<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997
REGISTRATION NO. 333-20931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GUITAR CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5733 95-4600862
(State or other jurisdiction (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. / /
------------------------
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>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States of up to an
aggregate of 6,210,000 shares of Common Stock (the "U.S. Offering"). The second
prospectus relates to a concurrent international offering outside of the United
States of up to an aggregate of 1,552,500 shares of Common Stock (the
"International Offering"). The prospectuses for the U.S. Offering and
International Offering will be identical with the exception of the following
alternate pages for the International Offering: a front cover page, the
Underwriting section and a back cover page. Such alternate pages appear in this
Registration Statement immediately following the complete prospectus for the
U.S. Offering.
<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 MARCH 10, 1997
6,750,000 SHARES
[LOGO]
GUITAR CENTER, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
Of the 6,750,000 shares of Common Stock offered, 5,400,000 shares are being
offered hereby in the United States and 1,350,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting."
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."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "GTRC."
------------------------
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. See
"Underwriting."
(2) Before deducting estimated expenses of $1,100,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 810,000 shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. Additionally, the Company has granted the
International Underwriters a similar option with respect to an additional
202,500 shares as part of the concurrent international offering. If such
options were to be exercised in full, the total initial public offering
price, underwriting discount and proceeds to the Company would be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares offered hereby are offered severally by the U.S. 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
March , 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 March , 1997.
<PAGE>
Photographs depicting the interior of a Guitar Center, Inc. retail store
with the following captions:
a. "Each store features a display of 300 to 500 guitars on its 'guitar
wall'."
b. "Customers are encouraged play instruments."
c. "Flagship Hollywood store and home of Rock Walk."
d. "Each department offers an extensive selection of brand name
merchandise."
e. "Knowledgeable salespeople demonstrate the latest technology."
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."
A map of the United States depicting all Guitar Center Store locations at
January 31, 1997 appears in the inside back cover.
STORE LOCATIONS
<TABLE>
<S> <C> <C> <C>
SOUTH NORTHERN TEXAS MICHIGAN
CALIFORNIA CALIFORNIA Dallas Detroit
Hollywood San Francisco Arlington Southfield
San Diego San Jose South Houston MINNESOTA
Fountain Valley El Cerrito North Houston Twin Cities
Sherman Oaks Pleasant Hill MASSACHUSETTS FLORIDA
Covina ILLINOIS Boston North Miami
Lawndale South Chicago Danvers South Miami
San Bernardino North Chicago OHIO
Brea Central Chicago Cleveland
San Marcos Villa Park
</TABLE>
*Existing Store Locations as of January 31, 1997.
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 IN THE CONCURRENT UNITED STATES AND INTERNATIONAL OFFERINGS
(TOGETHER, 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 1992 through fiscal 1996, the Company's net sales and
operating income before deferred compensation expense grew at compound annual
rates of 25.6% and 43.0%, respectively. This growth was principally the result
of strong and consistent comparable store sales growth, averaging 14.8% per year
over such five-year period, and the opening of 13 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 had positive store-level operating income 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 21 stores operated by the Company for the full year
ended December 31, 1996:
<TABLE>
<S> <C>
Average 1996 net sales per square foot......................... $ 707
Average 1996 net sales per store............................... 9,148,000
Average 1996 store-level operating income (1).................. 1,402,000
Average 1996 store-level operating income margin (1)........... 15.3%
</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 store-level 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 $4.0 billion of this market, representing a five-year compound
annual growth rate of 8.6%. 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, 1994, 1995 and 1996, the Company
recorded net income (loss) of $8.8 million, $10.9 million and ($72.4) million,
respectively. The results for 1996 reflect $11.6 million for transaction costs
and financing fees incurred in connection with the Recapitalization (as defined
herein) and non-recurring deferred compensation expense of $71.8 million,
substantially all of which related to the Recapitalization.
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
through each 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. In addition, the
Company's special grand opening activities in new markets are designed to
generate consumer awareness for each new store. 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 18.8% 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 by the Company:
United States Offering............... 5,400,000 shares
International Offering............... 1,350,000 shares
Total.............................. 6,750,000 shares
Common Stock to be outstanding after
the Offering (1)..................... 18,316,579 shares
Proposed Nasdaq National Market
Symbol............................... GTRC
Use of proceeds........................ The net proceeds of this Offering are currently
intended to be used to: (i) redeem (or repurchase
through open market purchases or otherwise) 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
1,317,000 shares of Common Stock held by certain
executive officers and other employees of the
Company (approximately $18.4 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 and possible
acquisitions. See "Use of Proceeds."
</TABLE>
- ------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised. 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 year ended October 31, 1992, the two
months ended December 31, 1992 and the fiscal years ended December 31, 1993,
1994, 1995 and 1996 has been derived from the audited financial statements of
the Company. 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
ENDED TWO MONTHS FISCAL YEAR
OCTOBER ENDED ENDED
31, DECEMBER 31, DECEMBER 31,
------- ------------ -------------------------------------
1992 1992 1993 1994 1995 1996
------- ------------ ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND
STORE AND INVENTORY OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $85,592 $18,726 $97,305 $129,039 $170,671 $213,294
Gross profit.................................... 25,472 5,393 28,778 36,764 47,256 60,072
Selling, general and administrative expenses.... 20,998 3,547 21,889 26,143 32,664 41,345
Deferred compensation expense (1)............... -- 373 1,390 1,259 3,087 71,760
Operating income (loss)......................... 4,474 1,473 5,499 9,362 11,505 (53,033)
Non recurring transaction expense............... -- -- -- -- -- (6,942)
Net income (loss)............................... 3,987 1,385 5,105 8,829 10,857 (72,409)
PRO FORMA FOR INCOME TAX PROVISION: (2)
Historical income (loss) before provision for
income taxes................................... $4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $(72,270)
Pro forma provision for income taxes............ 1,753 773 2,856 4,478 6,144 --
------- ------------ ------- -------- -------- --------
Pro forma net income (loss)..................... $2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $(72,270)
------- ------------ ------- -------- -------- --------
------- ------------ ------- -------- -------- --------
Pro forma net income (loss) per common share.... $ (3.72)
--------
--------
Weighted average shares outstanding (3)......... 19,408
--------
--------
OPERATING DATA:
Net sales per gross square foot (4)............. $ 429 -- $ 478 $ 546 $ 661 $ 707
Stores open at end of period.................... 15 15 17 20 21 28
Net sales growth................................ 14.3% 18.7% 13.7% 32.6% 32.3% 25.0%
Increase in comparable store sales (5).......... 11.5% 18.7% 11.4% 17.3% 23.4% 10.2%
Inventory turns................................. 3.3x 3.4x 3.1x 3.4x 3.7x 3.4x
Capital expenditures............................ $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 6,133
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1996
------------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C>
PRO FORMA DATA: (6)
Net sales................................................................................ $ 213,294
Operating income......................................................................... 19,159
Net income............................................................................... 6,456
Net income per share..................................................................... $ 0.33
Weighted average shares outstanding (3).................................................. 19,408
</TABLE>
FOOTNOTES APPEAR ON FOLLOWING PAGE.
7
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------
HISTORICAL AS ADJUSTED (7)
----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 47 $ 11,750
Net working capital...................................... 27,436 42,675
Total assets............................................. 74,849 85,429
Total long term and revolving debt (including current
maturities)............................................. 103,536 66,667
Senior preferred stock................................... 15,186 --
Junior preferred stock................................... 138,610 --
Warrants................................................. 6,500 6,500
Stockholders' equity (deficit)........................... (68,815) (6,180)
</TABLE>
- ------------------------------
(1) For 1996, the Company recorded a non-recurring deferred compensation
expense of $71.8 million, of which $69.9 million related to the
cancellation and exchange of management stock options pursuant to the
Recapitalization and $1.9 million related to a non-cash charge resulting
from the grant of stock options to management by the Investors. The Company
has not, and will not, incur any obligation in connection with such grant
of options by the Investors. See "The Recapitalization and Related
Transactions" and "Certain Transactions -- Options Granted by the Investors
to Certain Members of Management."
(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 other 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 (as defined
herein), this Offering and the application of the estimated net proceeds
therefrom 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, 1996.
(7) The pro forma balance sheet data give effect to the Junior Preferred Stock
Conversion, this Offering and the application of the estimated net proceeds
therefrom 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, is currently evaluating several such opportunities and is
in negotiations regarding one possible acquisition. Any such 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 to effect any
such acquisition. 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 acquisition or that any current negotiations
will result in an acquisition. 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
9
<PAGE>
relationships with brand name vendors could have a material adverse effect on
the Company's business. The Company believes it currently has adequate supply
sources; however, there can be no assurance, especially given the Company's
expansion plans, that the Company will be able to acquire sufficient quantities
and an appropriate mix of such merchandise at 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 (net sales for comparable periods,
excluding net sales attributable to stores not open for 14 months) 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%, 7.6% and 10.1% in the
first, second, third and fourth 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."
10
<PAGE>
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
December 31, 1996, the Company would have had approximately $66.7 million of
outstanding long-term indebtedness, its ratio of total long-term debt to total
capitalization would have been approximately 110% and it would have had a
stockholders' deficit of approximately $6.2 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 year ended December 31, 1996, the Company had a net loss of $72.4
million. The results for such period reflect non-recurring deferred compensation
expense of $71.8 million and $11.6 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 --
Fiscal 1996 Compared to Fiscal 1995."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
As of December 31, 1996, 13 of the Company's stores were located in
California and generated 55.9% and 52.8% of the Company's net sales for fiscal
1995 and 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
11
<PAGE>
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 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
$18.4 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 (I.E.,
approximately 1,317,000 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 $6.7 million and
$4.5 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 18.8% and 32.3%,
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 51.1% 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,
12
<PAGE>
the Company will have an aggregate of 18,316,579 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 11,566,579 shares of Common Stock (the "Restricted Shares")
are subject to restrictions under the Securities Act. Holders of such Restricted
Shares have registration rights with respect to all of such shares, and
11,300,327 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 795,970 shares of Common Stock issuable upon the
exercise of options granted to 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. Transaction costs and financing fees incurred by
the Company to effect the Recapitalization and the Bridge Facility aggregated
approximately $11.6 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
Company's executive officers and key managers, the Investors and the Scherr
Trust (and affiliated family trusts) will beneficially own approximately 18.8%,
32.3% and 9.3%, 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
14
<PAGE>
Act ("Rule 144A") and were later exchanged for a new series of 11% Senior Notes
due 2006 (the "Senior 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 or repurchased
(through open market purchases or otherwise), 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 $93.3 million ($107.5 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 (or repurchase through open market purchases or otherwise) 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 $18.4 million will be used to redeem
in the Management Tax Redemption approximately 1,317,000 shares of Common Stock
held by certain executive officers and other employees of the Company; and (iv)
the balance of approximately $14.1 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, and possible acquisitions. The Company regularly considers and
evaluates potential acquisition candidates in new and existing market areas, is
currently evaluating several such opportunities and is in negotiations regarding
one possible acquisition. As of the date of this Prospectus, the Company has no
existing agreements or commitments to effect any such acquisition. 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 acquisition
or that any current negotiations will result in an acquisition. 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 December 31, 1996, the net tangible book deficit of the Company, as
adjusted to give effect to the Junior Preferred Stock Conversion, was $(72.6)
million, or $(5.64) 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 December 31, 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
December 31, 1996 would have been approximately $(8.9) million, or $(0.48) per
share. This amount represents an immediate reduction in net tangible book
deficit of $5.16 per share to current stockholders and an immediate dilution of
$15.48 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 December 31, 1996, as
adjusted........................................................ $ (5.64)
Increase in net tangible book deficit per share attributable to
sale of Common Stock............................................ 5.16
---------
PRO FORMA net tangible book deficit per share after giving effect
to this Offering (2).............................................. (0.48)
---------
Dilution in net tangible book value per share to new investors
(3)............................................................... $ 15.48
---------
---------
</TABLE>
The following table summarizes, on a PRO FORMA basis as of December 31,
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.............. 11,566,579(4) 63.1% $ 125,960,045 55.4% $ 10.89
New stockholders................... 6,750,000 36.9 101,250,000 44.6 15.00
------------- ----- ---------------- ----- -----------
Total.......................... 18,316,579(4) 100.0% $ 227,210,045 100.0% $ 12.40
------------- ----- ---------------- -----
------------- ----- ---------------- -----
</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 exercise of the Underwriters' over-allotment
option. Also 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) or the issuance of 1,509,752 shares issuable upon the
exercise of employee stock options (at an exercise price per share of
$10.89), which were outstanding as of December 31, 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) Excludes 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 December 31, 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, 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 DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)
Senior notes........................................................................ $ 100,000 $ 66,667
1996 credit facility................................................................ 3,536 --
------------ ------------
Total long-term debt.............................................................. 103,536 66,667
------------ ------------
Senior preferred stock................................................................ 15,186 --
Stockholders' equity (deficit)
Junior preferred stock (1).......................................................... 138,610 --
Warrants............................................................................ 6,500 6,500
Common stock 55,000,000 shares, $.01 par value, authorized; 3,622,804 shares
outstanding, actual; 18,316,579 shares outstanding, as
adjusted (1)....................................................................... 36 183
Additional paid-in capital.......................................................... (6,966) 206,396
Retained earnings (deficit)......................................................... (206,995) (219,259)
------------ ------------
Total stockholders' equity (deficit).............................................. (68,815) (6,180)
------------ ------------
Total capitalization............................................................ $ 49,907 $ 60,487
------------ ------------
------------ ------------
</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 year ended October 31, 1992, the
two months ended December 31, 1992 and the fiscal years ended December 31, 1993,
1994, 1995 and 1996 has been derived from the audited financial statements of
the Company. 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>
TWO
FISCAL YEAR MONTHS
ENDED ENDED FISCAL YEAR ENDED DECEMBER 31,
OCTOBER 31, DECEMBER 31, ------------------------------------------
1992 1992 1993 1994 1995 1996
--------------- --------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE AND INVENTORY OPERATING DATA)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................ $ 85,592 $ 18,726 $ 97,305 $ 129,039 $ 170,671 $ 213,294
Cost of goods sold (1)............................... 60,120 13,333 68,527 92,275 123,415 153,222
--------------- --------------- --------- --------- --------- ---------
Gross profit....................................... $ 25,472 $ 5,393 $ 28,778 $ 36,764 $ 47,256 $ 60,072
Selling, general and administrative expenses......... 20,998 3,547 21,889 26,143 32,664 41,345
Deferred compensation expense (2).................... -- 373 1,390 1,259 3,087 71,760
--------------- --------------- --------- --------- --------- ---------
Operating income (loss).............................. $ 4,474 $ 1,473 $ 5,499 $ 9,362 $ 11,505 $ (53,033)
--------------- --------------- --------- --------- --------- ---------
Other (expense) income
Interest expense, net.............................. (457) (49) (271) (252) (368) (12,169)
Transaction expense and other expenses............. 59 -- 23 45 65 (7,068)
--------------- --------------- --------- --------- --------- ---------
$ (398) $ (49) $ (248) $ (207) $ (303) $ (19,237)
--------------- --------------- --------- --------- --------- ---------
Income (loss) before provision for income taxes...... 4,076 1,424 5,251 9,155 11,202 (72,270)
Provision for income taxes........................... 89 39 146 326 345 139
--------------- --------------- --------- --------- --------- ---------
Net income (loss).................................... $ 3,987 $ 1,385 $ 5,105 $ 8,829 $ 10,857 $ (72,409)
--------------- --------------- --------- --------- --------- ---------
--------------- --------------- --------- --------- --------- ---------
PRO FORMA FOR INCOME TAX PROVISION (3):
Historical income (loss) before provision for income
taxes............................................... $ 4,076 $ 1,424 $ 5,251 $ 9,155 $ 11,202 $ (72,270)
Pro forma provision for income taxes................. 1,753 773 2,856 4,478 6,144 --
--------------- --------------- --------- --------- --------- ---------
Pro forma net income (loss).......................... $ 2,323 $ 651 $ 2,395 $ 4,677 $ 5,058 $ (72,270)
--------------- --------------- --------- --------- --------- ---------
--------------- --------------- --------- --------- --------- ---------
Pro forma net income (loss) per common share......... $ (3.72)
---------
---------
Weighted average common shares outstanding (4)....... 19,408
---------
---------
OPERATING DATA:
Net sales per gross square foot (5).................. $ 429 -- $ 478 $ 546 $ 661 $ 707
Net sales growth..................................... 14.3% 18.7% 13.7% 32.6% 32.3% 25.0%
Increase in comparable store sales (6)............... 11.5% 18.7% 11.4% 17.3% 23.4% 10.2%
Stores open at end of period......................... 15 15 17 20 21 28
Inventory turns...................................... 3.3x 3.4x 3.1x 3.4x 3.7x 3.4x
Capital expenditures................................. $ 445 $ 966 $ 2,618 $ 3,277 $ 3,432 $ 6,133
BALANCE SHEET DATA:
Net working capital.................................. $ 11,923 $ 12,679 $ 10,243 $ 11,468 $ 6,002 $ 27,436
Property, plant and equipment, net................... 7,888 8,677 10,066 11,642 13,276 14,966
Total assets......................................... 32,082 34,978 37,602 46,900 49,618 74,849
Total long term and revolving debt (including current
debt)............................................... 6,103 5,001 3,400 825 -- 103,536
Senior preferred stock............................... -- -- -- -- -- 15,186
Junior preferred stock............................... -- -- -- -- -- 138,610
Stockholders' equity (deficit)....................... 16,612 17,997 18,484 23,424 19,763 (68,815)
</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 fiscal year 1996, the Company recorded a non-recurring deferred
compensation expense of $71.8 million, of which $69.9 million related to the
cancellation and exchange of management stock options pursuant to the
Recapitalization and $1.9 million related to a non-cash charge resulting
from the grant of stock options to management by the Investors. The Company
has not, and will not, incur any obligation in connection with such grant of
options by the Investors. See "The Recapitalization and Related
Transactions" and "Certain Transactions -- Options Granted by the Investors
to Certain Members of Management."
(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 other 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, 1996 reflects adjustments as if the
Recapitalization, the Junior Preferred Stock Conversion, the sale of the Senior
Notes, this Offering and the application of a portion of the estimated net
proceeds therefrom 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 and to repay amounts outstanding under the 1996 Credit Facility had
been consummated and were effective as of January 1, 1996. The unaudited PRO
FORMA condensed balance sheet as of December 31, 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, 1996
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
ADJUSTMENTS PRO FORMA RECAPITALIZATION,
RELATED TO THE FOR THE ADJUSTMENTS THE SALE OF THE
RECAPITALIZATION RECAPITALIZATION RELATED SENIOR NOTES
AND THE SALE OF AND THE SALE OF TO THIS AND THIS
HISTORICAL THE SENIOR NOTES THE SENIOR NOTES OFFERING OFFERING
---------- ---------------- ---------------- ------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 213,294 $ -- $ 213,294 $ -- $ 213,294
Cost of sales, buying, and occupancy....... 153,222 -- 153,222 -- 153,222
---------- -------- ---------------- ------------ ----------------
Gross profit............................... $ 60,072 $ -- $ 60,072 $ -- $ 60,072
Operating expenses......................... 41,345 (432)(1) 40,913 -- 40,913
Deferred compensation expense.............. 71,760 (71,760)(2) -- -- --
---------- -------- ---------------- ------------ ----------------
Operating income........................... $ (53,033) $ 72,192 $ 19,159 $ -- $ 19,159
Other (expenses) income:
Interest expense......................... (12,177) 671(3) (11,506) 3,792(4) (7,714)
Transaction expenses..................... (6,942) 6,942(5) -- -- --
Interest income.......................... 8 -- 8 -- 8
Other.................................... (126) -- (126) -- (126)
---------- -------- ---------------- ------------ ----------------
$ (19,237) $ 7,613 $ (11,624) $ 3,792 $ (7,832)
---------- -------- ---------------- ------------ ----------------
Income (loss) before provision for income
taxes..................................... (72,270) 79,805 7,535 3,792 11,327
Provision for income taxes................. 139 3,101(6) 3,240 1,631(6) 4,871
---------- -------- ---------------- ------------ ----------------
Net income (loss).......................... $ (72,409) $ 76,704 $ 4,295 $ 2,161 $ 6,456
Preferred stock dividends.................. (7,951) (6,083)(7) (14,034) 14,034(8) --
---------- -------- ---------------- ------------ ----------------
Net income (loss) available for common
stockholders.............................. $ (80,360) $ 70,621 $ (9,739) $ 16,195 $ 6,456
---------- -------- ---------------- ------------ ----------------
---------- -------- ---------------- ------------ ----------------
PRO FORMA
Historical income (loss) before provision
for income taxes.......................... $ (80,221)
Pro forma provision for income taxes (9)... --
----------
Pro forma net income (loss)................ $ (80,221)
----------
----------
Pro forma net income (loss) per common
share (10)................................ $ (4.13) $ 0.33
---------- ----------------
---------- ----------------
Weighted average common shares outstanding
(11)...................................... 19,408 19,408
---------- ----------------
---------- ----------------
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
20
<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 and a non-recurring charge associated with options granted
to management by the Investors.
(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>
YEAR ENDED
DECEMBER 31
1996
-------------
<S> <C>
Historical interest expense................................................................... $ 12,177
Assumed interest expense on new credit facility for working capital purposes.................. (131)
Cash interest expense on the Senior Notes at an interest rate of 11%.......................... (11,000)
-------------
Total cash interest expense adjustment........................................................ $ 1,046
Amortization of deferred financing fees
on the Senior Notes.......................................................................... (375)
-------------
Total interest expense adjustment............................................................. $ 671
-------------
-------------
</TABLE>
(4) The interest expense adjustment relating to this Offering is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996
-------------
<S> <C>
Interest expense relating to borrowings under Senior Notes repaid............................. $ 3,667
Amortization of deferred financing fees under Senior Notes repaid............................. 125
-------------
Interest expense adjustment................................................................... $ 3,792
-------------
-------------
</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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."
(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 assumed 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 the period presented.
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------------------
ADJUSTMENTS PRO FORMA
RELATED TO FOR THIS
ACTUAL THIS OFFERING OFFERING
--------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 47 $ 11,703 $ 11,750
Accounts receivable........................................... 4,062 -- 4,062
Inventories................................................... 49,705 -- 49,705
Prepaid expenses and other current assets..................... 1,455 -- 1,455
--------- -------------- ----------------
Total current assets........................................ $ 55,269 $ 11,703 $ 66,972
Property and equipment, net..................................... 14,966 -- 14,966
Other assets.................................................... 4,614 (1,123)(1) 3,491
--------- -------------- ----------------
Total assets.............................................. $ 74,849 $ 10,580 $ 85,429
--------- -------------- ----------------
--------- -------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 14,005 $ -- $ 14,005
Accrued expenses and other current liabilities................ 10,292 -- 10,292
Revolving line of credit...................................... 3,536 (3,536)(2) --
--------- -------------- ----------------
Total current liabilities................................... $ 27,833 $ (3,536) $ 24,297
Long term debt.................................................. 100,000 (33,333)(1) 66,667
Long term liabilities........................................... 645 -- 645
--------- -------------- ----------------
Total liabilities........................................... $ 128,478 $ (36,869) $ 91,609
--------- -------------- ----------------
Senior preferred stock.......................................... 15,186 (15,186)(4) --
Stockholders' equity (deficit):
Junior preferred stock........................................ 138,610 (138,610)(7) --
Warrants...................................................... 6,500 -- 6,500
Common stock.................................................. 36 147(5) 183
Additional paid in capital.................................... (6,966) 213,362(6) 206,396
Retained deficit.............................................. (206,995) (12,264)(8) (219,259)
--------- -------------- ----------------
Total stockholders' equity (deficit)........................ $ (68,815) $ 62,635 $ (6,180)
--------- -------------- ----------------
Total liabilities and stockholders' equity (deficit)...... $ 74,849 $ 10,580 $ 85,429
--------- -------------- ----------------
--------- -------------- ----------------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet data.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA
(1) Assumes a 10% premium to be paid to redeem a portion of the Senior Notes.
Following the consummation of this Offering, the Company intends to redeem
(or repurchase through open market purchases or otherwise) up to
approximately $33.3 million of Senior Notes. The Company will pay a 10%
premium on any redemptions of Senior Notes and will pay a premium, not to
exceed 10%, on any repurchases (through open market purchases or otherwise)
of Senior Notes. Such redemption, or repurchases, 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............................. 92(7)
Redemption of Common Stock....................................... (13)(12)
---------
$ 147
---------
---------
</TABLE>
(6) Represents adjustments to Additional Paid in Capital as follows:
<TABLE>
<CAPTION>
Net proceeds from the Offering................................... $ 93,248
<S> <C>
Conversion of Junior Preferred Stock............................. 138,529(7)
Redemption of Common Stock....................................... (18,415)(12)
---------
$ 213,362
---------
---------
</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.................. $ (648)(11)
<S> <C>
Assumed 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........................................................... (1,123)(1)
Dividend on Senior Preferred Stock............................... (6,416)(10)
Payroll taxes.................................................... (744)(3)
---------
$ (12,264)
---------
---------
</TABLE>
(9) Represents an assumed 10% premium to be paid to redeem a portion of the
Senior Notes. Following the consummation of this Offering, the Company
intends to redeem (or repurchase through open market purchases or otherwise)
up to approximately $33.3 million of Senior Notes. The Company will pay a
10% premium on any redemptions of Senior Notes and will pay a premium, not
to exceed 10%, on any repurchases (through open market purchases or
otherwise) of 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 3% premium to be paid to redeem the Senior Preferred Stock.
(12)Represents the redemption of shares of Common Stock pursuant to the
Management Tax Redemption.
23
<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 1992 to 1996,
Guitar Center's net sales and operating income before deferred compensation
expense grew at compound annual growth rates of 25.6% and 43.0%, respectively,
principally due to comparable store sales growth averaging 14.8% per year and
the opening of new stores. Guitar Center achieved comparable store net sales
growth of 17.3%, 23.4% and 10.2% for the fiscal years ended December 31, 1994,
1995 and 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.
The following table sets forth certain historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales......................................................................... 100.0% 100.0% 100.0%
Gross profit...................................................................... 28.5 27.7 28.2
Selling, general and administrative expenses...................................... 20.3 19.2 19.4
---------- ---------- ----------
Operating income before deferred compensation expense............................. 8.2 8.5 8.8
Deferred compensation expense..................................................... 0.9 1.8 33.7
---------- ---------- ----------
Operating income (loss)........................................................... 7.3 6.7 (24.9)
Interest expense, net............................................................. 0.2 0.1 5.7
Transaction expenses and other.................................................... -- -- 3.3
---------- ---------- ----------
Income (loss) before income taxes................................................. 7.1 6.6 (33.9)
Income taxes...................................................................... 0.3 0.2 --
---------- ---------- ----------
Net income (loss)................................................................. 6.8% 6.4% (33.9)%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
24
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the year ended December 31, 1996 increased 25.0% to $213.3
million from $170.7 million in fiscal 1995. This growth was attributable to an
increase of $25.6 million in new store net sales, accounting for 60.1% of such
increase. In addition, comparable store net sales increased 10.2%, or $17.0
million, accounting for 39.9% of such increase. The increase in comparable net
store sales was primarily attributable to increases in unit sales rather than
increases in prices or changes in the mix of sales between the 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 fiscal 1996 compared to fiscal 1995 increased 27.1% to
$60.1 million from $47.3 million in fiscal 1995. Gross profit as a percentage of
net sales ("gross margin") for fiscal 1996 increased to 28.2% from 27.7% in
fiscal 1995. This increase in gross margin was primarily the result of the
introduction and sales of higher margin high-technology pro audio and recording
equipment.
Selling, general and administrative expenses for fiscal 1996 increased 26.6%
to $41.3 million from $32.7 million in fiscal 1995. As a percentage of net
sales, selling, general and administrative expenses for fiscal 1996 increased to
19.4% from 19.2% in fiscal 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 sales
reaching mature levels. During fiscal 1996, seven new stores commenced operation
and were open an average of four and a half months. In addition, the increase
reflects increases in corporate personnel and management information systems
expenses associated with the Company's continuing expansion.
Deferred compensation expense for fiscal 1996 increased to $71.8 million
from $3.1 million in fiscal 1995. The deferred compensation expense resulted
from a $69.9 million charge related to the purchase and exchange of management
stock options and the cancellation of the Company's prior stock option program
and a $1.9 million non-cash charge related to stock options granted by the
Investors to certain members of management. These expenses are non-recurring.
The Company has not, and will not, incur any obligation in connection with such
grant of options by the Investors. See "The Recapitalization and Related
Transactions" and "Certain Transactions -- Options Granted by the Investors to
Certain Members of Management."
The operating loss for fiscal 1996 was $53.0 million compared to operating
income of $11.5 million in fiscal 1995. Operating income before deferred
compensation expense increased 28.1% to $18.7 million from $14.6 million over
the comparable period. As a percentage of net sales, operating income before
deferred compensation expense for fiscal 1996 increased to 8.8% from 8.5% in the
prior year.
Interest expense, net for fiscal 1996 increased to $12.2 million from $0.4
million in fiscal 1995. This increase was attributable to the write-off of
financing fees of $4.7 million and interest of $7.5 million on outstanding
borrowings during the seven months following the Recapitalization.
Nonrecurring transaction expenses of $6.9 million related to the
Recapitalization were expensed in fiscal 1996.
Net income (loss) for fiscal 1996 decreased to ($72.4) million from $10.9
million in fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for the year ended December 31, 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.
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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 million from $8.8
million for fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales for fiscal 1994 increased 32.6% to $129.0 million from $97.3
million in fiscal 1993. This growth was attributable to an increase of 17.3% in
comparable store sales which contributed $15.9 million, or 50% 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.
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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 presently-scheduled
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 February 14, 1997, the Company had $5.9 million outstanding and
approximately $18.8 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 respect to all such
requirements as of December 31, 1996.
For fiscal 1996, cash used in operating activities was $44.9 million. During
fiscal 1995, cash provided by operating activities was $16.4 million. Cash
provided by financing activities was $49.3 million for fiscal 1996, which
includes the effects of the Recapitalization. Cash used in financing activities
during fiscal 1995 was $15.3 million which consisted primarily of distributions
to the Company's former sole stockholder of $14.5 million.
Capital expenditures totaled $6.1 million for fiscal 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 operated 28 stores as
of December 31, 1996, seven of which were opened during fiscal 1996, and
presently expects to open approximately eight stores in each of fiscal 1997 and
1998. Each new store typically has required approximately $1.5 million for gross
inventory. 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 $110,000 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, is currently evaluating several such opportunities and is in
negotiations regarding one possible acquisition. Any such 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 to effect any
such acquisition. 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 acquisition or that any current negotiations will result in an
acquisition.
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.
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In December 1996, Chase Ventures, Wells Fargo and Weston Presidio granted
Investor Options to purchase an aggregate of 277,194 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 recorded a
non-cash, non-recurring compensation charge of approximately $1.9 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 the 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."
As a result of the $72.4 million loss incurred in fiscal 1996, the Company
has a tax net operating loss carryforward for federal income tax purposes
aggregating $64.2 million, which will expire if unused in 2011. As of December
31, 1996, the Company had fully reserved the related deferred tax asset of $22.5
million.
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.
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."
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BUSINESS
COMPANY HISTORY
Guitar Center was founded in 1964 in Hollywood, California. In 1972, the
Company opened its second store in San Francisco to capitalize on the emerging
San Francisco rock 'n roll scene. By this time, Guitar Center's inventory had
been expanded to include drums, keyboards, accessories and pro audio and
recording equipment. Throughout the 1980s, Guitar Center expanded by opening
nine stores in five major markets including Chicago, Dallas and Minneapolis.
Since 1990, the Company has continued its new store expansion and has focused on
building the infrastructure necessary to manage the Company's strategically
planned growth. Current 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 1992. 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 approximately 30,600
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 and music pioneers. 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 1992 through
fiscal 1996, the Company's net sales and operating income before deferred
compensation expense grew at compound annual growth rates of 25.6% and 43.0%,
respectively. This growth was principally the result of strong and consistent
comparable store sales growth, averaging 14.8% per year over such five-year
period, and the opening of 13 new stores. Comparable store sales (stores opened
for at least 14 months) for fiscal 1992, 1993, 1994, 1995 and 1996 were $85.6
million, $95.4 million, $113.2 million, $157.5 million and $187.7 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 had positive store-level operating income in each of the past five
fiscal years.
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The following summarizes certain key operating statistics of a Guitar Center
store and is based upon the 21 stores operated by the Company for the full year
ended December 31, 1996:
<TABLE>
<S> <C>
Average 1996 net sales per square foot......................... $ 707
Average 1996 net sales per store............................... 9,148,000
Average 1996 store-level operating income (1).................. 1,402,000
Average 1996 store-level operating income margin (1)........... 15.3%
</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 store-level 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 18.8% 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.
For fiscal years ended December 31, 1993, 1994, 1995 and 1996, the Company
had net income (loss) of $5.1 million, $8.8 million, $10.9 million and ($72.4)
million, respectively. The results for fiscal 1996 reflect $11.6 million for
transaction costs and financing fees incurred in connection with the
Recapitalization and non-recurring deferred compensation expense of $71.8
million, substantially all of which related to 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 $4.0 billion of this market, representing a five-year compound
annual growth rate of 8.6%. 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 approximately 3,200 square feet
and generates an average of approximately $0.6 million in annual net
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sales. In contrast, a Guitar Center store generally averages between 12,000 and
15,000 square feet and in 1996 generated an average of approximately $8.3
million in annual net sales for stores open the full year (excluding the
Company's Hollywood store).
Over the past ten years, technological advances in the industry have
resulted in dramatic changes to the nature of music-related products.
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 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.
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 through each 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 product introductions in the music products industry,
customers increasingly rely on qualified
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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. In addition, the
Company's special grand opening activities in new markets are designed to
generate consumer awareness for each new store. 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 18.8% 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.
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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.
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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.
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.
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 seven 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.
34
<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.
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 aspects of the Company's business
including sales, gross margins, inventory levels, purchase order
35
<PAGE>
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, among
others, 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 --
Aggressive Growth Strategy; -- 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,
normal repairs, 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.
36
<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
WASHINGTON
Seattle.......................................................... (1) 20,800 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, approximately 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.
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<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 DiMartino........ 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
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<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 Corporation. 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 Management
II, L.P., a venture capital firm and the sole general partner of Weston
Presidio. From 1986 to 1991, he served as Managing
39
<PAGE>
Director and Director of the Private Placement Department of Montgomery
Securities. He became a director of the Company upon consummation of the
Recapitalization. Mr. Lazarus is currently on the Board of Directors of Just For
Feet, Inc. and various privately held companies.
STEVEN BURGE is a Managing Director 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 DIMARTINO joined the Company in 1972. In 1983, Mr. DiMartino became the
manager of Guitar Center's flagship Hollywood, California store. In 1988, Mr.
DiMartino 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 were elected pursuant to the Stockholders Agreement (as
defined herein). All material terms of the
40
<PAGE>
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 and certain related entities own 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, each member of the Board who is not a
full-time employee will be paid $3,000 for attendance at each meeting of the
Board and $1,000 for attendance at each meeting of a committee of the Board, and
all directors will be reimbursed for reasonable out-of-pocket expenses arising
from attendance at any Board or committee meetings or otherwise related to
Company business. The 1997 Plan will also provide for the grant of options to
certain non-employee directors. Specifically, each non-employee director
initially elected to the Board after this Offering automatically will be granted
an option to purchase 15,000 shares of Common Stock on the date of such initial
election, and each non-employee director automatically will be granted an option
to purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders at which such director is re-elected to the Board, provided such
annual meetings is not less than 120 days after initial appointment to the
Board. All options granted to non-employee directors will have a per share
exercise price equal to fair market value of a share of Common Stock on the date
of grant. See "-- 1997 Equity Participation Plan."
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and each of the four other highest paid executive
officers of the Company (collectively, including the Chief Executive Officer,
the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ($) -----------------
------------------------------------------- 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 $ 58,500 -- 79,599 $ 11,250
Vice President and 1995 180,000 48,060 -- -- --
Chief Financial Officer
Barry Soosman........... 1996 $ 112,500 $ 10,000 -- 79,599 --
Vice President of 1995 -- -- -- -- --
Corporate Development
and General Counsel
Raymond Scherr (5)...... 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) 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 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
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<PAGE>
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.
43
<PAGE>
OTHER OPTION ARRANGEMENTS
Chase Ventures, Wells Fargo and Weston Presidio granted options (the
"Investor Options") to purchase an aggregate of 277,194 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 109,722 shares of Common Stock that were granted to each of Messrs.
Thomas and Albertson and 3,850 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 the 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.
44
<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 $10.89 per share under the 1996 Plan. See "-- Director
Compensation," "-- Employment Agreements," "-- Management Stock Option
Agreements," "-- 1996 Performance Stock Option Plan" and "-- 1997 Equity
Participation Plan."
45
<PAGE>
Set forth below is a table describing the options granted by the Company to
each of the Named Officers during the year ended December 31, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL OPTION GRANTS IN 1996
-----------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS/ PRICE APPRECIATION
UNDERLYING SARS GRANTED TO EXERCISE OR FOR OPTION TERM (2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/ 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:
<TABLE>
<CAPTION>
OPTION VALUES AT 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."
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
46
<PAGE>
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 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
47
<PAGE>
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 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.
48
<PAGE>
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 and option stock are held for certain minimum holding periods
and, in such event, the Company is not
49
<PAGE>
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The information in the following table sets forth the ownership of the
Common Stock, as of the date of this Prospectus, 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 the date of this Prospectus, the Company had
12,883,274 shares of Common Stock outstanding and, to the knowledge of the
Company, there were 45 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)....................... 4,381,265 34.1% 4,381,265 23.9%
380 Madison Avenue, 12th Floor
New York, NY 10017
Wells Fargo Small Business Investment Company (4)................ 878,589 6.8 878,589 4.8
333 South Grand Avenue
Los Angeles, CA 90071
Weston Presidio Capital II, L.P. (4)............................. 658,966 5.1 658,966 3.6
400 Sansome Street
San Francisco, CA 94111
Raymond Scherr (5)............................................... 1,710,148 13.3 1,710,148 9.3
David Ferguson (6)............................................... -- -- -- --
Jeffrey Walker (6)............................................... -- -- -- --
Michael Lazarus (7).............................................. -- -- -- --
Steven Burge (8)................................................. -- -- -- --
Larry Thomas (9)................................................. 1,864,254 14.5 1,384,816 7.6
Marty Albertson (10)............................................. 1,247,262 9.7 927,637 5.1
Bruce Ross (11).................................................. 3,850 * 3,850 *
Barry Soosman (12)............................................... 49,760 * 49,760 *
Dave DiMartino (13).............................................. 881,117 6.8 641,397 3.5
All Executive Officers and Directors as a group (9 persons)
(5)-(12)........................................................ 4,875,274 37.8 4,076,211 22.3
</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 207,899,
39,611 and 29,684 shares of Common Stock, respectively. See "Certain
Transactions -- Options Granted by the Investors to Certain Members of
Management."
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(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.
(7) Mr. Lazarus does not directly own any Common Stock. However, as a general
partner of Weston Presidio Management II, L.P., the sole 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, except
to the extent of his pecuniary interest therein.
(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, except to the extent of his
pecuniary interest therein.
(9) Includes 109,722 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 the 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) 109,722 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 the Investors to
Certain Members of Management."
(11)Represents 3,850 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 the 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) 3,850 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
the Investors to Certain Members of Management."
(13)Represents: (i) 877,267 shares of Common Stock (prior to this Offering) and
637,547 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) 3,850 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
the Investors to Certain Members of Management." The address of such person
is 430 Laloma Road, Pasadena, CA 91105.
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CERTAIN TRANSACTIONS
MANAGEMENT TRANSACTIONS
In April 1996, the Company made a personal loan to Larry Thomas, the
Company's President, of $1.0 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 $500,000. 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
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<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 Capital Management II, L.P. and has an equity interest therein.
Weston Presidio Capital Management II, L.P. is the sole general partner of
Weston Presidio.
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
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<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 in the event that certain specified
aspects of the Recapitalization are not treated for tax purposes in the manner
contemplated by the Recapitalization and related transactions. 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.
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<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 and certain related entities own
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
$18.4 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 (I.E.,
approximately 1,317,000 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 $6.7 million and
$4.5 million, respectively. See "Use of Proceeds."
OPTIONS GRANTED BY THE INVESTORS TO CERTAIN MEMBERS OF MANAGEMENT
Chase Ventures, Wells Fargo and Weston Presidio granted Investor Options to
purchase an aggregate of 277,194 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
109,722 shares of Common Stock that were granted to each of Messrs. Thomas and
Albertson and 3,850 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 Investor Options. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Captial
Resources."
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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 (the "IPO Clawback") 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 pursuant to the IPO Clawback (or repurchase
through open market purchases or otherwise) approximately $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%
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(subject to reduction depending on the ratio of Funded Debt to EBITDA); and (ii)
in the case of Eurodollar Rate Loans, the Eurodollar Rate for one, two, three,
six, nine or twelve months, plus a maximum margin of 3.00% (subject to reduction
depending on the ratio of Funded Debt to EBITDA).
MATURITY. The 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have 18,316,579 shares
of Common Stock outstanding (19,329,079 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 11,566,579 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 recently amended by the Securities
and Exchange Commission, a person who had beneficially owned shares of Common
Stock for at least one year, 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 (183,166 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), as recently amended by the Securities and Exchange Commission, provides
that a person who is not deemed to be an "affiliate" and who has beneficially
owned shares of Common Stock for at least two 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 two-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.
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, 11,300,327 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."
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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
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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
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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").
The Common Stock has been 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.
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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 ChaseMellon
Shareholder Services, L.L.C.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of Common Stock by a "Non-United States Holder" and does not deal with tax
consequences arising under the laws of any foreign, state, or local
jurisdiction. As used herein, a "Non-United States Holder" is a beneficial owner
of Common Stock that, for United States federal income tax purposes, is not (i)
a citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized under the laws of the United States or any
political subdivision thereof, (iii) an estate, the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States fiduciaries who have the
authority to control all substantial decisions of such trust.
This discussion is based on provisions of the Code, existing and proposed
regulations promulgated thereunder and administrative and judicial
interpretations thereof as of the date hereof, all of which are subject to
change, possibly retroactively. This discussion does not address all aspects of
United States federal income and estate taxation and does not deal with foreign,
state and local tax consequences that may be relevant to Non-United States
Holders in light of their personal circumstances. Prospective investors who are
Non-United States Holders are urged to consult their tax advisors regarding the
United States federal tax consequences of acquiring, holding and disposing of
the Common Stock, as well as any tax consequences that may arise under the laws
of any foreign, state, local or other taxing jurisdiction.
DIVIDENDS
Generally, any dividend paid to a Non-United States Holder will be subject
to withholding of United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. If the dividend is
effectively connected with the conduct of a United States trade or business of
the Non-United States Holder, the dividend would be subject to United States
federal income tax on a net income basis (and, with respect to corporate holders
and under certain circumstances, the branch profits tax) and would be exempt
from the 30% withholding tax described above.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above, and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under proposed United States
Treasury regulations, not currently in effect, however, a Non-United States
Holder who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification and other requirements.
A Non-United States Holder that is eligible for a reduced rate of United
States withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the United States Internal Revenue Service.
DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain recognized upon the sale or other disposition of
Common Stock unless (i) such gain is effectively connected with the conduct of a
United States trade or business of the Non-United States Holder or (ii) in the
case of a Non-United States Holder who is a non-resident alien individual and
holds the Common Stock as a capital asset, such individual is present in the
United States for 183 days or more days during the taxable year of disposition
and certain other requirements are met. If a Non-United States Holder falls
under clause (i) above, the holder will be subject to tax on the net gain
derived from the sale on the same basis that applies to United States persons
generally (and, with respect to corporate holders and under
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certain circumstances, the branch profits tax). If an individual Non-United
States Holder falls under clause (ii) above, the holder generally will be
subject to a flat 30% tax on the gain derived from the sale which gain may be
offset by United States source capital losses.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the United States Internal Revenue
Service and to each Non-United States Holder the amount of dividends paid to
such holder and the amount of any tax withheld. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-United States
Holder resides under the provisions of an applicable income tax treaty.
United States backup withholding tax generally will not apply to the payment
of (a) dividends on Common Stock to a Non-United States Holder at an address
outside the United States or (b) the proceeds of the sale of Common Stock to or
through the foreign office of a broker. In the case of the payment of proceeds
from such a sale of Common Stock through a foreign office of a United States
broker or a foreign broker that has certain types of relationships to the United
States, however, information reporting, but not backup withholding, is required
with respect to the payment unless the broker has documentary evidence in its
files that the owner is a Non-United States Holder and certain other
requirements are met or the holder otherwise establishes an exemption. The
payment of the proceeds from the sale of Common Stock and dividends paid on
Common Stock to or through a United States office of a broker is subject to
information reporting and possible backup withholding at the rate of 31% unless
the owner certifies its non-United States status under penalties of perjury or
otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the United States Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to holding and disposing of
Common Stock could be changed by future regulations. On April 15, 1996, the
United States Internal Revenue Service issued proposed Treasury Regulations
concerning the withholding of tax and reporting for certain amounts paid to
non-resident individuals and foreign corporations. The proposed regulations
would, among other changes, eliminate the presumption under current regulations
with respect to dividends paid to addresses outside the United States. The
proposed Treasury Regulations, if adopted in their present form, would be
effective for payments made after December 31, 1997. Prospective purchasers of
Common Stock should consult their tax advisors concerning the potential
application and effect of such Treasury Regulations.
FEDERAL ESTATE TAXES
Common Stock held by an individual Non-United States Holder at the time of
death will be included in such holder's gross estate for United States federal
estate tax purposes and may be subject to United States federal estate tax,
unless an applicable estate tax treaty provides otherwise.
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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 certain of the representatives of the
Underwriters and certain stockholders of the Company on a regular basis.
EXPERTS
The financial statements and schedule of Guitar Center, Inc. as of December
31, 1996 and for the year then ended, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Guitar Center, Inc. at December 31, 1995 and for
the two years 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. 333-20931 (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 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.
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GUITAR CENTER, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors (KPMG Peat Marwick LLP).................... F-2
Report of Independent Auditors (Ernst & Young LLP)........................ F-3
Balance Sheets as of December 31, 1995 and 1996........................... F-4
Statements of Operations for the years ended December 31, 1994, 1995 and
1996..................................................................... F-5
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1994, 1995 and 1996.................................................. F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996..................................................................... F-7
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Guitar Center, Inc.:
We have audited the accompanying balance sheet of Guitar Center, Inc. as of
December 31, 1996 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides 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. as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 10, 1997
F-2
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Guitar Center, Inc.
We have audited the accompanying balance sheet of Guitar Center, Inc. as of
December 31, 1995, and the related statements of operations, stockholders'
equity, and cash flows for each of the two 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 the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
March 6, 1996.
F-3
<PAGE>
GUITAR CENTER, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 1,338 $ 47
Accounts receivable, less allowance for doubtful accounts of $200 (1995) and $150
(1996)............................................................................. 2,203 4,062
Inventories......................................................................... 31,281 49,705
Prepaid expenses and other current assets........................................... 690 1,388
Employee notes...................................................................... 82 67
--------- ------------
Total current assets.................................................................. 35,594 55,269
Property and equipment, net........................................................... 13,276 14,966
Goodwill, net of accumulated amortization of $152 (1995) and $167 (1996).............. 447 432
Other assets.......................................................................... 301 4,182
--------- ------------
Total assets.......................................................................... $ 49,618 $ 74,849
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................... $ 12,613 $ 14,005
Accrued expenses.................................................................... 7,061 7,891
Deferred compensation............................................................... 7,908 --
Merchandise advances................................................................ 2,010 2,401
Current portion of long-term debt................................................... -- 3,536
--------- ------------
Total current liabilities............................................................. 29,592 27,833
Other long-term liabilities........................................................... 263 645
Long-term debt........................................................................ -- 100,000
Senior preferred stock, aggregate liquidation preference of $21,602; authorized
4,250,000 shares, issued and outstanding 800,000 shares.............................. -- 15,186
Stockholders' equity (deficit):
Junior preferred stock aggregate liquidation preference of $144,959................. -- 138,610
Common stock, no par value; authorized 2,500,000 shares, issued and outstanding
1,400,000 at December 31, 1995; $0.01 par value authorized 55,000,000 shares,
issued and outstanding 3,622,804 at December 31, 1996.............................. 4,987 36
Warrants............................................................................ -- 6,500
Additional paid in capital.......................................................... -- (6,966)
Retained earnings (deficit)......................................................... 14,776 (206,995)
--------- ------------
Total stockholders' equity (deficit).................................................. 19,763 (68,815)
--------- ------------
Total liabilities and stockholders' equity (deficit).................................. $ 49,618 $ 74,849
--------- ------------
--------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
GUITAR CENTER, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales................................................... $ 129,039 $ 170,671 $ 213,294
Cost of goods sold, buying and occupancy.................... 92,275 123,415 153,222
---------------- ---------------- ----------------
Gross profit................................................ 36,764 47,256 60,072
Selling, general and administrative expenses................ 26,143 32,664 41,345
Deferred compensation expense............................... 1,259 3,087 71,760
---------------- ---------------- ----------------
Operating income (loss)..................................... 9,362 11,505 (53,033)
Interest income............................................. 14 14 8
Interest expense............................................ (266) (382) (12,177)
Transaction expenses........................................ -- -- (6,942)
Other income (expenses)..................................... 45 65 (126)
---------------- ---------------- ----------------
Income (loss) before income taxes........................... 9,155 11,202 (72,270)
Income taxes................................................ 326 345 139
---------------- ---------------- ----------------
Net income (loss)........................................... $ 8,829 $ 10,857 $ (72,409)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Pro forma data (unaudited):
Income (loss) before taxes................................ $ 9,155 $ 11,202 $ (72,270)
Pro forma income taxes.................................... 4,478 6,144 --
---------------- ---------------- ----------------
Pro forma net income (loss)............................... $ 4,677 $ 5,058 $ (72,270)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Senior and junior preferred stock dividends............... -- -- 7,951
Net loss available to common stockholder.................. -- -- (80,221)
----------------
----------------
Pro forma net income (loss) per share..................... $ 0.24 $ 0.26 $ (4.13)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Weighted average shares outstanding....................... 19,408 19,408 19,408
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
GUITAR CENTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNIOR ADDITIONAL RETAINED
PREFERRED COMMON PAID IN EARNINGS
STOCK STOCK WARRANTS CAPITAL (DEFICIT) TOTAL
----------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1993............ $ -- $ 4,987 $ -- $ -- $ 13,477 $ 18,464
Net income............................ -- -- -- -- 8,829 8,829
Distributions to stockholder.......... -- -- -- -- (3,869) (3,869)
----------- ----------- ----------- ---------- ------------ ------------
Balance at December 31, 1994............ -- 4,987 -- -- 18,437 23,424
Net income............................ -- -- -- -- 10,857 10,857
Distributions to stockholder.......... -- -- -- -- (14,518) (14,518)
----------- ----------- ----------- ---------- ------------ ------------
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
Options granted to management by
investor group....................... -- -- -- 1,918 -- 1,918
Reclassification of excess of par
value................................ -- (1,364) -- 1,364 -- --
Sale of equity to management.......... 10 -- -- 1 -- 11
Net loss.............................. -- -- -- -- (72,409) (72,409)
Undeclared dividend on senior
preferred stock...................... -- -- -- -- (1,602) (1,602)
Accretion of senior preferred stock... -- -- -- -- (84) (84)
----------- ----------- ----------- ---------- ------------ ------------
Balance at December 31, 1996............ $ 138,610 $ 36 $ 6,500 $ (6,966) $ (206,995) $ (68,815)
----------- ----------- ----------- ---------- ------------ ------------
----------- ----------- ----------- ---------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
GUITAR CENTER, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ 8,829 $ 10,857 $ (72,409)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 1,488 1,802 2,161
Deferred compensation--repurchase of options................. -- -- 49,510
Investor options to management............................... -- -- 1,918
(Gain) loss on sale of fixed assets.......................... 85 (4) 112
Amortization of deferred financing fees...................... -- -- 215
Changes in operating assets and liabilities:
Accounts receivable........................................ 714 (513) (1,859)
Inventories................................................ (4,785) (2,487) (18,424)
Prepaid expenses........................................... 12 (317) (698)
Other assets............................................... 30 (154) (511)
Accounts payable........................................... 2,139 2,208 1,392
Accrued liabilities........................................ 2,871 1,452 830
Deferred compensation...................................... 1,259 3,087 (7,908)
Merchandise advances....................................... 349 490 391
Other long-term liabilities................................ 296 (33) 382
------------- -------------- --------------
Net cash provided by (used in) operating activities............ 13,287 16,388 (44,898)
INVESTING ACTIVITIES
Proceeds from sale of assets................................... 143 15 433
Purchases of property and equipment............................ (3,277) (3,432) (6,133)
Employee notes................................................. (39) (42) 15
------------- -------------- --------------
Net cash used in investing activities.......................... (3,173) (3,459) (5,685)
FINANCING ACTIVITIES
Principal repayments of long-term debt......................... (2,575) (825) --
Proceeds from issuance of long term debt....................... -- -- 100,000
Net change in revolving debt facility.......................... -- -- 3,536
Distribution of prior shareholder interest..................... -- -- (113,102)
Deferred financing fees paid................................... -- -- (3,585)
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................................... (3,869) (14,518) (28,057)
------------- -------------- --------------
Net cash provided by (used in) financing activities............ (6,444) (15,343) 49,292
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents........... 3,670 (2,414) (1,291)
Cash and cash equivalents at beginning of year................. 82 3,752 1,338
------------- -------------- --------------
Cash and cash equivalents at end of year....................... 3,752 $ 1,338 $ 47
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................... $ 292 $ 357 $ 11,890
------------- -------------- --------------
------------- -------------- --------------
Income taxes............................................... $ 111 $ 346 $ 139
------------- -------------- --------------
------------- -------------- --------------
</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 TO FINANCIAL STATEMENTS.
F-7
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Guitar Center, Inc. ("Guitar Center" or the "Company") operates a chain of
retail stores which sell high quality musical instruments primarily guitars,
keyboard, percussion and pro-audio equipment. At December 31, 1996, the Company
operated 28 stores in major cities throughout the United States with
approximately 50% of the stores located in California.
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.
RECAPITALIZATION
On June 5, 1996, Guitar Center consummated a series of transactions to
effect the recapitalization of the Company (the "Recapitalization"). Members of
management purchased 1,291,000 shares of the Company's Common Stock for $0.5
million cash and received 495,000 shares of 8% Junior Preferred Stock in
exchange for the cancellation of outstanding options exercisable for Common
Stock. The Company's former sole stockholder received 198,000 shares of Junior
Preferred Stock in exchange for Common Stock. New investors purchased 1,807,400
shares of Common Stock and 693,000 shares of Junior Preferred Stock for $70.0
million cash, and 800,000 shares of 14% Senior Preferred Stock and Warrants for
an aggregate $20 million cash. The Warrants are exchangeable for 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 cash, and canceled certain options for Common Stock held by management
in exchange for $27.9 million cash. For financial statement purposes, the
Company recorded a charge to operations in the amount of $69.9 million (net of
$7.9 million which the Company had previously accrued) related to the
cancellation and exchange of the management stock options.
In part to fund the Recapitalization transaction and to repay the $35.9
million outstanding under its Old Credit Facility, the Company borrowed $100
million under an increasing rate Bridge Facility. The Bridge Facility was repaid
on July 2, 1996 with the proceeds of the 11% Senior Notes due 2006 and cash on
hand.
In connection with the Recapitalization, the Company incurred transaction
costs and financing fees of approximately $11.6 million, which consists of $6.9
million of sellers transaction costs and $4.7 million in fees paid to finance
the Bridge Facility. These amounts have been charged to transaction expenses and
interest expense, net, respectively, in the 1996 statement of operations. In
addition, on July 2, 1996, in connection with the sale of the Notes,
approximately $3.6 million was paid and capitalized as an other asset and will
be amortized over the term of the related debt.
OFFERING
In January 1997, the Board of Directors authorized the filing of a
registration statement for an initial public offering (the "Offering") of the
Company's Common Stock $.01 par value ("Common Stock").
Upon consummation of the Offering, the Company will convert 100% of the
outstanding shares of the Company's Junior Preferred Stock into shares of Common
Stock at a ratio of 6.667 shares of Common Stock for each share of Junior
Preferred Stock. No accrued and unpaid dividends will be paid on any shares of
Junior Preferred Stock. Upon successful consummation of the Offering, the
Company intends to use the proceeds to redeem (or repurchase through open market
purchases or otherwise) up to approximately 33.3% of the Company's 11% Senior
Notes due 2006 (the "Senior Notes") at a price not to exceed 110% of the
principal amount thereof, plus accrued and unpaid interest. Accordingly, the
Company anticipates that an extraordinary charge to operations will be incurred
equal to the premium paid plus the write-off of one-third of the unamortized
deferred financing fees. Additionally, the Company
F-8
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
intends to redeem 100% of the outstanding shares of the Company's Senior
Preferred Stock, $.01 par value (the "Senior Preferred Stock"), at 103% of the
face amount thereof, plus accrued and unpaid dividends. If successful, a charge
to dividends will be incurred by the Company for the difference between the
financial statement value of the Senior Preferred Stock and the face amount
thereof, plus premium.
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
Effective January 1, 1996, the Company elected to capitalize certain
preopening costs and amortize the balance over 12 months. Previously, preopening
costs were charged to expense as incurred. The change was not material to any
previous periods presented.
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expense included in the statements of operations for the years ended December
31, 1994, 1995 and 1996, is $4,236,000, $4,128,000 and $5,717,000, 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
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
F-9
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 as of December 31, 1996 due to the increased
leverage of the Company on that date and its effect on future taxable income.
Prior to the Recapitalization, the Company had 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 operations.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired resulting from a business combination and is being
amortized on a straight-line basis over 40 years.
RENT EXPENSE
The Company leases certain store locations under operating leases that
provide for annual payments that increase over the life of the leases. The
aggregate of the minimum annual payments are expensed on a straight-line basis
over the term of the related lease without consideration of renewal option
periods. The amount by which straight-line rent expense exceeds actual lease
payment requirements in the early years of the leases is accrued as deferred
minimum rent and reduced in later years when the actual cash payment
requirements exceed the straight-line expense.
CONCENTRATION OF CREDIT RISK
The Company's deposits are with various high quality financial institutions.
Customer purchases are transacted using generally cash or credit cards. In
certain instances, the Company grants credit for larger purchases, generally to
professional musicians, under normal trade terms. Trade accounts receivable were
approximately $212,000 and $409,000 at December 31, 1995 and 1996, 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.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of
F-10
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
principally include cash, accounts receivable, accounts payable and accrued
expenses, approximates fair value due to the relatively short maturity of such
instruments.
The fair value of the Company's short term instrument reflects the fair
value based upon current rates available to the Company for similar debt. The
fair value of the Company's long term debt instrument is $110 million, based on
quoted market prices.
2. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Major goods...................................................................... $ 19,597 $ 32,758
Associated accessories........................................................... 5,952 9,057
Vintage guitars.................................................................. 2,072 2,569
Used merchandise................................................................. 1,940 2,439
General accessories.............................................................. 1,720 2,882
--------- ---------
$ 31,281 $ 49,705
--------- ---------
--------- ---------
</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-11
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................................. $ 2,881 $ 2,283
Buildings........................................................................ 9,075 7,693
Transportation equipment......................................................... 494 467
Furniture and fixtures........................................................... 5,838 8,161
Leasehold improvements........................................................... 2,416 6,440
Construction in progress......................................................... 1,201 185
--------- ---------
21,905 25,229
Less accumulated depreciation.................................................... 8,629 10,263
--------- ---------
$ 13,276 $ 14,966
--------- ---------
--------- ---------
</TABLE>
4. LONG-TERM DEBT
In connection with the Recapitalization, the Company borrowed $100 million
under increasing rate notes (the "Bridge Facility"). Financing fees of $4.7
million were paid and charged to the statement of operations during June 1996.
On July 2, 1996, the Bridge Facility was repaid with the proceeds from the sale
of 11% Senior Notes due 2006 and cash on hand. The Senior Notes are unsecured
and pay interest on a semi-annual basis.
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 in connection with an
initial public offering of Common Stock. The holders of the Senior Notes have
the right to require the Company to 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 defined.
In June 1996, the Company entered into a $25 million unsecured revolving
line of credit. The line expires in June 2001. The revolving line of credit
bears interest at various rates based on the prime lending rate (8.25% at
December 31, 1996) plus 1.5% or the Eurodollar rate (5.5% at December 31, 1996)
plus 3.0%. A fee of 0.375% is assessed on the unused portion of the facility
with interest due monthly. At December 31, 1996, the Company had $3.5 million
outstanding under the revolving line of credit and $300,000 outstanding on
standby letters of credit. The Company had available borrowings under the line
of credit of $21.2 million at December 31, 1996.
Under certain conditions, the line of credit will convert to a secured
credit facility. 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 or had appropriate waivers for such covenants at
December 31, 1996. In addition, the Senior Notes and line of credit restrict the
payment of cash dividends.
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.
F-12
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 $227,000. One of the
properties was then purchased by the Company for $500,000, a price determined by
an independent fiduciary. The other property was re-leased by the Company
through 2005 from a related party at a monthly rental of $8,250. The Company
leases three additional properties through 2006 from a related party at monthly
rentals aggregating $26,200. The total rent expense recorded for related party
leases totaled $238,000, $292,000 and $364,000 in 1994, 1995 and 1996,
respectively.
The total minimum rental commitment at December 31, 1996, under operating
leases, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
- -------------------------------------------------------------------- --------------
<S> <C>
(IN THOUSANDS)
1997................................................................ $ 3,281
1998................................................................ 3,238
1999................................................................ 3,161
2000................................................................ 3,147
2001................................................................ 3,110
Thereafter.......................................................... 13,950
--------------
$ 29,887
--------------
--------------
</TABLE>
The total rental expense included in the statements of operations for the
years ended December 31, 1994, 1995 and 1996 is $1,804,000, $1,985,000 and
$2,856,000, respectively.
6. PROFIT SHARING PLAN
The Company has a Profit Sharing Plan (the "Plan") which covers
substantially all employees who meet a minimum employment requirement. The
Company's board of directors can elect to contribute up to 15% of the
participants' compensation for any plan year, subject to a maximum of $30,000
per participant. During the Plan years ended October 31, 1994, 1995 and 1996,
the Company declared total contributions of $1,003,000, $1,272,000 and $654,000,
respectively, which is included in accrued liabilities. In addition, $195,000 of
assets, included in the Plan, which had been forfeited by terminated employees,
was reallocated to participants.
7. STOCK OPTION PLANS
1996 PERFORMANCE STOCK OPTION PLAN
In June 1996, the Company adopted the 1996 Performance Stock Option Plan (as
amended, the "1996 Plan"), which provides for the granting of options to
purchase units (each unit consisting of 2.582 shares of Common Stock and 99/100
of a share of Junior Preferred Stock (a "Unit")) at an aggregate weighted
average exercise price of $100.00 per unit. As of December 31, 1996, the Company
had issued options to purchase 60,399 Units under the 1996 Plan. Upon conversion
of the Junior Preferred Stock, an option to purchase a Unit will become an
option to purchase 9.182 shares of Common Stock at an exercise price of $10.89
per share. The options vest ratably over three years. The 1996 Plan will be
frozen upon the consummation of the Offering.
MANAGEMENT STOCK OPTION AGREEMENTS
In June 1996, the Company granted options to certain officers to purchase
86,688 Units at an exercise price of $100 per Unit. The options vest in three
equal installments commencing 2003, 2004,
F-13
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS (CONTINUED)
and 2005 and will terminate upon the certain events. The agreements contain
provisions to accelerate the vesting period, including the achievement of a
certain targeted "Calculated Corporate Value", as defined.
1997 EQUITY PARTICIPATION PLAN
In January of 1997, the Company and its stockholders adopted the 1997 Equity
Participation Plan (the "1997 Plan"). Under the 1997 Plan, the Company may grant
options to purchase up to 875,000 shares of Common Stock; provided, however,
that grants to any one individual may not exceed 150,000 shares of Common Stock
in any calendar year. As of December 31, 1996, no options had been granted under
the 1997 Plan.
OTHER OPTION ARRANGEMENTS
In December 1996, the Company's institutional investors granted options to
certain officers and key managers of the Company to purchase 30,188.68 Units
held by such investors at a purchase price of $39.75 per Unit. The Company is
not a party to this agreement and has not, and will not, incur any obligation in
connection with such options. Under generally accepted accounting principles,
the Company recorded a charge to the statement of operations in the amount of
$1.9 million, with a corresponding increase to additional paid in capital.
The Company applies APB Opinion No. 25 in accounting for its plans. Had the
Company determined compensation cost based upon the fair value at the grant date
for its stock options under SFAS No. 123 using the Black Scholes option pricing
model with the following weighted average assumptions: 1996 - expected dividend
yield 0%, risk free interest rate of 7.00%, and expected life of 10 years. The
Company's net loss for the year ended December 31, 1996 would have been
increased from $72.4 million to a pro forma loss of $73.2 million.
Pro forma net loss reflects only options granted in 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period of 3 to 10 years
and compensation cost for options granted prior to January 1, 1996 is not
considered.
At December 31, 1996, all the outstanding stock options had an exercise
price of $100 per Unit and a remaining contractual life of 10 years.
At December 31, 1996, no options were exercisable.
TERMINATED PLAN
Prior to the Recapitalization, the Company had granted to certain members of
management options to purchase 81,407,400 of common stock of the Company at
prices ranging from $.0005 to $0.11 per share. Upon consummation of the
Recapitalization, these options were exchanged for cash and securities with
management and canceled. For financial statement purposes, the Company recorded
a charge of approximately $69.9 million (net of the $7.9 million previously
accrued as deferred compensation) in the statement of operations.
F-14
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The pro forma unaudited income tax adjustments presented represent income
taxes which would have been reported had the Company been subject to Federal and
State income taxes as a C Corporation. The historical pro forma provisions for
income taxes were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Historical income taxes............................................................ $ 326 $ 345 139
--------- --------- ---------
Pro forma adjustments (unaudited):
Federal.......................................................................... 3,645 5,001 --
California....................................................................... 507 798 (139)
--------- --------- ---------
Total pro forma adjustments.................................................... 4,152 5,799 (139)
--------- --------- ---------
Total pro forma provision for income taxes..................................... $ 4,478 $ 6,144 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pro forma income tax expense differs from the statutory tax rate of 35% as
applied to earnings before income taxes, as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Expected income tax expense (benefit)............................................ $ 3,204 $ 3,921 (25,295)
State income taxes, net of federal benefit....................................... 541 743 (3,650)
Non deductible deferred compensation............................................. 441 1,080 --
Non deductible transaction costs................................................. -- -- 3,281
Benefit not recorded due to net carryforward position............................ -- -- 25,379
Other............................................................................ 292 400 285
--------- --------- ----------
$ 4,478 $ 6,144 --
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-15
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
(IN THOUSANDS)
Deferred tax assets:
Federal net operating loss carryforward.................................................... $ 22,483
State net operating loss carryforwards..................................................... 1,622
Deferred compensation...................................................................... 772
Accrued liabilities........................................................................ 648
Inventory reserves......................................................................... 336
---------
Total gross deferred tax assets.............................................................. 25,861
---------
Deferred tax liabilites
Depreciation............................................................................... 140
Other...................................................................................... 342
---------
Total gross deferred liabilities............................................................. 482
---------
Deferred tax assets net of deferred tax liabilities.......................................... 25,379
---------
Less valuation allowance..................................................................... 25,379
---------
Net deferred tax assets...................................................................... --
---------
---------
</TABLE>
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
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
of approximately $64 million prior to the expiration of the net operating loss
carry forwards in 2011.
In connection with the Recapitalization, the Company entered into a tax
indemnification agreement with its former sole stockholder pursuant to which the
Company has agreed to indemnify such stockholder for any loss, damage, or
liability and all expenses incurred, suffered, sustained or required to be paid
by such stockholder in the event that certain specified aspects of the
Recapitalization are not treated for tax purposes in the manner contemplated by
the Recapitalization and related transactions.
F-16
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. OTHER FINANCIAL INFORMATION
Accrued Expenses
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Wages, salaries and benefits........................................................ $ 2,218 $ 2,161
Sales tax payable................................................................... 1,666 2,011
Profit sharing accrual.............................................................. 1,272 786
Other............................................................................... 1,905 2,933
------------- -------------
$ 7,061 $ 7,891
------------- -------------
------------- -------------
</TABLE>
10. PREFERRED STOCK
REDEEMABLE SENIOR PREFERRED STOCK AND WARRANTS
In connection with the recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock with an initial aggregate liquidation value of $20.0
million.
Dividends on the Senior Preferred Stock accrue at a rate of 14%. Such
dividends are payable quarterly on each of March 15, June 15, September 15 and
December 15, beginning June 15, 1996. On or prior to June 15, 2002, dividends
shall not be payable in cash to holders, but shall, whether or not declared,
accrete to the liquidation value of the Senior Preferred Stock compounded on
each dividend payment date. Under certain circumstances the holders can elect to
receive additional shares of the Senior Preferred stock in lieu of accreting to
the liquidation value.
OPTIONAL REDEMPTION
The Company may, at its option, to the extent that funds are legally
available for such payment, redeem, prior to June 15, 1999, in whole or in part,
shares of Senior Preferred Stock at a redemption price equal to 103% of the
liquidation value 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. In January 1997, the
Company and holders of all outstanding shares of Senior Preferred Stock entered
into an agreement pursuant to which the Company will redeem all outstanding
shares of Senior Preferred Stock at 103% of the liquidation value thereof
simultaneously with the consummation of the Offering.
The Senior Preferred Stock is redeemable, on or after June 15,1999, at the
option of the company at a price equal to a percentage of the liquidation value
as follows:
<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.
F-17
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PREFERRED STOCK (CONTINUED)
Holders of the Senior Preferred Stock have no voting rights with respect to
any matters except as provided by law or as set forth in the Senior Preferred
Stock Certificate of Determination. Such Certificate of Determination provides
that in the event that (i) dividends on the Senior Preferred Stock are in
arrears and unpaid for six consecutive quarterly periods after June 15, 2002;
(ii) for any reason (including the reason that funds are not legally available
for redemption), the Company shall have failed to discharge any mandatory
redemption obligation; or (iii) the Company shall have failed to provide a
notice within the time period required by a redemption pursuant to a Change of
Control (each of the foregoing, a "Voting Trigger"), the Board will be increased
by two directors and the holders of the Senior Preferred Stock, together with
the holders of shares of every other series of preferred stock of the Company
with like rights to vote for the election of two additional directors, voting as
a class, will be entitled to elect two directors to the expanded Board of
Directors. Such voting rights will continue until the Company shall have
fulfilled its obligations that gave rise to a Voting Trigger.
The Senior Preferred Stock with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks Senior to Junior Preferred Stock
and the Common Stock.
In connection with the issuance of the Senior Preferred Stock the holders
received detachable warrants (in addition to the Senior Preferred Stock) for the
aggregate $20.0 million paid. The warrants are exchangeable for 73,684 Units (or
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 warrants are
exercisable at a price of $0.01 per Unit. 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 8%
Junior Preferred Stock, $.01 par value ("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.
The Company may be required to mandatorily redeem all or a portion of the
Junior Preferred Stock under certain conditions. Specifically, the company would
be required to redeem within 45 days of an initial public offering (IPO)
resulting in a market capitalization of more than $500 million, at a redemption
price per share equal to 100% of the liquidation value plus all accrued and
unpaid cash dividends as follows:
(i)
If the IPO results in a market capitalization of the Company of less
than $750 million but more than or equal to $500 million, the Company
shall redeem up to 25% of the outstanding shares of Junior Preferred Stock
held by each holder of such shares who requests redemption;
F-18
<PAGE>
GUITAR CENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PREFERRED STOCK (CONTINUED)
(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. In January 1997, the Company and
holders of the requisite number of shares of Junior Preferred Stock entered into
an agreement pursuant to which each outstanding share of Junior Preferred Stock
will be converted into 6.667 shares of Common Stock upon consummation of this
Offering.
Accumulated but unpaid dividends on the Junior and Senior Preferred Stock
aggregated $7,951,000 as of December 31, 1996.
11. 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.
12. PRO FORMA DATA (UNAUDITED)
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 has 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 sold in the Offering, the issuance of Common Stock upon
the conversion of all outstanding shares of Junior Preferred Stock in connection
with the 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 the
Offering.
F-19
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "U.S. Underwriting Agreement"), the Company has agreed to sell to each of
the U.S. underwriters named below (the "U.S. Underwriters"), and each of such
U.S. 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....................................................................... 5,400,000
---------
---------
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. 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 U.S. 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 entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the international offering
(the "International Underwriters") providing for the concurrent offer and sale
of 1,350,000 shares of Common Stock in an international offering outside the
United States. The offering price and aggregate underwriting discounts and
commissions per share for the two offerings are identical. The closing of the
offering made hereby is a condition to the closing of the international
offering, and vice versa. The representatives of the International Underwriters
are Goldman Sachs International, Donaldson, Lufkin & Jenrette Securities
Corporation, Montgomery Securities, Dain Bosworth Incorporated and Chase
Securities Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized or under the laws of
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the international
offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the
U-1
<PAGE>
United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 810,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the U.S. Underwriters exercise their over-allotment option, the U.S.
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
5,400,000 shares of Common Stock offered. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
202,500 additional shares of Common Stock.
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 the concurrent U.S.
and international offerings.
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 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 U.S. 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 of the U.S. Underwriters and the International Underwriters.
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.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment and
stabilizing transactions, "passive" market making (see below) and purchases to
cover syndicate short positions created in connection with the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to
U-2
<PAGE>
syndicate members or other broker-dealers in respect of the Common Stock sold in
the Offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected on the
NASDAQ National Market or otherwise, and these activities, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Exchange Act, Underwriters or prospective
Underwriters that are market makers ("passive market makers") in the Common
Stock may make bids for or purchases of Common Stock in the NASDAQ National
Market until such time, if any, when a stabilizing bid for such securities has
been made. Rule 103 generally provides that (1) a passive market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such securities for two full consecutive calendar months (or
any 60 consecutive days ending within the 10 days) immediately preceding the
filing date of the registration statement of which this Prospectus forms a part,
(2) a passive market maker may not effect transactions or display bids for the
Common Stock at a price that exceeds the highest independent bid for the Common
Stock by persons who are not passive market makers and (3) bids made by passive
market makers must be identified as such.
The Common Stock has been 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.
An affiliate of Chase Securities has in the past provided, and may in the future
provide, general financing and banking services to the Company. 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, 4,381,265 shares of Common
Stock (net of certain options granted to certain members of the Company's
management). See "Certain Transactions -- Transactions with Affiliates of DLJ
and Chase Securities" and "-- Options Granted by Certain Investors to Certain
Members of Management."
The Company has agreed to indemnify the several U.S. Underwriters against
certain liabilities, including liabilities under the Securities Act. The U.S.
Underwriters have agreed to reimburse the Company for certain expenses.
U-3
<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......................................................... 24
Business................................................................ 29
Management.............................................................. 38
Principal Stockholders.................................................. 51
Certain Transactions.................................................... 53
Description of Certain Indebtedness..................................... 57
Shares Eligible for Future Sale......................................... 59
Description of Capital Stock............................................ 60
Certain United States Federal Tax Considerations for Non-United States
Holders............................................................... 64
Legal Matters........................................................... 66
Experts................................................................. 66
Additional Information.................................................. 66
Index to Financial Statements........................................... F-1
Underwriting............................................................ U-1
</TABLE>
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>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "U.S. Underwriting Agreement"), the Company has agreed to sell to each of
the U.S. underwriters named below (the "U.S. Underwriters"), and each of such
U.S. 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....................................................................... 5,400,000
---------
---------
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. 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 U.S. 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 entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the international offering
(the "International Underwriters") providing for the concurrent offer and sale
of 1,350,000 shares of Common Stock in an international offering outside the
United States. The offering price and aggregate underwriting discounts and
commissions per share for the two offerings are identical. The closing of the
offering made hereby is a condition to the closing of the international
offering, and vice versa. The representatives of the International Underwriters
are Goldman Sachs International, Donaldson, Lufkin & Jenrette Securities
Corporation, Montgomery Securities, Dain Bosworth Incorporated and Chase
Securities Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized or under the laws of
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the international
offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the
U-1
<PAGE>
United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 810,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the U.S. Underwriters exercise their over-allotment option, the U.S.
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
5,400,000 shares of Common Stock offered. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
202,500 additional shares of Common Stock.
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 the concurrent U.S.
and international offerings.
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 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 U.S. 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 of the U.S. Underwriters and the International Underwriters.
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.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment and
stabilizing transactions, "passive" market making (see below) and purchases to
cover syndicate short positions created in connection with the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to
U-2
<PAGE>
syndicate members or other broker-dealers in respect of the Common Stock sold in
the Offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected on the
NASDAQ National Market or otherwise, and these activities, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Exchange Act, Underwriters or prospective
Underwriters that are market makers ("passive market makers") in the Common
Stock may make bids for or purchases of Common Stock in the NASDAQ National
Market until such time, if any, when a stabilizing bid for such securities has
been made. Rule 103 generally provides that (1) a passive market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such securities for two full consecutive calendar months (or
any 60 consecutive days ending within the 10 days) immediately preceding the
filing date of the registration statement of which this Prospectus forms a part,
(2) a passive market maker may not effect transactions or display bids for the
Common Stock at a price that exceeds the highest independent bid for the Common
Stock by persons who are not passive market makers and (3) bids made by passive
market makers must be identified as such.
The Common Stock has been 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.
An affiliate of Chase Securities has in the past provided, and may in the future
provide, general financing and banking services to the Company. 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, 4,381,265 shares of Common
Stock (net of certain options granted to certain members of the Company's
management). See "Certain Transactions -- Transactions with Affiliates of DLJ
and Chase Securities" and "-- Options Granted by Certain Investors to Certain
Members of Management."
The Company has agreed to indemnify the several U.S. Underwriters against
certain liabilities, including liabilities under the Securities Act. The U.S.
Underwriters have agreed to reimburse the Company for certain expenses.
U-3
<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......................................................... 24
Business................................................................ 29
Management.............................................................. 38
Principal Stockholders.................................................. 51
Certain Transactions.................................................... 53
Description of Certain Indebtedness..................................... 57
Shares Eligible for Future Sale......................................... 59
Description of Capital Stock............................................ 60
Certain United States Federal Tax Considerations for Non-United States
Holders............................................................... 64
Legal Matters........................................................... 66
Experts................................................................. 66
Additional Information.................................................. 66
Index to Financial Statements........................................... F-1
Underwriting............................................................ U-1
</TABLE>
6,750,000 SHARES
GUITAR CENTER, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[LOGO]
------------------------
GOLDMAN SACHS INTERNATIONAL
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...................................................... 50,000
Printing Expenses............................................................... 150,000
Legal Fees and Expenses......................................................... 400,000
Accounting Fees and Expenses.................................................... 200,000
Transfer Agent and Registrar Fees............................................... 10,000
Blue Sky Fees and Expenses (including counsel's fees)........................... 20,000
Miscellaneous Expenses.......................................................... 219,444
------------
Total....................................................................... $ 1,100,000
------------
------------
</TABLE>
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 3,100 Units for an aggregate
purchase price of approximately $0.3 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 Statements Schedules:
II. Valuation and Qualifying Accounts...................................S-1
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule pursuant to
the applicable accounting regulations of the Securities and Exchange Commission
or because the information required is included in the financial statements or
notes thereto.
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 Amendment No. 2 to 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 10th day of March, 1997.
GUITAR CENTER, INC.
By: */s/ LARRY THOMAS
------------------------------------------
Name: Larry Thomas
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to 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 March 10, 1997
Larry Thomas Officer)
/s/ BRUCE ROSS Vice President, Chief Financial
------------------------------------------- Officer and Secretary (Principal March 10, 1997
Bruce Ross Financial and Accounting Officer)
*/s/ MARTY ALBERTSON
------------------------------------------- Executive Vice President, Chief March 10, 1997
Marty Albertson Operating Officer and Director
*/s/ RAYMOND SCHERR
------------------------------------------- Director March 10, 1997
Raymond Scherr
*/s/ DAVID FERGUSON
------------------------------------------- Director March 10, 1997
David Ferguson
*/s/ JEFFREY WALKER
------------------------------------------- Director March 10, 1997
Jeffrey Walker
*/s/ MICHAEL LAZARUS
------------------------------------------- Director March 10, 1997
Michael Lazarus
*/s/ STEVEN BURGE
------------------------------------------- Director March 10, 1997
Steven Burge
*By: /s/ BRUCE ROSS
-------------------------------------------
Bruce Ross March 10, 1997
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
SCHEDULE II
GUITAR CENTER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
OF YEAR OPERATIONS ALLOWANCE OTHER OF YEAR
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Allowance for doubtful receivables................... $ 200 -- $ (50) -- $ 150
Allowance for obsolesence & damaged goods............ $ 100 $ 500 -- -- $ 600
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of U.S. Underwriting Agreement
1.2** Form of International 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 (Incorporated by reference to Exhibit 3.3 contained in Registration Statement on
Form S-1 (File No. 333-10491))
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
4.4 Form of Stock Certificate
5.1** Opinion of Latham & Watkins as to the validity of the shares of Common Stock offered hereby
10.1* Recapitalization Agreement, dated May 1, 1996 by and among the Company and the stockholders named
therein
10.2* Registration Rights Agreement, dated June 5, 1996, among the Company and the stockholders named
therein
10.3* Tax Indemnification Agreement, dated as of May 1, 1996, by and among the Company, Ray Scherr, and the
individuals identified on the signature pages thereto
10.4* Employment Agreement dated June 5, 1996, between the Company
and Lawrence Thomas (Incorporated by reference to Exhibit 10.5 contained in Registration Statement on
Form S-1 (File No. 333-10491))
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 Marty Albertson
10.7** Employment Agreement dated June 5, 1996, between the Company and Bruce Ross, as amended
10.8* Employment Agreement dated June 5, 1996, between the Company and Raymond Scherr
10.9** Employment Agreement dated June 5, 1996, between the Company and Barry Soosman, as amended
10.10* Securities Purchase Agreement dated June 5, 1996, by and among the Company
and the parties named therein
10.11** Form of Indemnification Agreement between the Company and each of its directors and executive officers
10.12* Credit Agreement dated June 5, 1996, between the Company
and Wells Fargo Bank, N.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.13* Revolving Promissory Note dated June 5, 1996, issued by the Company in favor of Wells Fargo Bank, N.A.
in the principal amount of $25,000,000
10.14* Security Agreement dated June 5, 1996, between the Company and Wells Fargo, N.A.
10.15* Registration Rights Agreement, dated July 2, 1996, by and among the Company, Chase Securities and DLJ
10.16* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Lawrence Thomas
10.17* Management Stock Option Agreement, dated June 5, 1996, by and between the Company and Marty Albertson
10.18* Registration Agreement dated June 5, 1996, among the Company
and the parties named therein (Incorporated by reference to Exhibit 10.11 contained in Registration
Statement on Form S-1 (File No. 333-10491))
10.19* Stockholders Agreement, dated June 5, 1996, among the Company, and the investors listed therein
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 Management Stock Repurchase Agreement
10.30** Amendment No. 2 to the Amended and Restated 1996 Performance Stock Option Plan
10.31** Amendment No. 1 to Management Stock Option Agreement, dated as of October 15, 1996, between the
Company and Larry Thomas (Incorporated by reference to Exhibit 10.21 contained in Registration
Statement on Form S-1 (File No. 333-10491))
10.32** Amendment No. 1 to Management Stock Option Agreement, dated as of October 15, 1996, between the
Company and Marty Albertson (Incorporated by reference to Exhibit 10.22 contained in Registration
Statement on Form S-1 (File No. 333-10491))
16.1 Letter re change in certifying accountant
23.1 Consent of KPMG Peat Marwick LLP, independent auditors
23.2 Consent of Ernst & Young LLP, independent auditors
23.4** Consent of Latham & Watkins (included in Exhibit 5.1)
24.1** Power of Attorney
27.1** Financial Data Schedule
</TABLE>
- ------------------------
*Incorporated by reference to the same numbered exhibit in the Registration
Statement on Form S-1 (File No. 333-10491).
**Previously filed.
<PAGE>
EXHIBIT 4.4
[LOGO]
COMMON STOCK CUSIP 402040 10 9
GUITAR CENTER, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
GUITAR CENTER, INC., a Delaware corporation (the "Corporation"). The shares
represented by this certificate are transferable only on the stock transfer
books of the Corporation by the holder of record hereof, or by the holder's
duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate is not valid until
countersigned by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
Dated:
/s/ /s/
- -------------------------- -------------------------
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Transfer Agent and Registrar
By
Authorized Officer
<PAGE>
GUITAR CENTER, INC.
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares of
stock of the Corporation, and upon the holders thereof as established by the
Certificate of Incorporation or by any certificate of determination of
preferences, and the number of shares constituting each series or class and
the designations thereof, may be obtained by any stockholder of the
Corporation upon request and without charge from the Secretary of the
Corporation at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT-......Custodian......
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act------------------
in common (State)
UNIF TRF MIN ACT-.......Custodian (until age.......)
(Cust)
...........under Uniform Transfers
(Minor)
to Minors Act....................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,__________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------------
----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By
-------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE>
EXHIBIT 10.29
MANAGEMENT STOCK REPURCHASE AGREEMENT
This Management Stock Repurchase Agreement, dated as of February 19, 1997
(this "AGREEMENT"), is among Guitar Center, Inc., a Delaware corporation (the
"COMPANY"), and the employees of the Company listed on the signature pages
hereto (the "MANAGEMENT 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,
par value $.01 per share ("COMMON STOCK").
B. Contemporaneous with the closing of the IPO, all shares of the Junior
Preferred Stock will be mandatorily converted into shares of Common Stock (the
"CONVERSION").
C. In connection with the Conversion, a significant amount of non-cash
income will be deemed to have been earned by the Management Stockholders for
federal and state income tax purposes in connection with compensation deemed
earned by them in their capacity as employees of the Company (whether or not the
Management Stockholders have received any cash with respect to the underlying
stock). To ensure that the Management Stockholders have sufficient cash to
finance a portion of such federal and state income tax obligations, the Company
and the Management Stockholders, severally and not jointly, have agreed to enter
into this Agreement.
D. The repurchase arrangements between the Company and each Management
Stockholder provided for herein have been approved by the Board of Directors of
the Company and by a majority of the disinterested directors as being in the
best interest of the Company.
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. STOCK REPURCHASE.
(a) In connection with the Conversion, the Company agrees to
repurchase from the Management Stockholders, and the Management Stockholders,
severally and not jointly, agree to sell to the Company, that aggregate number
of shares of Common Stock that can be repurchased for a total of $18,417,266,
allocated among each of the Management Stockholders as set forth on the
signature pages hereof (the "REPURCHASE AMOUNT").
(b) For purposes of this Agreement, the aggregate number of shares of
Common Stock to be repurchased by the Company from each Management Stockholder
(the "REPURCHASED SHARES"), in the case of each Management Stockholder, shall be
the (i) Repurchase Amount for such Management Stockholder divided by (ii) the
initial public offering price set forth on
<PAGE>
the cover page of the final prospectus, less the gross underwriting discount
actually paid by the Company (net of any reimbursed expenses) (the
"COMMISSION"). Fractional shares shall be rounded to the nearest whole share.
(c) In connection with the determination of the number of Repurchased
Shares, the parties hereto agree that the Chief Financial Officer of the Company
shall, at the time of pricing of the IPO, fill in the blanks on the signature
pages hereof associated with each Management Stockholder's Repurchased Shares in
accordance with the mathematical calculation called for by Section 1(b), above.
(d) The Management Stockholders, severally and not jointly,
acknowledge that the initial public offering price and the Commission in the IPO
will be binding upon each Management Stockholder. The Management Stockholders,
severally and not jointly, acknowledge that they will not be consulted during
the determination of the initial public offering price or Commission and, should
the Company decide not to pursue the IPO, that each will be similarly bound by
that decision.
(e) In connection with this Agreement, each Management Stockholder
agrees to deliver to the Company on or prior to the closing date of the IPO:
(i) a duly executed spousal consent (in substantially the form
of Exhibit A attached hereto); and
(ii) the certificate(s) representing his Repurchased Shares.
Upon delivery of such instruments at the closing of the IPO, the Company will
pay the related Repurchase Price in cash by wire transfer.
(f) It is expressly agreed that the obligation of the Company to
repurchase, and the Management Stockholders, severally and not jointly, to sell,
the Repurchased Shares is conditioned upon, and shall only occur concurrently
with, the consummation of the IPO.
(g) The Company confirms that this Agreement and the related terms of
the disposition of shares of Common Stock to the Company has been approved by
the Board of Directors of the Company in advance of the effectiveness hereof and
represents that the repurchase of the Repurchased Shares as contemplated hereby
does not violate Section 160 of the Delaware General Corporation Law, the
Restated Certificate of Incorporation of the Company or any indenture,
instrument or agreement to which the Company is a party or by which it is bound.
(h) Upon the consummation of the repurchase of the Repurchased Shares
as contemplated hereby, the Company will acquire sole and exclusive record and
beneficial ownership of such shares, free and clear of any adverse claims of any
sort whatsoever.
2. MISCELLANEOUS.
2.1. 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
2
<PAGE>
at the times contemplated herein the agreements provided for herein and the
actions contemplated by this Agreement.
2.2. TERMINATION. This Agreement shall be terminated automatically
without liability to any party if the IPO has not been consummated on or prior
to June 30, 1997.
2.3. 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.
2.4. 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 Agreement as a whole and not to any
particular Section or other subdivision. This Agreement 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 Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
2.5. COUNTERPARTS. This 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.
2.6. BINDING EFFECT. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their administrators, successors, legal representatives and assigns.
2.7. MISCELLANEOUS. This Agreement (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 Agreement;
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.
(SIGNATURE PAGES FOLLOW)
S-1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
GUITAR CENTER, INC.
By: /s/ BRUCE ROSS
--------------------------
Authorized Signatory
S-2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ LARRY THOMAS
Common Stock Sold -------------------------
Larry Thomas
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$6,706,145
Repurchase Price
S-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ MARTY ALBERTSON
Common Stock Sold -------------------------
Marty Albertson
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$4,470,756
Purchase Price
S-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ ROD BARGER
Common Stock Sold -------------------------
Rod Barger
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$793,433
Purchase Price
S-5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ BILL MCGARRY
Common Stock Sold -------------------------
Bill McGarry
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$1,154,084
Purchase Price
S-6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ RICH PIDANICK
Common Stock Sold -------------------------
Rich Pidanick
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$793,433
Purchase Price
S-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ ANDY HEYNEMAN
Common Stock Sold -------------------------
Andy Heyneman
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$577,042
Purchase Price
S-8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ GEORGE LAMPOS
Common Stock Sold -------------------------
George Lampos
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$323,332
Purchase Price
S-9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of /s/ DON KELSEY
Common Stock Sold -------------------------
Don Kelsey
- ---------------
(To Be Completed By Chief Financial
Officer pursuant to Section 1(c))
$245,958
Purchase Price
S-10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Stock Repurchase Agreement to be executed as of the date first written above.
Number of Shares of THE DAVE DIMARTINO
REVOCABLE LIVING TRUST
By: /s/ DAVE DIMARTINO
- --------------- ------------------------
Common Stock Sold Dave DiMartino
(To Be Completed By Chief Financial Trustee
Officer pursuant to Section 1(c))
$3,353,083
Purchase Price
S-11
<PAGE>
EXHIBIT A
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 Management
Stock Repurchase Agreement dated as of February 19, 1997 by and among the
Company and certain of its stockholders (the "AGREEMENT"), and that I have
reviewed the Agreement.
The Agreement contains certain provisions regarding my spouse selling or
retaining any equity securities, or rights to receive equity securities (the
"SECURITIES") issued by the Company. I agree that my spouse may sell any
Securities in compliance with the terms of the Agreement and that I will not
sell any such Securities in violation of the Agreement.
Executed as of February 19, 1997.
- -----------------------------------
(Signature)
Name:
------------------------------
(Please print name)
A-1
<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 March 10, 1997, of Guitar Center, Inc.
and are in agreement with the statements contained in the second paragraph
therein.
ERNST & YOUNG LLP
March 10, 1997
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Guitar Center, Inc.:
The audit referred to in our report dated February 10, 1997, included the
related financial statement schedule as of and for the year ended December 31,
1996, included in the registration statement. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 10, 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, in the Registration Statement (Form
S-1 No. 333-20931) and related Prospectus of Guitar Center, Inc. dated March 10,
1997.
ERNST & YOUNG LLP
Los Angeles, California
March 10, 1997
