>
SUBCHAPTER S DISTRIBUTIONS
The Company elected to be taxed as a "S" corporation from 1988 until
immediately prior to the consummation of the Recapitalization. The Scherr Trust,
as the sole stockholder, received for 1994, 1995 and 1996 aggregate "S"
corporation distributions of $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
(the "Scherr Board Representation Letter") 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). This Offering constitutes a Qualified Public Offering for purposes
of the Scherr Board Representation Letter.
MANAGEMENT TAX REDEMPTION
In connection with the conversion of management's shares of Junior Preferred
Stock upon completion of this Offering, a significant amount of non-cash income
will be deemed to have been earned by certain employees of the Company who are
also stockholders of the Company (including Larry Thomas and Marty Albertson)
for federal and state income tax purposes (whether or not such employees have
received any cash with respect to the underlying stock). In February 1997, the
Company entered into agreements with Larry Thomas, Marty Albertson and certain
other senior employees pursuant to which the Company agreed to effect the
Management Tax Redemption to provide sufficient cash to such employees to
finance a portion of such federal and state income tax obligations. Pursuant to
the terms of the Management Tax Redemption, the Company will use approximately
$16.0 million of the proceeds from this Offering to redeem for cash that number
of shares of Common Stock calculated by dividing the amount of such proceeds by
the initial public offering price less the net underwriting discount (E.G.,
approximately 1,138,000 shares of Common Stock, assuming an initial public
offering price of $15.00 per share). Pursuant to the Common Stock Redemption,
Larry Thomas and Marty Albertson will receive approximately $4.5 million and
$3.0 million, respectively. See "Use of Proceeds."
OPTIONS GRANTED BY CERTAIN INVESTORS TO CERTAIN MEMBERS OF MANAGEMENT
Chase Ventures, Wells Fargo and Weston Presidio granted Investor Options to
purchase an aggregate of 277,195 shares of Common Stock at a purchase price of
$4.33 per share to certain officers and key managers of the Company. Each grant
of an Investor Option is, to the extent possible, deemed to be granted by each
Investor to each member of management in the same ratio as granted by each
Investor (i.e., 75.00% by Chase Ventures, 14.29% by Wells Fargo and 10.71% by
Weston Presidio). Included in the Investor Options are options to purchase
109,725 shares of Common Stock that were granted to each of Messrs. Thomas and
Albertson and 3,847 shares of Common Stock that were granted to each of Messrs.
Ross and Soosman. The Investor Options were granted in December 1996, are
presently exercisable and will expire on December 30, 2001. This Company is not
a party to this agreement and has not, and will not, incur any obligation in
connection with such charge. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Captial
Resources."
59
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE SENIOR NOTES
The Company has issued an aggregate of $100 million of Senior Notes.
Interest on the Senior Notes is payable at the rate of 11% per annum, in cash,
semiannually, in arrears. The Senior Notes were issued pursuant to the Indenture
between the Company and U.S. Trust Company of California, as trustee (the
"Indenture"). This description of the material provisions of the Senior Notes is
qualified in its entirety by reference to the Indenture which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Senior Notes are unsecured obligations of the Company that will mature
on July 1, 2006. The Senior Notes are not entitled to the benefit of a sinking
fund. The Senior Notes may be redeemed, in whole or in part, at the option of
the Company, at any time after July 1, 2001 at prices declining from 105.5% to
100.0% of the principal amount redeemed, plus accrued and unpaid interest. In
addition, the Company may, at its option and subject to certain conditions,
redeem up to 33 1/3% of the original aggregate principal amount of Senior Notes,
at a redemption price of 110% of the principal amount thereof, with the proceeds
of an Initial Public Equity Offering (as such term is defined in the Indenture).
This Offering constitutes an Initial Public Equity Offering. The Company will
redeem $33.3 million aggregate principal amount of the Senior Notes with
approximately $37.9 million of the net proceeds of this Offering. See "Use of
Proceeds."
The holders of the Senior Notes have the right to require that the Company
repurchase their Senior Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest, upon the occurrence of a Change of Control (as such
term is defined in the Indenture).
The Indenture contains restrictions on, among other things, the Company's
and any of its future subsidiaries' ability to incur additional indebtedness,
make certain restricted payments (including the payment of dividends or
distributions on the Common Stock), encumber its assets, make certain
investments, sell assets and the capital stock of subsidiaries, if any, enter
into transactions with affiliates and expand the lines of business conducted. In
addition, the Indenture restricts the Company's ability to enter into mergers,
consolidations or similar fundamental corporate transactions.
Events of Default under the Senior Notes include: (i) the failure to pay
principal or interest when due; (ii) a violation of one or more covenants
contained in the Indenture; (iii) a default in certain other debt obligations of
the Company; (iv) a failure to make a timely payment on any final unsatisfied
judgment; and (v) certain events of bankruptcy.
THE 1996 CREDIT FACILITY
GENERAL. The Company has entered into the 1996 Credit Facility with Wells
Fargo Bank. The 1996 Credit Facility provides for a $25 million revolving credit
facility, including a sub-limit for letters of credit of $10 million, and
expires on June 1, 2001. This summary of the 1996 Credit Facility is qualified
in its entirety by reference to the 1996 Credit Facility which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Capitalized terms used in this description that are not defined herein have the
meaning given to such terms in the 1996 Credit Facility.
AVAILABILITY. Borrowings under the 1996 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 1996 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 Wells Fargo Bank, the 1996 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 1996 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).
60
<PAGE>
MATURITY. The 1996 Credit Facility will mature on June 1, 2001. Loans made
pursuant to the 1996 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 Wells Fargo
Bank a facility fee of $250,000, of which $100,000 was paid and $50,000 is
payable at the end of each fiscal year of the Company, PROVIDED that upon
termination or cancellation of the 1996 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 Wells Fargo Bank promptly upon demand, a fee of
$25,000 in consideration for Wells Fargo Bank agreeing to allow the Company 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 Wells Fargo Bank a commitment fee based on the average daily unused
portion of the committed undrawn amount of the 1996 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 normal issuance fee for each letter of credit
issued, the Company is required to pay to Wells Fargo Bank 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 Wells Fargo Bank to
make loans or extend letters of credit is subject to the satisfaction of certain
conditions including, but not limited to, the absence of a default or event of
default under the 1996 Credit Facility, all representations and warranties under
the 1996 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 1996 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 1996 Credit Facility also
contains covenants which, among other things, limit: (i) the incurrence of
additional indebtedness; (ii) the nature of the business of the Company; (iii)
leases of assets; (iv) ownership of subsidiaries; (v) dividends; (vi) capital
expenditures; (vii) transactions with affiliates; (viii) asset sales; (ix)
acquisitions, mergers and consolidations; (x) loans and investments; (xi) liens
and encumbrances; and (xii) other matters customarily restricted in loan
agreements. The 1996 Credit Facility also contains additional covenants which
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 Wells Fargo Bank, 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 1996 Credit Facility include
payment defaults, breach of representations, warranties and covenants (subject
to certain cure periods), cross-default to other indebtedness in excess of $2
million, dissolution of the Company, a material adverse change in the Company's
properties or business, 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 1996 Credit Facility, the Company has agreed to
indemnify Wells Fargo Bank 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 1996 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.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have 18,509,607 shares
of Common Stock outstanding (19,522,107 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 6,750,000
shares sold by the Company (7,762,500 shares if the Underwriters' over-allotment
option is exercised in full) in the Offering will be freely tradable without
restriction under the Securities Act, except for any shares held by an
"affiliate" of the Company as such term is defined in Rule 144 under the
Securities Act.
The 11,759,000 shares of Common Stock outstanding immediately prior to the
consummation of the Offering are Restricted Securities that were issued in
private transactions and may be publicly sold only if registered under the
Securities Act or sold in accordance with an exemption from registration, such
as Rule 144. In general, under Rule 144, as currently in effect, a person who
had beneficially owned shares of Common Stock for at least two years, including
an "affiliate," as that term is defined in Rule 144, is entitled to sell, within
any three-month period, a number of "restricted" shares of Common stock that
does not exceed the greater of one percent of the then outstanding shares of
Common Stock (185,096 shares immediately after the consummation of the Offering,
without taking into account any exercise of the Underwriters' over-allotment
option) or the average weekly trading volume during the four calendar weeks
preceding such sale. Sales under Rule 144 are subject to certain manner of sale
limitations, notice provisions and the availability of current public
information about the Company. Rule 144(k) provides that a person who is not
deemed to be an "affiliate" and who has beneficially owned shares of Common
Stock for at least three years is entitled to sell such shares at any time under
Rule 144 without regard to the limitations described above. None of the
Restricted Securities are eligible for the present three-year holding period
provided for in Rule 144(k) except for up to 1,700,966 shares of Common Stock
owned by the Scherr Trust and two related family trusts. In addition, the
Securities and Exchange Commission has published a notice of proposed rulemaking
which, if adopted as proposed, would shorten the applicable holding periods
under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the
current two and three-year periods). The Company cannot predict whether such
amendments will be adopted or the effect thereof on the trading market for its
Common Stock.
Any employee, officer, director or consultant of the Company who purchased
his or her shares pursuant to a written compensatory plan or contract and
otherwise in compliance with Rule 701 under the Securities Act, is entitled to
rely on the resale provisions of Rule 701 which permits non-affiliates to sell
their Rule 701 shares without having to comply with the public-information,
holding-period, volume-limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. Of the Restricted Shares, 11,464,239 are subject to
lock-up agreements under which the holders have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Goldman, Sachs & Co.
Following this Offering, the Company intends to file a registration
statement on one or more Forms S-8 under the Securities Act to register the
713,782 shares of Common Stock issuable upon the exercise of options granted
under the 1996 Plan (none of which are currently exercisable or will be
exercisable within 60 days of March 1, 1997), the 795,970 shares of Common Stock
issuable, upon the exercise of options granted to Larry Thomas and Marty
Albertson (none of which are currently exercisable), and the 875,000 shares
reserved for issuance under the 1997 Plan (none of which will have been granted
as of the consummation of this Offering), thus permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act. Such registration statements will become effective immediately
upon filing. See "Management -- Management Stock Option Agreements; -- 1996
Performance Stock Option Plan; -- 1997 Equity Participation Plan."
No predictions can be made as to the effect that sales of Common Stock under
Rule 144, pursuant to a registration statement or otherwise, or the availability
of shares of Common Stock for sale, will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices and could impair the Company's future
ability to raise capital through an offering of its equity securities. See "Risk
Factors -- Possible Effect of Shares Eligible for Future Sale."
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this Offering, the authorized capital stock of the
Company will consist of 55,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock. The following summary description relating to the capital
stock gives effect to the consummation of this Offering and does not purport to
be complete. Reference is made to the Certificate of Incorporation, and the
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, if any, as
may from time to time be declared by the Board of Directors of the Company out
of funds legally available therefor. Pursuant to the Certificate of
Incorporation, 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 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, and the shares of Common Stock offered by the
Company hereby when issued will be, 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 issued 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 into an aggregate of 676,566 shares of Common 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
obtainable pursuant to the Warrants shall be subject to change or adjustment
according to the anti-dilution provisions of the Warrants. In the case of any
capital reorganization or any reclassification of the capital stock of the
Company the Warrants shall thereafter be exercisable for the number of shares of
stock or other securities or property receivable upon such capital
reorganization or reclassification equal to the number of shares of Common Stock
into which the Warrants would have been exercisable immediately prior to such
reorganization or reclassification.
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. Upon completion of this Offering and the transactions contemplated
hereby, the Company will not have any shares of Preferred Stock outstanding.
Further issuances of Preferred Stock, while providing the Company with
flexibility in connection with general corporate purposes, may, among other
things, have an adverse effect on the rights of holders of Common Stock. See
"Risk Factors -- Ownership of the Company; Anti-takeover Provisions."
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. Approximately $22.9 million of the net
63
<PAGE>
proceeds of this Offering will be used to redeem all outstanding shares of
Senior Preferred Stock, at a premium, and to pay all accrued and unpaid dividend
with respect thereto, whereupon all such shares shall be cancelled by the
Company. See "Use of Proceeds."
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. Upon consummation of this Offering,
each outstanding share of Junior Preferred Stock will be converted into 6.667
shares of Common Stock pursuant to the terms of an amendment approved by the
Board of Directors and requisite stockholders in January 1997. No accrued and
unpaid dividends will be paid on any shares of Junior Preferred Stock.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Certificate of Incorporation and the Bylaws summarized
in the succeeding paragraphs may be deemed to have anti-takeover effects and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider to be in such stockholder's best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders. See "Risk Factors -- Ownership of the Company;
Anti-takeover Provisions."
The Bylaws provide that special meetings of stockholders of the Company may
be called only by the Board of Directors, or by a majority of the directors or
by a committee authorized by the Board of Directors to do so. Special meetings
may not be called by the stockholders. The Bylaws and the Certificate of
Incorporation provide that any action required to be taken or which may be taken
by holders of Common Stock must be effected at a duly called annual or special
meeting of such holders and may not be taken by any written consent of such
stockholders.
The Bylaws provide that the stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate directors at an annual or special
meeting of stockholders, must provide timely notice thereof in writing. To be
timely, a stockholder's notice must be delivered to, or mailed to and received
at, the principal executive offices of the Company on a date no later than than
the close of business on the 120th calendar day in advance of the first
anniversary of the date the Company's proxy statement was released to security
holders in connection with the preceding year's annual meeting; PROVIDED,
HOWEVER, that if no annual meeting was held in the previous year or the date of
the annual meeting has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, a proposal
shall be received by the Company no later than the close of business on the
tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first. The Bylaws also specify certain requirements for a stockholder's
notice to be in proper written form.
The Bylaws may be amended by a majority of the Board of Directors. The
Bylaws may also be amended by the stockholders; PROVIDED, HOWEVER that any such
amendment must be approved by at least 66 2/3 of the combined voting power of
the outstanding capital stock entitled to vote generally in the election of
directors. Certain provisions of the Certificate of Incorporation may be amended
only by the affirmative vote of at least 66 2/3 of the combined voting power of
the then outstanding capital stock entitled to vote generally in the election of
directors.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law ("Delaware Law")
prevents an "interested stockholder" (defined in Section 203, generally, as a
person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined in Section 203) with a
publicly-held Delaware corporation for three years following the time such
person became an interested stockholder unless (i) before such person became an
interested stockholder, the board of directors of the corporation approved
either the transaction or the business combination by which the interested
stockholder became an interested stockholder; (ii) upon consummation of the
transaction that resulted
64
<PAGE>
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation or by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) after such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of the stockholders by the affirmative vote of
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder.
LIMITATION TO DIRECTOR LIABILITY
The Certificate of Incorporation provides that, to the fullest extent
permitted by the Delaware Law, directors of the Company shall not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under the Delaware Law, a director's liability to the
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 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 for breach of his or her fiduciary duty of care as a
director, except in the situations set forth in clauses (i) through (iv) above.
In addition, the Certificate of Incorporation does not alter the liability of
directors 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 vent of a breach in a director's duty of care.
The Certificate of Incorporation requires the Company to indemnify 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 agreements to
provide indemnification for the Company's directors and executive officers in
addition to the indemnification permitted by the Certificate of Incorporation.
These agreements, among other things, will indemnify the Company's directors and
executive officers for certain expenses (including attorney's fees), and all
losses, claims, liabilities, judgments, fines and settlement amounts incurred by
such person arising out of or in connection with such person's service as a
director or officer of the Company to the fullest extent permitted by applicable
laws.
CERTAIN PROVISIONS OF CALIFORNIA LAW
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 may 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
qualified for trading as a national market security on the Nasdaq National
Market 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").
Application has been made to have the Company's Common Stock approved for
quotation on the Nasdaq National Market under the symbol "GTRC." However, since
a significant portion of the Company's activities presently occur in California,
certain provisions of California corporate law may apply to the Company, as
described above, unless as a result of this Offering (i) more than one-half of
its outstanding voting securities are held of record by persons not having
addresses in California or (ii) there are more than 800 holders of its equity
securities as of the applicable date.
65
<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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is .
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon by Latham & Watkins, Los Angeles, California. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Latham &
Watkins provides legal services to the representatives of the Underwriters.
EXPERTS
The financial statements of Guitar Center, Inc. at December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
In connection with the Recapitalization, Ernst & Young LLP was replaced on
July 24, 1996 by KPMG Peat Marwick LLP as the Company's independent certified
public accountants. The decision to change accountants was approved by the
Company's Board of Directors. The reports of Ernst & Young LLP on the Company's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
of the Company's financial statements for each of the two fiscal years ended
December 31, 1995, and the subsequent interim period ended June 30, 1996, there
were no disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make reference to the matter in their
report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement on Form S-1. File No. 333- (the
"Registration Statement") under the Securities Act with respect to the shares of
Common Stock 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 Common Stock and this Offering,
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 Securities and Exchange Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain regional
offices of the Commission located at 75 Park Place, 14th Floor, New York, New
York 10007 and Northwest Atrium Center, 500 Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at
66
<PAGE>
450 Fifth Street, N.W., Room 1025, Washington, D.C. 20549, at prescribed rates.
The Securities and Exchange 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
Securities and Exchange Commission. The Company is currently subject to the
informational requirements of the Exchange Act and, in accordance therewith,
files reports, proxy and information statements with the Securities and Exchange
Commission.
67
<PAGE>
GUITAR CENTER, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited).............................................................. F-2
Condensed Statements of Operations for the nine months ended September 30,
1995
and 1996 (unaudited)..................................................... F-3
Condensed Statements of Stockholders' Equity (Deficit) as of September 30,
1996 (unaudited)......................................................... F-4
Condensed Statements of Cash Flows for the nine months ended September 30,
1995
and 1996 (unaudited)..................................................... F-5
Notes to Condensed Financial Statements................................... F-6
Report of Independent Auditors............................................ F-11
Balance Sheets as of December 31, 1994 and 1995........................... F-12
Statements of Income for the years ended December 31, 1993, 1994 and
1995..................................................................... F-13
Statements of Stockholder's Equity for the years ended December 31, 1993,
1994 and 1995............................................................ F-14
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995..................................................................... F-15
Notes to Financial Statements............................................. F-16
</TABLE>
F-1
<PAGE>
GUITAR CENTER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 1,338 $ 52
Accounts receivable, less allowance for doubtful accounts of $200 (1995) and
$100 (1996)................................................................... 2,203 3,288
Merchandise inventories........................................................ 31,282 48,465
Prepaid expenses and other current assets...................................... 772 1,709
-------------- --------------
Total current assets............................................................. 35,595 53,514
Property and equipment, net...................................................... 13,276 15,262
Goodwill, net of accumulated amortization of $152 (1995) and $163 (1996)......... 447 436
Other assets..................................................................... 300 4,333
-------------- --------------
Total assets..................................................................... $ 49,618 $ 73,545
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 12,613 $ 9,754
Accrued expenses and other current liabilities................................. 16,979 10,512
Current portion of long-term debt.............................................. -- 9,930
-------------- --------------
Total current liabilities........................................................ 29,592 30,196
Other long-term liabilities...................................................... 263 564
Long-term debt................................................................... -- 100,000
Senior preferred stock, aggregate liquidation preference of $20,190; authorized
4,250,000 shares, issued and outstanding 800,000 shares......................... -- 14,442
Stockholders' equity (deficit):
Junior preferred stock......................................................... -- 138,600
Warrants....................................................................... -- 6,500
Common stock, $.01 par value; authorized 55,000,000 shares, issued and
outstanding 3,614,800 at September 30, 1996................................... 4,987 36
Additional paid in capital..................................................... -- (8,885)
Retained earnings (deficit).................................................... 14,776 (207,908)
-------------- --------------
Total stockholders' equity (deficit)............................................. 19,763 (71,657)
-------------- --------------
Total liabilities and stockholders' equity....................................... $ 49,618 $ 73,545
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
GUITAR CENTER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1996
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales............................................................................. $ 119,950 $ 145,409
Cost of goods sold, buying and occupancy.............................................. 86,949 104,337
----------- -----------
Gross profit.......................................................................... 33,001 41,072
Selling, general and administrative expenses.......................................... 23,439 29,521
Deferred compensation expense......................................................... 2,060 69,892
----------- -----------
Operating income (loss)............................................................... 7,502 (58,341)
Interest expense, net................................................................. 259 9,105
Transaction expenses.................................................................. -- 6,481
----------- -----------
Income (loss) before income taxes..................................................... 7,243 (73,927)
Income taxes.......................................................................... 109 139
----------- -----------
Net income (loss)..................................................................... $ 7,134 $ (74,066)
----------- -----------
----------- -----------
Pro forma data:
Income (loss) before taxes.......................................................... $ 7,243 $ (73,927)
Pro forma tax provision............................................................. 4,000 --
----------- -----------
Pro forma net income (loss)......................................................... $ 3,243 $ (73,927)
-----------
-----------
Senior and junior preferred stock dividends........................................... (4,499)
-----------
Net loss applicable to common stockholder............................................. $ (78,426)
-----------
-----------
Pro forma net loss per share.......................................................... $ (3.79)
-----------
-----------
Weighted average shares outstanding................................................... 19,512
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
GUITAR CENTER, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNIOR ADDITIONAL RETAINED
PREFERRED COMMON PAID IN EARNINGS
STOCK WARRANTS STOCK CAPITAL (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............................. 19,800 -- (4,787) -- (128,115) (113,102)
Reclassification of prior S
Corporation deficit.................. -- -- -- (10,249) 10,249 --
Issuance of equity to management...... 49,500 -- 500 -- -- 50,000
Issuance of equity to new investors... 69,300 -- 700 -- -- 70,000
Issuance of warrants.................. -- 6,500 -- -- -- 6,500
Reincorporation to $0.01 par value and
stock split.......................... -- -- (1,364) 1,364 -- --
Net loss.............................. -- -- -- -- (74,066) (74,066)
Undeclared dividend on senior
preferred stock...................... -- -- -- -- (895) (895)
Accretion of senior preferred stock... -- -- -- -- (47) (47)
----------- ----------- ----------- ---------- ------------ ------------
Balance at September 30, 1996......... $ 138,600 $ 6,500 $ 36 $ (8,885) $ (207,908) $ (71,657)
----------- ----------- ----------- ---------- ------------ ------------
----------- ----------- ----------- ---------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
GUITAR CENTER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1996
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................................... $ 7,134 $ (74,066)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 1,342 1,551
Deferred compensation -- repurchase of options...................................... -- 49,500
Amortization of deferred financing fees............................................. -- 108
Changes in operating assets and liabilities:
Inventories....................................................................... (2,372) (17,183)
Accounts Receivable............................................................... (539) (1,085)
Prepaid expenses.................................................................. (584) (937)
Other assets...................................................................... (104) (556)
Accounts payable.................................................................. (2,837) (2,859)
Accrued expenses and other current liabilities.................................... 1,541 (6,467)
Other long-term liabilities....................................................... 51 301
---------- ------------
Net cash provided by (used in) operating activities................................... 3,632 (51,693)
---------- ------------
INVESTING ACTIVITIES
Purchases of property and equipment................................................... (1,521) (5,279)
---------- ------------
Net cash used in investing activities................................................. (1,521) (5,279)
---------- ------------
FINANCING ACTIVITIES
Deferred financing fees............................................................... -- (3,585)
Principal repayment of note payable................................................... (825) --
Net proceeds from revolving line of credit............................................ 7,052 9,930
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.......................................................... (12,365) (28,057)
---------- ------------
Net cash provided by (used in) financing activities................................... (6,138) 55,686
---------- ------------
Net (decrease) increase in cash and cash equivalents.................................. (4,027) (1,286)
Cash and cash equivalents at beginning of period...................................... 4,059 1,338
---------- ------------
Cash and cash equivalents at end of period............................................ $ 32 $ 52
---------- ------------
---------- ------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
In 1996, the Company entered into two sale leaseback transactions with its
former sole stockholder aggregating $1,753,000.
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
GUITAR CENTER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of management, the accompanying condensed financial
statements of Guitar Center, Inc. (the "Company") contain all adjustments
necessary to present fairly the financial position of the Company as of
September 30, 1996, and the results of operations and cash flows for the nine
months ended September 30, 1996 and 1995.
The financial statements give effect to the reincorporation of the Company
from a California to a Delaware corporation on October 11, 1996 and a 2.582-to-1
stock split effectuated on January 15, 1997.
The results of operations for the first nine 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 nine months ended September 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, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS 121), 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 has adopted 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
Prior to June 5, 1996, the Company elected to be treated as an S Corporation
for federal and state income tax purposes. 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. See note 7.
Pro forma net earnings per share has been computed by dividing pro forma net
earnings (loss) by the weighted average number of shares outstanding during the
period. The pro forma net earnings (loss) per share gives effect to: (i) the
issuance of Common Stock, $.01 par value ("Common Stock"), sold in the Company's
initial public offering (this "Offering"), the issuance of Common Stock upon the
conversion of the Company's 8% Junior Preferred Stock, $.01 par value (the
"Junior Preferred Stock"), in
F-6
<PAGE>
3. PRO FORMA DATA (CONTINUED)
connection with this Offering, the issuance of Common Stock upon the exercise of
outstanding warrants and common stock equivalents and (ii) the redemption of
Common Stock from certain members of the Company's management upon consummation
of this Offering.
4. RECAPITALIZATION
On June 5, 1996, the Company consummated a series of transactions to effect
the recapitalization of the Company (the "Recapitalization"). Members of
management purchased 1,291,000 shares of the Common Stock for $0.5 million in
cash and received 495,000 shares of 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 1,807,400 shares of Common
Stock and 693,000 shares of Junior Preferred Stock for $70.0 million in cash,
and 800,000 shares of 14% Senior Preferred Stock, $.01 par value (the "Senior
Preferred Stock"), and warrants to purchase Common Stock and Junior Preferred
Stock (the "Warrants") for an aggregate $20 million in cash. The Warrants are
exchangeable for 190,252 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 in cash, and canceled certain options for
Common Stock held by management in exchange for $27.9 million in cash. For
financial statement purposes, the Company recorded a charge to operations in the
amount of $69.9 million (net of $7.9 million which the Company had previously
accrued) related to the cancellation and exchange of the management stock
options.
In part to fund the Recapitalization transaction and to repay the $35.9
million outstanding under its Old Credit Facility, the Company borrowed $100
million under an increasing rate bridge facility (the "Bridge Facility"). The
Bridge Facility was repaid on July 2, 1996 with the proceeds from the issuance
of 11% Senior Notes due 2006 (the "Senior Notes") and cash on hand.
In connection with the Recapitalization, the Company incurred transaction
costs of approximately $11.2 million, which consisted of $6.5 million of
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 nine months ended September 30, 1996 condensed
statement of operations. In addition, on July 2, 1996, in connection with the
sale of the Senior Notes, approximately $3.6 million was paid and will be
recorded as an other asset and amortized over the term of the related debt.
5. STOCK OPTION PLANS
In 1996 the Company granted to certain employees options to purchase 147,087
Units (a Unit consisting of 2.582 shares of Common Stock and 0.99 of a share of
Junior Preferred Stock) at an exercise price of $100.00 per Unit. The Company
has an additional 112,693 Units remaining available for grant. The options are
non-compensatory under the provisions of APB 25 and vest over various periods.
The option agreements of two officers are subject to future vesting which may be
accelerated upon the attainment by the Company of certain performance hurdles
based on market capitalization and other factors. In January 1997, the Company
granted options to purchase an aggregate of 17,338 Units to two executive
officers of the Company. These grants were required under the respective
employment agreements and were measured in accordance with APB 25 at June 5,
1996.
6. DEBT
In connection with the Recapitalization, the Company borrowed $100 million
under 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 the Senior Notes and cash
on hand. The Senior Notes are unsecured, accrue interest at a rate of 11% per
annum and pay interest on a semi-annual basis.
In addition, the Company entered into a $25 million unsecured revolving line
of credit with Wells Fargo Bank. The line expires in June 2001. The revolving
line of credit bears interest at various rates based on the
F-7
<PAGE>
6. DEBT (CONTINUED)
prime lending rate (8.25% at September 30, 1996) plus 1.5% or the Eurodollar
rate (5.4% at September 30, 1996) plus 3.0%. A fee of 0.375% is assessed on the
unused portion of the facility with interest due monthly. At September 30, 1996,
the Company had $9.9 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 at September 30,
1996 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% per annum.
Such dividends are payable quarterly on each of March 15, June 15, September 15
and December 15, beginning June 15, 1996. On or prior to June 15, 2002,
dividends shall not be payable in cash to holders, but shall, whether or not
declared, accrete to the liquidation value of the Senior Preferred Stock
compounded on each dividend payment date. Under certain circumstances the
holders can elect to receive additional shares of the Senior Preferred stock in
lieu of accreting to the liquidation value.
The Company may, at its option, to the extent that funds are legally
available for such payment, redeem, prior to June 15, 1999, in whole or in part,
shares of Senior Preferred Stock at a redemption price equal to 103% of the
liquidation value thereof if such redemption shall occur before June 15, 1997,
or 106% of the liquidation value thereof 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.
F-8
<PAGE>
8. PREFERRED STOCK (CONTINUED)
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 (the "Certificate of Incorporation"). Such
Certificate of Incorporation 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 ranks senior to Junior Preferred Stock and the
Common Stock with respect to dividend rights and rights on liquidation, winding
up and dissolution.
In connection with the issuance of the Senior Preferred Stock the holders
received detachable Warrants (in addition to the Senior Preferred Stock) for an
aggregate $20.0 million paid. The Warrants are exchangeable for 190,252 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
liquidation preference of $100.00. Dividends accrue at a rate of 8% per annum on
the sum of the liquidation preference plus accumulated but unpaid dividends
thereon.
The Junior Preferred Stock ranks junior to the Senior Preferred Stock and
senior to the Common Stock, with respect to dividend rights and rights on
liquidation, winding up and dissolution.
F-9
<PAGE>
8. PREFERRED STOCK (CONTINUED)
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 an ("IPO")
resulting in a market capitalization of more than $500 million, at a redemption
price per share equal to 100% of the liquidation preference 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. The provisions of the Company's certificate of
incorporation will be amended, effective simultaneously with the consummation of
the Offering, to provide that the Company will convert all of the shares of
Junior Preferred Stock then outstanding into Common Stock, such conversion (the
"Mandatory Conversion") to occur automatically upon the closing of the Offering.
Each share of Junior Preferred Stock being converted pursuant to the Mandatory
Conversion shall convert into such number of shares of Common Stock as is equal
to the liquidation value per share, divided by a number (the "Average Estimated
IPO Price") equal to the average of the high and low points of the range of
estimated initial public offering price to the public (excluding underwriting
discounts and commissions), as set forth on the cover page of the final version
of the "red herring" prospectus distributed publicly in connection with the
marketing of the Offering, with any fractional shares being redeemed by the
Corporation for cash in an amount equal to such fractional share amount
multiplied by the Average Estimated IPO Price.
Accumulated but unpaid dividends on the Junior Preferred Stock and Senior
Preferred Stock aggregated $4.5 million as of September 30, 1996.
F-10
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Guitar Center, Inc.
We have audited the accompanying balance sheets of Guitar Center, 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, 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-11
<PAGE>
GUITAR CENTER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 3,752,202 $ 1,338,342
Accounts receivable, less allowance for doubtful accounts of $200,000 (1994)
and (1995).................................................................. 1,689,378 2,202,836
Employee notes............................................................... 39,755 81,996
Inventories (NOTE 2)......................................................... 28,794,650 31,281,381
Prepaid expenses............................................................. 372,323 689,797
-------------- --------------
Total current assets........................................................... 34,648,308 35,594,352
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 $ 49,618,615
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................. $ 10,405,733 $ 12,613,356
Accrued liabilities (NOTE 9)................................................. 5,608,370 7,060,745
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 29,591,968
Other long-term liabilities.................................................... 296,239 262,941
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 $ 49,618,615
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
GUITAR CENTER, 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-13
<PAGE>
GUITAR CENTER, 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-14
<PAGE>
GUITAR CENTER, 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..................................... 145,472 714,448 (513,458)
Inventories............................................. (6,392,025) (4,784,738) (2,486,731)
Prepaid expenses........................................ 247,131 11,817 (317,473)
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 1,452,375
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 13,287,378 16,387,742
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) 3,670,170 (2,413,860)
Cash and cash equivalents at beginning of year.............. 4,780,047 82,032 3,752,202
-------------- -------------- ---------------
Cash and cash equivalents at end of year.................... 82,032 $ 3,752,202 $ 1,338,342
-------------- -------------- ---------------
-------------- -------------- ---------------
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-15
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Guitar Center, 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 such 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, was $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-16
<PAGE>
GUITAR CENTER, 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............................................................ $ 18,429,887 $ 19,597,816
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
-------------- --------------
$ 28,794,650 $ 31,281,381
-------------- --------------
-------------- --------------
</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-17
<PAGE>
GUITAR CENTER, 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 1,905,304
-------------- --------------
$ 11,642,270 $ 7,060,745
-------------- --------------
-------------- --------------
</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-18
<PAGE>
GUITAR CENTER, 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-19
<PAGE>
GUITAR CENTER, 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 1,905,304
------------- -------------
$ 5,608,370 $ 7,060,745
------------- -------------
------------- -------------
</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 (the "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-20
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained of the Underwriting Agreement,
the Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), and each of such Underwriters, for whom Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery Securities, Dain
Bosworth Incorporated and Chase Securities Inc. are acting as representatives,
has severally agreed to purchase from the Company the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
- -------------------------------------------------------------------------------- ---------
<S> <C>
Goldman, Sachs & Co.............................................................
Donaldson, Lufkin & Jenrette Securities Corporation.............................
Montgomery Securities...........................................................
Dain Bosworth Incorporated......................................................
Chase Securities Inc. ..........................................................
---------
Total....................................................................... 6,750,000
---------
---------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 1,012,500
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 6,750,000 shares of Common
Stock offered.
Each of the Company, its directors, officers and certain stockholders of the
Company, including Chase Ventures, Wells Fargo, Weston Presidio and the DLJ
Investors, has agreed that, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, it will not offer, sell, contract to sell or otherwise dispose
of any securities of the Company (other than pursuant to employee stock option
plans existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus) which are substantially
similar to the shares of Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the shares of
Common Stock without the prior written consent of Goldman, Sachs & Co., except
for the shares of Common Stock offered in connection with this Offering.
Under Rule 2720 of the National Association of Securities Dealers, Inc. (the
"NASD"), affiliates of DLJ and Chase Securities may be deemed to have a conflict
of interest with the Company. See "The Recapitalization and Related
Transactions," "Certain Transactions -- Transactions with Affiliates of DLJ and
Chase Securities." This Offering is being conducted in accordance with Rule
2720, which provides that, among other things, when an NASD member participates
in the underwriting of a company's equity
U-1
<PAGE>
securities where there exists a conflict of interest with such company, the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards. In accordance
with this requirement, Goldman, Sachs & Co. has served in such role and has
recommended a price in compliance with the requirements of Rule 2720. Goldman,
Sachs & Co. will receive compensation of $10,000 for serving in such role. In
connection with this Offering, Goldman, Sachs & Co., in its role as qualified
independent underwriter, has performed due diligence investigations and reviewed
and participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part. In addition, the Underwriters
may not confirm sales to any discretionary account without the prior specific
written approval of the customer.
Prior to this Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "GTRC."
Each of DLJ and Chase Securities has in the past provided, and may in the
future provide, investment banking services for the Company and its affiliates.
Affiliates of DLJ own all of the outstanding shares of Senior Preferred Stock
with an aggregate liquidation value of approximately $20.0 million and will
receive approximately $22.9 million of the net proceeds of this Offering in
connection with the redemption of such shares. See "Use of Proceeds." Affiliates
of DLJ will also, immediately after this Offering, continue to own all of the
Warrants to purchase 676,566 shares of Common Stock. An affiliate of Chase
Securites will beneficially own, immediately after this Offering, 4,381,270
shares of Common Stock (net of certain options granted to certain members of the
Company's management).
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act. The Underwriters
have agreed to reimburse the Company for certain expenses.
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES TO WHICH
IT RELATES NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary................................................................. 3
Risk Factors............................................................ 9
The Recapitalization and Related Transactions........................... 14
Use of Proceeds......................................................... 15
Dividend Policy......................................................... 15
Dilution................................................................ 16
Capitalization.......................................................... 17
Selected Historical Financial Data...................................... 18
Unaudited Pro Forma Condensed Financial Data............................ 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 26
Business................................................................ 32
Management.............................................................. 41
Principal Stockholders.................................................. 54
Certain Transactions.................................................... 56
Description of Certain Indebtedness..................................... 60
Shares Eligible for Future Sale......................................... 62
Description of Capital Stock............................................ 63
Legal Matters........................................................... 66
Experts................................................................. 66
Additional Information.................................................. 66
Index to Financial Statements........................................... F-1
Underwriting............................................................ U-1
</TABLE>
--------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS 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.
6,750,000 SHARES
GUITAR CENTER, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
DAIN BOSWORTH
Incorporated
CHASE SECURITIES INC.
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are as follows:
<TABLE>
<CAPTION>
EXPENSE AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
The Commission's Registration Fee.................................................. 37,636
NASD Fee........................................................................... 12,920
Nasdaq National Market Fee......................................................... 30,000
Printing Expenses.................................................................. *
Legal Fees and Expenses............................................................ *
Accounting Fees and Expenses....................................................... *
Transfer Agent and Registrar Fees.................................................. *
Blue Sky Fees and Expenses (including counsel's fees).............................. *
Miscellaneous Expenses............................................................. *
---------
Total.......................................................................... *
---------
---------
</TABLE>
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Certificate of Incorporation of Guitar Center, Inc. (the "Company"), as
in effect immediately following the consummation of the sale of Common Stock
offered pursuant to this Registration Statement (the "Offering"), provides that,
to the extent permitted by the Delaware General Corporation Law, a director or
officer shall not be personally liable to the Company or its stockholders 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 Amended and Restated Bylaws, as in effect immediately
following the consummation of the Offering (the "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.
Policies of insurance may be obtained and maintained by the Company under
which its directors and officers will be insured, within the limits and subject
to the limitations of the policies, against certain expenses in connection with
the defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
The form of Underwriting Agreement, filed as Exhibit 1.1. hereto, provides
for the indemnification of the Company, its controlling persons, its directors
and certain of its officers by the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All capitalized terms not otherwise defined herein, shall have the meanings
ascribed to such terms in Part I of this Registration Statement. Unless
otherwise indicated herein, share and Unit numbers do not give effect to the
2.582-to-1 stock split effectuated by the Company on January 15, 1997 or to the
Junior Preferred Stock Conversion.
In June 1996, Guitar Center Management Company, Inc. (the "Predecessor")
effected a Recapitalization in order to transfer ownership of the Predecessor
from its sole stockholder, the Scherr Trust, to members of management and the
Investors. The Recapitalization included the following transactions: (i) members
of the Predecessor's management purchased 500,000 shares of the Predecessor's
common stock, no par value ("Predecessor Common Stock"), for $0.5 million in
cash; (ii) members of the Predecessor's management received 495,000 shares of
junior preferred stock, no par value ("Predecessor 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
Predecessor Common Stock; (iii) the Scherr Trust received 198,000 shares of
Predecessor Junior Preferred Stock, with an aggregate liquidation preference of
$19.8 million, in exchange for 19,800,000 shares of Predecessor Common Stock;
(iv) the Investors purchased 700,000 shares of Predecessor Common Stock and
693,000 shares of Predecessor Junior Preferred Stock for $70.0 million in cash;
(v) the DLJ Investors purchased 800,000 shares of 14% senior preferred stock, no
par value (the "Predecessor Senior Preferred Stock"), with an aggregate
liquidation value of $20.0 million, and warrants (the "Predecessor Warrants") to
purchase 73,684 shares of Predecessor Common Stock and 72,947 shares of
Predecessor Junior Preferred Stock, for an aggregate purchase price of $20.0
million in cash; (vi) DLJ Bridge purchased $51.0 million aggregate principal
amount of unsecured increasing rate notes for cash. All shares numbers in this
paragraph give effect to a 100 to 1 stock split effected by the Predecessor on
June 5, 1996. Such transactions were exempt from registration by virtue of
Section 3(a)(9) or Section 4(2) of the Securities Act.
In June 1996, the Predecessor granted to certain employees options to
purchase an aggregate of 60,399 Units (a unit consisting of one share of
Predecessor Common Stock and 99/100ths of a share of Predecessor Junior
Preferred Stock (each a "Predecessor Unit")) pursuant to its 1996 Plan. Such
transactions were exempt by virtue of Section 4(2) of and Rule 701 under the
Securities Act. In June 1996, the Predecessor granted options to purchase 43,344
Predecessor Units to each of Messrs. Larry Thomas and Marty Albertson, executive
officers of the Predecessor. Such transactions were exempt by virtue of Section
4(2) of the Securities Act. After the effectiveness of the Registration
Statement the Company expects to file a Registration Statement on Form S-8 to
register the shares issuable upon exercise of such options.
In July 1996, the Company sold $100 million aggregate principal amount of
11% senior notes due 2006 ("Senior Notes") to DLJ and Chase Securities. Such
transaction was exempt by virtue of Section 4(2) of the Securities Act. DLJ and
Chase Securities resold an aggregate of $100 million principal amount of Senior
Notes to "Qualified Institutional Investors" (within the meaning of Rule 144A
under the Securities Act) in transactions meeting the requirements of Rule 144A.
The Company was incorporated in Delaware in October 1996. Pursuant to an
agreement and plan of merger, the Predecessor merged with and into the Company
in October 1996 and each share of Predecessor Common Stock, each share of
Predecessor Junior Preferred Stock, each share of Predecessor Senior Preferred
Stock, each Warrant to purchase Predecessor Common Stock and Predecessor Junior
Preferred Stock, and each employee option to purchase Predecessor Units were
converted into one share of Common Stock, $.01 par value of the Company ("Common
Stock"), one share of Junior Preferred Stock, $.01 par value of the Company
("Junior Preferred Stock"), one share of Senior Preferred Stock, $.01 par value
of the Company, a Warrant to purchase Common Stock and Junior Preferred Stock
and an employee option to purchase units of the Registrant (each unit consisting
of one share of Common Stock and 99/100ths of a share of Junior Preferred Stock
(each, a "Unit")), respectively. Such transaction is exempt by virtue of Section
4(2) of and Rule 145 under the Securities Act.
II-2
<PAGE>
Effective December 30, 1996, certain employees of the Company entered into
written, irrevocable agreements to purchase 4,500 Units for an aggregate
purchase price of approximately $0.5 million pursuant to a Supplemental Employee
Stock Purchase Plan of the Company. Such transactions were exempt by virtue of
Section 4(2) of the Rules 505 and 506 under the Securities Act.
In January 1997, the Company granted options to purchase an aggregate of
17,338 Units to two executive officers of the Company, pursuant to its 1996 Plan
and the terms of their employment agreements. Such transactions were exempt by
virtue of Section 4(2) of the Securities Act. After the effectiveness of the
Registration Statement the Company expects to file a registration statement on
Form S-8 to register the shares issuable upon exercise of such options.
ITEM 16. EXHIBITS.
(a) Exhibits. See Exhibit Index
(b) Financial Statement Schedules. No schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
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 of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the 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.
The undersigned registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall by deemed to be a part of this
registration statement as of the time it was declared effective.
(2)
For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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 31st day of January, 1997.
GUITAR CENTER, INC.
By: /s/ LARRY THOMAS
------------------------------------------
Name: Larry Thomas
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Larry Thomas, Marty Albertson and Bruce
Ross his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him in his true name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file any registration statement pursuant to Rule 462(b) and to
file the same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
/s/ LARRY THOMAS President, Chief Executive Officer
------------------------------------------- and Director (Principal Executive January 31, 1997
Larry Thomas Officer)
/s/ BRUCE ROSS Vice President, Chief Financial
------------------------------------------- Officer and Secretary (Principal January 31, 1997
Bruce Ross Financial and Accounting Officer)
/s/ MARTY ALBERTSON
------------------------------------------- Executive Vice President, Chief January 31, 1997
Marty Albertson Operating Officer and Director
/s/ RAYMOND SCHERR
------------------------------------------- Director January 31, 1997
Raymond Scherr
/s/ DAVID FERGUSON
------------------------------------------- Director January 31, 1997
David Ferguson
/s/ JEFFREY WALKER
------------------------------------------- Director January 31, 1997
Jeffrey Walker
/s/ MICHAEL LAZARUS
------------------------------------------- Director January 31, 1997
Michael Lazarus
/s/ STEVEN BURGE
------------------------------------------- Director January 31, 1997
Steven Burge
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* The Company's Certificate of Incorporation
3.2* Amendment to the Company's Certificate of Incorporation
3.3 Amendment to the Company's Certificate of Incorporation
3.4 Amendment to the Company's Certificate of Incorporation
3.5 The Company's Restated Certificate of Incorporation
3.6* The Company's Bylaws
3.7 The Company's Amended and Restated Bylaws
4.1* Indenture, dated as of July 2, 1996 by and between the Company and U.S. Trust Company of California as
trustee
4.2* Form of Restricted Stock Agreements dated as of May 1, 1996 between the Company and certain members of
management
4.3* Warrants (1-4) dated June 5, 1996, for the purchase of shares of Common Stock and Junior Preferred
Stock issued to certain investors
5.1** Opinion of Latham & Watkins as to the validity of the shares of Common Stock offered hereby
10.1* Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
10.2* Recapitalization Agreement, dated May 1, 1996 by and among the Company and the stockholders named
therein
10.3* Registration Rights Agreement, dated June 5, 1996, among the Company and the stockholders named therein
10.4* 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 The Company's Amended and Restated 1996 Performance Stock Option Plan
10.6* Employment Agreement dated June 5, 1996, between the Company
and Lawrence Thomas
10.7* Employment Agreement dated June 5, 1996, between the Company
and Marty Albertson
10.8* Employment Agreement dated June 5, 1996, between the Company and Bruce Ross, as amended
10.9* Employment Agreement dated June 5, 1996, between the Company and Raymond Scherr
10.10* Employment Agreement dated June 5, 1996, between the Company and Barry Soosman, as amended
10.11 Form of Indemnification Agreement between the Company and each of its directors and executive officers
10.12* Securities Purchase Agreement dated June 5, 1996, by and among the Company
and the parties named therein
10.13* Registration Agreement dated June 5, 1996, among the Company
and the parties named therein
10.14* Credit Agreement dated June 5, 1996, between the Company
and Wells Fargo Bank, N.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.15* 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
10.16* Security Agreement dated June 5, 1996, between the Company and Wells Fargo, N.A.
10.17* Registration Rights Agreement, dated July 2, 1996, by and among the Company, Chase Securities and DLJ
10.18* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Lawrence Thomas
10.19* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Marty Albertson
10.20 Purchase Agreement and Escrow Instructions, dated February 15, 1996, by and between the Company and
G.C. Realty LLC (Arlington, Texas)
10.21 Purchase Agreement and Escrow Instructions, dated February 15, 1996, by and between the Company and
G.C. Realty LLC (North Chicago, Illinois)
10.22 Offer, Agreement and Escrow Instructions for Purchase of Real Estate, dated August 11, 1995, by and
between Raymond I. Scherr and Guitar Center Management Company, Inc., Profit Sharing Plan (South
Chicago, Illinois)
10.23 Lease, dated August 31, 1995, by and between G.C. Realty LLC and the Company (Covina, California)
10.24 Amendment No. 1 to Amended and Restated 1996 Performance Stock Option Plan
10.25 Form of Employee Stock Purchase Plan Agreement
10.26 1997 Equity Participation Plan
10.27 Stockholders Consent, dated as of January 24, 1997, by and among the Company and certain of its
stockholders
10.28 Modification to Amended and Restated 1996 Performance Stock Option Plan.
10.29** Form of Management Tax Redemption Agreement
16.1 Letter re change in certifying accountant
23.2 Consent of Ernst & Young LLP, independent auditors
23.4** Consent of Latham & Watkins (included in Exhibit 5)
24.1 Power of Attorney (included on page II-4)
</TABLE>
- ------------------------
* Incorporated by reference to the same numbered exhibit in the Registration
Statement on Form S-1 (File No. 333-10491).
** To be filed by Amendment.
<PAGE>
Exhibit 1.1
[DRAFT]
GUITAR CENTER, INC.
6,750,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE
--------------------------
UNDERWRITING AGREEMENT
[ ], 1997
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Dain Bosworth Incorporated
Chase Securities Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Guitar Center, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and
sell to the Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 6,750,000 shares and, at the election of the Underwriters, up to
1,012,500 additional shares of Common Stock, $0.01 par value ("Stock"), of
the Company. The aggregate of 6,750,000 shares to be sold by the Company is
herein called the "Firm Shares" and the 1,012,500 additional shares to be
sold by the Company are herein called the "Optional Shares." The Firm Shares
and the Optional Shares that the Underwriters elect to purchase pursuant to
Section 2 hereof are herein collectively called the "Shares."
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No.
333-[ ]) (the "Initial Registration Statement") in respect of
the Shares has been filed with the Securities and Exchange
Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits
thereto, for you and each of the other Underwriters, have been
declared effective by the Commission in such form; other than a
registration
<PAGE>
statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing, no other document
with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration
Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened
by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act, is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and
including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b)
the Act in accordance with Section 6(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared
effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each
as amended at the time such part of the registration statement
became effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the
form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and
each Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that this representation and
warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished
in writing to the Company by an Underwriter through Goldman,
Sachs & Co. expressly for use therein;
(iii) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all
material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the
applicable filing date as to the Prospectus and any amendment
or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein
(with respect to the Prospectus and any amendment or
supplement thereto, in light of the circumstances under which
such statements were made) not misleading; PROVIDED, HOWEVER,
that this representation and warranty shall not apply to any
statements or
2
<PAGE>
omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(iv) The Company has not sustained since the date of the
latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective
dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in
the capital stock (except for immaterial issuances of stock
options to employees of the Company pursuant to existing stock
ption plans as in effect prior to the date hereof or except
as contemplated and disclosed in the Prospectus) or long-term
debt or material increase in short-term debt other than in the
ordinary course of business and consistent with past
practices, of the Company or any material adverse change, or
any development reasonably likely to result in a prospective
material adverse change, in or affecting the business,
management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set
forth or contemplated in the Prospectus;
(v) The Company has good and marketable title in fee
simple to all real property owned by it and owns all of the
personal property disclosed in the Prospectus as being owned
it, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made
of such property by the Company or such as would not have a
material adverse effect on the business, management, condition
(financial or otherwise), stockholders' equity, results of
operations or prospects of the Company, either individually or
in the aggregate (a "Material Adverse Effect"); any real
property and buildings held under lease by the Company is held
by it under valid, currently existing and enforceable leases
with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company or except where the failure to have a
valid, currently existing and enforceable lease would not have
a Material Adverse Effect; and except for such assets and
facilities as are immaterial in the aggregate to the business
of the Company taken as a whole, all tangible assets and
facilities of the Company are reasonably adequate for the uses
to which they are being put or would be put in the ordinary
course of business;
(vi) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the state of Delaware, with power and authority
(corporate and other) to (i) own its properties and conduct
its business as described in the Prospectus, (ii) authorize
the offering of the Shares, (iii) execute, deliver and perform
this Agreement, and (iv) issue, sell and deliver the Shares;
and the Company has been duly qualified as a foreign
corporation for the transaction of
3
<PAGE>
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, except where
the failure to be so qualified, either individually or in the
aggregate, would not have a Material Adverse Effect;
(vii) The Company has an authorized capitalization as
set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly and validly
authorized and issued, are fully paid and nonassessable and
conform to the description thereof contained in the Prospectus;
(viii) The unissued Shares to be issued and sold by the
Company to the Underwriters hereunder have been duly and
validly authorized and, when issued and delivered against
payment therefor as provided herein, will be duly and validly
issued and fully paid and nonassessable and will conform to
the description of the Stock contained in the Prospectus; and
the issuance and sale of the Shares by the Company will not be
subject to preemptive or other similar rights;
(ix) The issue and sale of the Shares to be sold by the
Company, and the compliance by the Company with all of the
provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company is a party or by which the
Company is bound or to which any of the property or assets of
the Company is subject, nor will such action result in any
violation of any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction
over the Company or any of its properties, except where such
conflict, breach, violation, or default either individually or
in the aggregate, would not have a Material Adverse Effect,
nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of the Company;
and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under
the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be
equired under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters;
(x) The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument to
which it is a party or by which it or any of its properties
may be bound, except where such default, either individually
or in the aggregate, would not have a Material Adverse Effect,
nor is the Company in violation of its Certificate of
Incorporation or By-laws; the Company is not in violation of
or in default in the performance of any
4
<PAGE>
statute, rule or regulation or administrative or court decree
applicable to the Company or any of its properties, except for
any such violation or default which, individually or in the
aggregate, would not have a Material Adverse Effect;
(xi) The statements set forth in the Prospectus under
the caption "Description of Capital Stock," insofar as they
purport to constitute a summary of the terms of the capital
stock of the Company, under the captions "Recapitalization,"
and "Certain Transactions" and under the caption
"Underwriting" (except, under the caption "Underwriting," for
paragraphs 3 and 6 and the last sentence of paragraph 7
thereof) insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate and
fair in all material respects;
(xii) Other than as set forth in the Prospectus, there
are no legal or governmental proceedings pending to which the
Company is a party or of which any property of the Company is
the subject which, if determined adversely to the Company,
would, individually or in the aggregate, have a Material
Adverse Effect and, to the best of the Company's knowledge, no
such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(xiii) The Company is not and, after giving effect to
the offering and sale of the Shares, will not be (i) an
"investment company" or[, TO THE KNOWLEDGE OF THE COMPANY,] an
entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act of 1940, as amended
(the "Investment Company Act");
(xiv) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or
affiliate located in Cuba within the meaning of Section
517.075, Florida Statutes;
(xv) KPMG Peat Marwick, L.L.P. and Ernst & Young L.L.P.,
who have certified certain financial statements of the Company
are each independent public accountants as required by the Act
and the rules and regulations of the Commission thereunder;
(xvi) The financial statements of the Company, together
with related notes, set forth in the Preliminary Prospectus
and the Prospectus (and any amendments or supplements thereto)
comply as to form in all material respects with the
requirements of the Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act") and fairly present the
financial position of the Company at the respective dates
indicated and the results of its operations and its cash flows
for the respective periods indicated, in accordance with
generally accepted accounting principles in the United States
of America ("GAAP") consistently applied throughout such
periods; the PRO FORMA financial statements, together with
related notes, set forth under the caption "Unaudited Pro
Forma Condensed Financial Data" in the Preliminary Prospectus
and
5
<PAGE>
the Prospectus have been prepared on a basis consistent
with such historical statements, except for the PRO FORMA
adjustments specified therein, and give effect to assumptions
made on a reasonable basis and present fairly the transactions
reflected thereby as indicated in the Preliminary Prospectus
and the Prospectus and this Agreement, and comply as to form
in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X and the PRO FORMA
adjustments have been properly applied to the historical
mounts in the compilation of those statements; and the other
financial information and data included in the Preliminary
Prospectus and the Prospectus (and any amendments or
supplements thereto), historical and PRO FORMA, are accurately
presented and prepared on a basis consistent with such
financial statements and the books and records of the Company;
(xvii) The Company has no subsidiaries;
(xviii) Except as would not, either individually or in
the aggregate, have a Material Adverse Effect or is otherwise
disclosed in the Prospectus, (i) the Company is not in
violation of any federal, state or local laws and regulations
relating to pollution or protection of human health or the
environment or the use, treatment, storage, disposal,
transport or handling, emission, discharge, release or
threatened release of toxic or hazardous substances, materials
or wastes, or petroleum and petroleum products ("Materials of
Environmental Concern") (collectively, "Environmental Laws"),
including, without limitation, noncompliance with or lack of
any permits or other environmental authorizations, and (ii)
(A) the Company has not received any communication from any
person or entity alleging any violation of or noncompliance
with any Environmental Laws, and, to the knowledge of the
Company [AFTER DUE INQUIRY], there are no past, present or
reasonably foreseeable circumstances that may lead to any such
violation in the future, (B) there is no pending or, to the
knowledge of the Company [AFTER DUE INQUIRY], threatened
claim, action, investigation or notice by any person or entity
against the Company or against any person or entity for whose
acts or omissions the Company is or would reasonably be
expected to be liable, either contractually or by operation of
law, alleging liability for investigatory, cleanup, or
governmental response costs, or natural resources or property
damages, or personal injuries, attorney's fees or penalties
relating to any Materials of Environmental Concern or any
violation [OR POTENTIAL VIOLATION], of any Environmental Law
(collectively, "Environmental Claims"), and (C) there are no
actions, activities, circumstances, conditions, events or
incidents that would reasonably be expected to form the basis
of any such Environmental Claim;
(xix) The Company is not in violation of any Federal,
state or local law relating to employment and employment
practices, discrimination in the hiring, promotion or pay of
employees nor any applicable wage or hour laws, nor any
provisions of ERISA or the rules and regulations promulgated
thereunder, except for any such violation which, individually
or in the aggregate, would not result in a Material Adverse
Effect or otherwise would not be required to be disclosed in
the Prospectus; there is (A) no
6
<PAGE>
significant unfair labor practice complaint pending or, to the
knowledge of the Company, threatened against the Company
before the National Labor Relations Board or any state or
local labor relations board, and no significant grievance or
significant arbitration proceeding arising out of or under any
collective bargaining agreement is pending or, to the
knowledge of the Company, threatened against the Company, (B)
no labor strike, dispute, slowdown or stoppage ("Labor
Dispute") in which the Company is involved other than routine
disciplinary and grievance matters, the Company is not aware
of any existing Labor Dispute by the employees of any of its
principal suppliers and (C) no question concerning union
representation within the meaning of the National Labor
Relations Act existing with respect to the employees of the
Company and, to the knowledge of the Company, no union
organizing activities are taking place, except (with respect
to any matter specified in clause (A), (B) or (C) above,
singly or in the aggregate) such as would not have a Material
Adverse Effect; and except for the Company's Profit Sharing
Plan, the Company is not a "party in interest" or a
"disqualified person" (as such terms are defined in Section
3(14) of ERISA or Section 4975 of the Code, respectively) with
respect to any employee benefit plan (as defined in Section
3(3) of ERISA) or any plan (as defined in Section 4975 of the
Code);
(xx) The Company maintains reasonable levels of
insurance in accordance with retail industry standards
covering its properties, operations, personnel and business;
the Company has not received written notice from any insurer
or agent of such insurer that substantial capital improvements
or other similar expenditures will have to be made in order to
continue such insurance; and all such insurance is outstanding
and in full force and effect on the date hereof and will be
outstanding and in full force and effect on each Time of
Delivery;
(xxi) All (A) (x) Federal, state and local income and
Franchise Tax returns required to be filed by the Company in
any jurisdiction have been filed and (y) material Tax returns
required to be filed by the Company in any jurisdiction have
been filed, and (B) material Taxes due or claimed to be due
from such entities have been paid, other than those being
contested in good faith and by appropriate proceedings and for
which adequate reserves have been provided in accordance with
GAAP on the books and records of the Company or those
currently payable without penalty or interest; "TAXES" shall
mean all Federal, state, local and foreign taxes, and other
assessments of a similar nature (whether imposed directly or
through withholding), including any interest, additions to
tax, or penalties applicable thereto;
(xxii) The Company possesses such licenses,
certificates, authorizations, exemptions, consents, approvals,
franchises, permits and other rights issued by local, state,
Federal or foreign regulatory agencies or bodies or other
governmental authorities or self-regulatory organizations
(collectively, "Permits") as are necessary to own, lease and
operate its properties and to conduct its business now
conducted by it except where the failure to possess any such
permit would not have a Material Adverse Ef-
7
<PAGE>
fect; the Company has fulfilled and performed all of its
material obligations with respect to such Permits; the Company
is in compliance with the terms and conditions of all such
Permits and with the rules and regulations of the regulatory
authorities and governing bodies having jurisdiction with
respect thereto, except to the extent that would not,
individually or in the aggregate, have a Material Adverse
Effect; and the Company has not received any notice of
proceedings relating to the revocation or modification of any
such Permit that would have a Material Adverse Effect and no
such Permits contain any restrictions that would result in a
Material Adverse Effect;
(xxiii) The Company owns or possesses all patents,
patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names
(collectively, the "Intellectual Property") presently employed
by it in connection with the business now operated by it,
except where the failure so to own or possess would not,
individually or in the aggregate, have a Material Adverse
Effect, and the Company has not received any notice of
infringement of or conflict with asserted rights of others
with respect to any of the foregoing, except where such
infringement or conflict would not individually, or in the
aggregate, have a Material Adverse Effect; and, to the
Company's knowledge, the use of the Intellectual Property in
connection with the business and operations of the Company
does not infringe on the rights of any person, except where
such infringement would not individually or in the aggregate
have a Material Adverse Effect;
(xxiv) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with
management's general or specific authorizations, (2)
transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP and to
maintain asset accountability, (3) access to assets is
permitted only in accordance with management's general or
specific authorization, and (4) the recorded accountability
for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences;
(xxv) On October 11, 1996, Guitar Center Management
Company, Inc., a California corporation, was merged with and
into the Company in accordance with California, Delaware and
all other applicable law (the "Reincorporation").
(xxvi) Except as disclosed in the Preliminary Prospectus
and the Prospectus or except for which valid waivers of such
rights as have been obtained, no holder of any security of the
Company has any right to require registration of any security
of the Company; and
(xxvii) There are no material business arrangements or
related party transactions which are not disclosed in the
Preliminary Prospectus and the Prospectus (or any
8
<PAGE>
amendments or supplements thereto) which would be required to
be disclosed by Item 404 of Regulation S-K of the Commission.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $[ ], the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Shares to be sold by the Company by a
fraction, the numerator of which is the aggregate number of Firm Shares to be
purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company hereunder, and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from
the Company, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Optional Shares
by a fraction the numerator of which is the maximum number of Optional Shares
which such Underwriter is entitled to purchase as set forth opposite the name
of such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 870,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from Goldman, Sachs &
Co. to the Company, given within a period of 30 calendar days after the date
of this Agreement and setting forth the aggregate number of Optional Shares
to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time
of Delivery (as defined in Section 5 hereof) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. The Company hereby confirms its engagement of Goldman, Sachs &
Co. as, and Goldman, Sachs & Co. hereby confirms its agreement with the
Company to render services as, a "qualified independent underwriter" within
the meaning of Rule 2720 of the National Association of Securities Dealers,
Inc. (the "NASD") with respect to the offering and sale of the Shares.
Goldman, Sachs & Co., in its capacity as qualified independent underwriter
and not otherwise, is referred to herein as the "QIU". As compensation for
the services of the QIU hereunder, the Company agrees to pay the QIU $10,000
on the Closing Date.
9
<PAGE>
4. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale
upon the terms and conditions set forth in the Prospectus.
5. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in
such names as Goldman, Sachs & Co. may request upon at least forty-eight
hours' prior notice to the Company shall be delivered by or on behalf of the
Company to Goldman, Sachs & Co., through the facilities of the Depository
Trust Company ("DTC"), for the account of such Underwriter, against payment
by or on behalf of such Underwriter of the purchase price therefor by wire
transfer of federal (same-day) funds, payable to the Company. The Company
will cause the certificates representing the Shares to be made available for
checking and packaging at least twenty-four hours prior to the Time of
Delivery (as defined below) with respect thereto at the office of DTC or its
designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York time, on [ ], 1997 or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman,
Sachs & Co. of the Underwriters' election to purchase such Optional Shares,
or such other time and date as Goldman, Sachs & Co. and the Company may agree
upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery," such time and date for delivery
of the Optional Shares, if not the First Time of Delivery, is herein called
the "Second Time of Delivery," and each such time and date for delivery is
herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 8 hereof, including
the cross receipt for the Shares and any additional documents requested by
the Underwriters pursuant to Section 8(k) hereof, will be delivered at the
offices of Skadden, Arps, Slate, Meagher & Flom, 300 South Grand Avenue, 34th
Floor, Los Angeles, California 90071 (the "Closing Location"), and the
Shares will be delivered at the Designated Office, all at such Time of
Delivery. A meeting will be held at the Closing Location at [ ] p.m., New
York City time, on the New York Business Day next preceding such Time of
Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 5, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not
a day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
6. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you
and to file such Prospectus pursuant to Rule 424(b) under the
Act not later than the Commission's close of business on the
second business day following the execution and delivery of
10
<PAGE>
this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or
any supplement to the Prospectus or any amended Prospectus has
been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus
or prospectus, of the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or Prospectus
or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus
or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as
you may reasonably request to qualify the Shares for offering
and sale under the securities laws of such jurisdictions as
you may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of
process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New
York Business Day next succeeding the date of this Agreement
and from time to time, to furnish the Underwriters with copies
of the Prospectus in New York City in such quantities as you
may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with
the offering or sale of the Shares and if at such time any
events shall have occurred as a result of which the Prospectus
as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when
such Prospectus is delivered, not misleading, or, if for any
other reason it shall be necessary during such period to amend
or supplement the Prospectus in order to comply with the Act,
to notify you and upon your request to prepare and furnish
without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to
the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the
time of issue of the Prospectus, upon your request but at the
expense of such Underwriter, to prepare and deliver to such
Underwriter as
11
<PAGE>
many copies as you may reasonably request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of
the Act;
(d) To make generally available to its securityholders
as soon as practicable, but in any event not later than
eighteen months after the effective date of the Registration
Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Act
and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date
of the Prospectus, not to offer, sell, contract to sell or
otherwise dispose of, except as provided hereunder, any
securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that
are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible
or exchangeable securities outstanding as of, the date of this
Agreement), without the prior written consent of Goldman,
Sachs & Co.;
(f) To furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report
(including a balance sheet and statements of income,
stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial
information of the Company and its subsidiaries for such
quarter in reasonable detail;
(g) During a period of five years from the effective
date of the Registration Statement, to furnish to you copies
of all reports or other communications (financial or other)
furnished to stockholders, and to deliver to you (i) as soon
as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities
of the Company is listed; and (ii) such additional information
concerning the business and financial condition of the Company
as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the
extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders
generally or to the Commission);
(h) To use the net proceeds received by it from the sale
of the Shares pursuant to this Agreement in the manner
specified in the Prospectus under the caption "Use of
Proceeds";
12
<PAGE>
(i) To use its best efforts to list for quotation the
Shares on the Nasdaq National Market ("NASDAQ");
(j) To file with the Commission such reports on Form SR
as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with
the Commission in compliance with Rule 462(b) by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement, and the
Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration
Statement or give irrevocable instructions for the payment of
such fee pursuant to Rule 11(b) under the Act.
7. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery
of the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in
Section 6(b) hereof, including the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey (not to exceed $10,000) (iv) all fees and
expenses in connection with listing the Shares on the NASDAQ; (v) the filing
fees incident to, [AND THE FEES AND DISBURSEMENTS OF COUNSEL FOR THE
UNDERWRITERS IN CONNECTION WITH,] securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
(vi) the fees associated with the use of a QIU, (vii) the cost of preparing
stock certificates; (viii) the cost and charges of any transfer agent or
registrar and (ix) all other costs and expenses incident to the performance of
the Company's obligations hereunder which are not otherwise specifically
provided for in this Section 7. It is understood, however, that the Company
shall bear the cost of any other matters not directly relating to the sale and
purchase of the Shares pursuant to this Agreement, and that, except as
provided in this Section 7, and Sections 9 and 13 hereof, the Underwriters
will pay all of their own costs and expenses, including the fees of their
counsel, stock transfer taxes on resale of any of the Shares by them, and any
advertising expenses connected with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company shall have
13
<PAGE>
performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) The Prospectus shall have been filed
with the Commission pursuant to Rule 424(b) within the
applicable time period prescribed for such filing by the rules
and regulations under the Act and in accordance with Section
6(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have
become effective by 10:00 p.m., Washington, D.C. time, on the
date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your
reasonable satisfaction;
(b) Skadden, Arps, Slate, Meagher & Flom, counsel for
the Underwriters, shall have furnished to you such opinion or
opinions (a draft of each such opinion is attached as Annex
II(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (iv) and (xi) of
subsection (c) below as well as such other related matters as
you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Latham & Watkins, counsel for the Company, shall
have furnished to you their written opinion, dated such Time
of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) The Company has been duly incorporated and is
validly existing in good standing under the laws of the
State of Delaware, with corporate power and authority to
own, lease and operate its properties and to conduct its
business described in the Prospectus. Based solely on
certificates from public officials, such counsel will
confirm that the Company is qualified to do business in
the States listed on Annex A hereto;
(ii) The authorized capital stock of the Company
consists solely of ________ shares of Common Stock, $.01
par value per share, and ________ shares of Preferred
Stock, $.01 par value per share. All of the outstanding
shares of Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable;
(iii) The Shares to be issued and sold by the
Company pursuant to the Underwriting Agreement have been
duly authorized and, when issued to and paid for by the
Underwriters in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully
paid and non-assessable;
14
<PAGE>
(iv) The Underwriting Agreement has been duly
authorized, executed and delivered by the Company;
(v) The issuance and sale of the Shares to be sold
by the Company pursuant to the Underwriting Agreement
will not result in the violation by the Company of its
Certificate of Incorporation or Bylaws or the violation
by the Company of any federal, California or Delaware
statute, rule or regulation known by such counsel to be
applicable to the Company (other than federal, California
or Delaware securities laws as to which no opinion need
be expressed in this paragraph) or in the breach of or a
default under any agreement or instrument filed as an
"Exhibit 4" or "Exhibit 10" exhibit to the Registration
Statement. No consent, approval, authorization or order
of, or filing with, any federal, California or Delaware
court or governmental agency or body known by such
counsel to be applicable to the Company is required for
the consummation of the issuance and sale of the Shares
to be sold by the Company, except for the filing of the
Company's Certificate of Amendment to the Certificate of
Incorporation filed as Exhibit ___ to the Registration
Statement and except such as have been obtained under the
Act and such as may be required under California and
Delaware securities laws in connection with the purchase
and distribution of Shares by the Underwriters (such
opinion to be based upon such counsel's consideration of
only those statutes, rules and regulations which, in such
counsel's experience, are normally applicable to
transactions of the type contemplated by Underwriting
Agreements, and no opinion need be expressed as to the
application of any antifraud, antitrust or trade
regulation laws);
(vi) The Registration Statement has become
effective under the Act, and no stop order suspending the
effectiveness of the Registration Statement has been
issued under the Act and no proceedings therefor, to the
best of such counsel's knowledge, have been initiated by
the Commission;
(vii) The Registration Statement and the Prospectus
comply as to form in all material respects with the
requirements for registration statements on Form S-1
under the Act and the rules and regulations of the
Commission thereunder; it being understood, however, that
such counsel need express no opinion with respect to the
financial statements, schedules and other financial data
included in the Registration Statement or the Prospectus.
In passing upon the compliance as to the form of
Registration Statement and Prospectus, such counsel may
assume that the statements made therein are correct and
complete;
(viii) The statements set forth in the Prospectus
under the heading "Description of Capital Stock,"
["THE RECAPITALIZATION," AND "CERTAIN TRANSACTIONS"]
insofar as such statements constitute a summary of the
terms
15
<PAGE>
of the Company's capital stock, legal matters or
documents referred to therein, are accurate in all
material respects;
(ix) To the best of such counsel's knowledge, there
are no legal or governmental proceedings required to be
described in the Prospectus that are not described as
required [ ,WHICH, IF DETERMINED ADVERSELY TO THE COMPANY,
WOULD INDIVIDUALLY OR IN THE AGGREGATE HAVE A MATERIAL
ADVERSE EFFECT ON THE CURRENT OR FUTURE CONSOLIDATED
FINANCIAL POSITION STOCKHOLDERS' EQUITY OR RESULTS OF
OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES; AND, TO
THE BEST OF SUCH COUNSEL'S KNOWLEDGE, NO SUCH PROCEEDINGS
ARE THREATENED OR CONTEMPLATED BY GOVERNMENTAL AUTHORITIES
OR THREATENED BY OTHERS], or contracts or documents of a
character required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement that are not described and filed as
required;
(x) The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940,
as amended;
(xi) Such counsel has participated in conferences
with officers and other representatives of the Company,
representatives of the independent accountants for the
Company, and representatives of the Underwriters, at
which the contents of the Registration Statement and the
Prospectus and related matters were discussed and,
although such counsel need not pass upon, and need not
assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the
Registration Statement and the Prospectus and need not
make any independent check or verification thereof
(except as set forth in paragraph (viii) above) during
the course of such participation (relying as to
materiality to the extent such counsel has deemed
appropriate upon the statements of officers and other
representatives of the Company), no facts came to such
counsels attention that caused them to believe that the
Registration Statement, at the time it became effective,
contained any untrue statement of a material fact or
omitted to state a material fact required to be stated
therein or necessary to make statements therein not
misleading, or that the Prospectus, as of its date and as
of the Closing Date, contained any untrue statement of a
material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
it being understood that such counsel need not express
any belief with respect to the financial statements,
schedules and other financial data included in the
Registration Statement or the Prospectus;
(d) Barry F. Soosman, the Company's General Counsel, shall
have furnished to you his written opinion, dated such Time of
Delivery, in form and substance satisfactory to you, to the
effect that:
16
<PAGE>
(i) Any real property and buildings held under
lease by the Company is held by it under valid,
subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made
and proposed to be made of such property and buildings by
the Company (in giving the opinion in this clause, such
counsel may state that no examination of record titles
for the purpose of such opinion has been made, and that
they are relying upon a general review of the titles of
the Company, upon abstracts, reports and policies of
title companies rendered or issued at or subsequent to
the time of acquisition of such property by the Company,
upon opinions of counsel to the lessors of such property
and, in respect of matters of fact, upon certificates of
officers of the Company, provided that such counsel shall
state that they believe that both you and they are
justified in relying upon such opinions, abstracts,
reports, policies and certificates);
[(ii) THE COMPANY IS NOT IN VIOLATION OF ITS
CERTIFICATE OF INCORPORATION OR BY-LAWS OR IN DEFAULT IN
THE PERFORMANCE OR OBSERVANCE OF ANY MATERIAL OBLIGATION,
AGREEMENT, COVENANT OR CONDITION CONTAINED IN ANY INDENTURE,
MORTGAGE, DEED OF TRUST, LOAN AGREEMENT, OR LEASE OR
AGREEMENT OR OTHER INSTRUMENT TO WHICH IT IS A PARTY OR BY
WHICH IT OR ANY OF ITS PROPERTIES MAY BE BOUND;]
(e) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time,
on the effective date of any post-effective amendment to the
Registration Statement filed subsequent to the date of this
Agreement and also at each Time of Delivery, KPMG Peat
Marwick, L.L.P. and Ernst & Young, L.L.P. shall have furnished
to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you,
to the effect set forth in Annex I hereto (the executed copy
of the letter delivered prior to the execution of this
Agreement is attached as Annex I(A) hereto and a draft of the
form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as
of each Time of Delivery is attached as Annex I(B) hereto);
(f)(i) The Company shall not have sustained since the
date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the
respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital
stock (except for immaterial issuances of stock options to
employees of the Company pursuant to existing stock option
plans as in effect prior to the date hereof or except as
contemplated and disclosed in the Prospectus) or long-term
debt or material increase in short-term debt other than in the
ordinary course of business and consistent with past
practices, of the Company or any
17
<PAGE>
change, or any development involving a prospective change, in
or affecting the business, management, financial position,
stockholders' equity or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus,
the effect of which, in any such case described in Clause (i)
or (ii), is in the judgment of the Representatives so material
and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in
the manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall
have occurred in the rating accorded the Company's debt
securities by any "nationally recognized statistical rating
organization," as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under
surveillance or review, with possible negative implications,
its rating of any of the Company's debt securities;
(h) On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the New York
Stock Exchange or on NASDAQ; (ii) a suspension or material
limitation in trading in the Company's securities on NASDAQ;
(iii) a general moratorium on commercial banking activities
declared by either Federal or New York or California State
authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United
States of a national emergency or war, if the effect of any
such event specified in this Clause (iv) in the judgment of
the Representatives makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in
the manner contemplated in the Prospectus;
(i) The Shares at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(j) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from each of
[TO COME], substantially to the effect set forth in Subsection
1(b)(iv) hereof in form and substance satisfactory to you;
(k) The Company shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of
officers of the Company satisfactory to you as to the accuracy
of the representations and warranties of the Company herein at
and as of such Time of Delivery, as to the performance by the
Company of all of its obligations hereunder to be performed at
or prior to such Time of Delivery, and as to such other
matters as you may reasonably request, and the Company shall
have furnished or caused to be furnished certificates as to
the matters set forth in subsections (a) and (e) of this
Section 8; and
18
<PAGE>
(l) The Company shall have complied with the
provisions of Section 6(c) hereof with respect to the furnishing
of prospectuses on the New York Business Day next succeeding the
date of this Agreement.
9. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (with respect to the Prospectus and
any amendment or supplement thereto, in light of the circumstances under
which such statements were made) not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman,
Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Goldman, Sachs & Co. expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any
19
<PAGE>
indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of
the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action
or claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by
or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bears to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree
20
<PAGE>
that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by PRO RATA allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 9 shall
be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 9 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of
the Company and to each person, if any, who controls the Company within the
meaning of the Act.
10. (a) The Company will indemnify and hold harmless Goldman,
Sachs & Co., in its capacity as QIU, against any losses, claims, damages or
liabilities, joint or several, to which the QIU may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (with respect to
the Prospectus and any amendment or supplement thereto, in light of the
circumstances under which such statements were made) not misleading, and will
reimburse the QIU for any legal or other expenses reasonably incurred by the
QIU in connection with investigating or defending any such action or claim as
such expenses are incurred.
(b) Promptly after receipt by the QIU under Subsection 10(a)
above of notice of the commencement of any action, the QIU shall, if a claim
in respect thereof is to be made against the Company under such subsection,
notify the Company in writing of the commencement thereof; but the omission
so to notify the Company shall not relieve it from any liability which it may
have to the QIU otherwise than under such subsection. In case
21
<PAGE>
any such action shall be brought against the QIU and it shall notify the
Company of the commencement thereof, the Company shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to the QIU (who shall not, except with the consent
of the QIU, be counsel to the Company), and, after notice from the
indemnifying party to the QIU of its election so to assume the defense
thereof, the indemnifying party shall not be liable to the QIU under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by the QIU, in connection with the defense
thereof other than reasonable costs of investigation. The Company shall not,
without the written consent of the indemnified party, effect the settlement
or compromise of, or consent to the entry of any judgment with respect to,
any pending or threatened action or claim in respect of which indemnification
or contribution may be sought hereunder (whether or not the QIU is an actual
or potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the QIU from
all liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by
or on behalf of the QIU.
(c) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless Goldman, Sachs & Co., in its
capacity as QIU, under Subsection 10(a) above in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then the Company shall contribute to the amount paid or payable by
the QIU as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the QIU on
the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the QIU failed to give the notice required under subsection (b)
above, then the Company shall contribute to such amount paid or payable by
the QIU in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand
and the QIU on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the QIU on
the other shall be deemed to be in the same proportion as the total net
proceeds from the sale of the Shares (before deducting expenses) received by
the Company, as set forth in the table on the cover page of the Prospectus,
bear to the fee payable to the QIU pursuant to Section 3 hereof. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the QIU on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the QIU agree
that it would not be just and equitable if contributions pursuant to this
subsection (c) were determined by PRO RATA allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to above in this subsection (c). The amount paid or payable by the
QIU as a result of the losses, claims, damages or liabilities (or actions in
respect thereof)
22
<PAGE>
referred to above in this subsection (c) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(d) The obligations of the Company under this Section 10 shall
be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls the QIU within the meaning of the Act.
11. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company shall be entitled
to a further period of thirty-six hours within which to procure another party
or other parties satisfactory to you to purchase such Shares on such terms.
In the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the
Company notifies you that they have so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone a Time of
Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement
or the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section 11 with like effect as if such person had originally been
a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company shall have the right to require each non-defaulting
Underwriter to purchase the number of Shares which such Underwriter agreed to
purchase hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
number of Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all of the Shares to be purchased at such Time of
23
<PAGE>
Delivery, or if the Company shall not exercise the right described in
subsection (b) above to require non-defaulting Underwriters to purchase
Shares of a defaulting Underwriter or Underwriters, then this Agreement (or,
with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares)
shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 7 hereof and
the indemnity and contribution agreements in Section 9 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
12. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set
forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or
on behalf of any Underwriter or any controlling person of any Underwriter, or
the Company, or any officer or director or controlling person of the Company,
and shall survive delivery of and payment for the Shares.
13. If this Agreement shall be terminated pursuant to Section 11
hereof, the Company shall then be under any liability to any Underwriter
except as provided in Sections 7 and 9 hereof; but, if for any other reason
any Shares are not delivered by or on behalf of the Company as provided
herein, the Company will reimburse the Underwriters through you for all
reasonable out-of-pocket expenses approved in writing by you, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 7 and 9 hereof.
14. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail, telex or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: Secretary; provided, however, that
any notice to an Underwriter pursuant to Section 9(c) hereof shall be
delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or
telex constituting such Questionnaire, which address will be supplied to the
Company by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
24
<PAGE>
15. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters and the Company and, to the extent provided in
Sections 9 and 12 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a
successor or assign by reason merely of such purchase.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
17. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the
same instrument.
25
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us eight counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters
and the Company. It is understood that your acceptance of this letter on
behalf of each of the Underwriters is pursuant to the authority set forth in
a form of Agreement among Underwriters, the form of which shall be submitted
to the Company for examination, upon request, but without warranty on your
part as to the authority of the signers thereof.
Very truly yours,
GUITAR CENTER, INC.
By: __________________________
Name:
Title:
Accepted as of the date hereof
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Dain Bosworth Incorporated
Chase Securities Inc.
By: ___________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
26
<PAGE>
SCHEDULE I
Number of
Optional Shares
Total Number of Firm to be Purchased
Shares if Maximum Option
Underwriter to be Purchased Exercised
----------- -------------------- ------------------
Goldman, Sachs & Co. . . . .
Donaldson, Lufkin &
Jenrette Securities
Corporation. . . . . . . .
Montgomery Securities . . . .
Dain Bosworth
Incorporated . . . . . . . .
Chase Securities Inc. . . . . ------------
Total . . . . . . . . . 6,750,000
------------
------------
27
<PAGE>
ANNEX I
Pursuant to Section 8(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company within the meaning of the Act and
the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if
applicable, financial forecasts and/or pro forma financial
information) examined by them and included in the Prospectus
or the Registration Statement comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in
accordance with standards established by the American
Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial
data, pro forma financial information, financial forecasts
and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified
in such letter, copies of which have been separately furnished
to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with
standards established by the American Institute of Certified
Public Accountants of the unaudited condensed statements of
income, balance sheets and statements of cash flows included
in the Prospectus as indicated in their reports thereon copies
of which have been separately furnished to the Representatives
and on the basis of specified procedures including inquiries
of officials of the Company who have responsibility for
financial and accounting matters regarding whether the
unaudited condensed financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the
Act and the related published rules and regulations, nothing
came to their attention that caused them to believe that the
unaudited condensed financial statements do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
1
<PAGE>
(iv) The unaudited selected financial information with
respect to the results of operations and financial position of
the Company for the five most recent fiscal years included in
the Prospectus agrees with the corresponding amounts (after
restatements where applicable) in the audited financial
statements for such five fiscal years;
(v) On the basis of limited procedures, not constituting
an examination in accordance with generally accepted auditing
standards, consisting of a reading of the unaudited financial
statements and other information referred to below, a reading
of the latest available interim financial statements of the
Company, inspection of the minute books of the Company since
the date of the latest audited financial statements included
in the Prospectus, inquiries of officials of the Company
responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to
believe that:
(A) (i) the unaudited statements of income, balance
sheets and statements of cash flows included in the
Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of
the Act and the related published rules and regulations,
or (ii) any material modifications should be made to the
unaudited condensed statements of income, balance sheets
and statements of cash flows included in the Prospectus
for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not
agree with the corresponding items in the unaudited
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived
any unaudited condensed financial statements referred to
in Clause (A) and any unaudited income statement data and
balance sheet items included in the Prospectus and
referred to in Clause (B) were not determined on a
2
<PAGE>
basis substantially consistent with the basis for the
audited financial statements included in the Prospectus;
(D) any unaudited pro forma condensed financial
statements included in the Prospectus do not comply as to
form in all material respects with the applicable
accounting requirements of the Act and the published
rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any
changes in the capital stock (other than issuances of
capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares
and upon conversions of convertible securities, in each
case which were outstanding on the date of the latest
financial statements included in the Prospectus) or any
increase in the long-term debt of the Company, or any
decreases in net current assets or stockholder's equity
or other items specified by the Representatives, or any
increases in any items specified by the Representatives,
in each case as compared with amounts shown in the latest
balance sheet included in the Prospectus, except in each
case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in net revenues or operating profit or the
total or per share amounts of net income or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with the comparable period of the preceding year
and with any other period of corresponding length
specified by the Representatives, except in each case for
decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(vi) In addition to the examination referred to in
their report(s) included in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other
procedures referred to in paragraphs (iii) and (v) above, they
have carried out certain specified procedures, not
3
<PAGE>
constituting an examination in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the
Representatives, which are derived from the general accounting
records of the Company, which appear in the Prospectus, or in
Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared
certain of such amounts, percentages and financial information
with the accounting records of the Company and have found them
to be in agreement.
4
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
GUITAR CENTER, INC.
GUITAR CENTER, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY THAT:
FIRST: At a meeting of the Board of Directors of the Corporation held
on January 15, 1997, resolutions were duly adopted setting forth proposed
amendments to the Certificate of Incorporation of the Corporation, declaring
said amendments to be advisable and directing its officers to submit said
amendments to the stockholders of the Corporation for consideration thereof.
The resolutions setting forth the proposed amendments are as follows:
"WHEREAS, in connection with the Corporation's proposed initial public
offering, the Board of Directors of the Corporation deems it to be desirable and
in the best interests of the Corporation and its stockholders to amend the
Corporation's Certificate of Incorporation to: (i) provide for the mandatory
conversion of each share of 8% Junior Preferred Stock, $.01 par value, of the
Corporation into shares of Common Stock contemporaneous with the consummation of
this Offering; and (ii) amend the notice provisions applicable to the
redemption of any shares of 14% Senior Preferred Stock, $.01 par value, of
the Corporation;
WHEREAS, all of the members of the Board of Directors have determined
that such mandatory conversion of Junior Preferred Stock into Common Stock shall
be a "grant, award or other acquisition from the issuer" satisfying the
applicable conditions set forth in Rule 16b-3(d) promulgated pursuant to the
1934 Act;
<PAGE>
RESOLVED, that paragraph (b) of Section 6 of Subpart A of Article IV
of the Certificate of Incorporation of the Corporation be, and it hereby is,
amended in its entirety to read as follows:
In the event the Corporation shall redeem shares of Senior Preferred Stock
pursuant to Sections 5(a) of Subpart A hereof on or prior to June 30, 1997,
notice of such redemption shall be given by telecopy on or prior to one
business day following the pricing of the Initial Public Offering, to each
holder of record of the shares to be redeemed at such holder's telecopier
number, as the same appears on the stock register of the Corporation.
Notwithstanding the foregoing sentence or the final sentence of this
paragraph (b), no holder to whom the Corporation has failed to give said
notice or whose notice was defective shall have any remedy against the
Corporation for such failure to give notice or for such defective notice,
as the case may be. In the event the Corporation shall redeem shares of
Senior Preferred Stock pursuant to Section 5(a) after June 30, 1997 or 5(b)
or 5(d) of Subpart A hereof, notice of such redemption shall be given by
first class mail, postage prepaid, mailed not less than 30 days nor more
than 60 days prior to the redemption date, to each holder of record of the
shares to be redeemed at such holder's address as the same appears on the
stock register of the Corporation. Notwithstanding the foregoing sentence
or the final sentence of this paragraph (b), neither the failure to give
such notice nor any defect therein shall affect the validity of the giving
of notice for the redemption of any share of Senior Preferred Stock to be
redeemed, except as to the holder to whom the Corporation has failed to
give said notice or whose notice was defective. Each such notice shall
state: (i) the
<PAGE>
redemption date; (ii) the number of shares of Senior Preferred Stock to be
redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and (v)
that dividends on the shares to be redeemed will cease to accrue or
accrete, as the case may be, on such redemption date.
FURTHER RESOLVED, that Section 7 of Subpart B of Article IV of the
Certificate of Incorporation of the Corporation be, and it hereby is, amended in
its entirety to read as follows:
(a) In the event the Corporation shall consummate an Initial
Public Offering, the Corporation will convert all of the shares of Junior
Preferred Stock then outstanding into Common Stock, such conversion (the
"MANDATORY CONVERSION") to occur automatically upon the closing of an
Initial Public Offering. Each share of Junior Preferred Stock being
converted pursuant to the Mandatory Conversion shall convert into such
number of shares of Common Stock as is equal to the Junior Preferred
Liquidation Value per share, divided by a number (the "AVERAGE ESTIMATED
IPO PRICE") equal to the average of the high and low points of the range of
estimated initial public offering price to the public (excluding
underwriting discounts and commissions), as set forth on the cover page of
the initial version of the "red herring" prospectus filed with the
Securities and Exchange Commission in connection with the Initial Public
Offering, with any fractional shares being redeemed by the Corporation
for cash in an amount equal to such fractional share amount multiplied by
the Average Estimated IPO Price. The Average Estimated IPO Price shall
be set forth in an officer's certificate certified by the Chief Executive
Officer, Chief Financial Officer, Treasurer, President or any Vice
President, and such officer's certificate shall be placed in the minute
books of the Corporation. A copy of such certificate shall be forwarded
to each holder of Junior Preferred Stock.
(b) In the event of a Mandatory Conversion, dividends on such shares
of Junior Preferred Stock shall cease to accrue, and all rights of the
holders thereof as holders of Junior Preferred Stock shall cease. Upon
surrender 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 with respect to such Mandatory
Conversion shall so state), such shares shall be converted by the
Corporation in accordance with the provisions of this Section 7. No
Accumulated and Unpaid Junior Preferred Dividends shall be paid on any
shares of Junior Preferred Stock converted into Common Stock pursuant to
the Mandatory Conversion, and the right to receive such Accumulated and
Unpaid Junior Preferred Dividends shall be cancelled in exchange for the
conversion of shares of Junior Preferred Stock into shares of Common Stock
pursuant to the Mandatory Conversion.
FURTHER RESOLVED, that the Certificate of Amendment of the Certificate
of Incorporation setting forth the foregoing resolutions shall be filed with the
Secretary of State of the State of Delaware; PROVIDED, HOWEVER, that such
Certificate of Amendment shall be effective simultaneously with the consummation
of the Initial Public Offering."
SECOND: Said amendments shall be effective simultaneously with the
consummation of the Initial Public Offering.
3
<PAGE>
THIRD: Thereafter, by written consent of the holders of 97.92% of the
issued and outstanding shares of Common Stock, holders of 97.92% of the issued
and outstanding shares of Junior Preferred Stock and holders of 100% of the
issued and outstanding shares of Senior Preferred Stock, in accordance with
Section 228 of the General Corporation Law of the State of Delaware, the
necessary number of shares required by statute were voted in favor of the
amendments, and prompt written notice in accordance with Section 228(d) of the
General Corporation Law of the State of Delaware has been given to those
stockholders of the Corporation who have not consented in writing.
FOURTH: Said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
* * * * *
(Signature Page Follows)
4
<PAGE>
IN WITNESS WHEREOF, Guitar Center, Inc. has caused this certificate to
be signed by Larry Thomas, its President, and Bruce Ross, its Secretary, as of
the 24th day of January, 1997.
GUITAR CENTER, INC.
By /S/LARRY THOMAS
--------------------------------
President
Attest:
/S/BRUCE ROSS
- --------------------------------------
Secretary
5
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
GUITAR CENTER, INC.
GUITAR CENTER, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY THAT:
FIRST: At a meeting of the Board of Directors of the Corporation held
on January 15, 1997, resolutions were duly adopted setting forth proposed
amendments to the Certificate of Incorporation of the Corporation, declaring
said amendments to be advisable and directing its officers to submit said
amendments to the stockholders of the Corporation for consideration thereof.
The resolutions setting forth the proposed amendments are as follows:
"WHEREAS, in connection with the Corporation's proposed initial public
offering, the Board of Directors of the Corporation deems it to be desirable and
in the best interests of the Corporation and its stockholders to amend the
Corporation's Certificate of Incorporation to: (i) increase the number of shares
of authorized Common Stock to 60,000,000 (comprised of 55,000,000 authorized
shares of Common Stock and 5,000,000 authorized shares of Preferred Stock);
(ii) provide that holders of at least 66-2/3% of the outstanding shares
entitled to vote may amend certain provisions of the Certificate of
Incorporation: (iii) provide that no action shall be taken by any
stockholders of the Corporation, except at an annual or special meeting of
stockholders, and that stockholders shall not be permitted to take any action
by written consent; and (iv) provide that special meetings of stockholders
shall only be permitted to be called by the Board of Directors, or a
committee thereof;
RESOLVED, that the first paragraph of Article IV of the Certificate of
Incorporation of the Corporation be, and it hereby is, amended in its entirety
to read as follows:
The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation shall have authority to issue is
Sixty Million (60,000,000) shares. The total number of shares of Common
Stock which the Corporation shall have authority to issue is Fifty-Five
Million (55,000,000) shares, and the par value of each share of Common
Stock is one cent ($.01). The total number of shares of Preferred Stock
which the Corporation shall have authority to issue is Five Million
(5,000,000) shares, and the par value of each share of Preferred Stock is
one cent
<PAGE>
($.01). The Preferred Stock may be issued in one or more series, each
series to be appropriately designated by a distinguishing letter or title,
prior to the issue of any shares thereof. The Board of Directors is hereby
authorized to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking
fund provisions, if any), the redemption price or prices, the liquidation
preferences, any other designations, preferences and relative,
participating, optional or other special rights, and any qualifications,
limitations or restrictions thereof, of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such unissued
series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of
shares of that series, but not below the number of shares of such series
then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing
the number of shares of such series. In addition to the foregoing right of
the Board of Directors, the Corporation hereby designates the following
classes of Preferred Stock:
FURTHER RESOLVED, that the Certificate of Incorporation be, and it
hereby is, amended by adding the following Articles X, XI, XII, XIII, XIV and
XV, which shall read as follows:
ARTICLE X
Notwithstanding Article V hereof, the Bylaws may be rescinded,
altered, amended or repealed in any respect by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding voting stock of the corporation, voting together as a single
class.
ARTICLE XI
The Board of Directors shall have that number of Directors set
out in the Bylaws of the Corporation as adopted or as set from time to time
by a duly adopted amendment thereto by the Directors or stockholders of the
Corporation.
ARTICLE XII
No action shall be taken by the stockholders except at an annual
or special meeting of stockholders. The stockholders may not take action
by written consent.
ARTICLE XIII
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors, or
by a majority of the members of the Board of Directors, or by a committee
of the Board of Directors which has been duly designated by the Board of
Directors and whose powers and authority, as provided in a resolution of
the Board of Directors or in the Bylaws of the Corporation, include the
power to call such meetings, but such special meetings may not be called by
any other person or persons; PROVIDED, HOWEVER, that if and to the extent
that any special meeting of stockholders may be called by any
<PAGE>
other person or persons specified in any provisions of this Certificate of
Incorporation or any amendment thereto or any certificate filed under
Section 151(g) of the Delaware General Corporation Law, then such special
meeting may also be called by the person or persons, in the manner, at the
times and for the purposes so specified.
ARTICLE XIV
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation; PROVIDED,
HOWEVER, that no amendment, alteration, change or repeal may be made to
Article X, XI, XII, XIII or XIV without the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66-2/3%) of the outstanding
voting stock of the corporation, voting together as a single class.
ARTICLE XV
The Corporation shall indemnify, in the manner and to the full
extent permitted by law, any person (or the estate of any person) who was
or is a party to, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether or not by or in
the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is a
director or officer of the Corporation, and at the discretion of the board
of directors may indemnify any person (or the estate of any person) who is
such a party or threatened to be made such a party by reason of the fact
that such person is or was an employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise. The Corporation may, to the full extent permitted by
law, purchase and maintain insurance on behalf of any such person against
any liability which may be asserted against him and may enter into
contracts providing for the indemnification of such person to the full
extent permitted by law.
FURTHER RESOLVED, that the Certificate of Amendment of the Certificate
of Incorporation setting forth the foregoing resolutions shall be filed with the
Secretary of State of the State of Delaware; PROVIDED, HOWEVER, that such
Certificate of Amendment shall be effective simultaneously with the consummation
of an initial public offering by the Corporation."
SECOND: Thereafter, by written consent of the holders of 97.92% the
issued and outstanding shares of Common Stock, holders of 97.92% of the issued
and outstanding shares of Junior Preferred Stock and holders of 100% of the
issued and outstanding shares of Senior Preferred Stock, in accordance with
Section 228 of the General Corporation Law of the State of Delaware, the
necessary number of shares required by statute were voted in favor of the
amendments, and prompt written notice
3
<PAGE>
in accordance with Section 228(d) of the General Corporation Law of the State of
Delaware has been given to those stockholders of the Corporation who have not
consented in writing.
THIRD: Said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware:
FOURTH: Said amendments shall be effective simultaneously with the
consummation of an initial public offering by the Corporation.
*****
(Signature Page Follows)
4
<PAGE>
IN WITNESS WHEREOF, Guitar Center, Inc. has caused this certificate to
be signed by Larry Thomas, its President, and Bruce Ross, its Secretary, as of
the 24th day January, 1997.
GUITAR CENTER, INC.
By /s/ LARRY THOMAS
----------------------------
President
Attest:
/s/ BRUCE ROSS
- ----------------------------
Secretary
5
<PAGE>
EXHIBIT 3.5
RESTATED CERTIFICATE OF INCORPORATION
OF
GUITAR CENTER, INC.
Guitar Center, Inc., a corporation existing under the laws of the
State of Delaware which was originally incorporated on October 11, 1996, does
hereby certify:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended and restated to read as follows:
ARTICLE I
The name of the corporation is Guitar Center, Inc. (the
"Corporation").
ARTICLE II
The address of its registered office in the State of Delaware is 1013
Centre Road, in the City of Wilmington, County of New Castle 19805. The name of
its registered agent at such address is Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
(a) The Corporation is authorized to issue two classes of shares to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation shall have authority to issue is
Sixty Million (60,000,000) shares. The total number of shares of Common
Stock which the Corporation shall have authority to issue is Fifty-Five Million
(55,000,000) shares, and the par value of each share of Common Stock is one cent
($.01). The total number of shares of Preferred
<PAGE>
Stock which the Corporation shall have authority to issue is Five Million
(5,000,000) shares, and the par value of each share of Preferred Stock is one
cent ($.01). The Preferred Stock may be issued in one or more series, each
series to be appropriately designated by a distinguishing letter or title, prior
to the issue of any shares thereof.
(b) The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions, if any), the redemption
price or prices, the liquidation preferences, any other designations,
preferences and relative, participating, optional or other special rights, and
any qualifications, limitations or restrictions thereof, of any wholly unissued
series of Preferred Stock, and the number of shares constituting any such
unissued series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
(c) In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, repeal, alter,
amend and rescind Bylaws of the Corporation.
ARTICLE VI
Notwithstanding Article V hereof, the Bylaws may be rescinded,
altered, amended or repealed in any respect by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding voting stock of the Corporation, voting together as a single class.
ARTICLE VII
The Board of Directors shall have that number of Directors set out in
the Bylaws of the Corporation as adopted or as set from time to time by a duly
adopted amendment thereto by the Directors or stockholders of the Corporation.
ARTICLE VIII
Elections of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Corporation shall so
provide.
<PAGE>
ARTICLE IX
No action shall be taken by the stockholders except at an annual or
special meeting of stockholders. The stockholders may not take action by
written consent.
ARTICLE X
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors, or by a
majority of the members of the Board of Directors, or by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose powers and authority, as provided in a resolution of the Board of
Directors or in the Bylaws of the Corporation, include the power to call such
meetings, but such special meetings may not be called by any other person or
persons; PROVIDED, HOWEVER, that if and to the extent that any special meeting
of stockholders may be called by any other person or persons specified in any
provisions of the Certificate of Incorporation or any amendment thereto or any
certificate filed under Section 151(g) of the Delaware General Corporation Law,
then such special meeting may also be called by the person or persons, in the
manner, at the times and for the purposes so specified.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation; provided, however, that no
amendment, alteration, change or repeal may be made to Article VI, VII, IX, X,
or XI without the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding voting stock of the Corporation,
voting together as a single class.
ARTICLE XII
Each reference in this Certificate of Incorporation to any provision
of the Delaware General Corporation Law refers to the specified provision of the
General Corporation Law of the State of Delaware, as the same now exists or as
it may hereafter be amended or superseded.
ARTICLE XIII
(a) To the fullest extent permitted by the General Corporation Law of
the State of Delaware, the Corporation shall indemnify and advance
indemnification expenses on behalf of all directors and officers of the
Corporation. The Corporation shall indemnify such
3
<PAGE>
other persons as may be required by statute or by the Bylaws of the Corporation.
The Corporation may, to the full extent permitted by Delaware law, purchase and
maintain insurance on behalf of any director or officer, or such other person as
may be permitted by statute or the Bylaws of the Corporation, against any
liability which may be asserted against any director, officer or such other
person and may enter into contracts providing for the indemnification of any
director, officer or such other person to the full extent permitted by Delaware
law.
(b) The liability of directors of the Corporation (for actions or
inactions taken by them as directors) for monetary damages shall be eliminated
to the fullest extent permissible under Delaware law. If the General
Corporation Law of the State of Delaware is hereafter amended to authorize
corporate action further limiting or eliminating the personal liability of
directors, then the liability of the director to the Corporation shall be
limited or eliminated to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended from time to time. Any repeal or
modification of this Article by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the personal
liability of a director of the Corporation existing at the time of such repeal
or modification.
SECOND: This Restated Certificate of Incorporation shall be effective
immediately following: (x) the redemption of all outstanding shares of the
Corporation's 14% Senior Preferred Stock, $.01 par value, (y) the payment of the
amount due on such redemption in accordance with the terms of the Corporation's
Certificate of Incorporation, as in effect at the time of such redemption, and
(z) the mandatory conversion of all outstanding shares of 8% Junior Preferred
Stock, $.01 par value per share, in connection with an initial public offering
and in accordance with the terms of the Corporation's Certificate of
Incorporation, as in effect at the time of such mandatory conversion.
THIRD: Thereafter, by written consent of the holders of 97.92% the
issued and outstanding shares of Common Stock, holders of 97.92% of the issued
and outstanding shares of Junior Preferred Stock and holders of 100% of the
issued and outstanding shares of Senior Preferred Stock, in accordance with
Section 228 of the General Corporation Law of the State of Delaware, the
necessary number of shares required by statute were voted in favor of the
Restated Certificate of Incorporation and prompt written notice in accordance
4
<PAGE>
with Section 228(d) of the General Corporation Law of the State of Delaware has
been given to those stockholders of the Corporation who have not consented in
writing.
FOURTH: This Restated Certificate of Incorporation was duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
5
<PAGE>
IN WITNESS WHEREOF, Guitar Center, Inc. has caused this certificate to
be signed by Larry Thomas, its President, and Bruce Ross, its Secretary, as of
the 24th day of January, 1997.
GUITAR CENTER, INC.
By /S/LARRY THOMAS
----------------------------
President
Attest:
/S/BRUCE ROSS
- ---------------------------------
Secretary
6
<PAGE>
EXHIBIT 3.7
AMENDED AND RESTATED BYLAWS
OF
GUITAR CENTER, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I - OFFICES......................................................... 1
Section 1. REGISTERED OFFICE........................................ 1
Section 2. OTHER OFFICES............................................ 1
ARTICLE II - STOCKHOLDERS................................................... 1
Section 1. PLACE OF MEETINGS........................................ 1
Section 2. ANNUAL MEETINGS OF STOCKHOLDERS.......................... 1
Section 3. SPECIAL MEETINGS......................................... 1
Section 4. NOTICE OF STOCKHOLDERS' MEETINGS......................... 1
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............. 1
Section 6. QUORUM................................................... 2
Section 7. ADJOURNED MEETING AND NOTICE THEREOF..................... 2
Section 8. VOTING................................................... 2
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDERS....... 2
Section 10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING 3
Section 11. RECORD DATE FOR STOCKHOLDER NOTICE AND VOTING............ 3
Section 12. PROXIES.................................................. 3
Section 13. INSPECTORS OF ELECTION; OPENING AND CLOSING THE POLLS.... 3
Section 14. NOMINATION AND STOCKHOLDER BUSINESS BYLAW................ 4
ARTICLE III - DIRECTORS..................................................... 6
Section 1. POWERS................................................... 6
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS.................... 6
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS................. 6
Section 4. VACANCIES................................................ 6
Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS................ 6
Section 6. ANNUAL MEETINGS.......................................... 7
Section 7. OTHER REGULAR MEETINGS................................... 7
Section 8. SPECIAL MEETINGS......................................... 7
Section 9. QUORUM................................................... 7
Section 10. WAIVER OF NOTICE......................................... 7
Section 11. ADJOURNMENT.............................................. 7
Section 12. NOTICE OF ADJOURNMENT.................................... 8
Section 13. ACTION WITHOUT MEETING................................... 8
Section 14. FEES AND COMPENSATION OF DIRECTORS....................... 8
ARTICLE IV - COMMITTEES..................................................... 8
Section 1. COMMITTEES OF DIRECTORS.................................. 8
Section 2. MEETINGS AND ACTION OF COMMITTEES........................ 9
ARTICLE V - OFFICERS........................................................ 9
i
<PAGE>
PAGE
----
Section 1. OFFICERS................................................. 9
Section 2. ELECTION OF OFFICERS..................................... 9
Section 3. SUBORDINATE OFFICERS, ETC................................ 9
Section 4. REMOVAL AND RESIGNATION OF OFFICERS...................... 9
Section 5. VACANCIES IN OFFICE...................................... 10
Section 6. CHAIRMAN OF THE BOARD.................................... 10
Section 7. PRESIDENT................................................ 10
Section 8. VICE PRESIDENTS.......................................... 10
Section 9. SECRETARY................................................ 10
Section 10. CHIEF FINANCIAL OFFICER.................................. 10
Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS........... 11
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS......................................... 11
Section 1. INDEMNIFICATION............................................. 11
ARTICLE VII - GENERAL CORPORATE MATTERS..................................... 12
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.... 12
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS................ 12
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED........ 12
Section 4. STOCK CERTIFICATES....................................... 12
Section 5. LOST CERTIFICATES........................................ 13
Section 6. REPRESENTATION OF STOCK OF OTHER CORPORATIONS............ 13
Section 7. CONSTRUCTION AND DEFINITIONS............................. 13
Section 8. FISCAL YEAR.............................................. 13
Section 9. SEAL..................................................... 13
ARTICLE VIII - AMENDMENTS................................................... 13
Section 1. AMENDMENT................................................ 13
ii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
GUITAR CENTER, INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of Guitar Center,
Inc. (hereinafter, called the "corporation") shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held
at any place within or outside the State of Delaware designated by the board of
directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETINGS OF STOCKHOLDERS. The annual meeting of
stockholders shall be held each year on a date and time designated by the board
of directors. Any previously scheduled annual meeting of the stockholders may
be postponed by resolution of the board of directors upon public notice given
prior to the date previously scheduled for such annual meeting of the
stockholders.
Section 3. SPECIAL MEETINGS. A special meeting of the stockholders may
be called at any time by the board of directors, or by a majority of the
directors or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authority, as provided
in a resolution of the board of directors, include the power to call such
meetings, but such special meetings may not be called by any other person or
persons. Any previously scheduled special meeting of the stockholders may be
postponed by resolution of the board of directors upon public notice given prior
to the date previously scheduled for such special meeting of the stockholders.
Section 4. NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings
of stockholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before the
date of the meeting being noticed. The notice shall specify the place, date and
hour of the meeting and in the case of a special meeting, the general nature of
the business to be transacted.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. If mailed,
notice shall be deemed to have been given when deposited in the mail, postage
prepaid, directed to the stockholder at
<PAGE>
his address appearing on the books of the corporation or given by the
stockholder to the corporation for the purpose of notice. An affidavit of the
mailing or other means of giving any notice of any stockholders' meeting shall
be executed by the secretary, assistant secretary or any transfer agent of the
corporation giving such notice, and shall be filed and maintained in the minute
book of the corporation.
Section 6. QUORUM. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of stockholders
shall constitute a quorum for the transaction of business. The stockholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. ADJOURNED MEETING AND NOTICE THEREOF. Any stockholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the chairman of the meeting, but in the absence of a
quorum, no other business may be transacted at such meeting, except as provided
in Section 6 of this Article II.
When any meeting of stockholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than thirty (30) days from the date
set for the original meeting. Notice of any such adjourned meeting, if
required, shall be given to each stockholder of record entitled to vote at the
adjourned meeting in accordance with the provisions of Sections 4 and 5 of this
Article II. At any adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting.
Section 8. VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section 11
of this Article II. Such vote may be by voice vote or by ballot, at the
discretion of the chairman of the meeting. Any stockholder entitled to vote on
any matter (other than the election of directors) may vote part of the shares in
favor of the proposal and refrain from voting the remaining shares or vote them
against the proposal; but, if the stockholder fails to specify the number of
shares such stockholder is voting affirmatively, it will be conclusively
presumed that the stockholder's approving vote is with respect to all shares
such stockholder is entitled to vote. If a quorum is present, the affirmative
vote of the majority of the shares represented at the meeting and entitled to
vote on any matter shall be the act of the stockholders, unless the vote of a
greater number or voting by classes is required by the Delaware General
Corporation Law or the certificate of incorporation or the certificate of
determination of preferences as to any preferred stock.
At a stockholders' meeting involving the election of directors, no
stockholder shall be entitled to cumulate (I.E., cast for any one or more
candidates a number of votes greater than the number of the stockholder's
shares). The candidates receiving the highest number of votes, up to the number
of directors to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDERS. The
transactions of any meeting of stockholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to
2
<PAGE>
vote, not present in person or by proxy, signs a written waiver of notice or a
consent to the holding of the meeting, or an approval of the minutes thereof.
The waiver of notice or consent need not specify either the business to be
transacted or the purpose of any annual or special meeting of stockholders. All
such waivers, consents or approvals shall be filed with the corporate records or
made part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if such objection is expressly made at the meeting.
Section 10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Stockholders may take action only at a regular or special meeting of
stockholders.
Section 11. RECORD DATE FOR STOCKHOLDER NOTICE AND VOTING. For purposes
of determining the holders entitled to notice of any meeting or to vote, the
board of directors may fix, in advance, a record date, which shall not be more
than sixty (60) days nor less than ten (10) days prior to the date of any such
meeting, and in such case only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date fixed as aforesaid, except as
otherwise provided in the Delaware General Corporation Law.
If the board of directors does not so fix a record date, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held.
Section 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, prior to the vote pursuant thereto, by a
writing delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy, or (ii) written notice of the death or
incapacity of the maker of such proxy is received by the corporation before the
vote pursuant thereto is counted; PROVIDED, HOWEVER, that no such proxy shall be
valid after the expiration of three (3) years from the date of such proxy,
unless otherwise provided in the proxy.
Section 13. INSPECTORS OF ELECTION; OPENING AND CLOSING THE POLLS. The
board of directors by resolution shall appoint one or more inspectors, which
inspector or inspectors may include individuals who serve the corporation in
other capacities, including, without limitation, as officers, employees, agents
or representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors
to replace any inspector who fails to act. If no inspector or alternate has
been appointed to act or is able to act at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by law.
3
<PAGE>
The chairman of the meeting shall fix and announce at the meeting the date
and time of the opening and the closing of the polls for each matter upon which
the stockholders will vote at a meeting.
Section 14. NOMINATION AND STOCKHOLDER BUSINESS BYLAW.
(A) ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the board of directors of
the corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the corporation who was a stockholder of
record at the time of giving of notice provided for in this bylaw, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this bylaw.
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this bylaw, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice
shall be delivered to the secretary at the principal executive offices of the
corporation not less than the close of business on the 120th calendar day in
advance of the first anniversary of the date the corporation's proxy statement
was released to security holders in connection with the preceding year's annual
meeting; PROVIDED, HOWEVER, that if no annual meeting was held in the previous
year or the date of the annual meeting has been changed by more than thirty (30)
calendar days from the date contemplated at the time of the previous year's
proxy statement, a proposal shall be received by the Company no later than the
close of business on the tenth day following the day on which notice of the date
of the meeting was mailed or public announcement of the date of the meeting was
made, whichever comes first. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to applicable federal securities laws, including, without limitation,
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this bylaw to the contrary, in the event that the number of
directors to be elected to the board of directors of the corporation is
increased and there is no public announcement by the corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least 70 days
4
<PAGE>
prior to the first anniversary of the date of the preceding year's annual
meeting, a stockholder's notice required by this bylaw shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall be brought before the
meeting pursuant to the corporation's notice of meeting. A stockholder's
nomination of one or more persons for election to the board of directors shall
only be permitted to be made at a special meeting of stockholders if: (i) the
corporation's notice of such meeting specified that directors are to be elected
at such special meeting; (ii) such stockholder was a stockholder of record
entitled to vote at the meeting at the time of giving of notice provided for in
this bylaw; and (iii) if such stockholder complies with the notice procedures
set forth in this bylaw. In the event the corporation calls a special meeting
of stockholders for the purpose of electing one or more directors to the board
of directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the corporation's
notice of meeting, if the stockholder's notice required by paragraph (A)(2) of
this bylaw shall be delivered to the secretary at the principal executive
offices of the corporation not earlier than the close of business on the 90th
day prior to such special meeting and not later than the close of business on
the later of the 60th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the board of directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
(C) GENERAL.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this bylaw shall be eligible to serve as directors.
Except as otherwise provided by law, the certificate of incorporation or these
bylaws, the chairman of the meeting shall have the power and authority to
determine the procedures of a meeting of stockholders, including, without
limitation, the authority to determine whether a nomination or any other
business proposed to be brought before the meeting was made or proposed, as the
case may be, in accordance with the procedures set forth in this bylaw and, if
any proposed nomination or business is not in compliance with this bylaw, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
(i) of stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of preferred stock, if any, to elect directors under certain
circumstances.
5
<PAGE>
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the Delaware General
Corporation Law and any limitations in the certificate of incorporation and
these bylaws relating to action required to be approved by the stockholders or
by the outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of
directors of the corporation shall be nine (9).
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall
be elected at each annual meeting of the stockholders to hold office until the
next annual meeting of stockholders. Each director, including a director
elected to fill a vacancy, shall hold office until the next annual meeting of
stockholders following the election of such director and until a successor has
been elected and qualified or the earlier of his resignation or removal.
Section 4. VACANCIES. Vacancies in the board of directors may be
filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director. Each director elected to fill a vacancy shall
hold office for the remainder of the term of the person whom he succeeds, and
until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the case of the death, retirement, resignation or removal of any
director, or if the board of directors by resolution declares vacant the office
of a director who has been declared of unsound mind by an order of court or
convicted of a felony, or if the authorized number of directors be increased, or
if the stockholders fail at any meeting of stockholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
Any director may resign or voluntarily retire upon giving written
notice to the chairman of the board, the president, the secretary or the board
of directors. Such retirement or resignation shall be effective upon the giving
of the notice, unless the notice specifies a later time for its effectiveness.
If such retirement or resignation is effective at a future time, the board of
directors may elect a successor to take office when the retirement or
resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings
of the board of directors may be held at any place within or without the State
of Delaware that has been designated from time to time by resolution of the
board. In the absence of such designation, regular meetings shall be held at
the principal executive office of the corporation. Special meetings of the
board shall be held at any place within or without the State of Delaware that
has been designated in the notice of the meeting or, if not stated in the notice
or there is no notice, at the principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in such meeting
can hear one another, and all such directors shall be deemed to be present in
person at such meeting.
6
<PAGE>
Section 6. ANNUAL MEETINGS. Immediately following each annual meeting
of stockholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and transaction of
other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board
of directors shall be held at such time as shall from time to time be determined
by the board of directors. Such regular meetings may be held without notice
provided that notice of any change in the determination of time of such meeting
shall be sent to all of the directors. Notice of a change in the determination
of the time shall be given to each director in the same manner as for special
meetings of the board of directors.
Section 8. SPECIAL MEETINGS. Special meetings of the board of
directors for any purpose or purposes may be called at any time by the chairman
of the board or the president or any vice president or the secretary or any two
directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by facsimile, first-class
mail or telegram, charges prepaid, addressed to each director at his or her
address as it is shown upon the records of the corporation. In case such notice
is mailed, it shall be deposited in the United States mail at least four (4)
days prior to the time of the holding of the meeting. In case such notice is
delivered personally, by telephone, facsimile or telegram, it shall be delivered
personally, or by telephone, by facsimile or to the telegraph company at least
twenty-four (24) hours prior to the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated to either the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose of the meeting nor the place if the meeting
is to be held at the principal executive office of the corporation.
Section 9. QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn as
hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum be present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes thereof. The waiver of notice or consent
need not specify the purpose of the meeting. All such waivers, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Notice of a meeting shall also be deemed given to any
director who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director.
Section 11. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any meeting to another time and place.
7
<PAGE>
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of an
adjourned meeting need not be given, unless the meeting is adjourned for more
than twenty-four (24) hours, in which case notice of such time and place shall
be given prior to the time of the adjourned meeting, in the manner specified in
Section 8 of this Article III, to the directors who were not present at the time
of the adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
such action. Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors. Such written consent or
consents shall be filed with the minutes of the proceedings of the board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members
of committees may receive such compensation, if any, for their services and such
reimbursement of expenses, as may be fixed or determined by resolution of the
board of directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for such services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, including an executive committee, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent member at any meeting of the committee. Any such
committee, to the extent provided in the resolution of the board, shall have all
the authority of the board, except with respect to:
(a) the approval of any action which, under the General Corporation
Law of Delaware, also requires the approval of the full board of directors,
or the stockholders of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the stockholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the
board of directors; or
8
<PAGE>
(g) the appointment of any other committees of the board of directors
or the members thereof.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment) and 13 (action without
meetings), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members, except that the time of regular meetings of committees may be
determined by resolution of the board of directors as well as the committee,
special meetings of committees may also be called by resolution of the board of
directors, and notice of special meetings of committees shall also be given to
all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be chosen
by the board of directors and shall include a chairman of the board or
president, or both, a vice president, a secretary and a chief financial officer.
The corporation may also have, at the discretion of the board of directors, a
president, one or more additional vice presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other officers as may be
held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen annually by the board
of directors, and each shall hold his office until he shall resign or be removed
or otherwise disqualified to serve or his successor shall be appointed in
accordance with the provisions of Section 3 of this Article V. Any number of
offices may be elected and qualified.
Section 3. SUBORDINATE OFFICERS, ETC. The board of directors may
appoint, and may empower the chairman of the board to appoint, such other
officers as the business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in the bylaws or as the board of directors may from time to time
determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Any officer may be
removed, either with or without cause, by the board of directors, at any regular
or special meeting thereof, or, except in case of an officer chosen by the board
of directors, by any officer upon whom such power of removal may be conferred by
the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
9
<PAGE>
Section 5. VACANCIES IN OFFICE. A vacancy in any office because of
death, resignation, removal, disqualification, or any other cause shall be
filled in the manner prescribed in these bylaws for regular appointments to such
office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board shall be
the chief executive officer of the corporation and shall, subject to the control
of the board of directors, have general supervision, direction and control of
the business and affairs of the corporation.
Section 7. PRESIDENT. The president shall be the chief operating
officer of the corporation and shall exercise and perform such powers and duties
with respect to the administration of the business and affairs of the
corporation as may from time to time be assigned to him by the chairman of the
board or by the board of directors, or as may be prescribed by the bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
president, a vice president designated by the board of directors shall perform
all the duties of the president, and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as form
time to time may be prescribed for them respectively by the board of directors
or the bylaws.
Section 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
order, a book of minutes of all meetings and actions of directors, committees of
directors and stockholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given, the names
of those present at directors' and committee meetings, the number of shares
present or represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a stock
register, or a duplicate register, showing the names of all stockholders and
their addresses, the number and classes of shares held by each, the number and
date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required by the bylaws or by
law to be given, and he shall keep the seal of the corporation in safe custody,
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or by the bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall be open at all reasonable times to inspection by any director.
The chief financial officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the board of directors. The chief
financial officer shall disburse the funds of the corporation as may be ordered
by the board of directors, shall render to the chairman of the board and
directors, whenever they request it, an account of all of his transactions as
chief financial officer and of the financial condition of the
10
<PAGE>
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. Any
assistant secretary may perform any act within the power of the secretary, and
any assistant treasurer may perform any act within the power of the chief
financial officer, subject to any limitations which may be imposed in these
bylaws or in board resolutions.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. INDEMNIFICATION. The corporation shall indemnify, in the
manner and to the full extent permitted by law, any person (or the estate of any
person) who was or is a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is a director
or officer of the corporation, and at the discretion of the board of directors
may indemnify any person (or the estate of any person) who is such a party or
threatened to be made such a party by reason of the fact that such person is or
was an employee or agent of the corporation or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The
corporation may, to the full extent permitted by law, purchase and maintain
insurance on behalf of any such person against any liability which may be
asserted against him and may enter into contracts providing for the
indemnification of such person to the full extent permitted by law. To the full
extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, and, in the manner provided by law, any such expenses may be paid by
the corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit
the right of the corporation to indemnify any other person for any such expenses
to the full extent permitted by law, nor shall it be deemed exclusive of any
other rights to which any person seeking indemnification from the corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
For the purposes of this Article VI, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers so that any
person who is or was a director or officer of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article VI with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
For purposes of this Article VI, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall
11
<PAGE>
include service as a director or officer of the corporation which imposes duties
on, or involves services by, such director or officer with respect to an
employee benefit plan, its participants or beneficiaries; and a person who acted
in good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the corporation"
as referred to in this section.
ARTICLE VII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the board of
directors may fix, in advance, a record date, which date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board of
Directors, and which shall not be more than sixty (60) nor less than ten (10)
days prior to any such action, and in such case only stockholders of record on
the date so fixed are entitled to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date fixed as aforesaid, except as otherwise provided in the Delaware
General Corporation Law.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the board of directors may fix a new record date for the
adjourned meeting. In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the board
of directors may fix a record date which shall not be more than ten days after
the date upon which the resolution fixing the record date is adopted by the
board of directors.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money, notes or other evidences of
indebtedness, issued in the name of or payable to the corporation shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the board of directors.
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
board of directors, except as otherwise provided in these bylaws, may authorize
any officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or to any amount.
Section 4. STOCK CERTIFICATES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
stockholder when any such shares are fully paid. All certificates shall be
signed in the name of the corporation by the chairman of the board or the
president or vice president and by the chief financial officer, the treasurer or
an assistant treasurer or the secretary or any assistant secretary, certifying
the number of shares and the class or series of shares owned by the stockholder.
Any or all of the signatures on the certificate may be facsimile. In
12
<PAGE>
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
Section 5. LOST CERTIFICATES. Except as hereinafter in this Section 5
provided, no new stock certificate shall be issued in lieu of an old certificate
unless the latter is surrendered to the corporation and canceled at the same
time. The board of directors may in case any stock certificate or certificate
for any other security is lost, stolen or destroyed, authorize the issuance of a
new certificate in lieu thereof, upon such terms and conditions as the board of
directors may require, including provision for indemnification of the
corporation secured by a bond or other adequate security sufficient to protect
the corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of
such certificate or the issuance of such new certificate.
Section 6. REPRESENTATION OF STOCK OF OTHER CORPORATIONS. The chairman
of the board, the president, or any vice president, or any other person
authorized by resolution of the board of directors by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all stock of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority herein granted to said
officers to vote or represent on behalf of the corporation any and all stock by
the corporation in any other corporation or corporations may be exercised by any
such officer in person or by any person authorized to do so by proxy duly
executed by said officer.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
Delaware General Corporation Law shall govern the construction of the bylaws.
Without limiting the generality of the foregoing, the singular number includes
the plural, the plural number includes the singular, and the term "person"
includes both a corporation and a natural person.
Section 8. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the board of directors.
Section 9. SEAL. The seal of the corporation shall be round and shall
bear the name of the corporation and words and figures denoting its organization
under the laws of the State of Delaware and year thereof, and otherwise shall be
in such form as shall be approved from time to time by the board of directors.
ARTICLE VIII
AMENDMENTS
Section 1. AMENDMENT. The bylaws, or any of them, may be rescinded,
altered, amended or repealed, and new bylaws may be made (i) by the board of
directors, by vote of a majority of the number of directors then in office as
directors, acting at any meeting of the board of directors, or (ii) by the
stockholders, by the vote of the holders of sixty-six and two-thirds percent
(66-2/3%) of the outstanding voting stock of the corporation, at any annual or
special meeting of stockholders, PROVIDED that notice of such proposed
amendment, modification, repeal or adoption is
13
<PAGE>
given in the notice of the annual or special meeting; PROVIDED, HOWEVER, that
the bylaws can only be amended if such amendment would not conflict with the
certificate of incorporation. Any bylaw made or altered by the requisite number
of stockholders may be altered or repealed by the board of directors or may be
altered or repealed by the requisite number of stockholders.
* * * *
14
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(a) That I am the duly elected and acting Secretary of Guitar Center,
Inc., a Delaware corporation (the "Corporation"); and
(b) That the foregoing Amended and Restated Bylaws constitute the
Amended and Restated Bylaws of the Corporation, as duly adopted by the Board of
Directors of the Corporation at a meeting duly held on January 15, 1997 and as
adopted by the holders of a majority of the Corporation's Common Stock pursuant
to a consent dated as of January 24, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 24th day
of January, 1997.
/S/BRUCE ROSS
- --------------------------
Bruce Ross, Secretary
15
<PAGE>
EXHIBIT 10.5
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 (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
<PAGE>
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.
"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.
2
<PAGE>
"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 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.
3
<PAGE>
"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.
"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.
4
<PAGE>
"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 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 action 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
5
<PAGE>
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).
(b) EXCEPTIONS
Notwithstanding anything contained in Section 4(a) to the contrary:
(i) no ISO may be granted under the Plan to an employee who owns,
directly or indirectly (within the meaning of Sections 422(b)(6) and
424(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.
6
<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.
(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.
7
<PAGE>
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 NSO 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 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.
8
<PAGE>
(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
Corporate Value that Become Units
Vesting Date Target Available for Award
- ------------ --------------- -----------------------
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
9
<PAGE>
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.
(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
10
<PAGE>
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 cease 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 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:
11
<PAGE>
(i) cash or personal or certified check payable to the Company
in an amount equal to the aggregate Option Price of the shares with
respect to which the Option is being exercised;
(ii) stock certificates (in negotiable form) representing
shares of Common Stock having a Fair Market Value on the date of
exercise (as determined in accordance with Section 6(b) as if the
date of exercise were the date of grant) equal to the aggregate
Option Price of the shares with respect to which the Option is being
exercised;
(iii) vested Options to purchase 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.
12
<PAGE>
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).
(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 Purchase Agreement dated
May 1, 1996 among the Company and the other parties thereto.
13
<PAGE>
(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.
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 representation and warranties as are
14
<PAGE>
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 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
<PAGE>
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
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 conditione 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.
16
<PAGE>
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 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.
17
<PAGE>
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 an of June 3, 1996.
18
<PAGE>
EXHIBIT A
INCENTIVE STOCK OPTION AGREEMENT
dated as of between
GUITAR CENTER MANAGEMENT COMPANY, INC.,
a California corporation (the "Company"),
and [_________] (the "Optionee").
The Company, acting through a Committee (as defined in the Plan) with
the consent of the Company's Board of Directors (the "Board") has granted to the
Optionee, effective as of the date of this Agreement, an option under the
Company's Amended and Restated 1996 Performance Stock Option Plan (the "Plan")
to purchase Units consisting of a combination of Common Stock and Junior
Preferred Stock, on the terms and subject to the conditions set forth in this
Agreement and the Plan.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement as if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control. A copy of the Plan may be obtained
from the Company by the Optionee upon request. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Optionee shall have the option
(the "Option") to purchase up to [___] Shares Available for Award (the "Option
Units") at the price of $[___] per Option Unit (the "Option Price") at the times
and in the manner provided herein. Payment of the Option Price may be made in
the manner specified by Section 10(a) of the Plan. The Option is intended to
qualify for federal income tax purposes as an incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
SECTION 3. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the tenth anniversary of the date
hereof, unless the Option shall have sooner been terminated in accordance with
the terms of the Plan (including, without limitation, Section 8 of the Plan) or
this Agreement.
SECTION 4. TIME VESTING. [As determined by the Committee pursuant to
the Plan].
SECTION 5. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Optionee and may be exercised during the lifetime of the Optionee only by
the Optionee. If the Optionee dies, the Option shall thereafter be exercisable,
during the period specified in Section 8 of
1
<PAGE>
the Plan, by his executors or administrators to the full extent to which the
Option was exercisable by the Optionee at the time of his death. The Option
shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
the Option contrary to the provision hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
SECTION 6. OPTIONEE'S EMPLOYMENT. Nothing in the Option shall confer
upon the Optionee any right to continue in the employ of the Company or any of
its affiliates or interfere in any way with the right of the Company or its
affiliates or stockholders, as the case may be, to terminate the Optionee's
employment or to increase or decrease the Optionee's compensation at any time.
SECTION 7. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura, California 91301
Attention: Chief Executive Officer
with copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400;
(b) if to the Optionee, to him at:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura, California
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business day
2
<PAGE>
after the date of delivery), (ii) in the case of nationally-recognized
overnight courier, on the next business day after the date sent, (iii) in the
case of telecopy transmission, when received (or if not sent on a business
day, on the next business day after the date sent), and (iv) in the case of
mailing, on the third business day following that on which the piece of mail
containing such communication is posted.
SECTION 8. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 9. OPTIONEE'S UNDERTAKING. The Optionee hereby agrees to
take whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement and the Plan.
SECTION 10. MODIFICATION OF RIGHTS. The rights of the Optionee are
subject to modification and termination in certain events as provided in this
Agreement and the Plan.
SECTION 11. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE APPLIED. IN FURTHERANCE
OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF CALIFORNIA WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
SECTION 12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 13. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 14. SEVERABILITY. It is the desire and intent of the parties
hereto that the provision of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each Jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
3
<PAGE>
provisions of the Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 15. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND
EFFECTIVELY DO SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING
HEREUNDER.
IN WITNESS WHEREOF, the parties hereto have executed this Incentive
Stock Option Agreement as of the date first written above.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By:
--------------------------------------
Name:
Title:
-----------------------------------------
[OPTIONEE]
4
<PAGE>
EXHIBIT B
NONQUALIFIED STOCK OPTION AGREEMENT dated as of
[_____________________________] between GUITAR CENTER
MANAGEMENT COMPANY, INC., a California corporation (the
"Company") and [______________] (the "Optionee").
The Company, acting through a Committee (as defined in the Plan) with
the consent of the Company's Board of Directors (the "Board") has granted to the
Optionee, effective as of the date of this Agreement, an option under the
Company's Amended and Restated 1996 Performance Stock Option Plan (the "Plan")
to purchase Units consisting of a combination of Common Stock and Junior
Preferred Stock, on the terms and subject to the conditions set forth in this
Agreement and the Plan.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement an if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control. A copy of the Plan may be obtained
from the Company by the Optionee upon request. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Optionee shall have the option
(the "Option") to purchase up to [____________] Units Available for Award (the
"Option Units") at the price of $[__________] per Option Unit (the "Option
Price") at the times and in the manner provided herein. Payment of the Option
Price may be made in the manner specified by Section 10(a) of the Plan. The
Option is not intended to qualify for federal income tax purposes as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.
SECTION 3. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the tenth anniversary of the Effective
Date, unless the Option shall have sooner been terminated in accordance with the
terms of the Plan (including, without limitation, Section 8 of the Plan) or this
Agreement.
SECTION 4. TIME VESTING. [As determined by the Committee pursuant to
the Plan].
SECTION 5. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Optionee and may be exercised during the lifetime of the Optionee only by
the Optionee. If the Optionee dies, the Option shall thereafter be exercisable,
during the period specified in Section 8 of
1
<PAGE>
the Plan, by his executor or administrators to the full extent to which the
Option was exercisable by the Optionee at the time of his death. The Option
shall not be subject to execution, attachment or similar process. Any
attempted alignment, transfer, pledge, hypothecation or other disposition of
the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
SECTION 6. OPTIONEE'S EMPLOYMENT. Nothing in the Option shall confer
upon the Optionee any right to continue in the employ of the Company or any of
its affiliates or interfere in any way with the right of the Company or its
affiliates or stockholders, as the case may be, to terminate the Optionee's
employment or to increase or decrease the Optionee's compensation at any time.
SECTION 7. NOTICES. All notices, claims, certificates, requests,
demands and other complications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura, California 91301
Attention: Chief Executive Officer
with a copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400;
(b) if to the Optionee, to him at:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura, California 91301
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business after the date of delivery), (ii) in the case
of nationally-recognized overnight courier, on the next business day
2
<PAGE>
after the date sent, (iii) in the case of telecopy transmission, when
received (or if not sent on a business day, on the next business day after
the date sent), and (iv) in the case of mailing, on the third business day
following that on which the piece of mail containing such communication is
posted.
SECTION 8. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 9. OPTIONEE'S UNDERTAKING. The Optionee hereby agrees to
take whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement and the Plan.
SECTION 10. MODIFICATION OF RIGHTS. The rights of the Optionee are
subject to modification and termination in certain events as provided in this
Agreement and the Plan.
SECTION 11. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE APPLIED. IN FURTHERANCE
OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF CALIFORNIA WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
SECTION 12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 13. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 14. SEVERABILITY. It is the desire and intent of the parties
hereto that the provision of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
3
<PAGE>
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction
SECTION 15. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND
EFFECTIVELY DO SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING
HEREUNDER.
IN WITNESS WHEREOF, the parties hereto have executed this Nonqualified
Stock Option Agreement as of the date first written above.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By:
-------------------------------------
Name:
Title:
----------------------------------------
[OPTIONEE]
4
<PAGE>
Exhibit 10.11
FORM OF INDEMNIFICATION AGREEMENT
This Agreement is made as of the _______ day of _________________, by and
between Guitar Center, Inc., a Delaware corporation (the "COMPANY"), and the
undersigned [PROSPECTIVE] [OFFICER/DIRECTOR] of the Company (the "INDEMNITEE"),
with reference to the following facts:
The Indemnitee is willing, under certain circumstances, to [CONTINUE TO]
serve as an [OFFICER/DIRECTOR] of the Company. The Indemnitee has indicated
that he does not regard the indemnities available under the Company's Bylaws as
adequate to protect him against the risks associated with his service to the
Company. In this connection, the Company and the Indemnitee now agree that they
should enter into this Indemnification Agreement in order to provide greater
protection to Indemnitee against such risks of service to the Company.
Section 145 of the General Corporation Law of the State of Delaware, under
which Law the Company is organized, empowers corporations to indemnify a person
serving as a director, officer, employee or agent of the Company and a person
who serves at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, or other
enterprise, and said Section 145 and the Bylaws of the Company specify that the
indemnification set forth in said Section 145 and in the Bylaws, respectively,
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any Bylaw, agreement, vote of stockholders
or disinterested directors or otherwise.
In order to induce the Indemnitee to [CONTINUE TO] serve as a[N]
[OFFICER/DIRECTOR] of the Company and in consideration of his continued service,
the Company hereby agrees, as of the date first set forth above, to indemnify
the Indemnitee as follows:
1. INDEMNITY. The Company will indemnify the Indemnitee, his
executors, administrators or assigns, for any Expenses (as defined below) which
the Indemnitee is or becomes legally obligated to pay in connection with any
Proceeding. As used in this Agreement the term "PROCEEDING" shall include any
threatened, pending or completed claim, action, suit or proceeding, whether
brought by or in the right of the Company or otherwise and whether of a civil,
criminal, administrative or investigative nature, in which the Indemnitee may be
or may have been involved as a party or otherwise, by reason of the fact that
Indemnitee is or was, or has agreed to become, a director or officer of the
Company, by reason of any actual or alleged error or misstatement or misleading
statement made or suffered by the Indemnitee, by reason of any action taken by
him or of any inaction on his part while acting as such director or officer, or
by reason of the fact that he was serving at the request of the Company as a
director, trustee, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise; PROVIDED,
that in each such case Indemnitee acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, in the case of a criminal proceeding, in addition had no
reasonable cause to believe that his conduct was unlawful. As used in this
Agreement, the term "other enterprise" shall include (without limitation)
employee benefit plans and administrative committees thereof, and the term
"fines" shall include (without limitation) any excise tax assessed with respect
to any employee benefit plan.
2. EXPENSES. As used in this Agreement, the term "EXPENSES" shall
include (without limitation) damages, judgments, fines, penalties, settlements
and costs, attorneys' fees
<PAGE>
and disbursements and costs of attachment or similar bonds, investigations, and
any expenses of establishing a right to indemnification under this Agreement.
3. ENFORCEMENT. If a claim or request under this Agreement is not
paid by the Company, or on its behalf, within thirty days after a written claim
or request has been received by the Company, the Indemnitee may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim or request and if successful in whole or in part, the Indemnitee shall be
entitled to be paid also the Expenses of prosecuting such suit. The Company
shall have the right to recoup from the Indemnitee the amount of any item or
items of Expenses theretofore paid by the Company pursuant to this Agreement, to
the extent such Expenses are not reasonable in nature or amounts; PROVIDED,
HOWEVER, that the Company shall have the burden of proving such Expenses to be
unreasonable. The burden of proving that the Indemnitee is not entitled to
indemnification for any other reason shall be upon the Company.
4. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
5. EXCLUSIONS. The Company shall not be liable under this Agreement
to pay any Expenses in connection with any claim made against the Indemnitee:
(a) to the extent that payment is actually made to the
Indemnitee under a valid, enforceable and collectible insurance policy;
(b) to the extent that the Indemnitee is indemnified and
actually paid otherwise than pursuant to this Agreement;
(c) in connection with a judicial action by or in the right of
the Company, in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company unless and only to
the extent that any court in which such action was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, the Indemnitee is fairly and reasonably
entitled to indemnity for such expenses as such court shall deem proper;
(d) with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification
under this Agreement or any other statute or law or as otherwise required
under the General Corporation Law of the State of Delaware, but such
indemnification or advancement of expenses may be provided by the Company
in specific cases if the Board has approved the initiation or bringing of
such suit;
2
<PAGE>
(e) if it is proved by final judgment in a court of law or other
final adjudication to have been based upon or attributable to the
Indemnitee's in fact having gained any personal profit or advantage to
which he was not legally entitled;
(f) for a disgorgement of profits made from the purchase and
sale by the Indemnitee of securities pursuant to Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any state statutory law or common law;
(g) brought about or contributed to by the dishonesty of the
Indemnitee seeking payment hereunder; however, notwithstanding the
foregoing, the Indemnitee shall be protected under this Agreement as to any
claims upon which suit may be brought against him by reason of any alleged
dishonesty on his part, unless a judgment or other final adjudication
thereof adverse to the Indemnitee shall establish that he committed (i)
acts of active and deliberate dishonesty, (ii) with actual dishonest
purpose and intent, (iii) which acts were material to the cause of action
so adjudicated;
(h) for any judgment, fine or penalty which the Company is
prohibited by applicable law from paying as indemnity or for any other
reason; or
(i) arising out of Indemnitee's breach of an employment
agreement with the company (if any) or any other agreement with the Company
or any of its subsidiaries.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
any other provision of this Agreement, to the extent that the Indemnitee has
been successful on the merits or otherwise in defense of any Proceeding or in
defense of any claim, issue or matter therein, including dismissal without
prejudice, Indemnitee shall be indemnified against any and all Expenses incurred
in connection therewith.
7. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify the Indemnitee for the portion of such Expenses to
which the Indemnitee is entitled.
8. ADVANCE OF EXPENSES. Expenses incurred by the Indemnitee in
connection with any Proceeding, except the amount of any settlement, shall be
paid by the Company in advance upon request of the Indemnitee that the Company
pay such Expenses. The Indemnitee hereby undertakes to repay to the Company the
amount of any Expenses theretofore paid by the Company to the extent that it is
ultimately determined that such Expenses were not reasonable or that the
Indemnitee is not entitled to indemnification.
9. APPROVAL OF EXPENSES. No Expenses for which indemnity shall be
sought under this Agreement, other than those in respect of judgments and
verdicts actually rendered, shall be incurred without the prior consent of the
Company, which consent shall not be unreasonably withheld.
3
<PAGE>
10. ASSUMPTION OF DEFENSE. In the event the Company shall be
obligated to pay the expenses of any proceeding against the Indemnitee, the
Company, if appropriate, shall be entitled to assume the defense of such
proceeding with counsel approved by Indemnitee which approval shall not be
unreasonably withheld, upon the delivery to Indemnitee of written notice of its
election to do so. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same proceeding, unless
(i) the employment of counsel by Indemnitee is authorized by the Company, (ii)
Indemnitee shall have reasonably concluded, based upon written advice of
counsel, that there may be a conflict of interest of such counsel retained by
the Company between the Company and Indemnitee in the conduct of such defense,
or (iii) the Company ceases or terminates the employment of such counsel with
respect to the defense of such proceeding, in any of which events then the fees
and expenses of Indemnitee's counsel shall be at the expense of the Company. At
all times, Indemnitee shall have the right to employ other counsel in any such
proceeding at Indemnitee's expense, and to participate in the defense of the
proceeding or claim through such counsel.
11. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that the action was not instituted in good faith or was frivolous. In the event
of an action instituted by or in the name of the Company under this Agreement,
Indemnitee shall be entitled to be paid all court costs and expenses, including
attorneys' fees, incurred by Indemnitee in defense of such action (including
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action the court determines that Indemnitee's
defenses to such action were not made in good faith or were frivolous.
12. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. Notwithstanding the foregoing, the Company shall have no obligation
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, or if the premium costs for
such insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
13. NOTICE OF CLAIM. The Indemnitee, as a condition precedent to his
right to be indemnified under this Agreement, shall give to the Company notice
in writing as soon as practicable of any claim made against him for which
indemnity will or could be sought under this Agreement. Notice to the Company
shall be given at its principal office and shall be directed to the Corporate
Secretary (or such other address as the Company shall designate in writing to
the Indemnitee); notice shall be deemed received if sent by prepaid mail
properly addressed, the date of such notice being the date postmarked. In
addition, the Indemnitee shall give the Company such
4
<PAGE>
information and cooperation as it may reasonably require and as shall be within
the Indemnitee's power.
14. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof and is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one instrument.
16. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. Nothing herein shall be
deemed to diminish or otherwise restrict the Indemnitee's right to
indemnification under any provision of the Certificate of Incorporation or
Bylaws of the Company and amendments thereto or under law.
17. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with Delaware law, without regard to the conflicts of law
provisions thereof.
18. SAVING CLAUSE. Wherever there is conflict between any provision
of this Agreement and any applicable present or future statute, law or
regulation contrary to which the Company and the Indemnitee have no legal right
to contract, the latter shall prevail, but in such event the affected provisions
of this Agreement shall be curtailed and restricted only to the extent necessary
to bring them within applicable legal requirements.
19. COVERAGE. The provisions of this Agreement shall apply with
respect to the Indemnitee's service as a[N] [OFFICER/DIRECTOR] of the Company
prior to the date of this Agreement and with respect to all periods of such
service after the date of this Agreement, even though the Indemnitee may have
ceased to be a[N] [OFFICER/DIRECTOR] of the Company.
(Signature Page Follows)
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
GUITAR CENTER, INC.
By
-------------------------------------------
Authorized Officer
"INDEMNITEE"
-------------------------------------------
NAME:
6
<PAGE>
EXHIBIT 10.20
PURCHASE AGREEMENT
AND ESCROW INSTRUCTIONS
THIS PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (this "Agreement") is
made this 15th day of February, 1996, between GUITAR CENTER MANAGEMENT COMPANY,
INC. ("Seller") and G.C. REALTY LLC, a California limited liability company, or
its nominee ("Purchaser").
ARTICLE I -- PROPERTY TO BE CONVEYED
A. Seller shall sell to Purchaser, and Purchaser shall purchase from
Seller, upon the terms and conditions hereinafter set forth, that certain real
property more particularly described in Exhibit "A" attached hereto and
incorporated herein by this reference (the "Land"), together with the building,
fixtures, and other improvements on the Land (the "Improvements") and the
equipment, supplies, and other personal property attached to, located at, or
used in connection with the operation, management, or maintenance of the Land or
the Improvements (the "Personal Property"). The Land, Improvements, and
Personal Property shall be collectively referred to herein as the "Property".
The Property is located in the City of Arlington, State of Texas, at 721 Ryan
Plaza Drive, Arlington, Texas.
B. The Property shall include all right, title and interest of
Seller, if any, in and to (i) any land lying in the bed of any street, road,
highway or avenue, open or proposed, in front of or adjoining all or any part of
the Property and in and to all rights-of-way, riparian rights and easements;
(ii) all right, title and interest of Seller, if any, in and to any award or
payment made or to be made (a) for any taking in condemnation or eminent domain
of land lying in the bed of any street, road, highway or avenue, open or
proposed, in front of or adjoining all or any part of the Property, (b) for
damage to the Property or any part thereof by reason of change of grade or
closing of any such street, road, highway or avenue, and (c) for any taking in
condemnation or eminent domain of any part of the Property; and (iii) all tenant
leases, and refundable security or other tenant deposits, as well as rents and
profits arising thereunder from and after the "Closing" (as defined in Article
VIII hereof).
ARTICLE II -- AGREEMENT TO SELL AND PURCHASE
Upon the execution of this Agreement by Seller and Purchaser, this
Agreement shall constitute a binding and enforceable agreement between the
parties.
ARTICLE III -- PURCHASE PRICE
The purchase price (the "Purchase Price") for the Property shall be
approximately Eight Hundred Twenty Thousand Dollars ($820,000), subject to all
prorations and adjustments provided herein. The Purchase Price shall be paid on
the Closing Date, Purchaser shall deliver, in cash or its equivalent, a sum
equal to the Purchase Price.
<PAGE>
ARTICLE IV -- TITLE CONTINGENCIES
Purchaser's obligations hereunder are subject to satisfaction that on
or before February 28, 1996; Seller shall obtain and deliver to Purchaser, at
Seller's sole cost and expense, a title commitment ("Title Commitment") for an
extended coverage ALTA Owner's Policy of Title Insurance ("Title Policy") from
Chicago Title Company ("Title Company") proposing to insure the Property in the
amount of the Purchase Price. The Title Commitment: (A) shall be effective as
of a date after the date of this Agreement; (B) shall reflect fee estate in
Seller; and (C) shall be accompanied by copies of all documents of record
referred to in the Title Commitment and all other documents relating to the
Title Commitment. With regard to standard printed exceptions and other common
exceptions generally included in title commitments, the Title Commitment shall
not: (i) have any survey exception; (ii) have any exception as to taxes and
special assessments except for those not due and payable as of the Closing Date;
(iii) have any exceptions as to rights of parties in possession, except for
Seller; (iv) have any exceptions as to easements not shown by public records; or
(v) have any exceptions as to mechanic's and materialmen's liens. The Title
Policy, to be issued at Closing, shall insure good and marketable, fee estate to
the Property in Purchaser subject only to those exceptions to title approved or
waived by Purchaser ("Permitted Exceptions"). Seller will pay the cost of the
Title Policy.
ARTICLE V -- REPRESENTATIONS AND WARRANTIES
Seller represents, warrants, and covenants to Purchaser as follows:
A. Seller has all requisite power and authority to own and operate
its properties and to carry on its business. Seller has the authority and
requisite power to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
have been duly authorized by Seller. Upon the execution and delivery of this
Agreement, this Agreement will constitute a legal, valid and binding obligation
of Seller enforceable against it.
B. Entering into this Agreement, and the consummation of the
transactions contemplated hereby, will not constitute or result in a violation
or breach by Seller of any contract to which Seller is bound or the Property is
subject, or any judgment, order, writ, injunction or decree issued against or
imposed upon it, or result in a violation of any applicable law, order, rule or
regulation of any governmental authority. There is no action, suit, proceeding
or investigation pending or threatened (including, without limitation, any
claims for labor or materials provided to or for the benefit of the Property)
which might become a cloud on title to the Property or any portion thereof.
C. There is no pending or threatened condemnation, requisition, or
similar proceeding affecting the Property or any portion thereof.
D. There are no violations of any state, federal, municipal or other
governmental law, statute, ordinances, or other legal requirements with respect
to the Property or any portion thereof, including, without limitation, any and
all laws relating to hazardous or
- 2 -
<PAGE>
toxic waste or waste products or hazardous substances. No portion of the
Property constitutes or contains hazardous or toxic waste or waste products or
hazardous substances.
E. There has not been nor is there now existing any default or
breach by Seller under any of the covenants, conditions, restrictions,
rights-of-way, easements, permits, licenses or governmental approvals or under
any note, mortgage, deed of trust, security agreement, leases, or other
instrument affecting the Property or any portion thereof.
F. No special assessments or similar charges have been levied or
threatened against all or any part of the Property. Seller has no knowledge of
any intended assessments or charges against all or any part of the Property.
G. Seller has good and marketable title to the Property, and has the
right to convey and transfer the same. As of the Closing, there shall be no
lien (including, without limitation, any mechanic's liens) or security interest
affecting the Property or any part thereof, other than the Permitted Exceptions.
From the date of this Agreement until the Closing, Seller will not sell, assign,
lease, or convey any right, title, or interest whatsoever, in or to the Property
or create or permit to exist any lien, encumbrance, or charge thereon.
H. From the date of this Agreement until the Closing, Seller:
(a) will not alter or change the condition of the Property, except as permitted
by Purchaser; (b) will pay all obligations arising in connection with the
Property, as payment becomes due or may become due after the Closing; and
(c) will maintain and repair the Property in its present condition.
I. Seller shall pay all invoices in connection with any labor or
materials supplied or performed in and to the Property on or before the Closing
Date.
J. Seller has had an opportunity to review this Agreement with legal
counsel and after such review has agreed to the terms and conditions hereunder.
All of the representations, warranties, and covenants of Seller
contained in this Agreement or in any other document delivered to Purchaser in
connection with the transactions contemplated hereby (i) shall be true and
correct in all material respects and not in default at the time of Closing,
either expressly or by implication, just as though they were made at such time;
and (ii) Purchaser's right to enforce such representations, warranties, and
covenants shall survive the Closing.
Purchaser covenants, represents, and warrants to Seller as follows:
AA. Purchaser has the authority and requisite power to enter into
this Agreement and to consummate the transactions contemplated hereby.
Purchaser has duly authorized the execution and delivery of this Agreement and
upon such execution and delivery will be duly bound to consummate the
transactions contemplated hereby, subject to the terms and conditions hereof.
- 3 -
<PAGE>
BB. Neither entering into this Agreement nor the consummation of the
transactions contemplated hereby will constitute or result in a violation or
breach by Purchaser of any judgment, order, writ, injunction or decree issued
against or imposed upon it, or will result in a violation of any applicable law,
order, rule or regulation of any governmental authority.
ARTICLE VI -- ITEMS TO BE DELIVERED BY SELLER
AND PURCHASER AT CLOSING
On the Closing Date, Seller agrees to deliver the following items to
Title Company:
A. A duly executed warranty grant deed, in a form acceptable for
recording, conveying to Purchaser, or its nominee, the fee estate to the
Property. Seller shall pay all federal, state, municipal and other taxes, fees,
stamps and charges in connection with the delivery and recording of the
aforesaid deed;
B. The Title Policy (reflecting only the Permitted Exceptions); and
C. Any other documents required to be delivered at Closing pursuant
to this Agreement, and any other documents or agreements deemed necessary or
reasonably appropriate by the Purchaser or its counsel.
At Closing, Purchaser agrees to deliver the following items to Seller:
AA. The Purchase Price, in cash or its equivalent, as provided in
Article II hereof; and
BB. Any other documents required to be delivered at Closing pursuant
to this Agreement, and any other documents or agreements deemed necessary or
reasonably appropriate by Seller's counsel.
ARTICLE VII -- CONDITIONS TO CLOSING
The obligations of Purchaser hereunder shall be subject to the
fulfillment of the following conditions on or prior to the Closing Date:
A. Receipt by Purchaser of all items provided herein to be delivered
to Purchaser.
B. The representations and warranties of Seller contained herein
shall be true and correct on and as of the Closing, as if made on and as of such
date.
C. Seller shall have performed all covenants, undertakings and
obligations and complied with all conditions required by this Agreement to be
performed, satisfied and/or complied with by Seller.
- 4 -
<PAGE>
ARTICLE VIII -- TIME AND PLACE OF CLOSING
The closing of the transactions contemplated by this Agreement shall
take place on or before April 1, 1996, or at such other time and place as Seller
and Purchaser shall mutually agree upon in writing. The closing shall be
consummated through the Title Company and shall occur when the grant deed
provided for in Article VI hereof is recorded (the "Closing").
ARTICLE IX -- APPORTIONMENTS, SECURITY DEPOSITS
The following items shall be apportioned as of the Closing Date:
(A) collected rents and other income, if any; (B) real and personal property tax
payments or assessments; and (C) utility, water and sewer charges. Seller will
pay at Closing all fees, charges and taxes due as a result of the sale of the
Property at Closing, including, without limitation, any documentary stamp tax,
recording fees, sales tax, or franchise tax.
ARTICLE X -- CONDEMNATION AND PHYSICAL LOSS
A. If prior to the Closing all of the Property shall be taken by
condemnation or eminent domain, this Agreement shall be automatically terminated
and, thereafter, this Agreement shall be null and void and of no further force
or effect, and neither Purchaser nor Seller shall have any further rights,
duties, liabilities or obligations to the other by reason hereof. If prior to
the Closing (i) less than all of the Property shall be taken by condemnation or
eminent domain, or (ii) there is any taking of land lying in the bed of any
street, road, highway or avenue, open or proposed, in front of or adjoining all
or any part of the Property, or (iii) there is any change of grade of any such
street, road, highway or avenue, provided such taking or change of grade
involves a diminution in value of more than $50,000, then Purchaser may, at its
option, terminate this Agreement and, thereafter, this Agreement shall be null
and void and of no further force or effect, and neither Purchaser nor Seller
shall have any further rights, duties, liabilities, or obligations to the other
by reason thereof. If this Agreement is not terminated in accordance with the
foregoing, or if such taking involves a diminution in value of $50,000 or less,
Purchaser shall accept title to the Property subject to the taking or change of
grade, in which event the proceeds of the award or payment shall be assigned by
Seller to Purchaser at the Closing and any moneys theretofore received by Seller
in connection with such taking or change in grade shall be paid over to
Purchaser.
B. If, prior to the Closing, the Property is damaged as the result
of fire or other casualty, Purchaser shall have the option to either accept
title to the Property without any abatement of the Purchase Price whatsoever, in
which event, at the Closing all of the insurance proceeds shall be assigned by
Seller to Purchaser and any moneys theretofore received by Seller in connection
with such fire or other casualty shall be paid over to Purchaser, or if such
loss exceeds $50,000, terminate this Agreement, and Purchaser and Seller shall
have no further rights or obligations to the other. Seller shall maintain
adequate insurance on the Property to cover the replacement value of the
building and other improvements which are part of the Property in case of any
fire or other casualty occurring before the Closing.
- 5 -
<PAGE>
ARTICLE XI -- NOTICES
All notices, demands, consents, approvals and other communications
which are required or desired to be given by either party to the other hereunder
shall be in writing and shall be either hand delivered or sent by United States
First Class mail, postage prepaid, or Federal Express or other private courier
service, addressed to the appropriate party at its address set forth below, or
at such other address as such party shall have last designated by notice to the
other. Notices, demands, consents, approvals, and other communications shall be
deemed given when hand delivered or when mailed:
To Seller: Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91301
Attention: Mr. Larry Thomas
To Purchaser: G.C. Realty LLC
5155 Clareton Drive
Agoura Hills, CA 91301
Attention: Mr. Ray Scherr
ARTICLE XII -- NO ORAL MODIFICATION; ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and is intended to supersede all prior
writings and understandings of the parties and cannot be changed or modified
other than by a written instrument executed by both parties.
ARTICLE XIII -- SUCCESSORS BOUND
The provisions of this Agreement shall extend to, bind and inure to
the benefit of the parties hereto and their respective successors and assigns.
ARTICLE XIV -- ASSIGNMENT
Notwithstanding any provisions to the contrary, whether express or
implied, Purchaser shall have the right to assign this Agreement and Purchaser's
rights and benefits hereunder to any person or assignee. Seller shall accept
the performance of Purchaser's obligations hereunder by any such person or
assignee provided such person or assignee assumes all obligations of Purchaser
hereunder and promptly notifies Seller of such assignment. If this Agreement is
assigned, any reference in this Agreement to Purchaser shall thereafter be
deemed to refer to such person or assignee.
- 6 -
<PAGE>
ARTICLE XV -- WAIVER
The Purchaser and Seller reserve the right to waive, in whole or in
part, any provision hereof which is for their respective benefits.
ARTICLE XVI -- BROKERS
Seller and Purchaser each warrant and represent to the other that
Seller and Purchaser have not dealt with any real estate agents or brokers, and
in the event any claims for real estate commissions, fees, or compensation arise
in connection with the transaction contemplated in this Agreement, the party so
incurring or causing such claims shall indemnify and hold harmless the other
party from any loss or damage which said other party suffers because of said
claim.
ARTICLE XVII -- DELIVERY OF POSSESSION
Purchaser shall be granted full possession of the Property upon
Closing subject to the rights of no other parties-in-possession, except for
Seller. Prior to the Closing, Purchaser shall have the right to enter the
Property for any purpose related to Purchaser's intended purchase.
ARTICLE XVIII -- GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
ARTICLE XIX -- COUNTERPARTS
This Agreement may be executed in more than one counterpart, each of
which shall be deemed an original.
ARTICLE XX -- FURTHER ASSURANCES
Seller shall, without further consideration, execute, acknowledge and
deliver to Purchaser at the Closing, or thereafter upon request of Purchaser,
any instruments or documents, or take such other actions, reasonably required to
fully consummate the transactions contemplated hereunder.
ARTICLE XXI -- CAPTIONS
The captions of this Agreement are inserted for convenience of
reference only and do not define, describe or limit the scope or intent of this
Agreement or any term hereof.
- 7 -
<PAGE>
ARTICLE XXII -- ATTORNEYS' FEES AND COSTS
In the event of any action involving or relating in any manner to a
default under this Agreement, the court in such action shall award a reasonable
sum as attorneys' fees to the party in whose favor judgment is entered and said
party shall be entitled to recover in addition, costs of suit and filing fees on
any appeal.
ARTICLE XXIII -- SEVERABILITY
In case any provision of this Agreement shall be invalid, illegal or
unenforceable, such provision shall be severable from the rest of this Agreement
and the validity, legality and enforceability of the remaining provisions shall
not in any way be affected.
ARTICLE XXIV -- TIME OF THE ESSENCE
Time is of the essence of this Agreement.
ARTICLE XXV -- INDEMNIFICATION
To the fullest extent permitted by law, Seller agrees to protect,
indemnify, defend and save harmless Purchaser, its directors, officers, agents
and employees from and against any and all liability, expense or damage of any
kind or nature, from any suits, claims, or demands, including reasonable legal
fees and expenses on account of any matter or thing or action or failure to act
by Seller, whether in suit or not, arising out of any breach of any
representation, warranty or covenant set forth in this Agreement or otherwise,
unless such suit, claim or damage is caused solely by an act or willful
misconduct of Purchaser, its directors, officers, agents and employees. Upon
receiving knowledge of any suit, claim or demand asserted by a third party that
Purchaser believes is covered by this indemnity, Purchaser shall give Seller
notice of the matter and an opportunity to defend it, at Seller's sole cost and
expense, with legal counsel satisfactory to Purchaser. Purchaser may also
require Seller to so defend the matter. This obligation on the part of Seller
shall survive the Closing.
ARTICLE XXVI -- EXPENSES
Except as provided hereunder, Seller and Purchaser shall each pay all
of their respective expenses incurred by or on behalf of each of them in
connection with this Agreement and the transactions contemplated hereunder.
ARTICLE XXVII -- SURVIVAL OF CONDITIONS
Notwithstanding any presumption to the contrary, all covenants,
conditions, warranties and representations contained in this Agreement, which by
their nature impliedly or expressly involve performance in any particular after
Closing, or which cannot be ascertained to have been fully performed until after
Closing shall survive the Closing.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, sealed and delivered the day and year first above written.
PURCHASER:
G.C. REALTY LLC
a California limited liability company
SCHERR LIVING TRUST, dated April 3, 1990, member
By: /s/ RAYMOND SCHERR
---------------------------------------------------------
Raymond Scherr, Trustee
By: /s/ JANET SCHERR
---------------------------------------------------------
Janet Scherr, Trustee
By: /s/ RAYMOND SCHERR
---------------------------------------------------------
Raymond Scherr, Member
By: /s/ JANET SCHERR
---------------------------------------------------------
Janet Scherr, Member
SELLER:
GUITAR CENTER MANAGEMENT COMPANY, INC.
a California corporation
By: /s/ LARRY THOMAS
---------------------------------------------------------
Larry Thomas
- 9 -
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
Tract D-R, Block 2, PARKWAY CENTRAL ADDITION to the City of Arlington, Tarrant
County, Texas, according to plat recorded in Volume 388-155, Page 31, Deed
Records of Tarrant County, Texas.
<PAGE>
EXHIBIT 10.21
PURCHASE AGREEMENT
AND ESCROW INSTRUCTIONS
THIS PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (this "Agreement") is
made this 15th day of February, 1996, between GUITAR CENTER MANAGEMENT COMPANY,
INC., ("Seller") and G.C. REALTY LLC, a California limited liability company, or
its nominee ("Purchaser").
ARTICLE I -- PROPERTY TO BE CONVEYED
A. Seller shall sell to Purchaser, and Purchaser shall purchase from
Seller, upon the terms and conditions hereinafter set forth, that certain real
property more particularly described in Exhibit "A" attached hereto and
incorporated herein by this reference (the "Land"), together with the building,
fixtures, and other improvements on the Land (the "Improvements") and the
equipment, supplies, and other personal property attached to, located at, or
used in connection with the operation, management, or maintenance of the Land or
the Improvements (the "Personal Property"). The Land, Improvements, and
Personal Property shall be collectively referred to herein as the "Property."
The Property is located in Cook County, State of Illinois, at 2375 S. Arlington
Heights Road, Arlington Heights, Illinois.
B. The Property shall include all right, title and interest of
Seller, if any, in and to (i) any land lying in the bed of any street, road,
highway or avenue, open or proposed, in front of or adjoining all or any part of
the Property and in and to all rights-of-way, riparian rights and easements;
(ii) all right, title and interest of Seller, if any, in and to any award or
payment made or to be made (a) for any taking in condemnation or eminent domain
of land lying in the bed of any street, road, highway or avenue, open or
proposed, in front of or adjoining all or any part of the Property, (b) for
damage to the Property or any part thereof by reason of change of grade or
closing of any such street, road, highway or avenue, and (c) for any taking in
condemnation or eminent domain of any part of the Property, and (iii) all tenant
leases, and refundable security or other tenant deposits, as well as rents and
profits arising thereunder from and after the "Closing" (as defined in Article
VIII hereof).
ARTICLE II -- AGREEMENT TO SELL AND PURCHASE
Upon the execution of this Agreement by Seller and Purchaser, this
Agreement shall constitute a binding and enforceable agreement between the
Parties.
ARTICLE III -- PURCHASE PRICE
The purchase price (the "Purchase Price") for the Property shall be
approximately Nine Hundred Thirty-Five Thousand Dollars ($935.000), subject to
all prorations and adjustments provided herein. The Purchase Price shall be
paid on the Closing Date, Purchaser shall deliver, in cash or its equivalent, a
sum equal to the Purchase Price.
1
<PAGE>
ARTICLE IV -- TITLE CONTINGENCIES
Purchaser's obligations hereunder are subject to satisfaction that on
or before February 28, 1996; Seller shall obtain and deliver to Purchaser, at
Seller's sole cost and expense, a title commitment ("Title Commitment") for an
extended coverage ALTA Owner's Policy of Title Insurance ("Title Policy") from
Chicago Title Company ("Title Company") proposing to insure the Property in the
amount of the Purchase Price. The Title Commitment: (A) shall be effective as
of a date after the date of this Agreement; (B) shall reflect fee estate in
Seller; and (C) shall be accompanied by copies of all documents of record
referred to in the Title Commitment and all other documents relating to the
Title Commitment. With regard to standard printed exceptions and other common
exceptions generally included in title commitments, the Title Commitment shall
not: (i) have any survey exception; (ii) have any exception as to taxes and
special assessments except for those not due and payable as of the Closing Date;
(iii) have any exceptions as to rights of parties in possession, except for
Seller; (iv) have any exceptions as to easements not shown by public records; or
(v) have any exceptions as to mechanic's and materialmen's liens. The Title
Policy, to be issued at Closing, shall insure good and marketable, fee estate to
the Property in Purchaser subject only to those exceptions to title approved or
waived by Purchaser ("Permitted Exceptions"). Seller will pay the cost of the
Title Policy.
ARTICLE V -- REPRESENTATIONS AND WARRANTIES
Seller represents, warrants, and covenants to Purchaser as follows:
A. Seller has all requisite power and authority to own and operate
its properties and to carry on its business. Seller has the authority and
requisite power to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
have been duly authorized by Seller. Upon the execution and delivery of this
Agreement, this Agreement will constitute a legal, valid and binding obligation
of Seller enforceable against it.
B. Entering into this Agreement, and the consummation of the
transactions contemplated hereby, will not constitute or result in a violation
or breach by Seller of any contract to which Seller is bound or the Property is
subject, or any judgment, order, writ, injunction or decree issued against or
imposed upon it, or result in a violation of any applicable law, order, rule or
regulation of any governmental authority. There is no action, suit, proceeding
or investigation pending or threatened (including, without limitation, any
claims for labor or materials provided to or for the benefit of the Property)
which might become a cloud on title to the Property or any portion thereof.
C. There is no pending or threatened condemnation, requisition, or
similar proceeding affecting the Property or any portion thereof.
D. There are no violations of any state, federal, municipal or other
governmental law, statute, ordinances, or other legal requirements with respect
to the Property or any portion thereof, including, without limitation, any and
all laws relating to hazardous or
2
<PAGE>
toxic waste or waste products or hazardous substances. No portion of the
Property constitutes or contains hazardous or toxic waste or waste products or
hazardous substances.
E. There has not been nor is there now existing any default or
breach by Seller under any of the covenants, conditions, restrictions, rights-
of-way, easements, permits, licenses or governmental approvals or under any
note, mortgage, deed of trust, security agreement, leases, or other instrument
affecting the Property or any portion thereof.
F. No special.assessments or similar charges have been levied or
threatened against all or any part of the Property. Seller has no knowledge of
any intended assessments or charges against all or any part of the Property.
G. Seller has good and marketable title to the Property, and has the
right to convey and transfer the same. As of the Closing, there shall be no
lien (including, without limitation, any mechanic's liens) or security interest
affecting the Property or any part thereof, other than the Permitted Exceptions.
From the date of this Agreement until the Closing, Seller will not sell, assign,
lease, or convey any right, title, or interest whatsoever, in or to the Property
or create or permit to exist any lien, encumbrance, or charge thereon.
H. From the date of this Agreement until the Closing, Seller: (a)
will not alter or change the condition of the Property, except as permitted by
Purchaser; (b) will pay all obligations arising in connection with the Property,
as payment becomes due or may become due after the Closing; and (c) will
maintain and repair the Property in its present condition.
I. Seller shall pay all invoices in connection with any labor or
materials supplied or performed in and to the Property on or before the Closing
Date.
J. Seller has had an opportunity to review this Agreement with legal
counsel and after such review has agreed to the terms and conditions hereunder.
All of the representations, warranties, and covenants of Seller
contained in this Agreement or in any other document delivered to Purchaser in
connection with the transactions contemplated hereby (i) shall be true and
correct in all material respects and not in default at the time of Closing,
either expressly or by implication, just as though they were made at such time;
and (ii) Purchaser's right to enforce such representations, warranties, and
covenants shall survive the Closing.
Purchaser covenants, represents, and warrants to Seller as follows:
AA. Purchaser has the authority and requisite power to enter into
this Agreement and to consummate the transactions contemplated hereby.
Purchaser has duly authorized the execution and delivery of this Agreement and
upon such execution and delivery will be duly bound to consummate the
transactions contemplated hereby, subject to the terms and conditions hereof.
3
<PAGE>
BB. Neither entering into this Agreement nor the consummation of the
transactions contemplated hereby will constitute or result in a violation or
breach by Purchaser of any judgment, order, writ, injunction or decree issued
against or imposed upon it, or will result in a violation of any applicable law,
order, rule or regulation of any governmental authority.
ARTICLE VI -- ITEMS TO BE DELIVERED BY SELLER AND PURCHASER AT
CLOSING
On the Closing Date, Seller agrees to deliver the following items to
Title Company:
A. A duly executed warranty grant deed, in a form acceptable for
recording, conveying to Purchaser, or its nominee, the fee estate to the
Property. Seller shall pay all federal, state, municipal and other taxes, fees,
stamps and charges in connection with the delivery and recording of the
aforesaid deed;
B. The Title Policy (reflecting only the Permitted Exceptions); and
C. Any other documents required to be delivered at Closing pursuant
to this Agreement, and any other documents or agreements deemed necessary or
reasonably appropriate by the Purchaser or its counsel.
At Closing, Purchaser agrees to deliver the following items to Seller:
AA. The Purchase Price, in cash or its equivalent, as provided in
Article II hereof; and
BB. Any other documents required to be delivered at Closing pursuant
to this Agreement, and any other documents or agreements deemed necessary or
reasonably appropriate by Seller's counsel.
ARTICLE VII -- CONDITIONS TO CLOSING
The obligations of Purchaser hereunder shall be subject to the
fulfillment of the following conditions on or prior to the Closing Date:
A. Receipt by Purchaser of all items provided herein to be delivered
to Purchaser.
B. The representations and warranties of Seller contained herein
shall be true and correct on and as of the Closing, as if made on and as of such
date.
C. Seller shall have performed all covenants, undertakings and
obligations and complied with all conditions required by this Agreement to be
performed, satisfied and/or complied with by Seller.
4
<PAGE>
ARTICLE VIII -- TIME AND PLACE OF CLOSING
The closing of the transactions contemplated by this Agreement shall
take place on or before April 1, 1996, or at such other time and place as Seller
and Purchaser shall mutually agree upon in writing. The closing shall be
consummated through the Title Company and shall occur when the grant deed
provided fur in Article VI hereof is recorded (the "Closing").
ARTICLE IX -- APPORTIONMENTS SECURITY DEPOSITS
The following items shall be apportioned as of the Closing Date: (A)
collected rents and other income, if any; (B) real and personal property tax
payments or assessments; and (C) utility, water and sewer charges. Seller will
pay at Closing all fees, charges and taxes due as a result of the sale of the
Property at Closing, including, without limitation, any documentary stamp tax,
recording fees, sales tax, or franchise tax.
ARTICLE X -- CONDEMNATION AND PHYSICAL LOSS
A. If prior to the Closing all of the Property shall be taken by
condemnation or eminent domain, this Agreement shall be automatically terminated
and, thereafter, this Agreement shall be null and void and of no further force
or effect, and neither Purchaser nor Seller shall have any further rights,
duties, liabilities or obligations to the other by reason hereof. If prior to
the Closing (i) less than all of the Property shall be taken by condemnation or
eminent domain, or (ii) there is any taking of land lying in the bed of any
street, road, highway or avenue, open or proposed, in front of or adjoining all
or any part of the Property, or (iii) there is any change of grade of any such
street, road, highway or avenue, provided such taking or change of grade
involves a diminution in value of more than $50,000, then Purchaser may, at its
option, terminate this Agreement and, thereafter, this Agreement shall be null
and void and of no further force or effect, and neither Purchaser nor Seller
shall have any further rights, duties, liabilities, or obligations to the other
by reason thereof. If this Agreement is not terminated in accordance with the
foregoing, or if such taking involves a diminution in value of $50,000 or less,
Purchaser shall accept title to the Property subject to the taking or change of
grade, in which event the proceeds of the award or payment shall be assigned by
Seller to Purchaser at the Closing and any moneys theretofore received by Seller
in connection with such taking or change in grade shall be paid over to
Purchaser.
B. If, prior to the Closing, the Property is damaged as the result
of fire or other casualty, Purchaser shall have the option to either accept
title to the Property without any abatement of the Purchase Price whatsoever, in
which event, at the Closing all of the insurance proceeds shall be assigned by
Seller to Purchaser and any moneys theretofore received by Seller in connection
with such fire or other casualty shall be paid over to Purchaser, or if such
loss exceeds $50,000, terminate this Agreement, and Purchaser and Seller shall
have no further rights or obligations to the other. Seller shall maintain
adequate insurance on the Property to cover the replacement value of the
building and other improvements which are part of the Property in case of any
fire or other casualty occurring before the Closing.
5
<PAGE>
ARTICLE XI -- NOTICES
All notices, demands, consents, approvals and other communications
which are required or desired to be given by either party to the other hereunder
shall be in writing and shall be either hand delivered or sent by United States
First Class mail, postage prepaid, or Federal Express or other private courier
service, addressed to the appropriate party at its address set forth below, or
at such other address as such party shall have last designated by notice to the
other. Notices, demands, consents, approvals, and other communications shall be
deemed given when hand delivered or when mailed.
To Seller: Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, CA 91301
Attention: Mr. Larry Thomas
To Purchaser: G.C. Realty LLC
5155 Clareton Drive
Agoura Hills, CA 91301
Attention: Mr. Ray Scherr
ARTICLE XII -- NO ORAL MODIFICATION;
ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and is intended to supersede all prior
writings and understandings of the parties and cannot be changed or modified
other than by a written instrument executed by both parties.
ARTICLE XIII -- SUCCESSORS BOUND
The provisions of this Agreement shall extend to, bind and inure to
the benefit of the parties hereto and their respective successors and assigns.
ARTICLE XIV -- ASSIGNMENT
Notwithstanding any provisions to the contrary, whether express or
implied, Purchaser shall have the right to assign this Agreement and Purchaser's
rights and benefits hereunder to any person or assignee. Seller shall accept
the performance of Purchaser's obligations hereunder by any such person or
assignee provided such person or assignee assumes all obligations of Purchaser
hereunder and promptly notifies Seller of such assignment. If this Agreement is
assigned, any reference in this Agreement to Purchaser shall thereafter be
deemed to refer to such person or assignee.
6
<PAGE>
ARTICLE XV -- WAIVER
The Purchaser and Seller reserve the right to waive, in whole or in
part, any provision hereof which is for their respective benefits.
ARTICLE XVI -- BROKERS
Seller and Purchaser each warrant and represent to the other that
Seller and Purchaser have not dealt with any real estate agents or brokers, and
in the event any claims for real estate commissions, fees, or compensation arise
in connection with the transaction contemplated in this Agreement, the party so
incurring or causing such claims shall indemnify and hold harmless the other
party from any loss or damage which said other party suffers because of said
claim.
ARTICLE XVII -- DELIVERY OF POSSESSION
Purchaser shall be granted full possession of the Property upon
Closing subject to the rights of no other parties-in-possession, except for
Seller. Prior to the Closing, Purchaser shall have the right to enter the
Property for any purpose related to Purchaser's intended purchase.
ARTICLE XVIII -- GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
ARTICLE XIX -- COUNTERPARTS
This Agreement may be executed in more than one counterpart, each of
which shall be deemed an original.
ARTICLE XX -- FURTHER ASSURANCES
Seller shall, without further consideration, execute, acknowledge and
deliver to Purchaser at the Closing, or thereafter upon request of Purchaser,
any instruments or documents, or take such other actions, reasonably required to
fully consummate the transactions contemplated hereunder.
ARTICLE XXI -- CAPTIONS
The captions of this Agreement are inserted for convenience of
reference only and do not define, describe or limit the scope or intent of this
Agreement or any term hereof.
7
<PAGE>
ARTICLE XXII -- ATTORNEYS' FEES AND COSTS
In the event of any action involving or relating in any manner to a
default under this Agreement, the court in such action shall award a reasonable
sum as attorneys' fees to the party in whose favor judgment is entered and said
party shall be entitled to recover in addition, costs of suit and filing fees on
any appeal.
ARTICLE XXIII -- SEVERABILITY
In case any provision of this Agreement shall be invalid, illegal or
unenforceable, such provision shall be severable from the rest of this Agreement
and the validity, legality and enforceability of the remaining provisions shall
not in any way be affected.
ARTICLE XXIV -- TIME OF THE ESSENCE
Time is of the essence of this Agreement.
ARTICLE XXV -- INDEMNIFICATION
To the fullest extent permitted by law, Seller agrees to protect,
indemnify, defend and save harmless Purchaser, its directors, officers, agents
and employees from and against any and all liability, expense or damage of any
kind or nature, from any suits, claims, or demands, including reasonable legal
fees and expenses on account of any matter or thing or action or failure to act
by Seller, whether in suit or not, arising out of any breach of any
representation, warranty or covenant set forth in this Agreement or otherwise,
unless such suit, claim or damage is caused solely by an act or willful
misconduct of Purchaser, its directors, officers, agents and employees. Upon
receiving knowledge of any suit, claim or demand asserted by a third party that
Purchaser believes is covered by this indemnity, Purchaser shall give Seller
notice of the matter and an opportunity to defend it, at Seller's sole cost and
expense, with legal counsel satisfactory to Purchaser. Purchaser may also
require Seller to so defend the matter. This obligation on the part of Seller
shall survive the Closing.
ARTICLE XXVI -- EXPENSES
Except as provided hereunder, Seller and Purchaser shall each pay all
of their respective expenses incurred by or on behalf of each of them in
connection with this Agreement and the transactions contemplated hereunder.
ARTICLE XXVII -- SURVIVAL OF CONDITIONS
Notwithstanding any presumption to the contrary, all covenants,
conditions, warranties and representations contained in this Agreement, which by
their nature impliedly or expressly involve performance in any particular after
Closing, or which cannot be ascertained to have been fully performed until after
Closing shall survive the Closing.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, sealed and delivered the day and year first above written.
PURCHASER:
G.C. REALTY LLC
a California limited liability company
SCHERR LIVING TRUST, dated April 3, 1990, Member
By: /s/ Raymond Scherr
------------------------------
Raymond Scherr, Trustee
By: /s/ Janet Scherr
------------------------------
Janet Scherr, Trustee
By: /s/ Raymond Scherr
------------------------------
Raymond Scherr, Member
By: /s/ Janet Scherr
------------------------------
Janet Scherr, Member
SELLER:
GUITAR CENTER MANAGEMENT COMPANY, INC.
a California corporation
By: /s/ Larry Thomas
------------------------------
Larry Thomas
9
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
PARCEL 1:
THE SOUTH 27.58 FEET, AS MEASURED ALONG THE WESTERLY LINE OF LOT 4 OF AUGUST
BUSSE'S DIVISION OF PARTS OF THE EAST 1/2 OF SECTION 16, TOWNSHIP 41 NORTH,
RANGE 11 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS,
TOGETHER WITH THAT PART OF LOT 3 OF SAID AUGUST BUSSE'S DIVISION LYING NORTH OF
THE FOLLOWING DESCRIBED PORTION OF SAID-LOT 3:
COMMENCING AT THE SOUTHEAST CORNER OF SAID SECTION 16; THENCE NORTHERLY ALONG
THE EAST LINE OF SAID SECTION 16, A DISTANCE OF 1,083.34 FEET TO THE NORTHEAST
CORNER OF LOT 1 OF SAID AUGUST BUSSE'S DIVISION, THENCE WESTERLY ALONG THE NORTH
LINE OF SAID LOT 1 A DISTANCE OF 500.00 FEET TO THE SOUTHEAST CORNER OF SAID LOT
3; THENCE NORTHEASTERLY ALONG THE EAST LINE OF SAID LOT 3 A DISTANCE OF 93.3
FEET TO THE POINT OF BEGINNING, SAID POINT OF BEGINNING BEING ON THE NORTHERLY
RIGHT OF WAY LINE OF THE NORTHERN ILLINOIS TOLL HIGHWAY; THENCE NORTHWESTERLY
ALONG SAID NORTHERLY RIGHT OF WAY LINE FORMING AN ANGLE OF 57 DEGREES 45 MINUTES
TO THE LEFT WITH THE LAST DESCRIBED LINE EXTENDED A DISTANCE OF 607.3 FEET TO A
POINT ON THE EASTERLY RIGHT OF WAY LINE OF ARLINGTON HEIGHTS ROAD; THENCE
NORTHERLY ALONG SAID EASTERLY RIGHT OF WAY LINE FORMING AN ANGLE OF 65 DEGREES,
25 MINUTES, AND 40 SECONDS TO THE RIGHT WITH THE LAST DESCRIBED LINE EXTENDED A
DISTANCE OF 506.9 FEET TO A POINT; THENCE EASTERLY ALONG A LINE FORMING AN ANGLE
OF 90 DEGREES 00 MINUTES TO THE RIGHT WITH THE LAST DESCRIBED LINE EXTENDED A
DISTANCE OF 312.0 FEET TO A POINT; THENCE SOUTHEASTERLY ALONG A LINE FORMING AN
ANGLE OF 26 DEGREES 43 MINUTES 30 SECONDS TO THE RIGHT WITH THE LAST DESCRIBED
LINE EXTENDED A DISTANCE OF 165.5 FEET TO A POINT ON THE EAST LINE OF SAID LOT
3; THENCE SOUTHERLY ALONG THE EAST LINE OF SAID LOT 3 A DISTANCE OF 691.1 FEET
TO THE POINT OF BEGINNING, IN COOK COUNTY, ILLINOIS, EXCEPT THAT PART OF THE
LAND CONVEYED TO THE DEPARTMENT OF TRANSPORTATION FOR THE STATE OF ILLINOIS IN
CASE 93L50754.
PARCEL 2:
EASEMENT APPURTENANT TO AND FOR THE BENEFIT OF PARCEL 1 AS CREATED BY GRANTS OF
EASEMENT MADE BY WHEELING TRUST AND SAVINGS BANK, A CORPORATION OF ILLINOIS, AS
TRUSTEE UNDER TRUST AGREEMENT DATED NOVEMBER 4, 1974 AND KNOWN AS TRUST NUMBER
74-339 AND FIRST ARLINGTON NATIONAL BANK OF ARLINGTON HEIGHTS, A A NATIONAL
BANKING ASSOCIATION, AS TRUSTEE UNDER TRUST AGREEMENT DATED AUGUST 16, 1973 AND
KNOWN AS TRUST NUMBER A-375 TO LOIS E. KLEHM INDIVIDUALLY AND AS EXECUTOR UNDER
THE LAST WILL AND TESTAMENT OF CARL G. KLEHM, RECORDED DECEMBER 22, 1982 AS
DOCUMENT NUMBERS 26446336 AND 26446337, RESPECTIVELY, FOR INGRESS AND EGRESS
OVER, UNDER AND ACROSS THE FOLLOWING DESCRIBED LAND:
THAT PART OF LOT 4 IN AUGUST BUSSE'S DIVISION OF PARTS OF THE EAST 1/2 OF
SECTION 16, TOWNSHIP 41 NORTH, RANGE 11 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN
COOK COUNTY, ILLINOIS DESCRIBED AS FOLLOWS:
1
<PAGE>
BEGINNING AT THE INTERSECTION OF THE NORTHERLY LINE OF SAID LOT 4 WITH THE
WESTERLY LINE OF THE EASTERLY 24 FEET, AS MEASURED PERPENDICULAR TO THE EASTERLY
LINE OF SAID LOT 4; THENCE SOUTHERLY ALONG THE SAID WESTERLY LINE, A DISTANCE OF
50.00 FEET; THENCE NORTHWESTERLY A DISTANCE OF 58.31 FEET TO A POINT ON THE SAID
NORTHERLY LINE OF SAID LOT 4; THENCE EASTERLY ALONG THE SAID NORTHERLY LINE OF
LOT 4, A DISTANCE OF 30.00 FEET TO THE POINT OF BEGINNING; ALSO THE EASTERLY 24
FEET OF SAID LOT 4, AS MEASURED PERPENDICULAR TO THE EASTERLY LINE OF SAID LOT
(EXCEPT THE PART OF SAID EASTERLY 24 FEET FALLING IN THE SOUTH 27.58 FEET OF
SAID LOT 4, AS MEASURED ALONG THE WESTERLY LINE OF SAID LOT 4), IN COOK COUNTY,
ILLINOIS.
2
<PAGE>
EXHIBIT 10.22
OFFER, AGREEMENT AND ESCROW
INSTRUCTIONS FOR PURCHASE OF REAL ESTATE
August 11, 1995
(Date for Reference Purposes)
1. BUYER.
1.1 RAYMOND I SCHERR or assignee, (the "Buyer") hereby offers to
purchase the real property, hereinafter described, from the GUITAR CENTER
MANAGEMENT COMPANY, INC., PROFIT SHARING PLAN (the "Seller") (collectively, the
"Parties" or individually, a "Party"), through an escrow (the "Escrow") to close
on such date as the parties shall agree upon in writing (the "Expected Closing
Date") to be held by an escrow company jointly selected by the Buyer and Seller
and so designated in writing (the "Escrow Holder"), upon the terms and
conditions set forth in this agreement (the "Agreement").
1.2 The term "Date of Agreement" as used herein shall be the date when
by execution and delivery of this document, Buyer and Seller have reached
agreement in writing whereby Seller agrees to sell, and Buyer agrees to
purchase, the Property upon terms accepted by both Parties.
2. PROPERTY.
2.1 The real property (the "Property") that is the subject of this offer
consists of a commercial building, which is located in the City of Burbank,
County of Cook, State of Illinois, is commonly known by the street address of
8250 South Cicero Avenue, Burbank, Illinois, and is legally described as the
East 1/2 of Lot 5 (except the north 50 feet thereof and except the east 17 feet
thereof) in Frederick H. Bartlett's Aero Fields, being a subdivision of the
south 20 acres of the east 1/2 of the north east 1/4 of Section 33, Township 38
North, Range 13 East of the Third Principal Meridian, and the south east 1/4 of
Section 33 (except part thereof dedicated for public highway by Document No.
7737153, recorded December 5, 1922, in Book 175 of Plats, Page 20) in Cook
County, Illinois.
2.2 If the legal description of the Property is not complete or is
inaccurate, this Agreement shall not be invalid and the legal description shall
be completed or corrected to meet the requirements of the title company jointly
selected by the Buyer and Seller and so designated in writing (the "Title
Company"), which Title Company shall issue the title policy hereinafter
described.
2.3 The property includes, at no additional cost to Buyer, the permanent
improvements thereon, including those items which the law of the State of
Illinois provides is part of the Property, as well as the following items, if
any, owned by the Seller and presently located in the Property: electrical
distribution systems (power panels, buss ducting, conduits, disconnects,
lighting fixtures), telephone distribution systems (lines, jacks and
connections),
1
<PAGE>
space heaters, air conditioning equipment, air lines, fire sprinkler systems,
security systems, carpets, window coverings and wall coverings (collectively the
"Improvements").
3. PURCHASE PRICE.
3.1 The purchase price (the "Purchase Price") to be paid by Buyer to
Seller for the Property shall be $960,100, payable as follows:
Deposit into escrow prior to Closing, pursuant to the
terms of paragraph 7.3(a): $960,100.00
----------
TOTAL PURCHASE PRICE $960,100.00
----------
3.2 The Purchase Price above includes both the value of the fee simple
in the Property and the present value of the right to receive lease payments for
the remainder of the lease term from the tenant under the terms of that certain
Lease ("Lease") for the property, dated March 3, 1989, entered into between the
Seller herein and Guitar Center Management Company, Inc., a California
corporation ("Lessee"). The Seller and the Lessee are currently in negotiation
regarding the cancellation of the Lease. In the event, prior to the Closing,
the Seller receives any payments from the Lessee for the cancellation of the
Lease, such payment(s) shall be applied towards the present value of the right
to receive such lease payments and the Purchase Price shall be reduced by the
amount of such payments, up to a maximum of $60,100.
4. REAL ESTATE BROKERS.
4.1 Buyer and Seller each represent and warrant to the other that he/it
has had no dealings with any person, firm, broker or finder in connection with
the negotiation of this Agreement and/or the consummation of the purchase and
sale contemplated herein, and no broker or other person, firm or entity is/are
entitled to any commission or finder's fee in connection with this transaction
as the result of any dealings or acts of such Party. Buyer and Seller do each
hereby agree to indemnify, defend, protect and hold the other harmless from and
against any costs, expenses or liability for compensation, commission or charges
which may be claimed by any broker, finder or other similar party, by reason of
any dealings or act of the indemnifying Party.
5. ESCROW AND CLOSING.
5.1 Upon acceptance hereof by Seller, this Agreement shall constitute
not only the agreement of purchase and sale between Buyer and Seller, but also
instructions to Escrow Holder for the consummation of the Agreement through the
Escrow. Escrow Holder shall not prepare any further escrow instructions
restating or amending this Agreement unless specifically so instructed by the
Parties herein or unless required by Escrow Holder in order to handle this
Escrow.
2
<PAGE>
5.2 Escrow Holder is hereby authorized and instructed to conduct the
Escrow in accordance with this Agreement, applicable law, custom and practice of
the community in which Escrow Holder is located, including any reporting
requirements of the Internal Revenue Code. In the event of a conflict between
the law of the state where the Property is located and the law of the state
where the Escrow Holder is located, the law of the state where the Property is
located shall prevail.
5.3 Subject to satisfaction of the contingencies herein described,
Escrow Holder shall close this escrow (the "Closing") by recording the grant
deed and other documents required to be recorded and by disbursing the funds and
documents in accordance with this Agreement.
5.4 If this transaction is terminated for non-satisfaction and
non-waiver of a Buyer's Contingency, as defined in paragraph 6.4, then neither
of the Parties shall thereafter have any liability to the other under this
Agreement, except to the extent of the breach of any affirmative covenant or
warranty in this Agreement that may have been involved. In the event of such
termination, Buyer shall be promptly refunded all funds deposited by or on
behalf of Buyer with Escrow Holder or Seller, less only Title Company and Escrow
Holder cancellation fees and costs, all of which shall be Buyer's obligation.
5.5 The Closing shall occur on the Expected Closing Date, or as soon
thereafter as the Escrow is in condition for Closing; provided, however, that if
the Closing does not occur by the Expected Closing Date and the Expected Closing
Date is not extended by mutual instructions of the Parties, a Party hereto not
then in default under this Agreement may notify the other Party and the Escrow
Holder, in writing that, unless the Closing occurs within five (5) business days
following said notice, the Escrow and this Agreement shall be deemed terminated
without further notice or instructions.
5.6 Should the Closing not occur during said five (5) day period, this
Agreement and Escrow shall be deemed terminated and Escrow Holder shall
forthwith return all monies and documents, less only Escrow Holder's reasonable
fees and expenses, to the Party who deposited them. Such Party shall indemnify
and hold Escrow Holder harmless in connection with such return. However, no
refunds or documents shall be returned to a party claimed by written notice to
Escrow Holder to be in default under this Agreement.
5.7 Except as otherwise provided herein, the termination of Escrow and
this Agreement and/or the return of deposited funds or documents shall not
relieve or release either Buyer or Seller from any obligation to pay Escrow
Holder's fees and costs or constitute a waiver, release or discharge of any
breach or default that has occurred in the performance of the obligations,
agreements, covenants or warranties contained herein.
5.8 If this Agreement terminates for any reason other than Seller's
breach or default, then at Seller's request, and as a condition to the return of
Buyer's deposit, Buyer shall, within five (5) days after written request
therefore, deliver to Seller, at no charge, copies of all surveys, engineering
studies, soil reports, maps, master plans, feasibility studies and other similar
items prepared by or for Buyer that pertain to the Property.
3
<PAGE>
6. CONTINGENCIES TO CLOSING.
6.1 The Closing of this transaction is contingent upon the satisfaction
or waiver of the following contingencies:
(a) HAZARDOUS SUBSTANCE CONDITIONS REPORT. Buyer's written
approval, within thirty (30) days following the later of the Date of Agreement
or receipt by Buyer of the Property Information Sheet, of a Hazardous Substance
Conditions report or a "phase one" environmental survey report concerning the
Property and relevant adjoining properties. Such report will be obtained at
Seller's direction and expense. A "Hazardous Substance" for purposes of this
Agreement is defined as any substance whose nature and/or quantity of existence,
use, manufacture, disposal or effect, render it subject to Federal, state or
local regulation, investigation, remediation or removal as potentially injurious
to public health or welfare. A "Hazardous Substance Condition" for purposes of
this Agreement is defined as the existence on, under or relevantly adjacent to
the Property of a Hazardous Substance that would require remediation and/or
removal under applicable Federal, state or local law.
(b) GOVERNMENTAL APPROVALS. Buyer's receipt within fifteen (15)
days after the later of the Date of Agreement, of all approvals and permits from
governmental agencies or departments which have or may have jurisdiction over
the Property which Buyer deems necessary or desirable in connection with its
intended use of the Property, including, but not limited to, permits and
approvals required with respect to zoning, planning, building and safety, fire,
police, handicapped access, transportation and environmental matters. Buyer's
failure to deliver to Escrow Holder and Seller written notice terminating this
Agreement prior to the expiration of said fifteen (15) day period as a result of
Buyer's failure to obtain such approvals and permits shall be conclusively
deemed to be Buyer's waive of this condition to Buyer's obligations under this
Agreement.
(c) CONDITION OF TITLE. Buyer's written approval of a current
preliminary title report concerning the Property (the "PTR") issued by the Title
Company, as well as all documents (the "Underlying Documents") (referred to in
the PTR, and the issuance by the Title Company of the title policy described in
10.1. Seller shall cause the PTR and all Underlying Documents to be delivered
to Buyer promptly after the Date of Agreement. Buyer's approval is to be given
within ten (10) days after receipt of said PTR and legible copies of all
Underlying Documents. The disapproval by Buyer of any monetary encumbrance,
which by the terms of this Agreement is not to remain against the Property after
the Closing, shall not be considered a failure of this condition, as Seller
shall have the obligation, at Seller's expense, to satisfy and remove such
disapproved monetary encumbrance at or before the Closing.
(d) SURVEY. Buyer's written approval, within thirty (30) days
after receipt of the PTR and Underlying Documents, of an ALTA title supplement
based upon a survey prepared to American Land Title Association (the "ALTA")
standards for an owner's policy by a licensed surveyor, showing the legal
description and boundary lines of the Property, any easements of record, and any
improvements, poles, structures and things located within ten (10) feet either
side of the Property boundary lines. The survey shall be prepared at Buyer's
direction and expense. If Buyer has obtained a survey and approved the ALTA
title
4
<PAGE>
supplement, Buyer may elect within the period allowed for Buyer's approval of a
survey to have an ALTA extended coverage owner's form of title policy, in which
event Buyer shall pay any additional premium attributable thereto.
(e) LESSEE'S REPRESENTATION AND WARRANTY. Buyer's written
approval, within ten (10) days after receipt, of a document from the Lessee,
executed by an authorized officer of the Lessee, containing Lessee's
representation and warranty that Lessee and Seller have both performed all of
their obligations and duties under the terms of the Lease; that there has been
no default by either Seller or Lessee under the terms of the Lease; that Lessee
has maintained the property in good condition and repair, as required under the
terms of the Lease; that the Property is in compliance with all applicable codes
and regulations; that Lessee has no knowledge of the existence or prior
existence on the Property of any Hazardous Substance nor of the existence or
prior existence of any above or below ground storage tank or tanks; that Lessee
has no knowledge of any aspect or condition of the Property which violates
applicable law, rules, regulations, codes or covenants, conditions or
restrictions, or of improvements or alterations made to the Property without a
permit where one was required, or of any unfulfilled order or directive of any
applicable governmental agency or casualty insurance company that any work of
investigation, remediation, repair, maintenance or improvement is to be
performed on the Property; that there are no unsatisfied mechanic's or
materialman's lien rights concerning the Property; and that Lessee has no
knowledge of any actions, suits or proceedings pending or threatened before any
commission, board, bureau, agency, instrumentality, arbitrator(s), court or
tribunal that would affect the Property or the right to occupy or utilize same.
Seller shall obtain and deliver to Buyer such representation and warranty from
Lessee within thirty (30) days of the Date of Agreement.
(f) OTHER AGREEMENTS. Buyer's written approval, within ten (10)
days after receipt, of a copy of any other agreements ("Other Agreements") known
to Seller that will affect the Property beyond the Closing. Seller shall cause
said copies to be delivered to Buyer promptly after the Date of Agreement.
(g) DESTRUCTION, DAMAGE OR LOSS. There shall not have occurred
prior to the Closing, a destruction of, or damage or loss to, the Property or
any portion thereof, from any cause whatsoever, which would cost more than
$5,000.00 to repair or cure. If the cost of repair or cure is $5,000.00 or
less, Seller shall repair or cure the loss prior to the Closing. Buyer shall
have the option, within ten (10) days after receipt of written notice of a loss
costing more than $5,000.00 to repair or cure, to either terminate this
transaction or to purchase the Property notwithstanding such loss, but without
deduction or offset against the Purchase Price. If the cost to repair or cure
is more than $10,000.00, and Buyer does not elect to terminate this transaction,
Buyer shall be entitled to any insurance proceeds applicable to such loss.
Unless otherwise notified in writing by either Party, Escrow Holder shall assume
no destruction, damage or loss costing more than $10,000.00 to repair or cure
has occurred prior to Closing.
(h) MATERIAL CHANGE. No Material Change, as hereinafter
defined, shall have occurred with respect to the Property that has not been
approved in writing by Buyer. For purposes of this Agreement, a "Material
Change" shall be a change in the status of the use,
5
<PAGE>
occupancy, tenants, or condition of the Property as reasonably expected by the
Buyer, that occurs after the date of this offer and prior to the Closing;
providing, however, that the termination of the Lease shall not constitute a
"Material Change" under the terms of this paragraph. Buyer shall have ten (10)
days following receipt of written notice from any source of any such Material
Change within which to approve or disapprove same. Unless otherwise notified in
writing by either party, Escrow Holder shall assume that no Material Change has
occurred prior to the Closing.
(i) SELLER PERFORMANCE. The delivery of all documents and the
due performance by Seller of each and every undertaking and agreement to be
performed by Seller under this Agreement.
(j) BREACH OF WARRANTY. That each representation and warranty
of Seller herein be true and correct as of the Closing. Escrow Holder shall
assume that this condition has been satisfied unless notified to the contrary in
writing by Buyer prior to the Closing.
(k) SIMULTANEOUS CLOSE OF OTHER ESCROW. The Closing of shall be
contingent upon, and shall occur simultaneously with, the close of the escrow
established for the purchase of the property located at 1515 North Main Street,
Santa Ana, California. Neither this Escrow nor the Other Escrow shall close
unless and until both such Escrows are in the position to close simultaneously.
In the event the Other Escrow shall, for any reason, not close, whether due to
the fact that the contingencies precedent to the Other Escrow have not been
satisfied or for any other reason, this Escrow shall be cancelled and neither
party shall have any liability to the other party as a result of the
cancellation of this Escrow.
6.2 All of the contingencies specified in subparagraphs (a) through (j)
of paragraph 6.1 are for the benefit of, and may be waived by, Buyer, and may be
elsewhere herein referred to as "Buyer Contingencies"; provided, however, that
the contingency specified in subparagraph (k) of paragraph 6.1 is for the
benefit of, and may be waived by, both Buyer and Seller and such contingency may
not be waived by either Buyer or Seller alone.
6.3 If Buyer shall fail, within the applicable time specified, to
approve or disapprove in writing to Escrow Holder and Seller, any item, matter
or document subject to Buyer's approval under the terms of this Agreement, it
shall be conclusively presumed that Buyer has approved such item, matter or
document. Buyer's conditional approval shall constitute a disapproval, unless
provision is made by the Seller within the time specified therefor by the Buyer
in the conditional approval or by this Agreement, whichever is later, for the
satisfaction of the condition imposed by the Buyer.
6.4 If any Buyer's Contingency is not satisfied or if Buyer disapproves
any matter subject to its approval within the time period applicable thereto
("Disapproved Item"), Seller shall have the right within ten (10) days following
the expiration of the time period applicable to such Buyer Contingency or
receipt of notice of Buyer's disapproval, as the case may be, to elect to cure
such Disapproved Item ("Seller's Election"). Seller's failure to give to Buyer
within said ten (10) day period, written notice of Seller's commitment to cure
such Disapproved Item on or before the Expected Closing Date shall be
conclusively presumed to
6
<PAGE>
be Seller's Election not to cure such Disapproved Item. If Seller elects either
by written notice or failure to give written notice, not to cure a Disapproved
Item, Buyer shall have the election, within ten (10) days after Seller's
Election, to either accept title to the Property subject to that Disapproved
Item, or to terminate this transaction. Buyer's failure to elect termination by
written notice to Seller within said ten (10) day period shall constitute
Buyer's election to accept title to the Property subject to that Disapproved
Item without deduction or effect. Unless expressly provided otherwise herein,
Seller's right to cure shall not apply to Hazardous Substance Conditions
referenced in paragraph 6.1(a). Unless the parties mutually instruct otherwise,
if the time periods for the satisfaction of contingencies or for Seller's and
Buyer's said Elections would expire on a date after the Expected Closing Date,
the Expected Closing Date shall be deemed extended to coincide with the
expiration of three (3) business days following the expiration of: (a) the
applicable contingency period(s), (b) the period within which the Seller may
elect to cure the Disapproved Item, or (c) if Seller elects not to cure, the
period within which Buyer may elect to terminate this transaction, whichever is
later.
6.5 Buyer understands and agrees that until such time as all Buyer's
Contingencies have been satisfied or waived, Seller and/or his agents may
solicit, entertain and/or accept back-up offers to purchase the subject Property
in the event the transaction covered by this Agreement is not consummated.
6.6 As defined in subparagraph 6.1(a), Buyer and Seller acknowledge that
extensive local, state and Federal legislation established broad liability upon
owners and/or users of real property for the investigation and remediation of a
Hazardous Substance Condition. The determination of the existence of a
Hazardous Substance Condition and the evaluation of the impact of such a
condition are highly technical. Buyer and Seller acknowledge that they have
been advised to consult their own technical and legal experts with respect to
the possible Hazardous Substance Condition aspects of the Property or adjoining
properties. Buyer and Seller hereby assume all responsibility for the impact of
such Hazardous Substance Conditions upon their respective interests herein.
7. DOCUMENTS REQUIRED AT CLOSING.
7.1 Escrow Holder shall cause to be issued to Buyer a standard coverage
(or ALTA extended, if so elected under paragraph 6.1(c)) owner's form policy of
title insurance effective as of the Closing, issued by the Title Company in the
full amount of the Purchase Price, insuring title to the Property vested in
Buyer, subject only to the exceptions approved by Buyer.
7.2 Seller shall deliver or cause to be delivered to Escrow Holder in
time for delivery to Buyer at the Closing, an original ink signed:
(a) Grant deed (or equivalent), duly executed and in recordable
form, conveying fee title to the Property to Buyer.
(b) If applicable, the Existing Leases and Other Agreements
together with duly executed assignments thereof by Seller and Buyer. The
assignment of Existing Leases
7
<PAGE>
shall be on the most recent Assignment and Assumption of Lessor's Interest in
Lease form published by the A.I.R. or its equivalent.
(c) The Lessee's written representation and warranty referred to
in paragraph 6.1(e), above.
(d) An affidavit executed by Seller to the effect that Seller is
not a "foreign person" within the meaning of Internal Revenue Code Section 1445
or successor statutes. If Seller does not provide such affidavit in form
reasonably satisfactory to Buyer at least three (3) business days prior to the
Closing, Escrow Holder shall at the Closing deduct from Seller's proceeds and
remit to Internal Revenue Service such sum as is required by applicable Federal
law with respect to purchases from foreign sellers.
7.3 Buyer shall deliver or cause to be delivered to Seller through
escrow:
(a) The cash portions of the Purchase Price and such additional
sums as are required of Buyer under this Agreement for prorations, expenses and
adjustments. The balance of the cash portion of the Purchase Price, including
Buyer's escrow charges and other cash charges, if any, shall be deposited by
Buyer with Escrow Holder, by cashier's check drawn upon a local major banking
institution, federal funds wire transfer, or any other method acceptable to
Escrow Holder as immediately collectable funds, no later than 11:00 o'clock A.M.
on the business day prior to the Expected Closing Date.
(b) The assumption portion of the Assignment and Assumption of
Lessor's Interest in Lease form specified in paragraph 7.2(b), above, duly
executed by Buyer with respect to the obligations of the Lessor accruing after
the Closing as to each Existing Lease.
(c) Assumptions duly executed by Buyer of the obligations of
Seller that accrue after Closing under any Other Agreements.
8. PRORATIONS, EXPENSES AND ADJUSTMENTS.
8.1 Taxes. Real property taxes payable by the owner of the Property
shall be prorated through Escrow as of the date of the Closing, based upon the
latest tax bill available. The Parties agree to prorate as of the Closing any
taxes assessed against the Property by supplemental bill levied by reason of
events occurring prior to the Closing. Seller and Buyer acknowledge that the
Lease provides that Lessee shall pay all property taxes accruing during the term
of the Lease and that Buyer shall first seek to obtain payment of any such taxes
applicable to the period prior to the Closing from the Lessee and only if the
Lessee fails to make such payments shall Buyer seek payment therefore from
Seller. Payment shall be made promptly in cash upon receipt of a copy of any
such supplemental bill of the amount necessary to accomplish such proration.
Seller shall pay and discharge in full at or before the Closing the unpaid
balance of any special assessment bonds.
8
<PAGE>
8.2 Insurance. If Buyer elects to take an assignment of the existing
casually and/or liability insurance that is maintained by Seller, the current
premium therefor shall be prorated through Escrow as of the date of Closing.
8.3 Rentals, Interest and Expenses. Collected rentals, interest on
Existing Notes, utilities, and operating expenses shall be prorated as of the
date of Closing. The Parties agree to promptly adjust between themselves
outside of Escrow any rents received after the Closing.
8.4 Security Deposit. Security Deposits held by Seller shall be given
to Buyer by a credit to the cash required of Buyer at the Closing.
8.5 Post Closing Matters. Any item to be prorated that is not
determined or determinable at the Closing shall be promptly adjusted by the
Parties by appropriate cash payment outside of the Escrow when the amount due is
determined.
8.6 Escrow Costs and Fees. Buyer and Seller shall each pay one-half of
the Escrow Holder's charges and Seller shall pay the usual recording fees and
any required documentary transfer taxes. Seller shall pay the premium for a
standard coverage owner's or joint protection policy of title insurance.
9. REPRESENTATION AND WARRANTIES OF SELLER AND DISCLAIMER.
9.1 Seller's warranties and representations shall survive the Closing
and delivery of the deed, and, unless otherwise noted herein, are true, material
and relied upon by Buyer in all respects, both as of the Date of Agreement, and
as of the date of Closing. Seller hereby makes the following warranties and
representations to Buyer:
(a) Authority of Seller. Seller is the owner of the Property
and/or has the full right, power and authority to sell, convey and transfer the
Property to Buyer as provided herein, and to perform Seller's obligations
hereunder.
(b) Maintenance During Escrow and Equipment Condition At
Closing. Expect as otherwise provided in Paragraph 6.1(g) hereof dealing with
destruction, damage or loss, Seller shall cause Lessee to maintain the Property
until the Closing in its present condition, ordinary wear and tear excepted.
The heating, ventilating, air conditioning, plumbing, elevators, loading doors
and electrical systems shall be in good operating order and condition at the
time of Closing.
(c) Hazardous Substances/Storage Tanks. Seller has no knowledge
or notice, except as otherwise disclosed to Buyer in writing, of the existence
or prior existence of, or the presence in, on, or under the Property or in, on
or about any property adjacent to, or in the immediate vicinity of the Property,
of any Hazardous Substance (as defined in paragraph 6.1(c) and further defined
in this paragraph, below) nor of the existence or prior existence of any above
or below ground storage tank or tanks. Seller, to the best of Seller's
knowledge, is delivering the Property to Buyer free of any hazardous substances.
Seller has received no notice, warning, notice of violation, administrative
complaint, judicial complaint or other formal
9
<PAGE>
or informal notice alleging that conditions on the Property are or have been in
violation of any environmental law. Seller has no notice or knowledge of any
proceeding, investigation or inquiry by any governmental authority (including
without limitation the Environmental Protection Agency or the California State
Department of Health Services) with respect to the presence of such Hazardous
Materials on the Property or their migration from or to other property. For
purposes of this Agreement, Hazardous Materials shall include but not be limited
to substances defined as "hazardous substance," "hazardous materials," or "toxic
substances" in the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (Title 42 United States Code Sections
9601-9675); the Hazardous Materials Transportation Act, as amended (Title 49
United States Code Sections 1801-1819); the Resource Conservation and Recovery
Act of 1976, as amended (Title 42 United States Code Sections 6901-6992k); the
Toxic Substances Control Act (Title 15 United States Code Sections 2601
et seq.); the Insecticide, Fungicide, Rodenticide Act (Title 7 United States
Code Sections 136 et seq.); the Superfund Amendments and Reauthorization Act
(Title 42 United States Code Sections 6901 et seq.); the Clean Air Act (Title
42 United States Code Sections 7401 et seq.); the Safe Drinking Water Act
(Title 42 United States Code Sections 300f et seq.); the Solid Waste Disposal
Act (Title 42 United States Code Sections 6901 et seq.); the Surface Mining
Control and Reclamation Act (Title 30 United States Code Sections 1201
et seq.); the Emergency Planning and Community Right to Know Act (Title 42
United States Code Sections 11001 et seq.); the Occupational Safety and Health
Act (Title 29 United States Code Sections 655 and 657); the California
Underground Storage of Hazardous Substances Act (California Health & Safety Code
Sections 25280 et seq.); the California Hazardous Substances Account Act
(California Health & Safety Code Sections 25300 et seq.); the California
Hazardous Waste Control Act (California Health & Safety Code Sections 25100
et seq.); the California Safe Drinking Water and Toxic Enforcement Act
(California Health & Safety Code Sections 24249.5 et seq.); the Porter-Cologne
Water Quality Act (California Water Code Sections 13000 et seq.) or any laws
regarding Hazardous Materials and Substances in effect in the state in which the
Property is located, together with any amendments of or regulations promulgated
under the statutes cited above and any other federal, state, or local law,
statute, ordinance, or regulation now in effect or later enacted that pertains
to occupational health or industrial hygiene, and only to the extent that the
occupational health or industrial hygiene laws, ordinances, or regulations
relate to Hazardous Substances in, on, under, or about the Property, or in, on,
under or about any property adjacent to, or in the immediate vicinity of the
Property, or the regulation or protection of the environment, including ambient
air, soil, soil vapor, groundwater, surface water, or land use; and any
substance defined as "hazardous waste" in California Health and Safety Code
Section 25117 or as "hazardous substance" in California Health and Safety Code
Section 25316, and in the regulations adopted and publications promulgated
under these laws and any other substances, materials and wastes that are or
become regulated or classified as hazardous or toxic under federal, state or
local laws or regulations.
(d) Compliance. Seller has no knowledge of any aspect or
condition of the Property which violates applicable laws, rules, regulations,
codes, or covenants, conditions or restrictions, or of improvements or
alterations made to the Property without a permit where one was required, or of
any unfulfilled order or directive of any applicable governmental agency or
casualty insurance company that any work of investigations, remediation, repair,
malpractice or improvement is to be performed on the Property.
10
<PAGE>
(e) Change In Agreement. Prior to the Closing, Seller will not
violate or modify, verbally or in writing, any Existing Lease or Other
Agreement, or create any new leases or other agreements affecting the Property,
without Buyer's written approval, which approval will not be unreasonably
withheld; provided, however, that Seller may terminate the Lease without Buyer's
written approval but, in such circumstance, Seller shall notify Buyer and Escrow
Holder, in writing, of any consideration received by Seller from Lessee upon the
cancellation of the Lease so that the Purchase Price may be adjusted as provided
in paragraph 3.2, above.
(f) Possessory Rights. Seller has no knowledge that anyone
will, at the Closing, have any right to possession of the Property, except for
the Lessee or as disclosed by this Agreement or otherwise in writing to Buyer.
(g) Mechanics' Liens. There are no unsatisfied mechanic's or
materialman's lien rights concerning the Property.
(h) Actions, Suits or Proceedings. Seller has no knowledge of
any actions, suits or proceedings pending or threatened before any commission,
board, bureau, agency, instrumentally, arbitrator(s) court or tribunal that
would affect the Property or the right to occupy or utilize same.
(i) Notice of Changes. Seller will promptly notify Buyer in
writing of any Material Change (as defined in paragraph 6.1(h)) affecting the
Property that becomes known to Seller prior to the Closing.
(j) No Seller Bankruptcy Proceedings. Seller is not the subject
of a bankruptcy, insolvency or probate proceeding.
9.2 Buyer hereby acknowledges that, except as otherwise stated in this
Agreement, Lessee has been responsible for maintaining the Property during the
term of the Lease and that Buyer is purchasing the Property in its existing
condition and will, by the time called for herein, make or have waived all
inspections of the Property Buyer believes are necessary to protect its own
interest in, and its contemplated use of, the Property. The Parties acknowledge
that, except as otherwise stated in this Agreement, no representations,
inducements, promises, agreements, assurances, oral or written, concerning the
Property, or any aspect of the Occupational Safety and Health Act, hazardous
substance laws, or any other act, ordinance or law, have been made by any Party,
or relied upon by either Party hereto.
10. POSSESSION.
10.1 Possession of the Property shall be given to Buyer at the Closing
subject to the rights of tenants under the Lease.
11
<PAGE>
11. BUYER'S ENTRY.
11.1 At any time during the Escrow period, Buyer, and its agents and
representatives, shall have the right at reasonable times and subject to rights
of the Lessee under the Lease, to enter upon the Property for the purpose of
making inspections and tests specified in this Agreement. Following any such
entry or work, unless otherwise directed in writing by Seller, Buyer shall
return the Property to the condition it was in prior to such entry or work,
including the recompaction or removal of any disrupted soil or material as
Seller may reasonably direct. All such inspections and tests and any other work
conducted or materials furnished with respect to the Property by or for Buyer
shall be paid for by Buyer as and when due and Buyer shall indemnify, defend,
protect and hold harmless Seller and the Property of and from any and all
claims, liabilities, demands, losses, costs, expenses (including reasonable
attorney's fees), damages or recoveries, including those for injury to person or
property, arising out of or relating to any such work or materials or the acts
or omissions of Buyer, its agents or employee in connection therewith.
12. FURTHER DOCUMENTS AND ASSURANCES.
12.1 Buyer and Seller shall each, diligently and in good faith, undertake
all actions and procedures reasonably required to place the Escrow in condition
for Closing as and when required by this Agreement. Buyer and Seller agree to
provide all further information, and to execute and deliver all further
documents and instruments, reasonably required by Escrow Holder or the Title
Company.
13. PRIOR AGREEMENTS/AMENDMENTS.
13.1 The Contract in effect as of the Date of Agreement supersedes any
and all prior agreements between Seller and Buyer regarding the Property.
13.2 Amendments to this Agreement are effective only if made in writing
and executed by Buyer and Seller.
14. NOTICES.
14.1 Whenever any Party hereto or Escrow Holder herein shall desire to
give or serve any notice, demand, request, approval or other communication, each
such communication shall be in writing and shall be delivered personally, by
messenger or by mail, postage prepaid, addressed as set forth adjacent to that
party's signature on this Agreement or by telecopy with receipt confirmed by
telephone. Service of any such communication shall be deemed made on the date
of actual receipt at such address.
14.2 Any Party hereto may from time to time, by notice in writing served
upon the other Party as aforesaid, designate a different address to which, or a
different person or additional persons to whom, all communications are
thereafter to be made.
12
<PAGE>
15. DURATION OF OFFER.
15.1 If this offer shall not be accepted by Seller on or before 5:00 P.M.
according to the time standard applicable to the city of Agoura Hills on the
date of August 15, 1995, it shall be deemed automatically revoked.
15.2 The acceptance of this offer, or of any subsequent counter-offer
hereto, that creates an agreement between the Parties as described in
paragraph 1.2, shall be deemed made upon delivery to the other Party herein of a
duly executed writing unconditionally accepting the last outstanding offer to
counter-offer.
16. ARBITRATION OF DISPUTES. (THIS ARBITRATION OF DISPUTES PARAGRAPH IS
APPLICABLE ONLY IF INITIALED BY BOTH PARTIES AND IS SUBJECT TO PARAGRAPH
17, BELOW.)
16.1 ANY CONTROVERSY AS TO WHETHER SELLER IS ENTITLED TO THE LIQUIDATED
DAMAGES AND/OR BUYER IS ENTITLED TO THE RETURN OF DEPOSIT MONEY, IF ANY, SHALL
BE DETERMINED BY BINDING ARBITRATION BY, AND UNDER THE COMMERCIAL RULES (the
"COMMERCIAL RULES") OF, THE AMERICAN ARBITRATION ASSOCIATION. HEARINGS ON SUCH
ARBITRATION SHALL BE HELD IN THE COUNTY WHERE THE PROPERTY IS LOCATED. ANY SUCH
CONTROVERSY SHALL BE ARBITRATED BY THREE (3) ARBITRATORS WHO SHALL BE IMPARTIAL
REAL ESTATE BROKERS WITH AT LEAST FIVE (5) FULL TIME YEARS OF EXPERIENCE IN THE
AREA WHERE THE PROPERTY IS LOCATED, IN THE TYPE OF REAL ESTATE THAT IS THE
SUBJECT OF THIS AGREEMENT AND SHALL BE APPOINTED UNDER THE COMMERCIAL RULES.
THE ARBITRATORS SHALL HEAR AND DETERMINE SAID CONTROVERSY IN ACCORDANCE WITH
APPLICABLE LAW AND THE INTENTION OF THE PARTIES AS EXPRESSED IN THIS AGREEMENT,
AS THE SAME MAY HAVE BEEN DULY MODIFIED IN WRITING BY THE PARTIES PRIOR TO THE
ARBITRATION, UPON THE EVIDENCE PRODUCED AT AN ARBITRATION HEARING SCHEDULED AT
THE REQUEST OF EITHER PARTY. SUCH PRE-ARBITRATION DISCOVERY SHALL BE PERMITTED
AS IS AUTHORIZED UNDER THE COMMERCIAL RULES OR STATE LAW APPLICABLE TO
ARBITRATION PROCEEDINGS. THE AWARD SHALL BE EXECUTED BY AT LEAST TWO (2) OF THE
THREE (3) ARBITRATORS, BE RENDERED WITHIN THIRTY (30) DAYS AFTER THE CONCLUSION
OF THE HEARING. JUDGMENT MAY BE ENTERED ON THE AWARD IN ANY COURT OF COMPETENT
JURISDICTION NOTWITHSTANDING THE FAILURE OF A PARTY DULY NOTIFIED OF THE
ARBITRATION HEARING TO APPEAR THEREAT.
16.2 BUYER'S RESORT TO OR PARTICIPATION IN SUCH ARBITRATION PROCEEDINGS
SHALL NOT BAR SUIT IN A COURT OF COMPETENT JURISDICTION BY THE BUYER FOR DAMAGES
AND/OR SPECIFIED PERFORMANCE UNLESS AND UNTIL THE ARBITRATION RESULTS IN AN
AWARD TO THE SELLER OF LIQUIDATION DAMAGES, IN WHICH EVENT SUCH AWARD SHALL ACT
AS A BAR AGAINST ANY ACTION BY BUYER FOR DAMAGES AND/OR SPECIFIC PERFORMANCE.
13
<PAGE>
16.3 NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU
ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW YOU ARE GIVING UP YOUR
JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY
INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO
ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE
UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT
TO THIS ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION
TO NEUTRAL ARBITRATION.
-------------- ---------------
BUYER INITIALS SELLER INITIALS
17. APPLICABLE LAW.
17.1 This Agreement shall be governed by, and paragraph 16.3 amended to
refer to, the laws of the State of Illinois.
18. TIME OF ESSENCE.
18.1 Time is of the essence of this Agreement.
19. COUNTERPARTS.
19.1 This Agreement may be executed by Buyer and Seller in counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument. Escrow Holder, after verifying that the
counterparts are identical except for the signatures, is authorized and
instructed to combine the signed signature pages on one of the counterparts,
which shall then constitute the Agreement.
20. THIRD PARTY BENEFICIARIES.
20.1 This Agreement has been made and is made solely for the benefit of
the Buyer and Seller and their respective successors and permitted assigns.
Nothing in this Agreement is intended to confer any rights or remedies under or
by reason of this Agreement on any persons other than the parties to it and
their respective successors and permitted assigns. Nothing in this Agreement is
intended to relieve or discharge the obligation or liability of any third
persons to any party to this Agreement.
14
<PAGE>
21. AUTHORITY.
21.1 Each person or entity signing this Agreement represents and warrants
that he, she or it is duly authorized and has full power, authority and legal
right to execute and deliver, and to perform and observe the provisions of, this
Agreement and to carry out the transactions contemplated hereby. The execution,
delivery and performance by the parties to this Agreement have been duly
authorized by all necessary legal action and the parties have obtained any
necessary consent, approval of, notice to, or any action by, any person, firm,
corporation or governmental entity or agency necessary or appropriate to
consummate the transaction contemplated hereby.
[SIGNATURES ON FOLLOWING PAGES]
15
<PAGE>
If this Agreement has been filled in it has been prepared for submission to your
attorney for his approval. The undersigned Buyer offers and agrees to buy the
Property on the terms and conditions stated and acknowledges receipt of a copy
hereof.
BUYER:
--------------------------------------------------
By Date
------------------ --------------------------
Name Printed:
-------------------------------------
Title:
--------------------------------------------
--------------------------------------------------
Address
--------------------------------------------------
--------------- ------------------------------
Telephone Facsimile No.
16
<PAGE>
22. ACCEPTANCE.
22.1 Seller accepts the foregoing offer to purchase the Property and
hereby agrees to sell the Property to Buyer on the terms and conditions therein
specified.
22.2 Seller acknowledges receipt of a copy hereof and hereby delivers a
signed copy to Buyer.
SELLER:
/s/ Bruce L. Ross
--------------------------------------------------
By Bruce L. Ross Date 8-11-95
------------------ --------------------------
Name Printed:
GUITAR CENTER MANAGEMENT COMPANY, INC., PROFIT
SHARING PLAN AND TRUST
Title: TRUSTEE
--------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------- ------------------------------
Telephone Facsimile No.
17
<PAGE>
EXHIBIT 10.23
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only
August 31, 1995, is made by and between G.C. Realty LLC, a California limited
liability company ("LESSOR") and Guitar Center Management Company, Inc.
("LESSEE") (collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 1054 North Azusa Avenue, Covina located in the
County of Los Angeles, State of California and generally described as (describe
briefly the nature of the property) approximately 14,700 square feet
("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: Ten (10) years and --- months ("ORIGINAL TERM") commencing
September 1, 1995 ("COMMENCEMENT DATE") and ending August 31, 2005 ("EXPIRATION
DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5 BASE RENT: $9,900.00 per month ("BASE RENT"), payable on the first
(1st) day of each month commencing September 1, 1995, and continuing each month
thereafter up to and including August 1, 2005. (See Paragraph 4 for further
provisions.)
/ / If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $9,900.00 as Base Rent for the period
September 1, 1995, through September 30, 1995.
1.7 SECURITY DEPOSIT: $ None ("SECURITY DEPOSIT"). (See Paragraph 5 for
further provisions).
1.8 PERMITTED USE: Sale and repair of musical instruments, accessories,
music, and related products. (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessee is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 (Deleted)
1.11 (Deleted)
<PAGE>
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 54 and Exhibits _________________________________________
_______________________________________________________________________ all of
which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date. If a non-compliance with said warranty
exists as of the Commencement Date, Lessor shall, except as otherwise provided
in this Lease, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify
same at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the Commencement
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alternations or Utility Installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Lessor to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of the Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2
<PAGE>
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 (Deleted)
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4. or, if no Early Possession Date
is specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease,
or the obligations of Lessee hereunder, or extend the term hereof, but in
such case, Lessee shall not, except as otherwise provided herein, be
obligated to pay rent or perform any other obligation of Lessee under the
terms of this Lease until Lessor deliver possession of the Premises to
Lessee. If possession of the Premises is not delivered to Lessee within
sixty (60) days after the Commencement Date, Lessee may, at its option, by
notice in writing to Lessor within ten (10) days thereafter, cancel this
Lease, in which event the Parties shall be discharged from all obligations
hereunder; provided, however, that if such written notice by Lessee is not
received by Lessor within said ten (10) day period, Lessee's right to cancel
this Lease shall terminate and be of no further force or effect. Except as
may be otherwise provided, and regardless of when the term actually
commences, if possession is not tendered to Lessee when required by this
Lease and Lessee does not terminate this Lease, as aforesaid, the period free
of the obligation to pay Base Rent, if any, that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or omissions
of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due under the terms of this Lease. Base
Rent and all other rent and charges for any period during the term hereof
which is for less than one (1) full calendar month shall be prorated based
upon the actual number of days of the calendar month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated
herein or to such other persons or at such other addresses as Lessor may from
time to time designate in writing to Lessee.
3
<PAGE>
5. SECURITY DEPOSIT*. Lessee shall deposit with Lessor the Security Deposit
as security for Lessee's faithful performance of Lessee's obligations under
this Lease. If Lessee fails to pay Base Rent or other rent or charges due
hereunder, or otherwise Defaults under this Lease (as defined in Paragraph
13.1), Lessor may use, apply or retain all or any portion of said Security
Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, cost, expense, loss or damage (including
attorneys' fees) which Lessor may suffer or incur by reason thereof. If
Lessor uses or applies all or any portion of said Security Deposit, Lessee
shall within ten (10) days after written request therefor deposit moneys with
Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed
in writing by Lessor, no part of the Security Deposit shall be considered to
be held in trust to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8 or any other use which is comparable thereto, and for
no other purpose. Lessee shall not use or permit the use of the Premises in a
manner that creates waste or a nuisance, or causes damage to, neighboring
premises or properties. Lessor hereby agrees to not unreasonably withhold or
delay its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of the Lessee, its
assignees and subtenants, for a modification of said permitted purpose for which
the premises may be used or occupied, so long as the same will not impair the
structural integrity of the improvements on the Premises, the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall
within five (5) business days give a written notification of same, which notice
shall include an explanation of Lessor's reasonable objections to the change in
use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
- ---------------
*Upon the occurrence of an assignment (as defined hereinafter in Section
12.1(a))
4
<PAGE>
or third party under any applicable statue or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined
in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of
any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority.
Reportable Use shall also include Lessee's being responsible for the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Law requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy
of any statement, report, notice, registration, application, permit, business
plan, license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
5
<PAGE>
but not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter at any time, in the case of an
emergency, and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this Lease
and all Applicable Laws (as defined in Paragraph 6.3), and to employee experts
and/or consultants in connection therewith and/or to advise Lessor with respect
to Lessee's activities, including but not limited to the installation,
operation, use, monitoring, maintenance, or removal of any Hazardous Substance
or storage tank on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease, violation of Applicable Law, or a contamination, caused or
materially contributed to by Lessee is found to exist or be imminent, or unless
the inspection is requested or ordered by a governmental authority as the result
of any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may
be, for the costs and expenses of such inspections.
6
<PAGE>
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as
to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.),
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, structural and non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are reasonably
or readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, without limiting the generality of the
foregoing, all equipment or facilities serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system, including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows, doors, plate
glass, skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including through the
plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take
all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance for, and with
contractors specializing and experienced in, the inspection, maintenance and
service of the following equipment and improvements, if any, located on the
Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and
drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the
7
<PAGE>
Premises) and 14 (relating to condemnation of the Premises), it is intended by
the Parties hereto that Lessor have no obligation, in any manner whatsoever, to
repair and maintain the Premises, the improvements located thereon, or the
equipment therein, whether structural or non structural, all of which
obligations are intended to be that of the Lessee under Paragraph 7.1 hereof.
It is the intention of the Parties that the terms of this Lease govern the
respective obligations of the Parties as to maintenance and repair of the
Premises. Lessee and Lessor expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Lessee the right to make repairs at the
expense of Lessor or to terminate this Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the
Premises. The term "ALTERATIONS" shall mean any modification of the
improvements on the Premises from that which are provided by Lessor under the
terms of this Lease, other than Utility installations or Trade Fixtures,
whether by addition or deletion. "LESSEE OWNED ALTERNATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alternations and/or Utility Installations made
by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a).
Lessee shall not make any Alternations or Utility Installations in, on, under
or about the Premises without Lessor's prior written consent. Lessee may,
however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof), as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during the term of this Lease
as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities, (ii) the furnishing of
copies of such permits together with a copy of the plans and specifications for
the Alteration or Utility Installation to Lessor prior to commencement of the
work thereon, and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in a good
and workmanlike manner, with good and sufficient materials, and in compliance
with all Applicable Law. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility
8
<PAGE>
Installation and/or upon Lessee's posting an additional Security Deposit with
Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alternations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) (Deleted)
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
9
<PAGE>
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8. Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the Lease term.
Payment shall be made by Lessee to Lessor within (10) days following receipt of
an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor may also maintain liability insurance
described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust on the Premises ("LENDER(S)"), insuring loss or damage to the Premises.
The amount of such insurance shall be equal to the full replacement cost of the
Premises, as the same shall exist from time to time, or the amount required by
Lenders, but in no event more than the commercially reasonable and available
insurance value thereof if, by reason of the unique nature or age of the
improvements involved, such latter amount is less than full replacement cost.
If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility
Installations shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a
10
<PAGE>
Lender), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Premises required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
cause of loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss, as defined
in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
the Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the
full rental and other charges payable by Lessee to Lessor under this Lease for
one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall provide that in the event the
Lease is terminated by reason of an insured loss, the period of indemnity for
such coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) (Deleted)
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party,
the Lessor shall not be required to insure Lessee Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by the Insuring Party under
Paragraph 8.3. Such insurance shall be full replacement cost coverage with a
deductible of not to exceed $1,000 per occurrence. The proceeds from any such
insurance shall be used by Lessee for the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide Lessor
with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining
11
<PAGE>
during the policy term a "General Policyholders Rating" of at least B+, V, or
such other rating as may be required by a Lender having a lien on the Premises,
as set forth in the most current issue of "Best's Insurance Guide." Lessee
shall not do or permit to be done anything which shall invalidate the insurance
policies referred to in this Paragraph 8. If Lessee is the Insuring Party,
Lessee shall cause to be delivered to Lessor certified copies of policies of
such insurance or certificates evidencing the existence and amounts of such
insurance with the insureds and loss payable clauses as required by this Lease.
No such policy shall be cancellable or subject to modification except after
thirty (30) days prior written notice to Lessor. Lessee shall at least thirty
(30) days prior to the expiration of such policies, furnish Lessor with evidence
of renewals or "insurance binders" evidencing renewal thereof, or Lessor may
order such insurance and charge the cost thereof to Lessee, which amount shall
be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to
procure and maintain the insurance required to be carried by the Insuring Party
under this Paragraph 8, the other Party may, but shall not be required to,
procure and maintain the same, but at Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's gross negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely
manner of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire
12
<PAGE>
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether the said injury or damage results from
conditions arising upon the Premises or upon other portions of the building of
which the Premises are a part, or from other sources or places, and regardless
of whether the cause of such damage or injury or the means of repairing the same
is accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alternations and Utility
Installations, the repair cost of which damage or destruction is less than 50%,
of the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence by their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total
13
<PAGE>
cost to repair of which is $10,000 or less, and, in such event, Lessor shall
make the insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to affect such repair, the
Lessee shall promptly contribute the shortage in proceeds as and when required
to complete said repairs. In the event, however, the shortage in proceeds was
due to the fact that, by reason of the unique nature of the improvements, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If in such case Lessor
does not so elect, then this Lease shall terminate sixty (60) days following the
occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall
in no event have any right to reimbursement from Lessor for any funds
contributed by Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3
rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available for
the repairs if made by either Party. See Insert 9.2
(Insert 9.2) DAMAGE OR DESTRUCTION. In the event Lessor either fails to
commence the repair of the Premises within sixty (60) days after the date of
such occurrence of such damage or substantially complete the repairs within
one hundred fifty (150) days from the date of such occurrence, then Lessee
shall have the option to: (i) use the proceeds of such insurance to perform
the repairs of the Premises; or (ii) terminate this Lease.
9.3 PARTIAL DAMAGE OR TOTAL DESTRUCTION--UNINSURED LOSS. If a Premises
Partial Damage or Total Destruction that is not an Insured Loss occurs,
unless caused by willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense and this Lease shall continue in full force and
effect, subject to Lessor's rights under Paragraph 13), Lessor may at
Lessor's option, either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) give written notice to Lessee within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60)
days following the giving of such notice. In the event Lessor elects to give
such notice of Lessor's intention to terminate this Lease, Lessee shall have
the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the repair of such
damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to
14
<PAGE>
make such repairs as soon as reasonably possible and the required funds are
available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall terminate
as of the date specified in Lessor's notice of termination.
9.4 PREMISES TOTAL DESTRUCTION--INSURED LOSS. If Premises Total
Destruction that is an Insured Loss occurs, Lessee may at its option, within
thirty (30) days after the date of occurrence of such damage, either (i)
terminate this Lease effective the date of occurrence of such damage by giving
written notice to the Lessor, or (ii) request that Lessor, at Lessor's expense,
repair such damage as soon as reasonably possible and this Lease shall continue
in full force and effect. In the event Lessor fails to commence the repair of
the Premises within sixty (60) days after the occurrence of such damage or
substantially complete the repair within two hundred seventy (270) days after
the occurrence of such damage, Lessee shall have the option to: (i) use the
proceeds of such insurance to perform the repairs of the Premises; or (ii)
terminate this Lease.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within (20) days following the occurrence of the damage, or before the
expiration of the time provided in such option for its exercise, whichever is
earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing
Lessor with any shortage in insurance proceeds (or adequate assurance thereof)
needed to make the repairs. If Lessee duly exercises such option during said
Exercise Period and provides Lessor with funds (or adequate assurance thereof)
to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense
repair such damage as soon as reasonably possible and this Lease shall continue
in full force and effect. If Lessee fails to exercise such option and provide
such funds or assurance during said Exercise Period, then Lessor may at Lessor's
option terminate this Lease as of the expiration of said sixty (60) day period
following the occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within ten (10) days after the expiration of the
Exercise Period, notwithstanding any term or provision in the grant of option to
the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be
15
<PAGE>
performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration.
(b) If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "COMMENCE" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the
16
<PAGE>
termination of this Lease and hereby waive the provisions of any present or
future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all of such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration of earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) in the event Breach has occurred hereunder monthly in advance with
the payment of the Base Rent. If Lessor elects to require payment monthly in
advance, the monthly payment shall be that equal monthly amount which, over the
number of months remaining before the month in which the applicable tax
installment would become delinquent (and without interest thereon), would
provide a fund large enough to fully discharge before delinquency the estimated
installment of taxes to be paid. When the actual amount of the applicable tax
bill is known, the amount of such equal monthly advance payment shall be
adjusted as required to provide the fund needed to pay the applicable taxes
before delinquency. If the amounts paid to Lessor by Lessee under the
provisions of this Paragraph are insufficient to discharge the obligations of
Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay
to Lessor, upon Lessor's demand, such additional sums as are necessary to pay
obligations. All moneys paid to Lessor under this Paragraph may be intermingled
with the other moneys of Lessor and shall not bear interest. In the event of a
Breach by Lessee in the performance of the obligations of Lessee under this
Lease, then any balance of funds paid to Lessor under the provisions of this
Paragraph may, subject to proration as provided in Paragraph 10.1(a).
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, "REAL PROPERTY
TAXES" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed upon the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Premises or in
17
<PAGE>
the real property of which the Premises are a part, Lessor's right to rent or
other income therefrom, and/or Lessor's business of leasing the Premises. The
term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in applicable law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Premises or in the
improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other, personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in Paragraph
10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in
this Lease or in the Premises without Lessor's prior written
consent given under and subject to the terms of Paragraph 36.
(b-d) (Deleted)
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive
relief.
18
<PAGE>
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1 shall
give Lessor the right (but not the obligation) to require that Security Deposit
be deposited with
19
<PAGE>
Lessor in an amount equal to three (3) times the monthly Base Rent and Lessor
may make the actual receipt by Lessor of the amount required to establish such
Security Deposit a condition to Lessor's consent to such transaction.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein;
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises, heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a subleasee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under
a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the
20
<PAGE>
grace period, if any, specified in such notice. The sublessee shall have a
right of reimbursement and offset from and against Lessee for any such Defaults
cured by sublessee.
13. DEFAULT; BREACH.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions,
or rule applicable to Lessee under this Lease. A "BREACH" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to
cure such Default prior to the expiration of the applicable grace period,
shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3;
(a) (Deleted)
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law
per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recision of an unauthorized
assignment of subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii)
the execution of any document requested under Paragraph 42 (easements), or
(viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice by or on
behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless,
21
<PAGE>
in the case of a petition filed against Lessee, the same is dismissed within
sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
subparagraph (e) is contrary to any applicable law, such provision shall be of
no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee hereunder was materially false.
(g) (Deleted)
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at its
option (but without obligation to do so), perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee, as defined in Paragraph 13.1, with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at
the time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this
22
<PAGE>
Paragraph. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve therein the right to recover all or any part thereof in a separate suit
for such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of the Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 (Deleted)
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding
23
<PAGE>
Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent
shall, at Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any mortgage or deed of trust covering the Premises whose
name and address shall have been furnished Lessee in writing for such purpose,
of written notice specifying wherein such obligation of Lessor has not been
performed; provided, however, that if the nature of Lessor's obligation is such
that more than thirty (30) days after such notice are reasonably required for
its performance, then Lessor shall not be in breach of this Lease if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than twenty percent (20%) of the
floor area of the Premises, or more than forty percent (40%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. The reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power or eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible
for the payment of any amount in excess of such net severance damages
required to complete such repair.
15. (Deleted)
24
<PAGE>
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee shall
deliver to any potential lender or purchaser designated by Lessor such financial
statements of Lessee as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
the Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
25
<PAGE>
22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between
the Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received
on a Sunday or legal holiday, it shall be deemed received on the next business
day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
26
<PAGE>
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor; or (iii) be bound by
prepayment of more than one (1) month's rent.
27
<PAGE>
30.3 NON-DISTURBANCE. With respect to the Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as
hereinafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorney's fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorney's fees
award shall not be computed in accordance with any court fee schedule, but shall
be such as to fully reimburse all attorney's fees reasonably incurred. Lessor
shall be entitled to attorney's fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any
time place on or about the Premises any ordinary "For Sale" signs and Lessor may
at any time during the last one hundred twenty (120) days of the term hereof
place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably
28
<PAGE>
required to advertise Lessee's own business. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof and the right to install, and all revenues from the installation of,
such advertising signs on the Premises, including the roof, as do not
unreasonably interfere with the conduct of Lessee's business.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting
of the Premises by Lessee shall not constitute an acknowledgement that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. (Deleted)
29
<PAGE>
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease.
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease; (b) the right of first refusal to lease Premises or the right of
first offer to lease the Premises.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each option to Lessee in this
Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner by
reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee); or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3), or more notices of Default under Paragraph 13.1, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve
30
<PAGE>
(12) month period, whether or not the Defaults are cured or (iii) Lessee
commits a Breach of this Lease.
40. (Deleted)
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder the Lessee, such easements, rights and
dedications the Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. It shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten and handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be
31
<PAGE>
reasonably required by an institutional, insurance company, or pension plan
Lender in connection with the obtaining of financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except to otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
32
<PAGE>
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Executed at
---------------------------- -----------------------
on on
------------------------------------- ---------------------------------
by LESSOR:G.C. REALTY LLC, a Cali- by LESSEE:THE GUITAR CENTER
----------------------------- -------------------------
fornia limited liability company MANAGEMENT COMPANY, a Cali-
- --------------------------------------- -----------------------------------
SCHERR LIVING TRUST, dated 4/3/90 fornia corporation
- --------------------------------------- -----------------------------------
By: By:/S/ LARRY THOMAS
------------------------------------ --------------------------------
Name Printed: Raymond Scherr Janet Scherr Name Printed:Larry Thomas
-------------------------- ----------------------
Title: Trustee Trustee Title:President
--------------------------------- -----------------------------
- --------------------------------------- -----------------------------------
By:/S/ RAYMOND SCHERR By:
------------------------------------- --------------------------------
Name Printed:Raymond Scherr Janet Scherr Name Printed:
--------------------------- ----------------------
Title: Member Member Title:
---------------------------------- -----------------------------
Address:5155 Clareton Drive Address:5155 Clareton Drive
-------------------------------- ---------------------------
Agoura Hills, CA 91301 Agoura Hills, CA 91301
- ---------------------------------------- -----------------------------------
Tel No.:(818) 735-8800 Tel. No.:(818) 735-8800
-------------------------------- --------------------------
FAX No.:(818) 735-8822 FAX No.:(818) 735-8822
-------------------------------- --------------------------
33
<PAGE>
ADDENDUM TO THAT CERTAIN STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -
NET, DATED AUGUST 31, 1995 ("LEASE"), BY AND BETWEEN G.C. REALTY LLC, A
CALIFORNIA LIMITED LIABILITY COMPANY ("LESSOR") AND GUITAR CENTER MANAGEMENT
COMPANY, INC. ("LESSEE")
49. LIMITED RECOURSE. The Lessee agrees to look only to the Lessor's interest
in the Premises in the event any suit, claim, or judgment is made or obtained
against Lessor and that Lessee shall have no recourse against Lessor or any of
the members of the Lessor in the event of any default hereunder or any suit,
claim, or judgment in connection therewith.
50. OPTION TO EXTEND. Lessee shall have the right to extend the Term of the
Lease as set forth in this Paragraph 50 and subject to the terms of Paragraph 39
of the Lease:
(a) Lessor hereby grants to Lessee two (2) options ("First Extension
Option" and "Second Extension Option", respectively) to extend the Term of
the Lease for an additional five (5) years each ("First Option Term" and
"Second Option Term", respectively), commencing as of the end of the
Original Term set forth in Paragraph 1.3 of the Lease.
(b) To exercise the First Extension Option and the Second Extension
Option, Lessee must give written notice of exercise ("Exercise Notice") to
Lessor no earlier than three hundred (300) days and no later than the date
which is one hundred eighty (180) days prior to the expiration of (i) the
Original Term of the Lease with respect to exercising the First Extension
Option, or (ii) the First Option Term with respect to exercising the Second
Extension Option. Lessee cannot exercise the Second Extension Option
without first having exercised the First Extension Option.
(c) If Lessee properly and timely exercises the First Extension Option,
then the Term of the Lease shall be extended by the First Option Term and
all terms and conditions of this Lease shall remain in full force and
effect, with the exception of the amount of the monthly Base Rent which
shall be computed at ninety-five percent (95%) of the Fair Market Rental
Rate; provided, however, that such Base Rent shall not be less than Base
Rent for the last month of the last year of the last term.
(d) If Lessee properly and timely exercises the Second Extension Option,
then the Term of the Lease, as extended, shall be further extended by the
Second Option Term and all terms and conditions of this Lease shall remain
in full force and effect, with the exception of the amount of the monthly
Base Rent which shall be computed at ninety-five percent (95%) of the Fair
Market Rental Rate; provided, however, that such Base Rent shall not be
less than the Base Rent for the last month of the last year of the First
Option Term.
(e) Within thirty (30) days after Lessor's receipt of such Exercise
Notice, Lessor and Lessee shall agree upon the Fair Market Rental Rate. If
Lessor and Lessee have not agreed on the Fair Market Rental Rate within
thirty (30) days after the Exercise
34
<PAGE>
Notice, then within ten (10) days after said thirty (30) day period, Lessor
and Lessee shall each submit to the other their good faith estimates of the
Fair Market Rental Rate (the "Estimated Fair Market Rental Rate"). Within
fifteen (15) days after the receipt of Lessor's estimate, Lessee may elect
to terminate the option herein granted by the delivery of written notice of
such termination to Lessor within such fifteen (15) day period. In the
event the option is not so terminated, the Fair Market Rental Rate shall be
determined as follows. If the higher of Lessor's and Lessee's estimates is
not more than one hundred ten percent (110%) of the lower of such
estimates, the Fair Market Rental Rate shall be the average of the two
Estimated Fair Market Rental Rates. If otherwise, then within ten (10)
days, the parties shall select a mutually acceptable MAI appraiser with
experience in real estate activities, including at least ten (10) years
experience in appraising lease rental rates for retail commercial buildings
in the Covina area of Los Angeles. If the parties cannot agree on an
appraiser, then within ten (10) days, each shall select an independent MAI
appraiser meeting the above criteria and within ten (10) days thereafter
the two appointed appraisers shall select a third appraiser meeting the
above criteria and the third appraiser shall determine the Fair Market
Rental Rate. If one party shall fail to make such appointment within said
period, then the appraiser chosen by the other party shall determine the
Fair Market Rental Rate. If the two appraisers selected by selected by
Lessor and Lessee cannot agree on a third appraiser, the third appraiser
shall be selected by the then-sitting Presiding Judge of the Superior Court
of California in and for Los Angeles County. Once the appraiser(s) has
(have) been selected as provided above, then, as soon thereafter as
practicable, the appraiser(s) shall select one of the two estimates of Fair
Market Rental Rate submitted by Lessor and Lessee pursuant to this Article,
which Fair Market Rental Rate shall be the one that is closer to the Fair
Market Rental Rate as determined by the appraiser(s). The rental so
selected shall be the Fair Market Rental Rate. The appraiser(s) shall
render a decision pursuant hereto within fifteen (15) days. Lessor and
Lessee shall equally share the cost of such appraisals. The decision in
the appraisal on the issue of Fair Market Rental Rate by the appraiser(s)
shall be binding on Lessor and Lessee.
(f) The phrase "Fair Market Rental Rate" as used herein shall mean the
fair market value annual rental rate for which lessors leasing space of
comparable type, size, quality, and floor height for premises comparably
located, at the time that such Fair Market Rental Rate is deemed to take
effect, would obtain from any prospective lessee for any retail use of such
space, as such space is then improved. Fair Market Rental Rent shall not
take into account the value of any rent or equivalent economic concessions
then usually and customarily given in connection with the leasing of such
comparable space for a comparable lease term, including such items as free
rent, lessee improvements, brokerage commission obligations, and lessee
improvement allowances.
51. EXCESS RENT. Notwithstanding anything to the contrary set forth in
Paragraph 12, all excess rent from each assignment and sublease shall be
delivered fifty percent (50%) to Lessor and fifty percent (50%) to Lessee.
As used in this Paragraph 51, "excess rent" shall mean the amount by which
all sums and other economic
35
<PAGE>
consideration to be received by Lessee as a result of an assignment or
sublease, whether denominated rent or otherwise, exceed, in the aggregate,
the total sums which Lessee is obligated to pay to Lessor under this Lease.
52. RIGHT OF FIRST REFUSAL. Subject to the terms of this Lease, if at any
time, during the Lease term Lessor receives and desires to accept a
third-party offer to purchase the Premises, then Lessee shall have three
(3) days following receipt from Lessor of a written itemization of the
relevant terms relating to such third-party offer (the "Terms Sheet") in
which to enter into a binding purchase and sale contract acceptable to
Lessor to purchase the Premises on an "AS-IS" basis and on the same
economic terms and conditions as were contained in the Terms Sheet and such
other non-economic terms and conditions as may be acceptable to Lessor (the
"Binding Agreement"). If, within such three-day period, Lessee does not
enter into the Binding Agreement with Lessor, then Lessor shall thereafter
have one hundred eighty (180) days from the expiration of such three-day
period in which to consummate the transaction with such third party or any
other person or entity at a purchase price of not less than ninety percent
(90%) of the purchase price contained in the Terms Sheet. If, for any
reason (including, without limitation, the parties' failure to agree upon
the form of the Binding Agreement or any of the terms contained therein),
Lessee does not execute and deliver to Lessor a Binding Agreement
acceptable to lessor containing the terms set forth in the Terms Sheet,
within such three-day period, then Lessee will be deemed to have elected
not to purchase the Premises on the terms contained in the Terms Sheet.
Lessee acknowledges and agrees that its right of first refusal to purchase
the Premises contained in this Paragraph 52 will not be triggered by the
following events: (i) the initial acquisition of the Premises by Lessor,
(ii) the assignment of the Lease by Lessor to any related company, or (iii)
transfers by and between or among shareholders, limited partners, general
partners, or members of Lessor, any related company, or any of the
constituents thereof.
36
<PAGE>
Exhibit 10.24
AMENDMENT NO. 1 TO THE
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
OF
GUITAR CENTER, INC.
(FORMERLY GUITAR CENTER MANAGEMENT COMPANY, INC.)
The Board of Directors of Guitar Center, Inc. (formerly Guitar Center
Management Company, Inc.) (the "COMPANY") approved and adopted the Amended and
Restated 1996 Performance Stock Option Plan (the "Plan"), effective October 25,
1996.
As permitted by Section 15 of the Plan, this amendment to the Plan
was authorized by resolution of the Board of Directors of the Company on
January 15, 1997 and by the written consent of the Requisite Stockholder
Shares dated as of January 24, 1997, and, together with the Plan, constitutes
the entire Plan as amended to date.
1. Section 10(a)(iii) of the Plan is hereby deleted and of no
further force and effect.
2. Section 10(a)(iv) is hereby renumbered as Section 10(a)(iii) and
is amended to read in its entirety as follows:
a combination of the methods set forth in clauses (i) and (ii).
3. This Amendment No. 1 to the Amended and Restated 1996 Performance
Stock Option Plan of Guitar Center, Inc. shall become effective contemporaneous
with the closing of the Company's initial public offering of common stock
pursuant to the Securities Act of 1933, as amended.
Executed at Agoura Hills, California, as of January 24, 1997.
By /s/ LARRY THOMAS
------------------------------
President
By /s/ BRUCE ROSS
------------------------------
Secretary
<PAGE>
The foregoing is consented to by the undersigned holders of the
Requisite Stockholder Shares as of the 24th day of January, 1997.
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By Chase Capital Partners,
Its General Partner
By /s/ DAVID L. FERGUSON
-----------------------------------
David L. Ferguson
General Partner
WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.
By /s/ STEVEN W. BURGE
-----------------------------------
Steven W. Burge
Managing Director
WESTON PRESIDIO CAPITAL II, L.P.
By Weston Presidio Capital Management II, L.P.,
Its General Partner
By /s/ MICHAEL P. LAZARUS
-----------------------------------
Michael P. Lazarus
General Partner
<PAGE>
SCHERR LIVING TRUST
By /s/RAY SCHERR
-----------------------
Ray Scherr, Trustee
By /s/JANET SCHERR
-----------------------
Janet Scherr, Trustee
RAYMOND SCHERR ANNUITY TRUST
By /s/DAVID SCHERR
-----------------------
David Scherr, Trustee
JANET SCHERR ANNUITY TRUST
By /s/DAVID SCHERR
-----------------------
David Scherr, Trustee
/s/DAVID SCHERR
- -----------------------
David Scherr
BARRY F. SOOSMAN AND JODY L. SOOSMAN REVOCABLE TRUST
By /s/BARRY SOOSMAN
-----------------------
Barry Soosman, Trustee
<PAGE>
/s/LARRY THOMAS
- -----------------------
Larry Thomas
/s/MARTY ALBERTSON
- -----------------------
Marty Albertson
GUITAR CENTER INVESTORS FUND, LLC
By /s/THOMAS R. HEIDENTHAL
-----------------------
Thomas R. Heidenthal, Administrative Member
/s/RICH PIDANICK
- -----------------------
Rich Pidanick
/s/DON KELSEY
- -----------------------
Don Kelsey
/s/GEORGE LAMPOS
- -----------------------
George Lampos
<PAGE>
DAVE DIMARTINO REVOCABLE LIVING TRUST
By /s/DAVE DIMARTINO
-----------------------
Dave DiMartino, Trustee
/s/BILL MCGARRY
- -----------------------
Bill McGarry
- -----------------------
Rod Barger
/s/ANDY HEYNEMAN
- -----------------------
Andy Heyneman
<PAGE>
THE MARTIN ALBERTSON ANNUITY TRUST
By /s/MARTY ALBERTSON
-----------------------
Marty Albertson, Trustee
THE LISA ROSE ANNUITY TRUST
By /s/MARTY ALBERTSON
-----------------------
Marty Albertson, Trustee
<PAGE>
EXHIBIT 10.25
Name of Employee __________________
Purchase Commitment $_______________
($100 per Unit)
GUITAR CENTER, INC.
SUPPLEMENTAL EMPLOYEE STOCK PURCHASE PROGRAM
INVESTMENT AGREEMENT
Guitar Center, Inc.
5155 Clareton Drive
Agoura Hills, California 91301
Ladies and Gentlemen:
The undersigned employee of Guitar Center, Inc. (the "COMPANY") hereby
confirms his irrevocable commitment to purchase the number of Units (as defined)
of capital stock of the Company indicated below for a purchase price of $100 per
Unit in cash, consistent with the terms described below in this letter. By
signing below, the undersigned will be legally obligated to deliver such funds
to the Company and the Company to deliver the shares upon the terms and subject
to the conditions set forth below. Specifically, we agree as follows:
1. UNITS OFFERED. Subject to the provisions of Section 7 below, each
Unit will consist of one share of Common Stock, $.01 par value ("COMMON STOCK"),
of the Company and 0.99 share of Junior Preferred Stock, $.01 par value, of the
Company, liquidation preference $100 per share ("JUNIOR PREFERRED STOCK").
2. CLOSING. The closing of the sale of the Units shall be held on such
date (the "CLOSING DATE") as the Company shall determine, PROVIDED that for
purposes of this investment agreement (the "INVESTMENT AGREEMENT"), the Closing
Date may not occur after February 14, 1997 without the undersigned's consent.
On the Closing Date, the undersigned will deliver the cash payment identified
above and the Company will issue the related Units. The Units subscribed for
shall not be deemed issued to, or owned by, the undersigned until such closing
is completed.
3. ALLOCATION. The Company reserves the right to accept or reject in its
absolute discretion this and any other subscription for Units in whole or in
part, in any order, at any time prior to the Closing Date, notwithstanding prior
receipt by the undersigned of notice of acceptance of the undersigned's
subscription. Subscriptions are subject to allotment before or after
acceptance.
<PAGE>
4. RESTRICTIONS ON SHARES. The undersigned acknowledges that the Units
to be issued may not be sold until the second anniversary of the actual Closing
Date of this offering (this two year period is referred to as the "RESTRICTED
PERIOD"). If the undersigned is still an employee of the Company at the end of
the Restricted Period, the undersigned will be free to sell the shares into the
public market in reliance on Rule 144 under the Securities Act of 1933, as
amended (the "SECURITIES ACT") if a public market has developed. This rule
requires that sales be made in normal brokerage transactions, after appropriate
notice filings are made. If, however, no public market develops, the
undersigned will be obliged to hold the Units indefinitely.
If employment of the undersigned with the Company is terminated for
any reason prior to the end of the Restricted Period (whether with or without
cause and with or without notice), the Company may at that time repurchase the
Units from the undersigned for a cash purchase price equal to the original
purchase price paid by the undersigned, plus 7% per annum. Alternatively, the
Company may elect not to exercise this option in which event the undersigned
will be free to sell the Units after the expiration of the Restricted Period.
The Company must make its election whether or not to repurchase shares held by
the undersigned within 30 days of the day the undersigned's employment with the
Company is terminated. The Company is under no obligation to repurchase such
shares.
In order to enforce the restrictions described above and the other
restrictions imposed by applicable securities laws, the certificates for the
Units (i) will be held by the Company as custodian for the undersigned until the
Restricted Period expires and (ii) for so long as required by applicable law,
shall bear a legend to the effect that such shares have not been registered
under the federal and state laws, may only be transferred in connection with a
registered offering or an exemption from the registration requirements of such
laws, and are subject to the repurchase and other rights contained in this
Investment Agreement.
5. TAX MATTERS. It is the intention of the Company and the undersigned
that the Units will constitute restricted stock for purpose of Section 83 of the
Internal Revenue Code of 1986, as amended (the "CODE"). Accordingly, the
undersigned should not recognize compensation income upon receipt of the Units.
Instead, the undersigned should recognize compensation income on the date the
restrictions on the Units lapse. Such restrictions lapse upon the earlier of
the following: (i) the end of the Restricted Period, or (ii) thirty days after
the termination of employment of the undersigned, if the Company does not elect
to exercise its right to repurchase the Units. The amount of income required to
be recognized should be equal to the fair market value of the Units on the date
the restrictions lapse less the amount paid for the Units.
In the event employment of the undersigned is terminated prior to the
end of the Restricted Period and the Company exercises its right to repurchase
the Units, the undersigned should recognize compensation income on the date of
repurchase equal to the amount received upon repurchase less the amount paid for
the Units.
If an election is made under Section 83(b) of the Code, the
undersigned should recognize compensation income upon receipt of the Units,
without regard to whether or not
2
<PAGE>
the restrictions have lapsed. In this event, the amount of income required to
be recognized should be equal to the fair market value of the Units on the date
of receipt less the amount paid for the Units. Any gain or loss recognized on a
subsequent disposition of the Units should not constitute compensation income,
but should be treated as gain or loss from the sale or exchange of stock.
AT SUCH TIME AS THE UNDERSIGNED IS REQUIRED TO RECOGNIZE COMPENSATION
INCOME FROM THE UNITS, EITHER DUE TO THE LAPSE OF THE RESTRICTIONS ON THE UNITS
OR THE COMPANY'S EXERCISE OF ITS RIGHT TO REPURCHASE THE UNITS, THE COMPANY WILL
BE REQUIRED TO WITHHOLD EMPLOYMENT TAXES ON THE COMPENSATION INCOME. THIS
WITHHOLDING TAX OBLIGATION, TO BE DETERMINED BY THE COMPANY, WILL BE REMITTED BY
THE UNDERSIGNED TO THE COMPANY AT SUCH TIME AS IS REQUIRED FOR THE COMPANY TO
TIMELY REMIT ITS WITHHOLDING TAX RETURNS.
6. REPRESENTATIONS TO THE COMPANY. In order to document the compliance
by the Company with applicable federal and state securities laws, the
undersigned hereby confirms to the Company, on and as of the date of this
Investment Agreement and on and as of the Closing Date, that:
(a) The undersigned is acquiring the Units for the undersigned's own
account as principal, for investment purposes only, and not with a view to, or
for, resale, distribution or fractionalization thereof, in whole or in part, and
no other person has or will have a direct or indirect beneficial interest in
such Units;
(b) The undersigned:
(i) understands that the offering and sale of the Units is
intended to be a transaction by an issuer not involving any public offering
exempt from registration under the Securities Act and the rules promulgated
by the Securities and Exchange Commission thereunder;
(ii) understands and acknowledges that there are substantial
risks of loss of investment involved in an investment in the Units, and
that the investment in the Units is an illiquid investment and the
undersigned must bear the economic risk of investment in the Units for an
indefinite period of time, and the undersigned represents and warrants that
he has the financial ability to bear the economic risk of his investment,
has adequate means for providing for his current needs and possible
contingencies and has no need for liquidity with respect to his investment
in the Units and that, at this time, he could bear a complete loss of his
investment therein;
(iii) understands that there is no established market for the
Units and there can be, and has been, no assurance that a public market for
such interests will develop;
(iv) has been furnished with a copy of a Prospectus dated
November 12, 1996, which was included in the Registration Statement on Form
S-1 filed by the
3
<PAGE>
Company with the Securities and Exchange Commission ("PROSPECTUS"), and any
documents that may have been available otherwise or upon his request; has
carefully read the information contained therein and understands and has
evaluated the risks of a purchase of the Units;
(v) has retained a "Purchaser Representative" (as such term is
defined in Rule 501 under the Securities Act) who possesses such knowledge
and experience in financial and business matters, including investments of
the type represented by the Units, as to be capable of evaluating the
merits and risks of investment in the Company;
(vi) has along with his purchaser representative been furnished
with a copy of the offering materials prepared in connection with this
offering and any documents that may have been made available otherwise or
upon his request or that of his purchaser representative;
(vii) has along with his purchaser representative been given
the opportunity to ask questions of, and receive answers from, the Company
regarding the Company's results of operation, financial condition,
business, assets and prospects, the terms and conditions of the offering
and other matters pertaining to investment in the Company; and has along
with his purchaser representative been given the opportunity to obtain such
additional information that is necessary for him along with his purchaser
representative to evaluate the merits and risks of investment in the
Company; and
(viii) has not been furnished with any oral representation,
warranty or information in connection with the offering of the Units,
except as indicated above;
(c) THE UNDERSIGNED RECOGNIZES THAT THE OFFERING MATERIALS, THIS
INVESTMENT AGREEMENT AND THE OTHER INFORMATION FURNISHED BY THE COMPANY DO NOT
CONSTITUTE INVESTMENT, ACCOUNTING, TAX OR LEGAL ADVICE; MOREOVER, THE
UNDERSIGNED IS NOT RELYING ON THE COMPANY WITH RESPECT TO TAX AND OTHER ECONOMIC
CONSIDERATIONS OF THE UNDERSIGNED RELATED TO THIS INVESTMENT;
(d) The undersigned further represents and warrants that (i) the
undersigned is empowered and authorized to enter into this Investment Agreement,
(ii) this Investment Agreement is valid and binding upon undersigned and is
enforceable against the undersigned in accordance with its terms (subject to the
effect of bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance and other similar laws relating to or affecting creditors'
rights generally and subject to general principles of equity), and (iii) this
Investment Agreement does not conflict with any law, court or administrative
order or material agreement to which the undersigned is a party or by which any
of its assets may be bound; and
(e) The undersigned accepts and agrees to be bound by the rights,
restrictions, preferences and privileges of the Units, the terms of the
Stockholders Agreement
4
<PAGE>
dated June 5, 1996 by and among the Company and the stockholders party thereto
(the "STOCKHOLDERS AGREEMENT") and the terms of the Registration Rights
Agreement dated June 5, 1996 by and among the Company and the stockholders party
thereto (the "REGISTRATION RIGHTS AGREEMENT"); the undersigned agrees to
execute, on or prior to the Closing Date, a joinder to the Stockholders
Agreement (in substantially the form of Exhibit A attached hereto), a
counterpart to the Registration Rights Agreement (in substantially the form of
Exhibit B attached hereto) and a spousal consent (in substantially the form of
Exhibit C attached hereto).
The foregoing acknowledgements, representations and agreements shall
survive the Closing Date.
7. ADJUSTMENTS. The undersigned and the Company understand and agree
that the one share of Common Stock and the 0.99 of a share of Junior Preferred
Stock that constitute one Unit are as of December 30, 1996 and shall be adjusted
if the outstanding shares of Common Stock or Junior Preferred Stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities of the Company through a reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, including, without limitation, the Common
Stock split and Junior Preferred Stock conversion that were approved by the
Board of Directors of the Company at its meeting duly held on January 15, 1997
(a "UNIT ADJUSTMENT"). In the event of a Unit Adjustment, there shall not be
any change to the aggregate purchase price applicable to all Units purchased
hereunder as a result of such Unit Adjustment.
8. LEGAL FEES AND COSTS. The undersigned agrees to pay the legal fees
and costs of the "Purchaser Representative" (as such term is defined in Rule 501
under the Securities Act) incurred in connection with this transaction PRO RATA
based on the number of Units purchased by the undersigned (relative to the
number of Units purchased by other purchasers on the Closing Date pursuant to
the terms of an investment agreement, substantially in the form of this
Investment Agreement).
9. MISCELLANEOUS.
(a) MODIFICATION. Neither this Investment Agreement nor any
provisions hereof shall be modified, discharged or terminated except by an
instrument in writing signed by the party against whom any waiver, change,
discharge or termination is sought.
(b) COUNTERPARTS. This Investment Agreement may be executed in any
number of counterparts, and each of such counterparts shall, for all purposes,
constitute one agreement binding on all the parties hereto, notwithstanding that
all parties are not signatories to the same counterpart.
(c) BINDING EFFECT. Except as otherwise provided herein, this
Investment Agreement shall be binding upon and inure to the benefit of the
parties hereto and their administrators, successors, legal representatives and
assigns.
5
<PAGE>
(d) GENDER. As used herein, masculine pronouns shall include the
feminine and neuter, and the singular shall be deemed to include the plural.
(e) ENTIRE AGREEMENT. This Investment Agreement contains the entire
agreement of the parties, and there are no representations, covenants or other
agreements except as stated or referred to herein or therein.
(f) ASSIGNABILITY. This Investment Agreement is not transferable or
assignable by the undersigned.
(g) APPLICABLE LAW. This Investment Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware (without
regard to Delaware's principles of conflicts of laws).
(h) STATE SECURITIES LAWS. The offering and sale of Units is
intended to be exempt from registration under the securities laws of certain
states. All subscribers must note that there are significant restrictions on
transfer of the Units, as agreed upon in Section 4 of this Investment Agreement.
6
<PAGE>
10. ACKNOWLEDGMENT. The undersigned acknowledges (a) that he has
consulted with or has had the opportunity to consult with a "Purchaser
Representative" (as such term is defined in Rule 501 under the Securities Act)
concerning this Agreement and has been advised to do so by the Company, and
(b) that he has read and understands the Investment Agreement, is fully aware of
its legal effect, and has entered into it freely based on his own judgment.
IN WITNESS WHEREOF, the undersigned has executed this INVESTMENT
AGREEMENT as of the 30th day of December, 1996.
Number of Units Acquired Purchase Price
$
- ------------------------------ -----------------------------
------------------------------
(Name of Individual)
(Please Type or Print)
Name:
-------------------------
(Signature)
Address:
----------------------
------------------------------
ACCEPTED AND AGREED as of the
___ day of January, 1997
GUITAR CENTER, INC.
By:
---------------------------
Authorized Signatory
7
<PAGE>
EXHIBIT A
MANAGEMENT STOCKHOLDER JOINDER
By execution of this Management Stockholder Joinder, the undersigned
agrees to become a party to that certain Stockholders Agreement dated as of June
5, 1996, among Guitar Center Company, Inc., a Delaware corporation, and certain
of its stockholders (the "STOCKHOLDERS AGREEMENT"). The undersigned shall have
all the rights, and shall observe all the obligations, applicable to a
Management Stockholder.
Notwithstanding Section 4(a) of the Stockholders Agreement, the
undersigned acknowledges and agrees that if employment of the undersigned with
the Company is terminated for any reason (whether with or without cause and with
or without notice) prior to the end of the Restricted Period (as such term is
defined in the Investment Agreement dated as of December 30, 1996 by and between
the Company and the undersigned (the "INVESTMENT AGREEMENT")), the second
paragraph of Section 4 of the Investment Agreement shall govern the Company's
right to repurchase any of the undersigned's Units purchased pursuant to the
Investment Agreement.
Name:
--------------------------------
Address for Notices: with copies to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature:
------------------------
Date:
-----------------------------
8
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT COUNTERPART
By execution of this Registration Rights Agreement Counterpart, the
undersigned executes, adopts and agrees to the terms and conditions of the
Registration Rights Agreement dated as of June 5, 1996, among Guitar Center
Company, Inc., a Delaware corporation, and certain of its stockholders (the
"REGISTRATION RIGHTS AGREEMENT"). The undersigned hereby becomes a Shareholder
for purposes of the Registration Rights Agreement.
Name:
--------------------------------------------
(Please print name and sign name)
The Company hereby consents and agrees to the admission of
_________________ as a Shareholder for purposes of the Registration Rights
Agreement.
GUITAR CENTER INC.
By_______________________________
Name:
Title:
9
<PAGE>
EXHIBIT C
CONSENT AND AGREEMENT OF SPOUSE
I, ____________________________________, am the spouse of
________________________, one of the stockholders of Guitar Center, Inc., a
Delaware corporation (the "COMPANY"). I understand that my spouse is a party to
that certain Stockholders Agreement dated as of June 5, 1996 by and among the
Company and certain of its stockholders (the "STOCKHOLDERS AGREEMENT"), and that
I have reviewed the Stockholders Agreement.
The Agreement contains certain provisions regarding my acquiring or
retaining any equity securities, or rights to receive equity securities (the
"SECURITIES") issued by the Company. I agree that I may not acquire any
Securities (whether by gift, purchase, will, intestate succession, operation of
law or decree, order or injunction of any court, division of community or
marital property or otherwise), except in compliance with the terms of the
Stockholders Agreement. I acknowledge and understand that if I ever propose to
acquire any Securities in compliance with the Agreement, I must first agree to
become a party to the Stockholders Agreement.
Executed as of ________________________, 1997.
Name:_______________________________________
(Please print name and sign name)
10
<PAGE>
EXHIBIT 10.26
THE 1997 EQUITY PARTICIPATION PLAN
OF
GUITAR CENTER, INC.
Guitar Center, Inc., a Delaware corporation, has adopted The 1997
Equity Participation Plan of Guitar Center, Inc. (the "PLAN") for the benefit of
its eligible employees, consultants and directors. The Plan consists of two
plans, one for the benefit of key Employees (as such term is defined below) and
consultants and one for the benefit of Independent Directors (as such term is
defined below). The Plan was adopted by the Board of Directors of the Company
at a meeting duly held on January 15, 1997, and was approved by the stockholders
of the Company by written consent dated as of January 24, 1997. The Plan shall
be effective immediately following the Company's initial public offering.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I
DEFINITIONS
Wherever the following terms are used in this Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise.
AWARD LIMIT. "Award Limit" shall mean 150,000 shares of Common Stock.
BOARD. "Board" shall mean the Board of Directors of the Company.
CHANGE IN CONTROL. "Change in Control" shall mean a change in
ownership or control of the Company effected through either of the following
transactions occurring after the adoption of this Plan:
(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept; or
<PAGE>
(b) there is a change in the composition of the Board over a period
of thirty-six (36) consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be
comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
COMMITTEE. "Committee" shall mean the Compensation Committee of the
Board, or another committee of the Board, appointed as provided in Section 9.1.
COMMON STOCK. "Common Stock" shall mean the common stock of the
Company, par value $.01 per share, and any equity security of the Company issued
or authorized to be issued in the future, but excluding any preferred stock and
any warrants, options or other rights to purchase Common Stock. Debt securities
of the Company convertible into Common Stock shall be deemed equity securities
of the Company.
COMPANY. "Company" shall mean Guitar Center, Inc., a Delaware
corporation.
CORPORATE TRANSACTIONS. "Corporate Transaction" shall mean any of the
following stockholder-approved transactions occurring after the adoption of this
Plan to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred or issued to a person or persons different from those who held
such securities immediately prior to such merger.
CSAR. "CSAR" shall mean a Coupled Stock Appreciation Right.
DEFERRED STOCK. "Deferred Stock" shall mean Common Stock awarded
under Article VII of this Plan.
DIRECTOR. "Director" shall mean a member of the Board.
DIVIDEND EQUIVALENT. "Dividend Equivalent" shall mean a right to
receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article VII of this Plan.
<PAGE>
EMPLOYEE. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
FAIR MARKET VALUE. "Fair Market Value" of a share of Common Stock as
of a given date shall be (i) the closing price of a share of Common Stock on the
principal exchange on which shares of Common Stock are then trading, if any (or
as reported on any composite index which includes such principal exchange), on
the trading day previous to such date, or if shares were not traded on the
trading day previous to such date, then on the next preceding date on which a
trade occurred, or (ii) if Common Stock is not traded on an exchange but is
quoted on Nasdaq or a successor quotation system, the mean between the closing
representative bid and asked prices for the Common Stock on the trading day
previous to such date as reported by Nasdaq or such successor quotation system;
or (iii) if Common Stock is not publicly traded on an exchange and not quoted on
Nasdaq or a successor quotation system, the Fair Market Value of a share of
Common Stock as established by the Committee (or the Board, in the case of
Options granted to Independent Directors) acting in good faith.
GRANTEE. "Grantee" shall mean an Employee or consultant granted a
Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation
Right, or an award of Deferred Stock, under this Plan.
INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an option
which conforms to the applicable provisions of Section 422 of the Code and which
is designated as an Incentive Stock Option by the Committee.
INDEPENDENT DIRECTOR. "Independent Director" shall mean a member of
the Board who is not an Employee of the Company.
INDEPENDENT DIRECTOR AFFILIATE. "Independent Director Affiliate"
shall mean, with respect to any Independent Director, any other person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such Independent Director. For the purposes of this definition,
"control" when used with respect to any Independent Director means the power to
direct the employment, management, activities or policies of such person,
directly or indirectly, whether through an employment agreement, investment
agreement, stockholders agreement, ownership of voting securities, by contract
or otherwise.
ISAR. "ISAR" shall mean an Independent Stock Appreciation Right.
NON-QUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall mean
an Option which is not designated as an Incentive Stock Option by the Committee.
OPTION. "Option" shall mean a stock option granted under Article III
of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
PROVIDED, HOWEVER, that Options granted to Independent Directors and consultants
shall be Non-Qualified Stock Options.
3
<PAGE>
OPTIONEE. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
PERFORMANCE AWARD. "Performance Award" shall mean a cash bonus, stock
bonus or other performance or incentive award that is paid in cash, Common Stock
or a combination of both, awarded under Article VII of this Plan.
PLAN. "Plan" shall mean The 1997 Equity Participation Plan of Guitar
Center, Inc.
QDRO. "QDRO" shall mean a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
RESTRICTED STOCK. "Restricted Stock" shall mean Common Stock awarded
under Article VI of this Plan.
RESTRICTED STOCKHOLDER. "Restricted Stockholder" shall mean an
Employee or consultant granted an award of Restricted Stock under Article VI of
this Plan.
RULE 16B-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
STOCK APPRECIATION RIGHT. "Stock Appreciation Right" shall mean a
stock appreciation right granted under Article VIII of this Plan.
STOCK PAYMENT. "Stock Payment" shall mean (i) a payment in the form
of shares of Common Stock, or (ii) an option or other right to purchase shares
of Common Stock, as part of a deferred compensation arrangement, made in lieu of
all or any portion of the compensation, including without limitation, salary,
bonuses and commissions, that would otherwise become payable to a key Employee
or consultant in cash, awarded under Article VII of this Plan.
SUBSIDIARY. "Subsidiary" shall mean any corporation in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
50 percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
TERMINATION OF CONSULTANCY. "Termination of Consultancy" shall mean
the time when the engagement of an Optionee, Grantee or Restricted Stockholder
as a consultant to the Company or a Subsidiary is terminated for any reason,
with or without cause and with or without notice, including, but not by way of
limitation, by resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company or any Subsidiary. The Committee, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Consultancy. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate a
consultant's service at any time for any reason whatsoever, with or without
cause and with or without notice, except to the extent expressly provided
otherwise in writing.
4
<PAGE>
TERMINATION OF DIRECTORSHIP. "Termination of Directorship" shall mean
the time when an Optionee who is an Independent Director ceases to be a Director
for any reason, including, but not by way of limitation, a termination by
resignation, failure to be elected, death or retirement. The Board, in its sole
and absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
TERMINATION OF EMPLOYMENT. "Termination of Employment" shall mean the
time when the employee-employer relationship between an Optionee, Grantee or
Restricted Stockholder and the Company or any Subsidiary is terminated for any
reason, with or without cause and with or without notice, including, but not by
way of limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former employee.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; PROVIDED,
HOWEVER, that, unless otherwise determined by the Committee in its discretion, a
leave of absence, change in status from an employee to an independent contractor
or other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that, such leave of absence,
change in status or other change interrupts employment for the purposes of
Section 422(a)(2) of the Code and the then applicable regulations and revenue
rulings under said Section. Notwithstanding any other provision of this Plan,
the Company or any Subsidiary has an absolute and unrestricted right to
terminate an Employee's employment at any time for any reason whatsoever, with
or without cause and with or without notice, except to the extent expressly
provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 SHARES SUBJECT TO PLAN.
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially shares of
the Company's Common Stock, par value $.01 per share. The aggregate number of
such shares which may be issued upon exercise of such options or rights or upon
any such awards under the Plan shall not exceed Eight Hundred Seventy-Five
Thousand (875,000). The shares of Common Stock issuable upon exercise of such
options or rights or upon any such awards may be either previously authorized
but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options or
Stock Appreciation Rights granted under the Plan to any individual in any
calendar year shall not exceed the Award Limit. To the extent required by
Section 162(m) of the Code, shares subject to Options which are canceled
continue to be counted against the Award Limit and if, after grant of an Option,
the price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option and both the
Option deemed to be canceled and the Option deemed to be granted
5
<PAGE>
are counted against the Award Limit. Furthermore, to the extent required by
Section 162(m) of the Code, if, after grant of a Stock Appreciation Right, the
base amount on which stock appreciation is calculated is reduced to reflect a
reduction in the Fair Market Value of the Company's Common Stock, the
transaction is treated as a cancellation of the Stock Appreciation Right and a
grant of a new Stock Appreciation Right and both the Stock Appreciation Right
deemed to be canceled and the Stock Appreciation Right deemed to be granted are
counted against the Award Limit.
2.2 ADD-BACK OF OPTIONS AND OTHER RIGHTS. If any Option, or other
right to acquire shares of Common Stock under any other award under this Plan,
expires or is canceled without having been fully exercised, or is exercised in
whole or in part for cash as permitted by this Plan, the number of shares
subject to such Option or other right but as to which such Option or other right
was not exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Options or other awards which are
adjusted pursuant to Section 10.3 and become exercisable with respect to shares
of stock of another corporation shall be considered cancelled and may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or
withheld by the Company upon the exercise of any Option or other award under
this Plan, in payment of the exercise price thereof, may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1. If any
share of Restricted Stock is forfeited by the Grantee or repurchased by the
Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this Section 2.2, no shares of Common Stock
may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
ARTICLE III
GRANTING OF OPTIONS
3.1 ELIGIBILITY. Any Employee or consultant selected by the
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be
granted Options at the times and in the manner set forth in Section 3.4(a)(i) or
3.4(d).
3.2 DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing Subsidiary or parent corporation (within the meaning of
Section 422 of the Code) unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock
Option shall be granted to any person who is not an Employee.
3.4 GRANTING OF OPTIONS
6
<PAGE>
(a) The Committee (or the Board, with respect to an Option granted to
an Independent Director) shall from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees or consultants (including Employees or consultants
who have previously received Options or other awards under this Plan) such
of them as in its opinion should be granted Options and determine which
Independent Directors, if any, should, in its opinion, be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees,
consultants or Independent Directors;
(iii) Subject to Section 3.3, determine whether such Options are
to be Incentive Stock Options or Non-Qualified Stock Options and whether
such Options are to qualify as performance-based compensation as described
in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; PROVIDED, HOWEVER, that the terms and conditions
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Upon the selection of a key Employee, consultant or Independent
Director to be granted an Option, the Committee (or the Board, with respect to
an Option granted to an Independent Director) shall instruct the Secretary of
the Company to issue the Option and may impose such conditions on the grant of
the Option as it deems appropriate. Without limiting the generality of the
preceding sentence, (x) the Board may, in its discretion and on such terms as it
deems appropriate, provide that an Option granted to any Independent Director
shall be in addition to or in lieu of an Option that may be or has been granted
to such Independent Director pursuant to Section 3.4(d) hereof, or (y) the
Committee (or the Board, with respect to an Option granted to an Independent
Director) may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee, consultant or
Independent Director that the Employee, consultant or Independent Director
surrender for cancellation some or all of the unexercised Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments or other rights which have been
previously granted to him under this Plan or otherwise. An Option, the grant of
which is conditioned upon such surrender, may have an option price equal to or
higher (but not lower) than the exercise price of such surrendered Option or
other award, may cover the same (or a lesser or greater) number of shares as
such surrendered Option or other award, may contain such other terms as the
Committee deems appropriate, and shall be exercisable in accordance with its
terms, without regard to the number of shares, exercise period or any other term
or condition of such surrendered Option or other award; it being understood that
an Option, the grant of which is conditioned on such surrender, shall not have
an exercise price that is less than the exercise price of the Option
surrendered.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
7
<PAGE>
(d) During the term of the Plan, (i) a person who is initially
elected to the Board after the consummation of the initial public offering of
Common Stock and who is an Independent Director at the time of such initial
election automatically shall be granted an Option to purchase 15,000 shares of
Common Stock (subject to adjustment as provided in Section 10.3) on the date of
such initial election, and (ii) a person who is re-elected to the Board after
the consummation of the initial public offering of Common Stock and who is an
Independent Director at the time of such re-election automatically shall be
granted an Option to purchase 5,000 shares of Common Stock (subject to
adjustment as provided in Section 10.3) on the date of each annual meeting of
stockholders at which the Independent Director is re-elected to the Board.
Notwithstanding the first sentence of this paragraph (d), no grant shall be made
to an Independent Director pursuant to clause (i) of such sentence if: (x) an
Independent Director Affiliate of such Independent Director served on the Board
within the twelve-month period prior to the initial election of such Independent
Director and if such Independent Director Affiliate is not a member of the Board
at the time of initial election of such Independent Director, or (y) such
Independent Director is an employee of the Company who subsequently retires from
the Company and remains on the Board. Notwithstanding the first sentence of
this paragraph (d), no grant shall be made to an Independent Director pursuant
to clause (ii) of such sentence if such Independent Director was initially
elected to the Board within 120 days of such annual meeting of stockholders.
All the foregoing Option grants authorized by this Section 3.4(d) are subject to
stockholder approval of the Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 OPTION AGREEMENT. Each Option shall be evidenced by a written
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock
Options shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2 OPTION PRICE. The price per share of the shares subject to each
Option shall be set by the Committee; PROVIDED, HOWEVER, that such price shall
be no less than 100% of the Fair Market Value of a share of Common Stock on the
date the Option is granted, and, in the case of Incentive Stock Options granted
to an individual then owning (within the meaning of Section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning of
Section 422 of the Code) such price shall not be less than 110% of the Fair
Market Value of a share of Common Stock on the date the Option is granted.
4.3 OPTION TERM. The term of an Option shall be set by the Committee
in its discretion; PROVIDED, HOWEVER, that, (i) in the case of Options granted
to Independent Directors, the term shall be ten (10) years from the date the
Option is granted, without variation or acceleration hereunder, but subject to
Section 5.6, (ii) in the case of Incentive Stock Options, the term shall not be
more than ten (10) years from the date the Incentive Stock Option is granted, or
five (5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or
8
<PAGE>
any Subsidiary or parent corporation thereof (within the meaning of Section 422
of the Code), and (iii) in the case of Non-Qualified Stock Options, the term
shall not be more than ten (10) years from the date the Non-Qualified Stock
Option is granted. Except as limited by requirements of Section 422 of the Code
and regulations and rulings thereunder applicable to Incentive Stock Options,
the Committee may extend the term of any outstanding Option in connection with
any Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
4.4 OPTION VESTING
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee in its sole and
absolute discretion and the Committee may determine that an Option may not be
exercised in whole or in part for a specified period after it is granted;
PROVIDED, HOWEVER, that, unless the Committee otherwise provides in the terms of
the Option or otherwise, no Option shall be exercisable by any Optionee who is
then subject to Section 16 of the Exchange Act within the period ending six
months and one day after the date the Option is granted; and PROVIDED, FURTHER,
that Options granted to Independent Directors pursuant to Section 3.4(d) shall
become exercisable in cumulative annual installments of 33-1/3% on each of the
first, second and third anniversaries of the date of Option grant, without
variation or acceleration hereunder except as provided in Section 10.3(b). At
any time after grant of an Option, the Committee may, in its sole and absolute
discretion and subject to whatever terms and conditions it selects, accelerate
the period during which an Option (except an Option granted to an Independent
Director) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees or
consultants either in the Stock Option Agreement or by action of the Committee
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall for all purposes be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth
in the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.4(c), the Fair
Market Value of stock shall be determined as of the time the Option with respect
to such stock is granted.
4.5 CONSIDERATION. In consideration of the granting of an Option,
the Optionee shall agree, in the written Stock Option Agreement, to remain in
the employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year (or
such shorter period as may be fixed in the Stock Option Agreement or by action
of the Committee following grant of the Option) after the Option is granted (or,
in the case of an Independent Director, until the next annual meeting of
stockholders of the Company). Nothing in this Plan or in any Stock Option
Agreement hereunder shall confer upon any Optionee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby
9
<PAGE>
expressly reserved, to discharge any Optionee at any time for any reason
whatsoever, with or without cause and with or without notice.
ARTICLE V
EXERCISE OF OPTIONS
5.1 PARTIAL EXERCISE. An exercisable Option may be exercised in
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 MANNER OF EXERCISE. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to Independent
Directors) stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Optionee or other person then entitled to exercise
the Option or such portion;
(b) Such representations and documents as the Committee (or the
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer notices to agents and
registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However,
the Committee (or the Board, in the case of Options granted to Independent
Directors), may in its discretion (i) allow a delay in payment up to thirty (30)
days from the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common Stock
owned by the Optionee, duly endorsed for transfer to the Company with a Fair
Market Value on the date of delivery equal to the aggregate exercise price of
the Option or exercised portion thereof; (iii) allow payment, in whole or in
part, through the delivery of property of any kind which constitutes good and
valuable consideration; (iv) allow payment, in whole or in part, through the
delivery of a full recourse promissory note bearing interest (at no less than
such rate as shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Committee or the Board; (v)
allow payment, in whole or in part, through the delivery of a notice that the
Optionee has placed a market sell order with a broker with respect to shares of
Common Stock then issuable upon exercise of the Option, and that the broker has
been directed to pay a sufficient portion of the net proceeds of the sale to the
Company in satisfaction of the Option exercise price; or (vi) allow payment
through any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv) and (v). In the case of a promissory note, the
Committee (or the Board, in the case of Options granted to Independent
Directors) may also prescribe the form of
10
<PAGE>
such note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited by
law.
5.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall
not be required to issue or deliver any certificate or certificates for shares
of stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges or
quotation systems on which such class of stock is then listed or admitted for
quotation, as the case may be;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory body
which the Committee or Board shall, in its absolute discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors) shall, in its absolute discretion,
determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons of
administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4 RIGHTS AS STOCKHOLDERS. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
5.5 OWNERSHIP AND TRANSFER RESTRICTIONS. The Committee (or Board, in
the case of Options granted to Independent Directors), in its absolute
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The
Committee may require the Employee to give the Company prompt notice of any
disposition of shares of Common Stock acquired by exercise of an Incentive Stock
Option within (i) two years from the date of granting such Option to such
Employee or (ii) one year after the transfer of such shares to such Employee.
The Committee may direct that the certificates evidencing shares acquired by
exercise of an Option refer to such requirement to give prompt notice of
disposition.
11
<PAGE>
5.6 LIMITATIONS ON EXERCISE OF OPTIONS GRANTED TO INDEPENDENT
DIRECTORS. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three-month period; or
(d) The expiration of ten years from the date the Option was granted.
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 AWARD OF RESTRICTED STOCK
(a) The Committee may from time to time, in its absolute discretion:
(i) Select from among the key Employees or consultants
(including Employees or consultants who have previously received other
awards under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this Plan.
(b) The Committee shall establish the purchase price, if any, and
form of payment for Restricted Stock; PROVIDED, HOWEVER, that such purchase
price per share shall be no less than the par value of the Common Stock to be
purchased, unless otherwise permitted by applicable state law. In all cases,
legal consideration shall be required for each issuance of Restricted Stock.
(c) Upon the selection of a key Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
6.2 RESTRICTED STOCK AGREEMENT. Restricted Stock shall be issued
only pursuant to a written Restricted Stock Agreement, which shall be executed
by the selected key Employee or consultant and an authorized officer of the
Company and which shall contain such terms and conditions as the Committee shall
determine, consistent with this Plan.
6.3 CONSIDERATION. As consideration for the issuance of Restricted
Stock, in addition to payment of any purchase price, the Restricted Stockholder
shall agree, in the written Restricted Stock Agreement, to remain in the employ
of, or to consult for, the Company or any Subsidiary for a period
12
<PAGE>
of at least one year after the Restricted Stock is issued (or such shorter
period as may be fixed in the Restricted Stock Agreement or by action of the
Committee following grant of the Restricted Stock). Nothing in this Plan or in
any Restricted Stock Agreement hereunder shall confer on any Restricted
Stockholder any right to continue in the employ of, or as a consultant for, the
Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Restricted Stockholder at any time for any reason whatsoever,
with or without cause and with or without notice.
6.4 RIGHTS AS STOCKHOLDERS. Upon delivery of the shares of
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; PROVIDED,
HOWEVER, that in the discretion of the Committee, any extraordinary
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.
6.5 RESTRICTIONS. All shares of Restricted Stock issued under this
Plan (including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; PROVIDED, HOWEVER,
that, unless the Committee otherwise provides in the terms of the Restricted
Stock Agreement or otherwise, no share of Restricted Stock granted to a person
subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise
transferred until at least six months and one day have elapsed from the date on
which the Restricted Stock was issued, and PROVIDED, FURTHER, that by action
taken after the Restricted Stock is issued, the Committee may, on such terms and
conditions as it may determine to be appropriate, remove any or all of the
restrictions imposed by the terms of the Restricted Stock Agreement. Restricted
Stock may not be sold or encumbered until all restrictions are terminated or
expire. Unless provided otherwise by the Committee, if no consideration was
paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's
rights in unvested Restricted Stock shall lapse upon Termination of Employment
or, if applicable, upon Termination of Consultancy with the Company.
6.6 REPURCHASE OF RESTRICTED STOCK. The Committee shall provide in
the terms of each individual Restricted Stock Agreement that the Company shall
have the right to repurchase from the Restricted Stockholder the Restricted
Stock then subject to restrictions under the Restricted Stock Agreement
immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy between the Restricted Stockholder and the Company,
at a cash price per share equal to the price paid by the Restricted Stockholder
for such Restricted Stock; PROVIDED, HOWEVER, that provision may be made that no
such right of repurchase shall exist in the event of a Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.
6.7 ESCROW. The Secretary of the Company or such other escrow holder
as the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
13
<PAGE>
6.8 LEGEND. In order to enforce the restrictions imposed upon shares
of Restricted Stock hereunder, the Committee shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Restricted Stock Agreements, which legend or
legends shall make appropriate reference to the conditions imposed thereby.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 PERFORMANCE AWARDS. Any key Employee or consultant selected by
the Committee may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits or
other measure of the value of Common Stock or other specific performance
criteria determined appropriate by the Committee, in each case on a specified
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee or
consultant.
7.2 DIVIDEND EQUIVALENTS. Any key Employee or consultant selected by
the Committee may be granted Dividend Equivalents based on the dividends
declared on Common Stock, to be credited as of dividend payment dates, during
the period between the date an Option, Stock Appreciation Right, Deferred Stock
or Performance Award is granted, and the date such Option, Stock Appreciation
Right, Deferred Stock or Performance Award is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
cash or additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee. With respect
to Dividend Equivalents granted with respect to Options intended to be qualified
performance-based compensation for purposes of Section 162(m) of the Code, such
Dividend Equivalents shall be payable regardless of whether such Option is
exercised.
7.3 STOCK PAYMENTS. Any key Employee or consultant selected by the
Committee may receive Stock Payments in the manner determined from time to time
by the Committee. The number of shares shall be determined by the Committee and
may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
7.4 DEFERRED STOCK. Any key Employee or consultant selected by the
Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock
shall be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined to be appropriate by the Committee, in
each case on a specified date or dates or over any period or periods determined
by the Committee. Common Stock underlying a Deferred Stock award will not be
issued until the Deferred Stock award has vested, pursuant to a vesting schedule
or performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to
14
<PAGE>
such Deferred Stock until such time as the award has vested and the Common Stock
underlying the award has been issued.
7.5 PERFORMANCE AWARD AGREEMENT, DIVIDEND EQUIVALENT AGREEMENT,
DEFERRED STOCK AGREEMENT, STOCK PAYMENT AGREEMENT. Each Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be
evidenced by a written agreement, which shall be executed by the Grantee and an
authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
7.6 TERM. The term of a Performance Award, Dividend Equivalent,
award of Deferred Stock and/or Stock Payment shall be set by the Committee in
its discretion.
7.7 EXERCISE UPON TERMINATION OF EMPLOYMENT. A Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable
or payable only while the Grantee is an Employee or consultant; PROVIDED that
the Committee may determine that the Performance Award, Dividend Equivalent,
award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent
to Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
7.8 PAYMENT ON EXERCISE. Payment of the amount determined under
Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of
both, as determined by the Committee. To the extent any payment under this
Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.
7.9 CONSIDERATION. In consideration of the granting of a Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the
Grantee shall agree, in a written agreement, to remain in the employ of, or to
consult for, the Company or any Subsidiary for a period of at least one year
after such Performance Award, Dividend Equivalent, award of Deferred Stock
and/or Stock Payment is granted (or such shorter period as may be fixed in such
agreement or by action of the Committee following such grant). Nothing in this
Plan or in any agreement hereunder shall confer on any Grantee any right to
continue in the employ of, or as a consultant for, the Company or any Subsidiary
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without cause and with or without
notice.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 GRANT OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right
may be granted to any key Employee or consultant selected by the Committee. A
Stock Appreciation Right may be granted (i) in connection and simultaneously
with the grant of an Option, (ii) with respect to a previously granted Option,
or (iii) independent of an Option. A Stock Appreciation Right shall be subject
to such terms and conditions not inconsistent with this Plan as the Committee
shall impose and shall be evidenced by a written Stock Appreciation Right
Agreement, which shall be executed by the Grantee and an authorized officer of
the Company. The Committee, in its discretion, may determine whether a Stock
Appreciation Right is to qualify as performance-based compensation as described
in Section 162(m)(4)(C)
15
<PAGE>
of the Code and Stock Appreciation Right Agreements evidencing Stock
Appreciation Rights intended to so qualify shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Without limiting the generality of the foregoing, the
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition of the grant of a Stock Appreciation Right to an Employee
or consultant that the Employee or consultant surrender for cancellation some or
all of the unexercised Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, or other rights which have been previously granted to him under this
Plan or otherwise. A Stock Appreciation Right, the grant of which is
conditioned upon such surrender, may have an exercise price lower (or higher)
than the exercise price of the surrendered Option or other award, may cover the
same (or a lesser or greater) number of shares as such surrendered Option or
other award, may contain such other terms as the Committee deems appropriate,
and shall be exercisable in accordance with its terms, without regard to the
number of shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
8.2 COUPLED STOCK APPRECIATION RIGHTS
(a) A CSAR shall be related to a particular Option and shall be
exercisable only when and to the extent the related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to which it
is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3 INDEPENDENT STOCK APPRECIATION RIGHTS
(a) An ISAR shall be unrelated to any Option and shall have a term
set by the Committee. An ISAR shall be exercisable in such installments as the
Committee may determine. An ISAR shall cover such number of shares of Common
Stock as the Committee may determine; PROVIDED, HOWEVER, that unless the
Committee otherwise provides in the terms of the ISAR or otherwise, no ISAR
granted to a person subject to Section 16 of the Exchange Act shall be
exercisable until at least six months have elapsed from (but excluding) the date
on which the Option was granted. The exercise price per share of Common Stock
subject to each ISAR shall be set by the Committee. An ISAR is exercisable only
while the Grantee is an Employee or consultant; PROVIDED that the Committee may
determine that the ISAR may be exercised subsequent to Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company, or because of the Grantee's retirement, death or disability, or
otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value
16
<PAGE>
of a share of Common Stock on the date of exercise of the ISAR by the number of
shares of Common Stock with respect to which the ISAR shall have been exercised,
subject to any limitations the Committee may impose.
8.4 PAYMENT AND LIMITATIONS ON EXERCISE
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both, as
determined by the Committee. To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of Section 5.3
above pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or exercise
of a Stock Appreciation Right, including a window-period limitation, as may be
imposed in the discretion of the Board or Committee.
8.5 CONSIDERATION. In consideration of the granting of a Stock
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, or to consult for, the Company or
any Subsidiary for a period of at least one year after the Stock Appreciation
Right is granted (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee following grant of
the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without cause and with or without
notice.
ARTICLE IX
ADMINISTRATION
9.1 COMPENSATION COMMITTEE. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under this Plan) shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members
may resign at any time by delivering written notice to the Board. Vacancies in
the Committee may be filled by the Board.
9.2 DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to Options granted
to Independent Directors. Any such grant or award under this Plan need not be
the same with respect to each Optionee, Grantee or
17
<PAGE>
Restricted Stockholder. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. In its absolute discretion, the Board may at any time and from
time to time exercise any and all rights and duties of the Committee under this
Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of
the Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee.
9.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
9.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS.
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 NOT TRANSFERABLE. Options, Restricted Stock awards, Deferred
Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he may exercise
an Option or other right or award (or any portion thereof) granted to him under
the Plan, unless it has been disposed of pursuant to a QDRO. After the death of
the Optionee or Grantee, any exercisable portion of an Option or other right or
award may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement or other agreement, be exercised
by his personal representative
18
<PAGE>
or by any person empowered to do so under the deceased Optionee's or Grantee's
will or under the then applicable laws of descent and distribution.
10.2 AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN. Except as
otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Board or the Committee may be taken that would
otherwise require stockholder approval as a matter of applicable law, regulation
or rule. No amendment, suspension or termination of this Plan shall, without
the consent of the holder of Options, Restricted Stock awards, Deferred Stock
awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments, alter or impair any rights or obligations under any Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted
or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 10.4.
10.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS.
(a) Subject to Section 10.3(d), in the event that the Committee (or
the Board, in the case of Options granted to Independent Directors) determines
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, reclassification,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale,
transfer, exchange or other disposition of all or substantially all of the
assets of the Company (including, but not limited to, a Corporate Transaction),
or exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of the
Company, or other similar corporate transaction or event, in the Committee's
sole discretion (or in the case of Options granted to Independent Directors, the
Board's sole discretion), affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan or with respect to an Option, Restricted Stock award, Performance
Award, Stock Appreciation Right, Dividend Equivalent, Deferred Stock award or
Stock Payment, then the Committee (or the Board, in the case of Options granted
to Independent Directors) shall, in such manner as it may deem equitable, adjust
any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be
granted under the Plan, or which may be granted as Restricted Stock or
Deferred Stock (including, but not limited to, adjustments of the
19
<PAGE>
limitations in Section 2.1 on the maximum number and kind of shares which
may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
the number and kind of shares of outstanding Restricted Stock or Deferred
Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment.
(b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event of any
Corporate Transaction or other transaction or event described in Section 10.3(a)
or any unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion is hereby authorized to take any
one or more of the following actions whenever the Committee (or the Board, in
the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of the agreement or by action taken prior to the occurrence of
such transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option, Performance Award,
Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any
Restricted Stock or Deferred Stock for an amount of cash equal to the
amount that could have been attained upon the exercise of such option,
right or award or realization of the optionee's rights had such option,
right or award been currently exercisable or payable or fully vested or the
replacement of such option, right or award with other rights or property
selected by the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee (or the
Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted
Stock or Deferred Stock or by action taken prior to the occurrence of such
transaction or event that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event, that for a specified period of time prior to such transaction or
event, such option, right or award shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section
4.4 or (ii) the provisions of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted
Stock or Deferred Stock;
20
<PAGE>
(iv) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event, that upon such event, such option, right or award shall be assumed
by the successor or survivor corporation, or a parent or subsidiary
thereof, or shall be substituted for by similar options, rights or awards
covering the stock of the successor or survivor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices;
(v) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may make adjustments in
the number and type of shares of Common Stock (or other securities or
property) subject to outstanding Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the
number and kind of outstanding Restricted Stock or Deferred Stock and/or in
the terms and conditions of (including the grant or exercise price), and
the criteria included in, outstanding options, rights and awards and
options, rights and awards which may be granted in the future; and
(vi) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee may provide either by the
terms of a Restricted Stock award or Deferred Stock award or by action
taken prior to the occurrence of such event that, for a specified period of
time prior to such event, the restrictions imposed under a Restricted Stock
Agreement or a Deferred Stock Agreement upon some or all shares of
Restricted Stock or Deferred Stock may be terminated, and, in the case of
Restricted Stock, some or all shares of such Restricted Stock may cease to
be subject to repurchase under Section 6.6 or forfeiture under Section 6.5
after such event.
None of the foregoing discretionary actions taken under this Section
10.3(b) shall be permitted with respect to Options granted under Section 3.4(d)
to Independent Directors to the extent that such discretion would be
inconsistent with the applicable exemptive conditions of Rule 16b-3. In the
event of a Change in Control or a Corporate Transaction, to the extent that the
Board does not have the ability under Rule 16b-3 to take or to refrain from
taking the discretionary actions set forth in Section 10.3(b)(iii) above, each
Option granted to an Independent Director shall be exercisable as to all shares
covered thereby upon such Change in Control or during the five days immediately
preceding the consummation of such Corporate Transaction and subject to such
consummation, notwithstanding anything to the contrary in Section 4.4 or the
vesting schedule of such Options. In the event of a Corporate Transaction, to
the extent that the Board does not have the ability under Rule 16b-3 to take or
to refrain from taking the discretionary actions set forth in Section
10.3(b)(ii) above, no Option granted to an Independent Director may be exercised
following such Corporate Transaction unless such Option is, in connection with
such Corporate Transaction, either assumed by the successor or survivor
corporation (or parent or subsidiary thereof) or replaced with a comparable
right with respect to shares of the capital stock of the successor or survivor
corporation (or parent or subsidiary thereof).
In the event of any Corporate Transaction, each outstanding Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, Stock Payment,
Restricted Stock, or Deferred Stock award shall, immediately prior to the
effective date of the Corporate Transaction, automatically become fully
exercisable for all of the shares of Common Stock at the time subject to such
rights or fully vested, as applicable, and may be exercised for any or all of
those shares as fully-vested shares of Common
21
<PAGE>
Stock. However, an outstanding right shall not so accelerate if and to the
extent: (i) such right is, in connection with the Corporate Transaction, either
to be assumed by the successor or survivor corporation (or parent thereof) or to
be replaced with a comparable right with respect to shares of the capital stock
of the successor or survivor corporation (or parent thereof) or (ii) the
acceleration of exercisability of such right is subject to other limitations
imposed by the Committee (or the Board, in the case of Options granted to
Independent Directors) at the time of grant. The determination of comparability
of rights under clause (i) above shall be made by the Committee (or the Board,
in the case of Options granted to Independent Directors), and its determination
shall be final, binding and conclusive.
(c) Subject to Section 10.3(d) and 10.8, the Committee (or the Board,
in the case of Options granted to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock agreement or certificate, as it may deem
equitable and in the best interests of the Company.
(d) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 10.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that the option or other award is not to comply with such
exemptive conditions. The number of shares of Common Stock subject to any
option, right or award shall always be rounded to the next whole number.
10.4 APPROVAL OF PLAN BY STOCKHOLDERS. This Plan will be submitted
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted
and Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval; PROVIDED that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such
Restricted Stock or Deferred Stock shall not vest prior to the time when this
Plan is approved by the stockholders, and PROVIDED, FURTHER, that if such
approval has not been obtained at the end of said twelve-month period, all
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments previously granted and all Restricted Stock or Deferred Stock
previously awarded under this Plan shall thereupon be canceled and become null
and void.
10.5 TAX WITHHOLDING. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting or exercise
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of Options granted to Independent Directors) may in its
discretion and in satisfaction of the foregoing requirement allow such Optionee,
Grantee or Restricted Stockholder to elect to return to the Company shares of
Common Stock having a Fair Market Value equal to the sums required to be
withheld.
22
<PAGE>
10.6 LOANS. The Committee may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment granted under this Plan, or the issuance of Restricted Stock or Deferred
Stock awarded under this Plan. The terms and conditions of any such loan shall
be set by the Committee.
10.7 FORFEITURE PROVISIONS. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
10.8 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND
PERFORMANCE-BASED COMPENSATION. Notwithstanding any other provision of this
Plan, this Plan, and any Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred
Stock awarded, to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule. Furthermore, notwithstanding any other provision
of this Plan, any Option or Stock Appreciation Right intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
10.9 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption
of this Plan shall not affect any other compensation or incentive plans in
effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or Consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights
otherwise than under this Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
limited liability company, firm or association.
10.10 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights,
23
<PAGE>
Dividend Equivalents or Stock Payments under this Plan and the issuance and
delivery of shares of Common Stock and the payment of money under this Plan or
under Options, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments granted or Restricted Stock or Deferred Stock
awarded hereunder are subject to compliance with all applicable federal and
state laws, rules and regulations (including but not limited to state and
federal securities law and federal margin requirements) and to such approvals by
any listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith. Any
securities delivered under this Plan shall be subject to such restrictions, and
the person acquiring such securities shall, if requested by the Company, provide
such assurances and representations to the Company as the Company may deem
necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan, Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments granted or awarded
hereunder shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
10.11 TITLES. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of this Plan.
10.12 GOVERNING LAW. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of Guitar Center, Inc. on January 15, 1997 and approved by the
stockholders of the Company by written consent dated as of January 24, 1997.
Executed on this 24th day of January, 1997.
/s/ BRUCE ROSS
-------------------------------
Bruce Ross
Secretary
24
<PAGE>
EXHIBIT 10.27
GUITAR CENTER, INC.
INITIAL PUBLIC OFFERING
STOCKHOLDER CONSENT
This Consent, dated as of January 24, 1997 (this "CONSENT"), is among
Guitar Center, Inc., a Delaware corporation and successor to Guitar Center
Management Company, Inc. (the "COMPANY"), and the stockholders listed on the
signature pages hereto (the "STOCKHOLDERS").
RECITALS
A. The Board of Directors of the Company has determined that it is in the
best interests of the Company to obtain additional financing for the operations
of the Company by effecting an initial public offering ("IPO") of Common Stock,
$.01 par value ("COMMON STOCK"). Certain actions in connection with such IPO
require the consent of certain of the Company's stockholders.
B. In connection with the IPO, the Stockholders have agreed to enter into
this Consent to, among other things: (i) confirm certain understandings related
to the Stockholders pursuant the Stockholders Agreement and the Registration
Rights Agreement, (ii) amend certain provisions of the Company's Certificate of
Incorporation and Bylaws, (iii) agree not to dispose of any equity securities of
the Company for a 180-day period following the consummation of the IPO, and (iv)
approve of a form of indemnification agreement for officers and directors of the
Company.
C. In connection with the IPO, the holders of Junior Preferred Stock have
agreed to enter into this Consent to, among other things: (i) approve an
amendment to the Certificate of Incorporation to provide for the mandatory
conversion of all shares of the Junior Preferred Stock into shares of Common
Stock upon the consummation of the IPO, and (ii) waive certain notice provisions
applicable to the Junior Preferred Stock.
D. In connection with the IPO, the holders of Senior Preferred Stock have
agreed to enter into this Consent to, among other things: (i) approve an
amendment to the Certificate of Incorporation to amend certain notice provisions
applicable to the Senior Preferred Stock, and (ii) provide for certain
procedures to be followed in connection with such redemption.
E. In connection with the IPO, the DLJ Investors have agreed to enter
into this Consent to, among other things, (i) waive certain rights provided to
the DLJ Investors pursuant to the Warrants and the DLJ Registration Rights
Agreement, and (ii) agree not to dispose of any equity securities of the Company
for a 180-day period following the consummation of the IPO.
F. The signature pages hereto set forth the numbers of shares of Common
Stock and Junior Preferred Stock held by each Stockholder and the number of
shares of Senior Preferred Stock held by the DLJ Investors. Such shares of
Common Stock, Junior Preferred Stock and Senior Preferred Stock constitute in
excess of the requisite number of shares of such capital stock required to
consent to the actions provided for herein pursuant to the terms of the
applicable Governing Documents. The signature pages hereto set forth the number
of shares of Common Stock and Junior Preferred Stock issuable upon the exercise
of all outstanding Warrants. None of the share numbers used in this
Agreement give effect to the 2.582-to-1 Common Stock split effectuated on
January 15, 1997.
<PAGE>
AGREEMENT
In consideration of the premises and the mutual covenants herein contained
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of this Consent, the following capitalized
terms shall have the following meanings ascribed to such terms:
"1996 PLAN" shall mean the Amended and Restated 1996 Performance Stock
Option Plan of the Company.
"1997 PLAN" shall mean the 1997 Equity Performance Plan of the Company.
"BYLAWS" shall mean the Bylaws of the Corporation, as in effect on the date
hereof.
"BOARD" shall mean the Board of Directors of the Company.
"CERTIFICATE OF INCORPORATION" shall mean the Certificate of Incorporation
of the Company, as in effect on the date hereof.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"DLJ INVESTORS" shall mean DLJ Merchant Banking Partners, L.P., a Delaware
limited partnership, DLJ International Partners, C.V., a Netherlands Antilles
limited partnership, DLJ Offshore Partners, C.V., a Netherlands Antilles limited
partnership, DLJ Merchant Banking Funding Inc., a Delaware corporation, and DLJ
First ESC L.L.C., a Delaware limited liability company.
"DLJ REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Agreement,
dated as of June 5, 1996, among the Company and the DLJ Investors.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"FUNDS" shall mean Chase Venture Capital Associates, L.P., Wells Fargo
Small Business Investment Company, Inc. and Weston Presidio Capital II, L.P.
"GOVERNING DOCUMENTS" shall mean the Stockholders Agreement, the
Certificate of Incorporation, the Bylaws, the Registration Rights Agreement, the
DLJ Registration Rights Agreement, the 1996 Plan and the 1997 Plan.
"JUNIOR PREFERRED STOCK" shall mean the Junior Preferred Stock, $.01 par
value, of the Company.
"REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights
Agreement, dated as of June 5, 1996, among the Company and the stockholders of
the Company party thereto.
"SCHERR TRUSTS" shall mean the Scherr Living Trust, the Raymond Scherr
Annuity Trust and the Janet Scherr Annuity Trust.
"SENIOR PREFERRED STOCK" shall mean the 14% Senior Preferred Stock, $.01
par value, of the Company.
2
<PAGE>
"STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement, dated as of
June 5, 1996, among the Company and the stockholders of the Company party
thereto.
"WARRANTS" shall mean the Warrants to purchase Common Stock and Junior
Preferred Stock issued to each of the DLJ Investors.
2. STOCKHOLDERS AGREEMENT.
(a) COMPENSATION COMMITTEE REQUIREMENTS. Section 10(e) of the
Stockholders Agreement provides, among other things, that the Compensation
Committee of the Board of Directors shall include two members of the Board
designated by Messrs. Larry Thomas and Marty Albertson. As of the date hereof,
Messrs. Thomas and Albertson have designated themselves as members of the
Compensation Committee. Section 15(c) of the Stockholders Agreement provides
that the Compensation Committee shall administer the Company's stock option
plan. After the effectiveness of the IPO, in order for grants of options and
other awards under the Company's 1997 Equity Performance Plan (the "1997 PLAN")
to comply with certain provisions of the Code (including Section 162(m) thereof)
and certain provisions of the Exchange Act (including Section 16b-3 thereof),
the Compensation Committee of the Board of Directors must consist solely of two
or more "independent directors" appointed by and holding office at the pleasure
of the Board, each of whom is: (i) not an officer or other employee (as defined
in accordance with Section 3401(c) of the Code) of the Company or of a
subsidiary of the Company; (ii) a non-employee director (as defined by Rule
16b-3 promulgated pursuant to the Exchange Act); and (iii) an outside director
(for purposes of Section 162(m) of the Code). Since Messrs. Thomas and
Albertson are officers of the Company, they are not considered "independent
directors."
(b) CONSENT TO MEMBERS OF COMPENSATION COMMITTEE. In accordance with
Section 19(a) of the Stockholders Agreement, the Company and each Stockholder
hereby agree that, notwithstanding the provisions of Section 10(e) and 15(c) of
the Stockholders Agreement, effective upon the consummation of the IPO, the
Compensation Committee shall consist solely of two or more "independent
directors" as described above. Such "independent directors" shall be appointed
by and hold office at the pleasure of the Board.
(c) CERTAIN MEMBERS OF MANAGEMENT CONSIDERED "PERMITTED TRANSFEREES"
FOR PURPOSES OF OPTION GRANTED BY FUNDS. The Funds have granted to an option to
purchase an aggregate of 30,189 Units (as defined therein) pursuant to an
Amended and Restated Memorandum of Understanding and Stock Option Agreement.
Such option grants may be considered a "Transfer" as that term is used in the
Stockholders Agreement. The Company and each Stockholder hereby approve and
consent to the treatment of the transactions contemplated by such option
grants as a "Permitted Transfer" pursuant to Section 5 of the Stockholders
Agreement and agree that such transferees shall be treated as "Management
Stockholders" under the Stockholders Agreement.
(d) ISSUANCE OF UNITS TO CERTAIN EMPLOYEES OF THE COMPANY. Certain
employees of the Company have irrevocably agreed to purchase Units from the
Company (not to exceed 5,000 Units) at a purchase price of $100 per Unit
pursuant to a supplemental employee stock purchase plan. As a condition to
such purchases, such employees will be signing a joinder agreement to the
Stockholders Agreement pursuant to which such employees have all the rights,
and shall observe all the obligations, applicable to a "Management
Stockholder" under the Stockholders Agreement. Notwithstanding Section 4(a)
of the Stockholders Agreement, each Stockholder agrees that if employment by
the Company of any such employee is terminated for any reason, the Company
3
<PAGE>
may, at its option, repurchase the Units from such employee for a cash purchase
price equal to the original purchase price paid by such employees for such
Units, plus 7% per annum, and if the Company does not exercise its option to
repurchase such Units no other Stockholder shall have the right to purchase such
Units pursuant to Section 4(a) of the Stockholders Agreement.
3. STOCK OPTION PLANS.
(a) AMENDMENT TO 1996 PLAN. Each Stockholder hereby approves the
Amendment to the 1996 Plan, in substantially the form attached hereto as EXHIBIT
A, which Amendment deletes a section of the 1996 Plan that permits an
optionholder to exercise vested options by paying the option exercise price for
such vested options through the cancellation of other unexercised vested options
and shall be effective upon the consummation of the IPO.
(b) ADOPTION OF 1997 PLAN. Each Stockholder hereby approves the 1997
Plan, in substantially the form attached hereto as EXHIBIT B.
4. CERTIFICATE OF INCORPORATION.
4.1. JUNIOR PREFERRED STOCK.
(a) CONVERSION PRICE. In order to, among other things, provide
for the mandatory conversion of each share of Junior Preferred Stock into Common
Stock and permit disclosure to prospective investors in the IPO of a specified
conversion price for each share of Junior Preferred Stock and a specified number
of shares of Common Stock outstanding immediately following the consummation of
the IPO and in order to provide such disclosure in the "red herring" prospectus
distributed to prospective investors, each holder of Junior Preferred Stock
signatory hereto hereby approves the Certificate of Amendment to the Certificate
of Incorporation, in the form of EXHIBIT C attached hereto. Such Amendment
enables a conversion price to be specified prior to the consummation of the IPO
by providing, among other things, that each share of Junior Preferred Stock
shall convert into such number of shares of Common Stock as is equal to the
Junior Preferred Liquidation Value (as defined in the Certificate of
Incorporation) per share, without interest, divided by a number equal to the
average of the high and low points of the range of estimated initial public
offering price to the public (excluding underwriting discounts and commissions),
as set forth on the cover page of the initial version of the "red herring"
prospectus filed with the Securities and Exchange Commission in connection with
the IPO.
(b) BOARD OF DIRECTORS APPROVAL. The Company confirms that the
Certificate of Amendment to the Certificate of Incorporation, in substantially
the form of EXHIBIT C, and the related issuance of Common Stock by the Company
has been approved by Board of Directors of the Company.
4.2. SENIOR PREFERRED STOCK.
(a) APPROVAL OF AMENDMENTS. Each holder of Senior Preferred
Stock hereby approves the Certificate of Amendment to the Certificate of
Incorporation, in the form of EXHIBIT C hereto, which Certificate of Amendment,
among other things,
4
<PAGE>
provides for redemption, at the Company's option, of all outstanding shares
of Senior Preferred Stock to be effected without notice and contemporaneous
with the consummation of the IPO. The Company hereby agrees to exercise its
option to redeem all outstanding shares of Senior Preferred Stock
simultaneously with the consummation of the IPO in accordance with the
provisions of the Certificate of Incorporation, as amended in the form of
EXHIBIT C hereto. In addition, if, on or prior to 12:00 p.m., Eastern time,
on the business day immediately preceding the date of redemption of the
Senior Preferred Stock, the DLJ Investors provide the Company the necessary
tax and other related documents customary to permit such redemption payment
(including, without limitation, a Form W-9, as applicable, and written wire
instructions regarding the account(s) to receive such payment), the Company
hereby agrees to pay the amount due on such redemption in same-day funds
simultaneously with the Company's receipt of payment for the shares of Common
Stock sold in the IPO by wire transfer to the account designated in writing
by the DLJ Investors. Notwithstanding the provisions of paragraph (a) of
Section 5 of Subpart A of Article IV of the Certificate of Incorporation, as
amended in the form of EXHIBIT C hereto, if such necessary tax and other
related documents are not provided to the Company in accordance with the
foregoing sentence, the Company shall set aside for payment the amount of
such redemption payment, which amount shall be paid on the business day
following the date such necessary tax and other related documents are
provided to the Company (or the second business day following such date if
such necessary tax and other related documents are provided to the Company
after 12:00 p.m., Eastern time, on such date or are provided on a
non-business day).
(b) REDEMPTION MECHANICS. The Company hereby agrees with each
holder of Senior Preferred Stock to keep such holders and their counsel
reasonably apprised of the status of the Company's IPO and of the intended time
and place of the closing of such IPO with the objective of facilitating the
actual payment of the redemption proceeds to the holders of the Senior Preferred
Stock simultaneously with the closing of the IPO. Without limiting the
generality of the foregoing, the Company will use all reasonable commercial
efforts to facilitate the delivery by the holders of the Senior Preferred Stock
of their underlying certificates and the related documentation (such as, for
example, tax withholding certification and related customary documentation) at
the closing of the IPO.
4.3. OTHER AMENDMENTS TO CERTIFICATE OF INCORPORATION; AMENDMENTS TO
BYLAWS; RESTATED CERTIFICATE OF INCORPORATION. Each Stockholder hereby approves
the Certificate of Amendment to the Certificate of Incorporation, in
substantially the form of EXHIBIT D attached hereto, and the Amended and
Restated Bylaws, in substantially the form of EXHIBIT E attached hereto, both of
which shall be effective simultaneously with the consummation of the IPO. Such
Certificate of Amendment to the Certificate of Incorporation and such Amended
and Restated Bylaws provide, among other things, that (i) holders of at least
66-2/3% of the outstanding shares entitled to vote may amend provisions of the
Certificate of Incorporation and Bylaws, as applicable; and (ii) no action shall
be taken by any stockholders of the Company, except at an annual or special
meeting of stockholders, and that stockholders shall not be permitted to take
any action by written consent. In addition, such Certificate of Amendment
provides for an increase in the number of shares of authorized Common Stock.
Each Stockholder hereby agrees that such increased number of authorized shares
shall be equal to 60 million shares of capital stock (comprised of 55 million
shares of Common Stock and 5 million shares of preferred stock, $.01 par
value). Such increased number of authorized shares shall be set forth in the
Certificate of Amendment to the Certificate of Incorporation to be filed with
the Secretary of State of the State of Delaware and effective simultaneously
the consummation of the IPO. Each Stockholder hereby
5
<PAGE>
approves the Restated Certificate of Incorporation, in the form of EXHIBIT F
attached hereto, which shall be effective immediately following the redemption
of all outstanding shares of Senior Preferred Stock and payment of the amount
due on such redemption as provided in Section 4.2 hereof and the mandatory
conversion of all outstanding shares of Junior Preferred Stock in connection
with the IPO.
4.4. APPROVAL OF FORM OF INDEMNIFICATION AGREEMENTS. Each
Stockholder hereby approves the form of Indemnification Agreement, in
substantially the form of EXHIBIT G attached hereto, to be entered into
between the Company and each of its existing directors and officers and each
person who shall become a director or officer on or after the date hereof.
5. REGISTRATION RIGHTS.
5.1. REGISTRATION RIGHTS AGREEMENT. In connection with the Company's
recapitalization in June 1996, each Stockholder was provided with certain
registration rights pursuant to the Registration Rights Agreement that are
effective in connection with the IPO. Each Stockholder hereby waives any right
to receive further written notice of such IPO in accordance with the terms of
the Registration Rights Agreement. In addition, each Stockholder waives any
right under the Registration Rights Agreement to request registration of any
shares of Common Stock held or receivable by such Stockholder in connection
with the Company's registration of shares of Common Stock to be issued and
sold by it in the IPO. Except as otherwise set forth in Section 8.2 hereof,
the waiver of the right to request registration provided in this Section 5.1
shall be irrevocable. The foregoing waiver shall not have any effect on the
rights of any Stockholder in respect of any offering covered by the
Registration Rights Agreement, other than the IPO.
5.2. DLJ REGISTRATION RIGHTS AGREEMENT. In connection with the
Company's recapitalization in June 1996, each DLJ Investor was provided with
certain registration rights pursuant to the DLJ Registration Rights Agreement
that are effective in connection with the IPO. Each DLJ Investor hereby waives
any right to receive written notice of such IPO in accordance with the terms of
the DLJ Registration Rights Agreement. In addition, in connection with the IPO,
each DLJ Investor waives any right under the DLJ Registration Rights Agreement
to request registration of the Warrant held by such DLJ Investor, any shares of
Senior Preferred Stock held by such DLJ Investor, or any shares of Junior
Preferred Stock or Common Stock issuable upon exercise of the Warrant held by
such DLJ Investor. Except as otherwise set forth in Section 8.2 hereof, the
waiver of the right to request registration provided in this Section 5.2 shall
be irrevocable. The foregoing waiver shall not have any effect on the rights of
any DLJ Investor in respect of any offering covered by the DLJ Registration
Rights Agreement, other than the IPO.
6. WARRANT AGREEMENT.
6.1. COMMON STOCK REDEMPTION. Notwithstanding the provisions of
Section 9(g) of each Warrant or the definition of "Fair Market Value" as set
forth in each Warrant, each DLJ Investor hereby agrees that if, substantially
contemporaneous with the consummation of the IPO, the Company redeems any Common
Stock held by any Stockholder who is an officer or employee of the Company for a
cash redemption price per share of Common Stock that is not in excess of the
initial public offering price per share (excluding net underwriting discounts
and commissions) and that, in the aggregate, does not exceed $25.0 million, then
such redemption shall not be considered to be a purchase in excess Fair Market
Value for purposes of Section 9(g) of each Warrant.
6
<PAGE>
6.2. ISSUANCE OF UNITS TO CERTAIN EMPLOYEES OF THE COMPANY. As
described in Section 2(d) above, certain employees of the Company have
irrevocably agreed to purchase Units from the Company (not to exceed 5,000
Units) at a purchase price of $100 per Unit pursuant to a supplemental
employee stock purchase plan. Notwithstanding the provisions of Section 9(d)
of each Warrant or the definition of "Fair Market Value" as set forth in each
Warrant, each DLJ Investor hereby agrees that the issuance of such Units at a
purchase price of $100 per Unit shall not be considered a below market
issuance of Common Stock (or Junior Preferred Stock) for purposes of Section
9(d) of each Warrant.
6.3. ISSUANCE OF OPTIONS TO CERTAIN OFFICERS OF THE COMPANY. The
employment agreements between the Company and each of Mr. Bruce Ross and Mr.
Barry Soosman, as amended, provide for the grant of 8,669 Units to each of
Messrs. Ross and Soosman at an exercise price of $100 per Unit. An amendment
to the 1996 Plan is required to permit the grant of such options to Messrs.
Ross and Sossman in accordance with the terms of their employment agreements,
as amended. Notwithstanding the provisions of Section 9(d) of each Warrant
or the definition of "Fair Market Value" as set forth in each Warrant, each
DLJ Investor hereby agrees that neither the issuance of such options nor the
issuance of any Units, Common Stock or Junior Preferred Stock upon the
exercise of such options shall be considered a below market issuance of
Common Stock (or Junior Preferred Stock) for purposes of Section 9(d) of each
Warrant.
6.4. JUNIOR PREFERRED STOCK CONVERSION. Each DLJ Investor hereby
agrees that each share of Junior Preferred Stock being converted to Common Stock
pursuant to the provisions of Section 4.1 shall convert in accordance with such
provisions and that, following such conversion, the number of shares of Common
Stock issuable upon the exercise of each Warrant shall be adjusted to give
effect to such conversion as provided in Section 9(b)(ii) of the Warrant. The
Company agrees to reserve a sufficient number of shares of Common Stock for
issuance upon exercise of all Warrants, such reservation to be effective
immediately upon conversion of the Junior Preferred Stock.
7. LOCK-UP AGREEMENT.
7.1. Each of the Stockholders and the DLJ Investors hereby confirms
its agreement pursuant to Section 5 of the Registration Rights Agreement and
Section 2.4(d) of the DLJ Registration Rights Agreement, as the case may be, to
enter into a 180-day lock-up agreement with the underwriters of the IPO which
lock-up agreement shall be on customary terms and provide, among other things,
that such Stockholder shall not (without the prior written consent of the lead
underwriter) dispose of any equity securities of the Company for a period of 180
days after the consummation of the IPO. The lock-up agreements executed by the
Funds and the DLJ Investors shall provide that if the terms and conditions of
any lock-up agreement applicable to any Fund or any DLJ Investor are amended,
altered or waived, then the terms of the lock-up agreement applicable to all
other Funds and all other DLJ Investors shall be deemed to be so amended,
altered or waived.
8. MISCELLANEOUS.
8.1. COOPERATION. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective at the
times contemplated herein the agreements provided for herein and the actions
contemplated by this Consent.
8.2. TERMINATION. The consent of any signatory to any of the
provisions in the foregoing Sections 1 through 8 may be terminated by such
person, only if the IPO has not been consummated on or prior to June 30, 1997
and if written notice of such termination is provided to each party hereto in
accordance with the provisions of Section 19(g) of the Stockholders
Agreement. Notwithstanding the foregoing of this Section 8.2, the provisions
of Sections 6.2 and 6.3 shall only terminate upon the written agreement of the
Company and the DLJ Investors.
8.3. WAIVER; AMENDMENT. Subject to applicable law, at any time prior
to the consummation of the IPO, any party hereto may waive compliance as to such
party with any of the agreements of any other party or with any conditions to
its own obligations. Any agreement on the part of a party to any such waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer. No party hereto shall be bound by any
waiver which it has not signed. No amendment of the terms hereof shall be
effective as against the DLJ Investors unless such amendment is signed by the
DLJ Investors.
8.4. SPECIFIC PERFORMANCE. The Stockholders and the DLJ Investors
recognize that the obligations imposed on them in this Agreement are special,
unique and of extraordinary character, and that in the event of a breach by any
of them of any of the provisions hereof, damages will be an insufficient remedy;
consequently, it is agreed that the parties hereto may have specific performance
and injunctive relief (in addition to damages) for the enforcement hereof,
without proving damages. Notwithstanding the foregoing or any other provisions
of this Consent, none of the Stockholders nor the DLJ Investors shall have any
right to obtain or seek an injunction restraining or otherwise
7
<PAGE>
delaying the IPO as the result of any controversy that might arise with respect
to the interpretation or implementation of this Consent.
8.5. INTERPRETATION. All defined terms herein include the plural as
well as the singular. The words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Consent as a whole and not to any
particular Section or other subdivision. This Consent shall not be construed
for or against any party hereto by reason of the authorship or alleged
authorship of any provisions hereof or by reason of the status of the respective
parties hereto. The headings contained in this Consent are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Consent.
8.6. MISCELLANEOUS. This Consent (i) constitutes the entire agreement
and supersedes all other prior agreements and undertakings, both written and
oral, among the parties hereto, or any of them, with respect to the subject
matter hereof; (ii) is not intended to confer upon any other person any rights
or remedies hereunder; (iii) shall not be assigned, except by Company to a
directly or indirectly wholly owned subsidiary of the Company which, in a
written instrument shall agree to assume all of the Company's obligations
hereunder and be bound by all of the terms and conditions of this Consent;
PROVIDED, HOWEVER, that no such assignment shall relieve the assigning party of
the obligations hereunder; and (iv) shall be governed in all respects, including
validity, interpretation and effect, by the internal laws of the State of
Delaware, without giving effect to the principles of conflict of laws thereof.
This Consent may be executed in one or more counterparts which together shall
constitute a single agreement.
* * * * *
(SIGNATURE PAGES TO FOLLOW)
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Consent to be
executed as of the date first written above.
GUITAR CENTER, INC.
By /s/LARRY THOMAS
-----------------------
President
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By Chase Capital Partners,
Its General Partner
By /s/DAVID FERGUSON
-----------------------
General Partner
499,800 shares of Common Stock
494,802 shares of Junior Preferred Stock
WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.
By /s/STEVEN BURGE
-----------------------
Title:
100,000 shares of Common Stock
99,000 shares of Junior Preferred Stock
WESTON PRESIDIO CAPITAL II, L.P.
By Weston Presidio Capital Management II, L.P.,
Its General Partner
By /s/MICHAEL LAZARUS
-----------------------
75,000 shares of Common Stock
74,250 shares of Junior Preferred Stock
S-1
<PAGE>
STOCKHOLDER CONSENT
SCHERR LIVING TRUST
By /s/RAY SCHERR
-----------------------
Ray Scherr, Trustee
By /s/JANET SCHERR
-----------------------
Janet Scherr, Trustee
125,250 shares of Common Stock
123,998 shares of Junior Preferred Stock
RAYMOND SCHERR ANNUITY TRUST
By /s/DAVID SCHERR
-----------------------
David Scherr, Trustee
30,000 shares of Common Stock
29,700 shares of Preferred Stock
JANET SCHERR ANNUITY TRUST
By /s/DAVID SCHERR
-----------------------
David Scherr, Trustee
30,000 shares of Common Stock
29,700 shares of Preferred Stock
/s/DAVID SCHERR
- -----------------------
David Scherr
1,000 shares of Common Stock
990 shares of Preferred Stock
BARRY F. SOOSMAN AND JODY L. SOOSMAN REVOCABLE TRUST
By /s/BARRY SOOSMAN
-----------------------
Barry Soosman, Trustee
5,000 shares of Common Stock
4,950 shares of Junior Preferred Stock
S-2
<PAGE>
STOCKHOLDER CONSENT
/s/LARRY THOMAS
- -----------------------
Larry Thomas
191,083.88 shares of Common Stock
189,171.92 shares of Junior Preferred Stock
/s/MARTY ALBERTSON
- -----------------------
Marty Albertson
82,758 shares of Common Stock
122,649.41 shares of Junior Preferred Stock
GUITAR CENTER INVESTORS FUND, LLC
By /s/THOMAS R. HEIDENTHAL
-----------------------
Thomas R. Heidenthal, Administrative Member
25,200 shares of Common Stock
24,948 shares of Junior Preferred Stock
/s/RICH PIDANICK
- -----------------------
Rich Pidanick
16,890 shares of Common Stock
16,721.45 shares of Junior Preferred Stock
/s/DON KELSEY
- -----------------------
Don Kelsey
6,142 shares of Common Stock
6,080.53 shares of Junior Preferred Stock
/s/GEORGE LAMPOS
- -----------------------
George Lampos
9,213 shares of Common Stock
9,120.79 shares of Junior Preferred Stock
S-3
<PAGE>
STOCKHOLDER CONSENT
DAVE DIMARTINO REVOCABLE LIVING TRUST
By /s/DAVE DIMARTINO
-----------------------
Dave DiMartino, Trustee
95,542 shares of Common Stock
94,586.27 shares of Junior Preferred Stock
/s/BILL MCGARRY
- -----------------------
Bill McGarry
24,568 shares of Common Stock
24,322.11 shares of Junior Preferred Stock
- -----------------------
Rod Barger
16,890 shares of Common Stock
16,721.45 shares of Junior Preferred Stock
/s/ANDY HEYNEMAN
- -----------------------
Andy Heyneman
12,284 shares of Common Stock
12,161.06 shares of Junior Preferred Stock
S-4
<PAGE>
STOCKHOLDER CONSENT
DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ Merchant Banking, Inc.
Its Managing General Partner
By /s/IVY DODES
-----------------------
Name: Ivy Dodes
Title: Vice President
371,539 shares of Senior Preferred Stock
Warrant to purchase 34,221 shares of Common Stock and 33,878.45 shares of
Junior Preferred Stock
DLJ INTERNATIONAL PARTNERS, C.V.
By DLJ Merchant Banking, Inc.
Its Advisory General Partner
By /s/IVY DODES
-----------------------
Name: Ivy Dodes
Title: Vice President
179,691 shares of Senior Preferred Stock
Warrant to purchase 16,550 shares of Common Stock and 16,385.01 shares of
Junior Preferred Stock
DLJ OFFSHORE PARTNERS, C.V.
By DLJ Merchant Banking, Inc.
Its Advisory General Partner
By /s/IVY DODES
-----------------------
Name: Ivy Dodes
Title: Vice President
9,551 shares of Senior Preferred Stock
Warrant to purchase 880 shares of Common Stock and 870.93 shares of
Junior Preferred Stock
S-5
<PAGE>
STOCKHOLDER CONSENT
DLJ MERCHANT BANKING FUNDING INC.
By /s/IVY DODES
-----------------------
Name: Ivy Dodes
Title: Vice President
143,532 shares of Senior Preferred Stock
Warrant to purchase 13,220 shares of Common Stock and 13,087.79 shares of
Junior Preferred Stock
DLJ FIRST ESC, L.L.C.
By /s/IVY DODES
-----------------------
Name: Ivy Dodes
Title: Vice President
95,687 shares of Senior Preferred Stock
Warrant to purchase 8,813 shares of Common Stock and 8,725.19 shares of
Junior Preferred Stock
S-6
<PAGE>
STOCKHOLDER CONSENT
THE MARTIN ALBERTSON ANNUITY TRUST
By /s/MARTY ALBERTSON
-----------------------
Marty Albertson, Trustee
20,565 shares of Common Stock
THE LISA ROSE ANNUITY TRUST
By /s/MARTY ALBERTSON
-----------------------
Marty Albertson, Trustee
20,565 shares of Common Stock
S-7
<PAGE>
EXHIBIT 10.28
MODIFICATION TO THE
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
OF
GUITAR CENTER, INC.
(formerly Guitar Center Management Company, Inc.)
A. The Board of Directors and stockholders of Guitar Center, Inc.
(formerly Guitar Center Management Company, Inc.)(the "COMPANY") have previously
adopted and approved the Amended and Restated 1996 Performance Stock Option Plan
(the "PLAN").
B. By its terms, 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 (all capitalized but
undefined terms used herein having the meanings provided for in the Plan).
C. The Committee has determined that the Plan may be deemed to be
inconsistent with certain commitments made by the Company to issue options under
the Plan.
D. The Committee, with the prior approval of the Board and the prior
written consent of the holders of the Requisite Stockholder Shares, desires to
correct such inconsistencies.
Based on the foregoing, the following modifications and amendments to the
Plan are hereby adopted as of January 30, 1997 to take effect as of June 3,
1996:
1. CALCULATION OF CORPORATE VALUE TARGET. At any time that a Corporate
Value Target shall be determined, such amount shall be increased (or decreased)
by the positive (or negative) amount equal to the Cumulative Adjustment Amount
as of such date.
2. LIMITATION TO THE APPLICATION OF SECTIONS 5(c) AND 7(g). The
following modifications to the Plan are approved in order to permit the Company
to satisfy its obligations under the terms and conditions of the respective
Employment Agreements, dated as of June 5, 1996, as amended, between the Company
and each of Messrs. Bruce Ross and Barry Soosman (the "AGREEMENTS").
(a) The proviso to Section 5(c) shall not apply to options to acquire
up to 17,338 Units granted to Bruce Ross and Barry Soosman pursuant to the
terms and conditions of Section 2 of Exhibit A to the Agreements, except to
the extent expressly provided for therein.
<PAGE>
(b) Section 7(g) shall be modified by adding the following exception
as an additional sentence: "Notwithstanding the foregoing, options to
acquire up to an additional 17,338 Units shall be granted to Messrs. Bruce
Ross and Barry Soosman under the Plan in satisfaction of the obligations
contained in their respective Employment Agreements, dated as of June 5,
1996, as amended, it being understood that, upon the occurrence of the
Company's initial public offering, the number of Units included in the
successor stock option plan referred to above shall be reduced, on a Unit-
for-Unit basis, by such amount."
(c) For purposes of Section 5(f), the 17,338 Units covered by Section
2 of Exhibit A to the Agreement shall constitute Units Available for Award.
(d) The Committee is authorized to approve any necessary conforming
changes in the form of non-qualified stock option agreement utilized under
the Plan
3. CONDITION TO EFFECTIVENESS. This modification to the Plan shall be
effective upon approval by the Committee, with the prior approval of the Board
and the prior written consent of the holders of the Requisite Stockholder
Shares. The Corporate Secretary of the Company shall maintain a copy of such
approvals in the records of the Company.
* * * * * * * *
2
<PAGE>
EXHIBIT 16.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the statements under the heading "Experts" contained in the
Registration Statement on Form S-1 dated January 31, 1997, of Guitar Center,
Inc. and are in agreement with the statements contained in the second paragraph
therein.
ERNST & YOUNG LLP
January 30, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 1996, except for Note 10, as to which the
date is June 6, 1996, in the Registration Statement (Form S-1 No. 33- ) and
related Prospectus of Guitar Center, Inc. dated January 31, 1997.
ERNST & YOUNG LLP
Los Angeles, California
January 30, 1997
