<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 20, 1997
REGISTRATION NO. 333-20931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GUITAR CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5733 95-4600862
(State or other jurisdiction (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 FEBRUARY 20, 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 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). 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 and is currently evaluating several such opportunities.
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 with respect to any such acquisitions. Accordingly, there can be no
assurance that the Company will be able to identify suitable acquisition
candidates available for sale at reasonable prices or consummate any
acquisitions. Further, acquisitions may involve a number of special risks,
including diversion of management's attention, the inability to integrate
successfully any acquired business, the incurrence of legal liabilities and
unanticipated events or circumstances, some or all of which could have a
material adverse effect on the Company's results of operations, financial
condition, business and prospects. See "Business."
DEPENDENCE ON SUPPLIERS
The Company's business and its expansion plans are dependent to a
significant degree upon its suppliers. As it believes is customary in the
industry, the Company does not have any long-term supply contracts with its
suppliers. The loss of certain key vendors or the failure to establish and
maintain
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). 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 and is currently evaluating several such opportunities. 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 with
respect to any such acquisitions. There can be no assurance that the Company
will be able to identify suitable acquisition candidates available for sale at
reasonable prices or consummate any acquisitions.
Management believes that, following the consummation of this Offering, the
Company will have adequate capital resources and liquidity to meet its borrowing
obligations, fund all required capital expenditures and pursue its business
strategy for at least the next twelve months, including its present plans for
expansion as described elsewhere herein. The Company's capital resources and
liquidity are expected to be provided by the Company's cash flow from operations
and borrowings under the 1996 Credit Facility. Depending on market conditions,
the Company may also incur additional indebtedness or issue equity securities.
There can be no assurance that such additional capital, if and when required,
will be available on terms acceptable to the Company, if at all.
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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 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.
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<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
38
<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 II, L.P., a
venture capital firm. From 1986 to 1991, he served as Managing Director and
Director of the Private Placement Department of
39
<PAGE>
Montgomery Securities. He became a director of the Company upon consummation of
the Recapitalization. Mr. Lazarus is currently on the Board of Directors of Just
For Feet, Inc. and various privately held companies.
STEVEN BURGE is a Managing Director of Wells Fargo. He became a director of
the Company upon consummation of the Recapitalization. From 1987 through 1995,
Mr. Burge was a Managing General Partner of Wedbush Capital Partners, a private
investment fund, and was an executive in the Corporate Finance Department of
Wedbush Morgan Securities, a regional investment banking firm. Prior to joining
Wedbush Morgan Securities, Mr. Burge held various positions with Wells Fargo
Bank.
DAVE 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
42
<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.
50
<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 Certain 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 arising from his general partnership interest
therein.
(7) Mr. Lazarus does not directly own any Common Stock. However, as a general
partner of Weston Presidio, he may be deemed to share voting and investment
control over the shares of Common Stock held by Weston Presidio. Mr. Lazarus
disclaims beneficial ownership of the shares held by Weston Presidio.
(8) Mr. Burge does not own any Common Stock. However, as a managing director of
Wells Fargo, he may be deemed to share voting or investment control over the
shares of Common Stock owned by Wells Fargo. Mr. Burge disclaims beneficial
ownership of the shares held by Wells Fargo.
(9) Includes 109,722 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 Certain Investors to Certain Members of
Management."
(10)Includes: (i) 53,099 shares of Common Stock held in trust for the benefit of
Mr. Albertson and one of his children for which Mr. Albertson serves as
trustee; (ii) 53,099 shares of Common Stock held in trust for the benefit of
Mr. Albertson's spouse and one of his children for which Mr. Albertson
serves as trustee; and (iii) 109,722 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 Certain 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 Certain Investors to Certain Members of
Management."
(12)Represents: (i) 45,910 shares of Common Stock held by the Soosman Family
Trust with respect to which Mr. Soosman and his spouse serve as co-trustees
and share voting and investment control; and (ii) 3,850 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
Certain 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
Certain 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 and has an equity interest therein.
In connection with the Recapitalization, the Scherr Trust and stockholders
holding management positions (the "Management Stockholders") have agreed to
indemnify the Investors and the DLJ Investors for losses incurred in connection
with any misrepresentations or breaches of warranty by the Company or its
affiliates. The Investors and the DLJ Investors (as defined herein) have agreed
to indemnify the Company in substantially the same manner, with the indemnified
amount limited to each Investor's ratable share of such losses.
TRANSACTIONS WITH AFFILIATES OF DLJ AND CHASE SECURITIES
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock and Warrants to purchase 190,252 shares of Common
Stock and 72,947 shares of Junior Preferred Stock (for an aggregate of $20
million in cash) to DLJ Merchant Banking Partners, L.P., DLJ International
Partners, C.V., DLJ Offshore Partners, C.V. and DLJ Merchant Banking Funding,
Inc. (collectively, the "DLJ Investors"), all of which may be deemed to be
affiliates of DLJ. The Company granted certain registration rights to the DLJ
Investors. See "-- Registration Rights."
In connection with the Recapitalization, the Company entered into a Bridge
Facility with DLJ Bridge, an affiliate of DLJ, and Chemical, an affiliate of
Chase Securities, pursuant to which DLJ Bridge purchased $51.0 million aggregate
principal amount of senior unsecured increasing rate notes for $51.0 million in
cash with interest payable at 12.75% per annum, and Chemical loaned $49.0
million in cash to the Company with interest payable at 12.75% per annum. The
Company applied the net proceeds of the offering of the Senior Notes, for which
DLJ and Chase Securities acted as Initial Purchasers, to the retirement of the
Bridge Facility. DLJ and Chase Securities are also acting as underwriters in
this Offering. In connection with such transactions, DLJ Bridge, Chemical, DLJ
and Chase Securities received customary fees.
1996 CREDIT FACILITY
Effective with the Recapitalization, Wells Fargo, an affiliate of Wells
Fargo Bank, purchased approximately 7.14% of the then outstanding Common Stock.
See "Principal and Selling Stockholders." Wells Fargo Bank is acting as lender
under the 1996 Credit Facility and is being paid customary fees therefor. In
addition, the Company has agreed to pay to Wells Fargo Bank, promptly upon
demand, a fee of
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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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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this Offering, the authorized capital stock of the
Company will consist of 55,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock. The following summary description relating to the capital
stock gives effect to the consummation of this Offering and does not purport to
be complete. Reference is made to the Certificate of Incorporation, and the
Bylaws, which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part, for a detailed description of the provisions thereof
summarized below.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends, if any, as
may from time to time be declared by the Board of Directors of the Company out
of funds legally available therefor. Pursuant to the Certificate of
Incorporation, holders of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote and do not
have cumulative voting rights. Holders of Common Stock have no preemptive,
conversion, redemption or sinking fund rights. In the event of a liquidation,
dissolution or winding-up of the Company, holders of Common Stock are entitled
to share equally and ratably in the assets of the Company, if any, remaining
after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding Preferred Stock. The outstanding
shares of Common Stock are, and the shares of Common Stock offered by the
Company hereby when issued will be, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to any series
of Preferred Stock which the Company may issue in the future.
WARRANTS
In connection with the Recapitalization, the Company issued a warrant for
the purchase of shares of the Common Stock and the Junior Preferred Stock of the
Company (collectively, the "Warrants") to each of the DLJ Investors. The
Warrants are exercisable into an aggregate of 676,566 shares of Common Stock at
an exercise price of $0.01 per share and expire on June 5, 2006.
So long as any of the Warrants are outstanding, the amount of Common Stock
obtainable pursuant to the Warrants shall be subject to change or adjustment
according to the anti-dilution provisions of the Warrants. In the case of any
capital reorganization or any reclassification of the capital stock of the
Company the Warrants shall thereafter be exercisable for the number of shares of
stock or other securities or property receivable upon such capital
reorganization or reclassification equal to the number of shares of Common Stock
into which the Warrants would have been exercisable immediately prior to such
reorganization or reclassification.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the designations, preferences,
powers and relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption price and liquidation preference, and to fix
the number of shares to be included in any such series. Any Preferred Stock so
issued may rank senior to the Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of the Preferred Stock may have class or series voting
rights. Upon completion of this Offering and the transactions contemplated
hereby, the Company will not have any shares of Preferred Stock outstanding.
Further issuances of Preferred Stock, while providing the Company with
flexibility in connection with general corporate purposes, may, among other
things, have an adverse effect on the rights of holders of Common Stock. See
"Risk Factors -- Ownership of the Company; Anti-takeover Provisions."
SENIOR PREFERRED STOCK
In connection with the Recapitalization, the Company issued 800,000 shares
of Senior Preferred Stock with an initial aggregate liquidation value of $20.0
million. Approximately $22.9 million of the net
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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.
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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
<PAGE>
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.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "GTRC."
U-2
<PAGE>
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>
--------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
6,750,000 SHARES
GUITAR CENTER, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
DAIN BOSWORTH
Incorporated
CHASE SECURITIES INC.
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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 FEBRUARY 20, 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, 1,350,000 shares are being
offered hereby in an international offering outside the United States and
5,400,000 shares are being offered in a concurrent United States offering. 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 International Underwriters an option for 30 days
to purchase up to an additional 202,500 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
U.S. Underwriters a similar option with respect to an additional 810,000
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 International
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 INTERNATIONAL DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES DAIN BOSWORTH CHASE SECURITIES INC.
Incorporated
--------------------------
The date of this Prospectus is March , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "International Underwriting Agreement"), the Company has agreed to sell to
each of the international underwriters named below (the "International
Underwriters"), and each of such International Underwriters, for whom Goldman
Sachs International, 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 International.....................................................
Donaldson, Lufkin & Jenrette Securities Corporation.............................
Montgomery Securities...........................................................
Dain Bosworth Incorporated......................................................
Chase Securities Inc. ..........................................................
---------
Total....................................................................... 1,350,000
---------
---------
</TABLE>
Under the terms and conditions of the International Underwriting Agreement,
the International Underwriters are committed to take and pay for all of the
shares offered hereby, if any are taken.
The International 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 International 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 "U.S.
Underwriting Agreement") with the underwriters of the U.S. offering (the "U.S.
Underwriters") providing for the concurrent offer and sale of 5,400,000 shares
of Common Stock in an offering in 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 U.S. offering, and vice versa. The representatives of the U.S.
Underwriters are Goldman, Sachs & Co., 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 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 in 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 named herein 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 of any
concession to agree to observe a similar restriction.
Pursurant 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 International Underwriters an option exercisable
for 30 days after the date of this Prospectus to purchase up to an aggregate of
202,500 additional shares of Common Stock solely to cover over-allotments, if
any. If the International Underwriters exercise their over-allotment option, the
International 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
1,350,000 shares of Common Stock offered. The Company has granted the U.S.
Underwriters a similar option to purchase up to an aggregate of 810,000
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 International,
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 International Underwriters may not confirm sales to any
discretionary account without the prior specific written approval of the
customer.
Each international Underwriter has also agreed that (a) it has not offered
or sold and prior to the date six months after the date of issue of the shares
of Common Stock will not offer or sell any shares of Common Stock to persons in
the United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (b) it
has complied, and will comply, with all applicable provisions of the Financial
Services Act of 1986 of Great Britain with respect to anything done by it in
relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom, and (c) it has only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in connection with
U-2
<PAGE>
the issuance of the shares of Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom
the document may otherwise lawfully be issued or passed on.
Buyers of shares of Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the country
of purchase in addition to the initial public offering price.
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 International Underwriters and the U.S. 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.
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 International Underwriters
against certain liabilities, including liabilities under the Securities Act. The
International 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>
--------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
6,750,000 SHARES
GUITAR CENTER, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[LOGO]
------------------------
GOLDMAN SACHS 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. 1 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 18th day of February, 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. 1 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 February 18, 1997
Larry Thomas Officer)
/s/ BRUCE ROSS Vice President, Chief Financial
------------------------------------------- Officer and Secretary (Principal February 18, 1997
Bruce Ross Financial and Accounting Officer)
*/s/ MARTY ALBERTSON
------------------------------------------- Executive Vice President, Chief February 18, 1997
Marty Albertson Operating Officer and Director
*/s/ RAYMOND SCHERR
------------------------------------------- Director February 18, 1997
Raymond Scherr
*/s/ DAVID FERGUSON
------------------------------------------- Director February 18, 1997
David Ferguson
*/s/ JEFFREY WALKER
------------------------------------------- Director February 18, 1997
Jeffrey Walker
*/s/ MICHAEL LAZARUS
------------------------------------------- Director February 18, 1997
Michael Lazarus
*/s/ STEVEN BURGE
------------------------------------------- Director February 18, 1997
Steven Burge
*By: /s/ BRUCE ROSS
-------------------------------------------
Bruce Ross February 18, 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
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.
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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*** Form of 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.
***To be filed by Amendment.
<PAGE>
EXHIBIT 1.1
[DRAFT]
GUITAR CENTER, INC.
5,400,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE
UNDERWRITING AGREEMENT
(U.S. VERSION)
March __, 1997
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Dain Bosworth Incorporated
Chase Securities Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Guitar Center, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
5,400,000 shares and, at the election of the Underwriters, up to 810,000
additional shares of Common Stock, $0.01 par value ("Stock"), of the Company.
The aggregate of 5,400,000 shares to be sold by the Company is herein called the
"Firm Shares" and the 810,000 additional shares to be sold by the Company are
herein called the "Optional Shares." The Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares."
It is understood and agreed to by all parties that the Company is
concurrently entering into an agreement (the "International Underwriting
Agreement") providing for the sale by the Company of up to a total of 1,552,500
shares of Stock (the "International Shares"), including the overallotment option
thereunder, through arrangements with certain underwriters outside the United
States (the "International Underwriters"), for whom Goldman Sachs International,
Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery Securities, Dain
Bosworth Incorporated and Chase Securities Inc. are acting as representatives.
Anything herein or therein to the contrary notwithstanding, the respective
closings under this
<PAGE>
Agreement and the International Agreement are hereby expressly made
conditional on one another. The Underwriters hereunder and the International
Underwriters are simultaneously entering into an Agreement between U.S. and
International Underwriting Syndicates (the "Agreement between Syndicates")
which provides, among other things, for the transfer of shares of Stock
between the two syndicates and for consultation by the representatives
hereunder with Goldman, Sachs & Co. prior to exercising the rights of the
Underwriters under Section 8 hereof. Two forms of prospectus are to be used
in connection with the offering and sale of shares of Stock contemplated by
the foregoing, one relating to the Shares hereunder and the other relating to
the International Shares. The latter form of prospectus will be identical to
the former except for certain substitute pages as included in the
registration statement and amendments thereto as mentioned below. Except as
used in Sections 2, 4, 5, 11 and 13 herein, and except as the context may
otherwise require, references hereinafter to the Shares shall include all the
shares of Stock which may be sold pursuant to either this Agreement or the
International Underwriting Agreement, and references herein to any prospectus
whether in preliminary or final form, and whether as amended or supplemented,
shall include both the U.S. and the international versions thereof.
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-20931) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto, for
you and each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement has heretofore
been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has
been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the Act,
is hereinafter called a "Preliminary Prospectus"; the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with Section
6(a) hereof and deemed by virtue of Rule 430A under the Act to be part of
the Initial Registration Statement at the time it was declared effective or
such part of the Rule 462(b) Registration Statement, if any, became or
hereafter becomes effective, each as amended at the time such part of the
registration statement became effective, are
2
<PAGE>
hereinafter collectively called the "Registration Statement"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein (with respect to the Prospectus and any amendment or supplement
thereto, in light of the circumstances under which such statements were
made) not misleading; PROVIDED, HOWEVER, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iv) The Company has not sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock (except for
immaterial issuances of stock options to employees of the Company pursuant
to existing stock option plans as in effect prior to the date hereof or
except as contemplated and disclosed in the Prospectus) or long-term debt
or material increase in short-term debt other than in the ordinary course
of business and consistent with past practices, of the Company or any
material adverse change, or any development reasonably likely to result in
a prospective material adverse change, in or affecting the business,
3
<PAGE>
management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in
the Prospectus;
(v) The Company has good and marketable title in fee simple to all real
property owned by it and owns all of the personal property disclosed in the
Prospectus as being owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company or such as would not have a material adverse effect on the
business, management, condition (financial or otherwise), stockholders'
equity, results of operations or prospects of the Company, either
individually or in the aggregate (a "Material Adverse Effect"); any real
property and buildings held under lease by the Company is held by it under
valid, currently existing and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company or except where the
failure to have a valid, currently existing and enforceable lease would not
have a Material Adverse Effect; and except for such assets and facilities
as are immaterial in the aggregate to the business of the Company taken as
a whole, all tangible assets and facilities of the Company are reasonably
adequate for the uses to which they are being put or would be put in the
ordinary course of business;
(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the state of Delaware,
with power and authority (corporate and other) to (i) own its properties
and conduct its business as described in the Prospectus, (ii) authorize the
offering of the Shares, (iii) execute, deliver and perform this Agreement,
and (iv) issue, sell and deliver the Shares; and the Company has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, except where the failure to be so qualified, either
individually or in the aggregate, would not have a Material Adverse Effect;
(vii) The Company has an authorized capitalization as set forth in the
Prospectus; all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus;
(viii) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder and under the International Underwriting Agreement
have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein and in the International
Underwriting Agreement, will be duly and validly issued and fully paid and
nonassessable and will conform to the description of the Stock contained in
the Prospectus; and the issuance and sale of the Shares by the Company will
not be subject to preemptive or other similar rights;
4
<PAGE>
(ix) The issue and sale of the Shares to be sold by the Company
hereunder and under the International Underwriting Agreement and the
compliance by the Company with all of the provisions of this Agreement and
the International Underwriting Agreement and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party
or by which the Company is bound or to which any of the property or assets
of the Company is subject, nor will such action result in any violation of
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
properties, except where such conflict, breach, violation, or default
either individually or in the aggregate, would not have a Material Adverse
Effect, nor will such action result in any violation of the provisions of
the Certificate of Incorporation or By-laws of the Company; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement and the International Underwriting
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as may
be required under state or foreign securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
(x) The Company is not in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any of its
properties may be bound, except where such default, either individually or
in the aggregate, would not have a Material Adverse Effect, nor is the
Company in violation of its Certificate of Incorporation or By-laws; the
Company is not in violation of or in default in the performance of any
statute, rule or regulation or administrative or court decree applicable to
the Company or any of its properties, except for any such violation or
default which, individually or in the aggregate, would not have a Material
Adverse Effect;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock," insofar as they purport to constitute a
summary of the terms of the capital stock of the Company, under the
captions "Recapitalization," and "Certain Transactions" and under the
caption "Underwriting" (except, under the caption "Underwriting," for
paragraphs 3 and 6 and the last sentence of paragraph 7 thereof) insofar as
they purport to describe the provisions of the laws and documents referred
to therein, are accurate and fair in all material respects;
(xii) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of
which any property of the Company is the subject which, if determined
adversely to the Company, would,
5
<PAGE>
individually or in the aggregate, have a Material Adverse Effect and, to
the best of the Company's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others;
(xiii) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be (i) an "investment company" or[, TO THE
KNOWLEDGE OF THE COMPANY,] an entity "controlled" by an "investment
company", as such terms are defined in the Investment Company Act of 1940,
as amended (the "Investment Company Act");
(xiv) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(xv) KPMG Peat Marwick, L.L.P. and Ernst & Young L.L.P., who have
certified certain financial statements of the Company are each independent
public accountants as required by the Act and the rules and regulations of
the Commission thereunder;
(xvi) The financial statements of the Company, together with related
notes, set forth in the Preliminary Prospectus and the Prospectus (and any
amendments or supplements thereto) comply as to form in all material
respects with the requirements of the Act and the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and fairly present the financial
position of the Company at the respective dates indicated and the results
of its operations and its cash flows for the respective periods indicated,
in accordance with generally accepted accounting principles in the United
States of America ("GAAP") consistently applied throughout such periods;
the PRO FORMA financial statements, together with related notes, set forth
under the caption "Unaudited Pro Forma Condensed Financial Data" in the
Preliminary Prospectus and the Prospectus have been prepared on a basis
consistent with such historical statements, except for the PRO FORMA
adjustments specified therein, and give effect to assumptions made on a
reasonable basis and present fairly the transactions reflected thereby as
indicated in the Preliminary Prospectus and the Prospectus and this
Agreement, and comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X and the
PRO FORMA adjustments have been properly applied to the historical amounts
in the compilation of those statements; and the other financial information
and data included in the Preliminary Prospectus and the Prospectus (and any
amendments or supplements thereto), historical and PRO FORMA, are
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company;
(xvii) The Company has no subsidiaries;
6
<PAGE>
(xviii) Except as would not, either individually or in the aggregate,
have a Material Adverse Effect or is otherwise disclosed in the Prospectus,
(i) the Company is not in violation of any federal, state or local laws and
regulations relating to pollution or protection of human health or the
environment or the use, treatment, storage, disposal, transport or
handling, emission, discharge, release or threatened release of toxic or
hazardous substances, materials or wastes, or petroleum and petroleum
products ("Materials of Environmental Concern") (collectively,
"Environmental Laws"), including, without limitation, noncompliance with or
lack of any permits or other environmental authorizations, and (ii) (A) the
Company has not received any communication from any person or entity
alleging any violation of or noncompliance with any Environmental Laws,
and, to the knowledge of the Company [AFTER DUE INQUIRY], there are no
past, present or reasonably foreseeable circumstances that may lead to any
such violation in the future, (B) there is no pending or, to the knowledge
of the Company [AFTER DUE INQUIRY], threatened claim, action, investigation
or notice by any person or entity against the Company or against any person
or entity for whose acts or omissions the Company is or would reasonably be
expected to be liable, either contractually or by operation of law,
alleging liability for investigatory, cleanup, or governmental response
costs, or natural resources or property damages, or personal injuries,
attorney's fees or penalties relating to any Materials of Environmental
Concern or any violation [OR POTENTIAL VIOLATION], of any Environmental Law
(collectively, "Environmental Claims"), and (C) there are no actions,
activities, circumstances, conditions, events or incidents that would
reasonably be expected to form the basis of any such Environmental Claim;
(xix) The Company is not in violation of any Federal, state or local
law relating to employment and employment practices, discrimination in the
hiring, promotion or pay of employees nor any applicable wage or hour laws,
nor any provisions of ERISA or the rules and regulations promulgated
thereunder, except for any such violation which, individually or in the
aggregate, would not result in a Material Adverse Effect or otherwise would
not be required to be disclosed in the Prospectus; there is (A) no
significant unfair labor practice complaint pending or, to the knowledge of
the Company, threatened against the Company before the National Labor
Relations Board or any state or local labor relations board, and no
significant grievance or significant arbitration proceeding arising out of
or under any collective bargaining agreement is pending or, to the
knowledge of the Company, threatened against the Company, (B) no labor
strike, dispute, slowdown or stoppage ("Labor Dispute") in which the
Company is involved other than routine disciplinary and grievance matters,
the Company is not aware of any existing Labor Dispute by the employees of
any of its principal suppliers and (C) no question concerning union
representation within the meaning of the National Labor Relations Act
existing with respect to the employees of the Company and, to the knowledge
of the Company, no union organizing activities are taking place, except
(with respect to any matter specified in clause (A), (B) or (C) above,
singly or in the aggregate) such as would not have a Material Adverse
Effect; and except for the Company's Profit Sharing Plan, the Company is
not a "party in
7
<PAGE>
interest" or a "disqualified person" (as such terms are defined in
Section 3(14) of ERISA or Section 4975 of the Code, respectively)
with respect to any employee benefit plan (as defined in Section 3(3)
of ERISA) or any plan (as defined in Section 4975 of the Code);
(xx) The Company maintains reasonable levels of insurance in accordance
with retail industry standards covering its properties, operations,
personnel and business; the Company has not received written notice from
any insurer or agent of such insurer that substantial capital improvements
or other similar expenditures will have to be made in order to continue
such insurance; and all such insurance is outstanding and in full force and
effect on the date hereof and will be outstanding and in full force and
effect on each Time of Delivery;
(xxi) All (A) (x) Federal, state and local income and Franchise Tax
returns required to be filed by the Company in any jurisdiction have been
filed and (y) material Tax returns required to be filed by the Company in
any jurisdiction have been filed, and (B) material Taxes due or claimed to
be due from such entities have been paid, other than those being contested
in good faith and by appropriate proceedings and for which adequate
reserves have been provided in accordance with GAAP on the books and
records of the Company or those currently payable without penalty or
interest; "TAXES" shall mean all Federal, state, local and foreign taxes,
and other assessments of a similar nature (whether imposed directly or
through withholding), including any interest, additions to tax, or
penalties applicable thereto;
(xxii) The Company possesses such licenses, certificates,
authorizations, exemptions, consents, approvals, franchises, permits and
other rights issued by local, state, Federal or foreign regulatory agencies
or bodies or other governmental authorities or self-regulatory
organizations (collectively, "Permits") as are necessary to own, lease and
operate its properties and to conduct its business now conducted by it
except where the failure to possess any such Permit would not have a
Material Adverse Effect; the Company has fulfilled and performed all of its
material obligations with respect to such Permits; the Company is in
compliance with the terms and conditions of all such Permits and with the
rules and regulations of the regulatory authorities and governing bodies
having jurisdiction with respect thereto, except to the extent that would
not, individually or in the aggregate, have a Material Adverse Effect; and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such Permit that would have a Material
Adverse Effect and no such Permits contain any restrictions that would
result in a Material Adverse Effect;
(xxiii) The Company owns or possesses all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names (collectively, the "Intellectual Property") presently employed by it
in connection with the business now operated by it, except where
8
<PAGE>
the failure so to own or possess would not, individually or in the
aggregate, have a Material Adverse Effect, and the Company has not
received any notice of infringement of or conflict with asserted rights
of others with respect to any of the foregoing, except where such
infringement or conflict would not individually, or in the aggregate,
have a Material Adverse Effect; and, to the Company's knowledge, the
use of the Intellectual Property in connection with the business and
operations of the Company does not infringe on the rights of any person,
except where such infringement would not individually or in the aggregate
have a Material Adverse Effect;
(xxiv) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specific
authorizations, (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (3) access to assets is permitted only in accordance
with management's general or specific authorization, and (4) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences;
(xxv) On October 11, 1996, Guitar Center Management Company, Inc., a
California corporation, was merged with and into the Company in accordance
with California, Delaware and all other applicable law (the
"Reincorporation").
(xxvi) Except as disclosed in the Preliminary Prospectus and the
Prospectus or except for which valid waivers of such rights as have been
obtained, no holder of any security of the Company has any right to require
registration of any security of the Company; and
(xxvii) There are no material business arrangements or related party
transactions which are not disclosed in the Preliminary Prospectus and the
Prospectus (or any amendments or supplements thereto) which would be
required to be disclosed by Item 404 of Regulation S-K of the Commission.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at a purchase
price per share of $[ ], the number of Firm Shares (to be adjusted by you so
as to eliminate fractional shares) determined by multiplying the aggregate
number of Shares to be sold by the Company by a fraction, the numerator of which
is the aggregate number of Firm Shares to be purchased by such Underwriter as
set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company hereunder, and (b) in the event and to
the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
9
<PAGE>
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 810,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from Goldman, Sachs &
Co. to the Company, given within a period of 30 calendar days after the date of
this Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 5 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of such
notice.
3. The Company hereby confirms its engagement of Goldman, Sachs & Co.
as, and Goldman, Sachs & Co. hereby confirms its agreement with the Company to
render services as, a "qualified independent underwriter" within the meaning of
Rule 2720 of the National Association of Securities Dealers, Inc. (the "NASD")
with respect to the offering and sale of the Shares. Goldman, Sachs & Co., in
its capacity as qualified independent underwriter and not otherwise, is referred
to herein as the "QIU". As compensation for the services of the QIU hereunder,
the Company agrees to pay the QIU $10,000 on the Closing Date.
4. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
5. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of federal
(same-day) funds, payable to the Company. The Company will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of DTC or its designated custodian
(the "Designated Office"). The time and date of such delivery and payment shall
be, with respect to the Firm Shares, 9:30 a.m., New York time, on [
], 1997 or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m.,
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New York time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of the Underwriters' election to
purchase such Optional Shares, or such other time and date as Goldman, Sachs
& Co. and the Company may agree upon in writing. Such time and date for
delivery of the Firm Shares is herein called the "First Time of Delivery,"
such time and date for delivery of the Optional Shares, if not the First Time
of Delivery, is herein called the "Second Time of Delivery," and each such
time and date for delivery is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 8 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 8(k) hereof, will be delivered at the offices of Skadden,
Arps, Slate, Meagher & Flom, 300 South Grand Avenue, 34th Floor, Los Angeles,
California 90071 (the "Closing Location"), and the Shares will be delivered at
the Designated Office, all at such Time of Delivery. A meeting will be held at
the Closing Location at [ ] p.m., New York City time, on the New York Business
Day next preceding such Time of Delivery, at which meeting the final drafts of
the documents to be delivered pursuant to the preceding sentence will be
available for review by the parties hereto. For the purposes of this Section 5,
"New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
6. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
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(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any events shall have occurred as
a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in order
to comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may reasonably request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder and under the International Underwriting Agreement, any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock
option
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plans existing on, or upon the conversion or exchange of convertible
or exchangeable securities outstanding as of, the date of this Agreement),
without the prior written consent of Goldman, Sachs & Co.;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement and the International Underwriting Agreement in
the manner specified in the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market ("NASDAQ");
(j) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
11(b) under the Act.
7. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under
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the Act and all other expenses in connection with the preparation, printing
and filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost
of printing or producing any Agreement among Underwriters, this Agreement,
the International Underwriting Agreement, the Agreement between Syndicates,
the Selling Agreement, the Blue Sky Memorandum, closing documents (including
any compilations thereof) and any other documents in connection with the
offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 6(b) hereof, including the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(not to exceed $10,000) (iv) all fees and expenses in connection with listing
the Shares on the NASDAQ; (v) the filing fees incident to, [AND THE FEES
AND DISBURSEMENTS OF COUNSEL FOR THE UNDERWRITERS IN CONNECTION WITH,]
securing any required review by the National Association of Securities
Dealers, Inc. of the terms of the sale of the Shares; (vi) the fees
associated with the use of a QIU, (vii) the cost of preparing stock
certificates; (viii) the cost and charges of any transfer agent or registrar
and (ix) all other costs and expenses incident to the performance of the
Company's obligations hereunder which are not otherwise specifically provided
for in this Section 7. It is understood, however, that the Company shall
bear the cost of any other matters not directly relating to the sale and
purchase of the Shares pursuant to this Agreement, and that, except as
provided in this Section 7, and Sections 9 and 13 hereof, the Underwriters
will pay all of their own costs and expenses, including the fees of their
counsel, stock transfer taxes on resale of any of the Shares by them, and any
advertising expenses connected with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
6(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
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(b) Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters,
shall have furnished to you such opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery,
with respect to the matters covered in paragraphs (i), (iv) and (xi) of
subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Latham & Watkins, counsel for the Company, shall have furnished to
you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing in good standing under the laws of the State of Delaware,
with corporate power and authority to own, lease and operate its
properties and to conduct its business described in the Prospectus.
Based solely on certificates from public officials, such counsel will
confirm that the Company is qualified to do business in the States
listed on Annex A hereto;
(ii) The authorized capital stock of the Company consists solely
of ________ shares of Common Stock, $.01 par value per share, and
________ shares of Preferred Stock, $.01 par value per share. All of
the outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable;
(iii) The Shares to be issued and sold by the Company pursuant
to the Underwriting Agreement have been duly authorized and, when
issued to and paid for by the Underwriters in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully
paid and non-assessable;
(iv) This Underwriting Agreement and the International
Underwriting Agreement have been duly authorized, executed and
delivered by the Company;
(v) The issuance and sale of the Shares to be sold by the
Company pursuant to this Underwriting Agreement and the International
Underwriting Agreement will not result in the violation by the Company
of its Certificate of Incorporation or Bylaws or the violation by the
Company of any federal, California or Delaware statute, rule or
regulation known by such counsel to be applicable to the Company
(other than federal, California or Delaware securities laws as to
which no opinion need be expressed in this paragraph) or in the breach
of or a default under any agreement or instrument filed as an "Exhibit
4" or "Exhibit 10" exhibit to the Registration Statement. No consent,
approval, authorization or order of, or filing with, any federal,
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California or Delaware court or governmental agency or body known by
such counsel to be applicable to the Company is required for the
consummation of the issuance and sale of the Shares to be sold by the
Company, except for the filing of the Company's Certificate of
Amendment to the Certificate of Incorporation filed as Exhibit ___ to
the Registration Statement and except such as have been obtained under
the Act and such as may be required under California and Delaware
securities laws in connection with the purchase and distribution of
Shares by the Underwriters (such opinion to be based upon such
counsel's consideration of only those statutes, rules and regulations
which, in such counsel's experience, are normally applicable to
transactions of the type contemplated by Underwriting Agreements, and
no opinion need be expressed as to the application of any antifraud,
antitrust or trade regulation laws);
(vi) The Registration Statement has become effective under the
Act, and no stop order suspending the effectiveness of the
Registration Statement has been issued under the Act and no
proceedings therefor, to the best of such counsel's knowledge, have
been initiated by the Commission;
(vii) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirements for registration
statements on Form S-1 under the Act and the rules and regulations of
the Commission thereunder; it being understood, however, that such
counsel need express no opinion with respect to the financial
statements, schedules and other financial data included in the
Registration Statement or the Prospectus. In passing upon the
compliance as to the form of Registration Statement and Prospectus,
such counsel may assume that the statements made therein are correct
and complete;
(viii) The statements set forth in the Prospectus under the
heading "Description of Capital Stock," ["THE RECAPITALIZATION," AND
"CERTAIN TRANSACTIONS"] insofar as such statements constitute a
summary of the terms of the Company's capital stock, legal matters or
documents referred to therein, are accurate in all material respects;
(ix) To the best of such counsel's knowledge, there are no legal
or governmental proceedings required to be described in the Prospectus
that are not described as required [ ,WHICH, IF DETERMINED ADVERSELY
TO THE COMPANY, WOULD INDIVIDUALLY OR IN THE AGGREGATE HAVE A MATERIAL
ADVERSE EFFECT ON THE CURRENT OR FUTURE CONSOLIDATED FINANCIAL
POSITION, STOCKHOLDERS' EQUITY OR RESULTS OF OPERATIONS OF THE COMPANY
AND ITS SUBSIDIARIES; AND, TO THE BEST OF SUCH COUNSEL'S KNOWLEDGE, NO
SUCH PROCEEDINGS ARE THREATENED OR CONTEMPLATED BY GOVERNMENTAL
AUTHORITIES OR THREATENED BY OTHERS], or contracts or documents of a
character required to be described in the Registration Statement or
Prospectus or to be filed as exhibits to the Registration Statement
that are not described and filed as required;
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(x) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended;
(xi) Such counsel has participated in conferences with officers
and other representatives of the Company, representatives of the
independent accountants for the Company, and representatives of the
Underwriters, at which the contents of the Registration Statement and
the Prospectus and related matters were discussed and, although such
counsel need not pass upon, and need not assume any responsibility
for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus and need
not make any independent check or verification thereof (except as set
forth in paragraph (viii) above) during the course of such
participation (relying as to materiality to the extent such counsel
has deemed appropriate upon the statements of officers and other
representatives of the Company), no facts came to such counsels
attention that caused them to believe that the Registration Statement,
at the time it became effective, contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make statements therein not misleading,
or that the Prospectus, as of its date and as of the Closing Date,
contained any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; it being
understood that such counsel need not express any belief with respect
to the financial statements, schedules and other financial data
included in the Registration Statement or the Prospectus;
(d) Barry F. Soosman, the Company's General Counsel, shall have
furnished to you his written opinion, dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) Any real property and buildings held under lease by the
Company is held by it under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the
Company (in giving the opinion in this clause, such counsel may state
that no examination of record titles for the purpose of such opinion
has been made, and that they are relying upon a general review of the
titles of the Company, upon abstracts, reports and policies of title
companies rendered or issued at or subsequent to the time of
acquisition of such property by the Company, upon opinions of counsel
to the lessors of such property and, in respect of matters of fact,
upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions, abstracts, reports, policies
and certificates);
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[(ii) THE COMPANY IS NOT IN VIOLATION OF ITS CERTIFICATE OF
INCORPORATION OR BY-LAWS OR IN DEFAULT IN THE PERFORMANCE OR
OBSERVANCE OF ANY MATERIAL OBLIGATION, AGREEMENT, COVENANT OR
CONDITION CONTAINED IN ANY INDENTURE, MORTGAGE, DEED OF TRUST, LOAN
AGREEMENT, OR LEASE OR AGREEMENT OR OTHER INSTRUMENT TO WHICH IT IS A
PARTY OR BY WHICH IT OR ANY OF ITS PROPERTIES MAY BE BOUND;]
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery, KPMG Peat
Marwick, L.L.P. and Ernst & Young, L.L.P. shall have furnished to you a
letter or letters, dated the respective dates of delivery thereof, in form
and substance satisfactory to you, to the effect set forth in Annex I
hereto (the executed copy of the letter delivered prior to the execution of
this Agreement is attached as Annex I(A) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(B) hereto);
(f)(i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been
any change in the capital stock (except for immaterial issuances of stock
options to employees of the Company pursuant to existing stock option plans
as in effect prior to the date hereof or except as contemplated and
disclosed in the Prospectus) or long-term debt or material increase in
short-term debt other than in the ordinary course of business and
consistent with past practices, of the Company or any change, or any
development involving a prospective change, in or affecting the business,
management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in Clause
(i) or (ii), is in the judgment of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization," as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
(ii) no such organization shall have publicly announced
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that it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York or California State authorities; or
(iv) the outbreak or escalation of hostilities involving the United States
or the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this Clause (iv) in the judgment
of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(i) The Shares at such Time of Delivery shall have been duly listed
for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each of [TO COME], substantially to
the effect set forth in Subsection 1(b)(iv) hereof in form and substance
satisfactory to you;
(k) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other
matters as you may reasonably request, and the Company shall have furnished
or caused to be furnished certificates as to the matters set forth in
subsections (a) and (e) of this Section 8; and
(l) The Company shall have complied with the provisions of Section
6(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement.
9. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (with respect to the Prospectus and any amendment or supplement thereto,
in light of the circumstances under
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which such statements were made) not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman,
Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in
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respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability arising
out of such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 9 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bears to the total underwriting discounts and commissions received by the
Underwriters with respect to the shares purchased under this Agreement, in each
case as set forth in the table on the cover page of the Prospectus relating to
such Shares. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by PRO RATA allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue
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statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 9 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
10. (a) The Company will indemnify and hold harmless Goldman, Sachs & Co.,
in its capacity as QIU, against any losses, claims, damages or liabilities,
joint or several, to which the QIU may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (with respect to the Prospectus and any amendment or
supplement thereto, in light of the circumstances under which such statements
were made) not misleading, and will reimburse the QIU for any legal or other
expenses reasonably incurred by the QIU in connection with investigating or
defending any such action or claim as such expenses are incurred.
(b) Promptly after receipt by the QIU under Subsection 10(a) above of
notice of the commencement of any action, the QIU shall, if a claim in respect
thereof is to be made against the Company under such subsection, notify the
Company in writing of the commencement thereof; but the omission so to notify
the Company shall not relieve it from any liability which it may have to the QIU
otherwise than under such subsection. In case any such action shall be brought
against the QIU and it shall notify the Company of the commencement thereof, the
Company shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to the QIU (who shall not,
except with the consent of the QIU, be counsel to the Company), and, after
notice from the indemnifying party to the QIU of its election so to assume the
defense thereof, the indemnifying party shall not be liable to the QIU under
such subsection for any legal expenses of other counsel or any other expenses,
in each case subsequently incurred by the QIU, in connection with the defense
thereof other than reasonable costs of investigation. The Company shall not,
without the written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not
22
<PAGE>
the QIU is an actual or potential party to such action or claim) unless such
settlement, compromise or judgment (i) includes an unconditional release of
the QIU from all liability arising out of such action or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a
failure to act, by or on behalf of the QIU.
(c) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless Goldman, Sachs & Co., in its
capacity as QIU, under Subsection 10(a) above in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then the Company shall contribute to the amount paid or payable by
the QIU as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the QIU on
the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the QIU failed to give the notice required under subsection (b)
above, then the Company shall contribute to such amount paid or payable by
the QIU in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand
and the QIU on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the QIU on
the other shall be deemed to be in the same proportion as the total net
proceeds from the sale of the Shares (before deducting expenses) received by
the Company, as set forth in the table on the cover page of the Prospectus,
bear to the fee payable to the QIU pursuant to Section 3 hereof. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the QIU on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the QIU agree
that it would not be just and equitable if contributions pursuant to this
subsection (c) were determined by PRO RATA allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to above in this subsection (c). The amount paid or payable by the
QIU as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (c) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(d) The obligations of the Company under this Section 10 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls the QIU
within the meaning of the Act.
11. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange
23
<PAGE>
for you or another party or other parties to purchase such Shares on the
terms contained herein. If within thirty-six hours after such default by any
Underwriter you do not arrange for the purchase of such Shares, then the
Company shall be entitled to a further period of thirty-six hours within
which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company that you have so arranged for the
purchase of such Shares, or the Company notifies you that they have so
arranged for the purchase of such Shares, you or the Company shall have the
right to postpone a Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section 11 with like effect as if
such person had originally been a party to this Agreement with respect to
such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all of the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 7 hereof and the
indemnity and contribution agreements in Section 9 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
12. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full
24
<PAGE>
force and effect, regardless of any investigation (or any statement as to the
results thereof) made by or on behalf of any Underwriter or any controlling
person of any Underwriter, or the Company, or any officer or director or
controlling person of the Company, and shall survive delivery of and payment
for the Shares.
13. If this Agreement shall be terminated pursuant to Section 11 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 7 and 9 hereof; but, if for any other reason any Shares are
not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all reasonable out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter in respect of the
Shares not so delivered except as provided in Sections 7 and 9 hereof.
14. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives of the Underwriters.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 9(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company by you on request.
Any such statements, requests, notices or agreements shall take effect upon
receipt thereof.
15. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters and the Company and, to the extent provided in Sections 9
and 12 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
25
<PAGE>
17. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
26
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us eight counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters (U.S. Version), the form of which shall be
submitted to the Company for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
GUITAR CENTER, INC.
By: __________________________
Name:
Title:
Accepted as of the date hereof
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Dain Bosworth Incorporated
Chase Securities Inc.
By: ___________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
27
<PAGE>
SCHEDULE I
Number of
Optional
Total Shares
Number of to be
Firm Purchased
Shares if Maximum
to be Option
Underwriter Purchased Exercised
----------- --------- ----------
Goldman, Sachs & Co.. . . . . .
Donaldson, Lufkin &
Jenrette Securities
Corporation . . . . . . . .
Montgomery Securities . . . . .
Dain Bosworth Incorporated . .
Chase Securities Inc. . . . .
---------
Total . . . . . . . . . . 5,400,000
=========
28
<PAGE>
ANNEX I
Pursuant to Section 8(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable published
rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected financial
data, pro forma financial information, financial forecasts and/or condensed
financial statements derived from audited financial statements of the
Company for the periods specified in such letter, copies of which have been
separately furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed statements of income, balance sheets and statements of cash flows
included in the Prospectus as indicated in their reports thereon copies of
which have been separately furnished to the Representatives and on the
basis of specified procedures including inquiries of officials of the
Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed financial statements referred to
in paragraph (vi)(A)(i) below comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations, nothing came to their attention that
caused them to believe that the unaudited condensed financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
1
<PAGE>
(iv) The unaudited selected financial information with respect to the
results of operations and financial position of the Company for the five
most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
financial statements for such five fiscal years;
(v) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company, inspection of the minute books of the Company
since the date of the latest audited financial statements included in the
Prospectus, inquiries of officials of the Company responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited statements of income, balance sheets and
statements of cash flows included in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations,
or (ii) any material modifications should be made to the unaudited
condensed statements of income, balance sheets and statements of cash
flows included in the Prospectus for them to be in conformity with
generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in
the unaudited financial statements from which such data and items were
derived, and any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the corresponding
amounts in the audited financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to
in Clause (B) were not determined on a
2
<PAGE>
basis substantially consistent with the basis for the audited financial
statements included in the Prospectus;
(D) any unaudited pro forma condensed financial statements included
in the Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the published
rules and regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of
those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the capital stock (other
than issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements included in
the Prospectus) or any increase in the long-term debt of the Company, or
any decreases in net current assets or stockholder's equity or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus, except in
each case for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in such
letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause
(E) there were any decreases in net revenues or operating profit or the
total or per share amounts of net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable period of
the preceding year and with any other period of corresponding length
specified by the Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(vi) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(v) above, they have carried out certain specified procedures, not
3
<PAGE>
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company, which appear in the Prospectus,
or in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain of
such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
4
<PAGE>
EXHIBIT 1.2
[DRAFT]
GUITAR CENTER, INC.
1,350,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE
Underwriting Agreement
(International Version)
---------------------------
March __, 1997
Goldman Sachs International
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Dain Bosworth Incorporated
Chase Securities Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB, England
Ladies and Gentlemen:
Guitar Center, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto
(the "Underwriters") an aggregate of 1,350,000 shares and, at the
election of the Underwriters, up to 202,500 additional shares of
Common Stock, $0.01 par value ("Stock"), of the Company. The
aggregate of 1,350,000 shares to be sold by the Company is herein
called the "Firm Shares" and the 202,500 additional shares to be
sold by the Company are herein called the "Optional Shares." The
Firm Shares and the Optional Shares that the Underwriters elect
to purchase pursuant to Section 2 hereof are herein collectively
called the "Shares."
It is understood and agreed to by all parties that the
Company is concurrently entering into an agreement, a copy of
which is attached hereto (the "U.S. Underwriting Agreement"),
providing for the sale by the Company of up to a total of
6,210,000 shares of Stock (the "U.S. Shares") including the
overallotment option thereunder through arrangements with certain
underwriters in the United States (the "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. Anything herein and therein to the contrary
notwithstanding, the respective closings under
<PAGE>
this Agreement and the U.S. Underwriting Agreement are hereby expressly made
conditional on one another. The Underwriters hereunder and the U.S.
Underwriters are simultaneously entering into an Agreement between U.S. and
International Underwriting Syndicates (the "Agreement between Syndicates")
which provides, among other things, for the transfer of shares of Stock
between the two syndicates and for consultation by the representatives
hereunder with Goldman, Sachs & Co. prior to exercising the rights of the
Underwriters under Section 8 hereof. Two forms of prospectus are to be used
in connection with the offering and sale of shares of Stock contemplated by
the foregoing, one relating to the Shares hereunder and the other relating to
the U.S. Shares. The latter form of prospectus will be identical to the
former except for certain substitute pages as included in the registration
statement and amendments thereto as mentioned below. Except as used in
Sections 2, 4, 5, 11 and 13 herein, and except as the context may otherwise
require, references hereinafter to the Shares shall include all the shares of
stock which may be sold pursuant to either this Agreement or the U.S.
Underwriting Agreement, and references herein to any prospectus whether in
preliminary or final form, and whether as amended or supplemented, shall
include both of the U.S. and the international versions thereof.
1. The Company hereby makes with the Underwriters the same
representations, warranties and agreements as are set forth in Section 1 of
the U.S.Underwriting Agreement, which Section is incorporated herein by this
reference.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $[ ], the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Shares to be sold by the Company by a
fraction, the numerator of which is the aggregate number of Firm Shares to be
purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company hereunder, and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from
the Company, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Optional Shares
by a fraction the numerator of which is the maximum number of Optional Shares
which such Underwriter is entitled to purchase as set forth opposite the name
of such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to
purchase at their election up to 202,500 Optional Shares, at the
purchase price per share set forth in the paragraph above, for
the sole purpose of covering overallotments in the sale of the
Firm Shares. Any such
2
<PAGE>
election to purchase Optional Shares may be exercised only by written notice
from Goldman Sachs International to the Company, given within a period of 30
calendar days after the date of this Agreement and setting forth the
aggregate number of Optional Shares to be purchased and the date on which
such Optional Shares are to be delivered, as determined by you but in no
event earlier than the First Time of Delivery (as defined in Section 5
hereof) or, unless you and the Company otherwise agree in writing, earlier
than two or later than ten business days after the date of such notice.
[3. The Company hereby confirms its engagement of Goldman Sachs
International as, and Goldman Sachs International hereby confirms its
agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the National Association of
Securities Dealers, Inc. (the "NASD") with respect to the offering and sale
of the Shares. Goldman Sachs International in its capacity as qualified
independent underwriter and not otherwise, is referred to herein as the "QIU".
As compensation for the services of the QIU hereunder, the Company agrees to
pay the QIU $10,000 on the Closing Date.]
4. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus and in the forms of Agreement
among Underwriters (International Version) and Selling Agreements, which have
been previously submitted to the Company by you. Each Underwriter hereby
makes to and with the Company the representations and agreements of such
Underwriter as a member of the selling group contained in Sections 3(d) and
3(e) of the form of Selling Agreements.
5. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman Sachs International may request upon at least forty-eight
hours prior notice to the Company shall be delivered by or on behalf of the
Company to Goldman Sachs International through the facilities of the
Depository Trust Company ("DTC"), for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of federal (same-day) funds, payable to the
Company. The Company will cause the certificates representing the Shares to
be made available for checking and packaging at least twenty-four hours prior
to the Time of Delivery (as defined below) with respect thereto at the office
of DTC or its designated custodian (the "Designated Office"). The time and
date of such delivery and payment shall be, with respect to the Firm Shares,
9:30 a.m., New York time, on [ ], 1997 or such other time and
date as Goldman Sachs International and the Company may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time,
on the date specified by Goldman Sachs International in the written notice
given by Goldman Sachs International of the Underwriters' election to
purchase such Optional Shares, or such other time and date as Goldman Sachs
International and the Company may agree upon in writing. Such time and date
for delivery of the Firm Shares is herein called the "First Time of
Delivery," such time and date for delivery of the Optional
3
<PAGE>
Shares, if not the First Time of Delivery, is herein called the "Second Time
of Delivery," and each such time and date for delivery is herein called a
"Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 8 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 8(k) hereof, will be delivered at the
offices of Skadden, Arps, Slate, Meagher & Flom, 300 South Grand Avenue, 34th
Floor, Los Angeles, California 90071 (the "Closing Location"), and the
Shares will be delivered at the Designated Office, all at such Time of
Delivery. A meeting will be held at the Closing Location at [ ] p.m., New
York City time, on the New York Business Day next preceding such Time of
Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 5, New York Business Day
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not
a day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
6. The Company hereby makes to the Underwriters the same agreements as
are set forth in Section 6 of the U.S. Underwriting Agreement, which Section
is incorporated herein by this reference.
7. The Company and the Underwriters hereby agree with respect to
certain expenses on the same terms as set forth in Section 7 of the U.S.
Underwriting Agreement, which Section is incorporated herein by this
reference.
8. Subject to the provisions of the Agreement between Syndicates, the
obligations of the Underwriters hereunder, as to the Shares to be delivered
at each Time of Delivery, shall be subject, in their discretion, to the
condition that all representations and warranties and other statements of the
Company herein are, at and as of such Time of Delivery, true and correct, the
condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and additional conditions identical to
those set forth in Section 8 of the U.S. Underwriting Agreement, which
Section is incorporated herein by this reference.
9. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein (with respect to the Prospectus and any
amendment or supplement thereto, in light of the circumstances under which
such statements were made) not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with
4
<PAGE>
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman Sachs International expressly for
use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Goldman Sachs International expressly for use therein;
and will reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending any
such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of
the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action
or claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such
5
<PAGE>
settlement, compromise or judgment (i) includes an unconditional release of
the indemnified party from all liability arising out of such action or claim
and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bears to the
total underwriting discounts and commissions received by the Underwriters
with respect to the shares purchased under this Agreement, in each case as
set forth in the table on the cover page of the Prospectus relating to such
Shares. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this subsection (d) were determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any
6
<PAGE>
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 9 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of
the Company and to each person, if any, who controls the Company within the
meaning of the Act.
10. (a) The Company will indemnify and hold harmless Goldman Sachs
International, in its capacity as QIU, against any losses, claims, damages or
liabilities, joint or several, to which the QIU may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (with respect to
the Prospectus and any amendment or supplement thereto, in light of the
circumstances under which such statements were made) not misleading, and will
reimburse the QIU for any legal or other expenses reasonably incurred by the
QIU in connection with investigating or defending any such action or claim as
such expenses are incurred.
(b) Promptly after receipt by the QIU under Subsection 10(a) above
of notice of the commencement of any action, the QIU shall, if a claim in
respect thereof is to be made against the Company under such subsection,
notify the Company in writing of the commencement thereof; but the omission
so to notify the Company shall not relieve it from any liability which it may
have to the QIU otherwise than under such subsection. In case any such
action shall be brought against the QIU and it shall notify the Company of
the commencement thereof, the Company shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to the QIU (who shall not, except with the consent of
the QIU, be counsel to the Company), and, after notice from the indemnifying
party to the QIU of its election so to assume the defense thereof, the
indemnifying party shall not be liable to the QIU under such subsection for
any legal expenses of other counsel or any other expenses, in each case
subsequently incurred by the QIU, in connection with the defense thereof
other than reasonable costs of investigation. The Company shall not, without
the written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the QIU is an actual or
potential party to such action or claim) unless such settlement, compromise
or judgment (i) includes an unconditional release of the QIU from all
liability
7
<PAGE>
arising out of such action or claim and (ii) does not include a statement as
to or an admission of fault, culpability or a failure to act, by or on behalf
of the QIU.
(c) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless Goldman Sachs International,
in its capacity as QIU, under Subsection 10(a) above in respect of any
losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then the Company shall contribute to the amount paid or
payable by the QIU as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
QIU on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the QIU failed to give the notice required under
subsection (b) above, then the Company shall contribute to such amount paid
or payable by the QIU in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the QIU on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the QIU on the other shall be deemed to be in the same proportion as
the total net proceeds from the sale of the Shares (before deducting
expenses) received by the Company, as set forth in the table on the cover
page of the Prospectus, bear to the fee payable to the QIU pursuant to
Section 3 hereof. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the QIU on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Company and the QIU agree that it would not be just and equitable if
contributions pursuant to this subsection (c) were determined by PRO RATA
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (c). The
amount paid or payable by the QIU as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to above in this
subsection (c) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(d) The obligations of the Company under this Section 10 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls the QIU within the meaning of the Act.
11. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery,
you may in your discretion arrange for you or another party or other parties
to purchase such Shares on the terms contained herein. If within thirty-six
hours after such default by any Underwriter you do not arrange
8
<PAGE>
for the purchase of such Shares, then the Company shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In
the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the
Company notifies you that they have so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone a Time of
Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement
or the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section 11 with like effect as if such person had originally been
a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares
which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
number of Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares
which remains unpurchased exceeds one-eleventh of the aggregate number of all
of the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company
to sell the Optional Shares) shall thereupon terminate, without liability on
the part of any non-defaulting Underwriter or the Company, except for the
expenses to be borne by the Company and the Underwriters as provided in
Section 7 hereof and the indemnity and contribution agreements in Section 9
hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
12. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set
forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or
on behalf of any Underwriter or any controlling person of any Underwriter, or
9
<PAGE>
the Company, or any officer or director or controlling person of the Company,
and shall survive delivery of and payment for the Shares.
13. If this Agreement shall be terminated pursuant to Section 11 hereof,
the Company shall not then be under any liability to any Underwriter except
as provided in Sections 7 and 9 hereof; but, if for any other reason any
Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all reasonable
out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 7 and 9 hereof.
14. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman Sachs International on behalf of you as
the representatives of the Underwriters.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman
Sachs International, Peterborough Court, 133 Fleet Street, London EC4A 2BB,
England, Attention: Equity Capital Markets, Telex no. 94012165, facsimile
transmission No. (071) 774-1550; and if to the Company shall be delivered or
sent by mail, telex or facsimile transmission to the address of the Company
set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 9(c) hereof
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or
telex constituting such Questionnaire, which address will be supplied to the
Company by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
15. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters and the Company and, to the extent provided in Sections
9 and 12 hereof, the officers and directors of the Company and each person
who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser
of any of the Shares from any Underwriter shall be deemed a successor or
assign by reason merely of such purchase.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
10
<PAGE>
17. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, United States of America.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the
same instrument.
11
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us eight counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters
and the Company. It is understood that your acceptance of this letter on
behalf of each of the Underwriters is pursuant to the authority set forth in
a form of Agreement among Underwriters (International Version), the form of
which shall be submitted to the Company for examination, upon request, but
without warranty on your part as to the authority of the signers thereof.
Very truly yours,
GUITAR CENTER, INC.
By: __________________________
Name:
Title:
Accepted as of the date hereof
Goldman Sachs International
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Dain Bosworth Incorporated
Chase Securities Inc.
By: Goldman Sachs International
By: ___________________________
(Goldman Sachs International)
On behalf of each of the Underwriters
12
<PAGE>
SCHEDULE I
Number of
Optional Shares
Total Number of to be Purchased
Firm Shares if Maximum
Underwriter to be Purchased Option Exercised
----------- --------------- ----------------
Goldman Sachs
International ..........
Donaldson, Lufkin &
Jenrette Securities
Corporation............
Montgomery Securities...
Dain Bosworth
Incorporated ...........
Chase Securities Inc. ..
----------------
Total.............. 1,350,000
===========
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EXHIBIT 5.1
LATHAM & WATKINS
ATTORNEYS AT LAW
633 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071-2007
TELEPHONE (213) 485-1234
FAX (213) 891-8763
February 18, 1997
Guitar Center, Inc.
5155 Clareton Drive
Agoura Hills, California 91301
Re: Registration Statement on Form S-1 (File No. 333-20931)
7,762,500 Shares of Common Stock
-------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of 7,762,500 shares of common
stock, par value $.01 per share (the "Shares"), of Guitar Center, Inc., a
Delaware corporation (the "Company"), under the Securities Act of 1933, as
amended, pursuant to a Registration Statement on Form S-1 (File No. 333-20931)
as filed with the Securities and Exchange Commission (the "Commission") on
January 31, 1997, as amended by Amendment No. 1 filed with the Commission on
February 19, 1997 (collectively, the "Registration Statement"), you have
requested our opinion with respect to the matters set forth below.
<PAGE>
LATHAM & WATKINS
Guitar Center, Inc.
February 18, 1997
Page 2
In our capacity as your special counsel in connection with such
registration, we are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the authorization, issuance and sale of
the Shares, and, for the purposes of this opinion, have assumed such proceedings
will be timely completed in the manner presently proposed. In addition, we have
made such legal and factual examinations and inquiries, including an examination
of originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the General Corporation Law of the State of Delaware and we express no
opinion with respect to the applicability thereto, or the effect thereon, of any
other laws or as to any matters of municipal law or the laws of any local
agencies within that state.
Subject to the foregoing, it is our opinion that, as of the date
hereof, the Shares have been duly authorized, and upon issuance, delivery and
payment therefor in the manner contemplated by the Registration Statement, will
be validly issued, fully paid and nonassessable.
We consent to you filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters."
Very truly yours,
/s/ Latham & Watkins
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement"), between GUITAR CENTER MANAGEMENT COMPANY, INC., a California
corporation (the "Company"), and Bruce Ross (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to (i) the closing of the Stock Purchase Agreement (the
"Purchase Agreement") of even date herewith by and among the Company, Chase
Venture Capital Associates, L.P., Wells Fargo Small Business Investment Company,
Inc., Weston Presidio Capital II, L.P. (collectively, the "Investors"), and the
security holder of the Company.
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company shall employ the Executive, and the
Executive accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the date hereof and ending
as provided in paragraph 4 hereof (the "Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve initially
as the Chief Financial Officer of the Company and shall have the normal duties,
responsibilities and authority of the Chief Financial Officer, subject to the
power of the board of directors of the Company (the "Board") and the powers
delegated to the Executive's superiors (if any) by the Board.
(b) The Executive shall report to the Board or its designee, and the
Executive shall devote his best efforts and substantially all of his business
time, attention and energies (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its Subsidiaries (as defined below). The Executive shall
perform his duties and responsibilities to the best of his abilities in a
diligent, trustworthy, and businesslike manner. During the Employment Period,
the Executive shall not engage in any business activity which, in the reasonable
judgment of the Board, materially conflicts with the duties of the Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage; PROVIDED, HOWEVER, that the Company acknowledges that the
Executive may devote such time that the Executive deems appropriate for managing
his own investment portfolio so long as the Executive shall at all times
adequately fulfill his obligations pursuant to this Section 2(b).
<PAGE>
(c) For purposes of this Agreement, (i) "SUBSIDIARIES" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries; and (ii) "PERSON" shall be
construed broadly and shall include, without limitation, an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, a limited liability company and a governmental entity or any
department or agency thereof.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's base salary shall
be $195,000 per annum or such higher rate as the Board (excluding the Executive
if he should be a member of the Board at the time of such determination) may
designate from time to time (the "Base Salary"), which salary shall be payable
in such installments as is the policy of the Company with respect to its senior
executive employees and shall be subject to Federal, state and local withholding
and other payroll taxes. In addition, during the Employment Period, the
Executive shall be entitled to participate in all employee benefit programs for
which all executives of the Company are generally eligible and the Executive
shall be eligible to participate in all insurance plans available generally to
all executives of the Company.
(b) In addition to the Base Salary, for each fiscal year ending
during the Employment Period, Executive shall also be eligible to receive an
annual bonus at the discretion of the Board.
(c) The Company shall reimburse the Executive for all reasonable
expenses incurred by him in the course of performing his duties under this
Agreement which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and documenting
such expenses.
(d) During the Employment Period, the Executive shall be entitled to
three weeks paid vacation during each 12-month period worked, commencing on the
date hereof.
(e) The Company shall issue Executive options to acquire shares of
Common Stock in the amounts and on the dates set forth on Exhibit A hereto.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and the
Executive, the Employment Period shall end on the third anniversary of the date
of this Agreement; PROVIDED, HOWEVER, that (i) the Employment Period shall
terminate prior to such date upon the Executive's resignation pursuant to the
provisions of Section 4(f) or 4(g) hereof, or the death or
2
<PAGE>
Disability (as hereinafter defined) of Executive; and (ii) the Employment
Period may be terminated by the Company at any time prior to such date for
Cause (as defined below) or without Cause. For purposes of this Agreement
the term "DISABILITY" means any long-term disability or incapacity which (i)
renders the Executive unable to substantially perform all of his duties
hereunder for 180 days during any 18-month period or (ii) would reasonably be
expected to render the Executive unable to substantially perform all of his
duties for 180 days during any 18-month period, in each case as determined by
the Board (excluding the Executive if he should be a member of the Board at
the time of such determination) in its good faith judgment after seeking and
reviewing advice from a qualified physician.
(b) If the Employment Period is terminated by the Company without
Cause or by the Executive with Reasonable Justification, the Executive shall be
entitled to receive as severance the Base Salary, an annual cash bonus equal to
the last annual bonus (excluding any portion thereof that the President of the
Company considered extraordinary and non-recurring) he received prior to
termination (such bonus to be pro-rated for any partial year), and continuation
of his medical benefits (or, if such continuation is not permitted by the
Company's insurers beyond the Employment Period, an annual cash payment equal to
the average premium the company pays to obtain health insurance for an
employee), for the period beginning on the date of such termination and ending
on the third anniversary of this Agreement, unless the Executive has breached
the provisions of this Agreement, in which case the provisions of paragraph
ll(a)(iii) shall apply. For purposes of this Section 4(b), benefits will not
include future participation in any discretionary bonus or equity incentive
pool, other than continuation of annual cash bonuses as contemplated in the
previous sentence. Such severance payments will be made periodically in the
same amounts and at the same intervals as the Base Salary, annual bonus and
benefits (as applicable) were paid immediately prior to termination of
employment. Executive shall have no duty to mitigate any damages which
Executive may suffer as a result of such termination nor shall the severance
benefits payable be reduced by any sums actually earned by Executive as a result
of any other employment obtained by Executive during the original Employment
Period. In addition, if the Employment Period is terminated by the Company
without Cause, all stock options held by the Executive may immediately vest
pursuant to the terms of the agreements by which such options were issued.
(c) If the Employment Period is terminated for any reason (including
pursuant to paragraph 4(h)) other than by the Company without Cause or by the
Executive with Reasonable Justification, the Executive shall be entitled to
receive only the Base Salary and then only to the extent such amount has accrued
through the date of termination.
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(d) Except as otherwise expressly required by law (E.G., COBRA) or as
specifically provided herein, all of the Executive's rights to salary,
severance, benefits, bonuses and other amounts hereunder (if any) accruing after
the termination of the Employment Period shall cease upon such termination. In
the event that the Employment Period is terminated by the Company without Cause
or by the Executive with Reasonable Justification, the Executive's sole remedy
shall be to receive the severance payments and benefits described in paragraph
4(b) hereof.
(e) For purposes of this Agreement, "Cause" means (i) the repeated
failure by the Executive to perform such lawful duties consistent with
Executive's position as are reasonably requested by the Board as documented in
writing to the Executive, (ii) the Executive's repeated material neglect of his
duties on a general basis (other than as a result of illness or disability),
notwithstanding written notice of objection from the Board and the expiration of
a thirty (30) day cure period, (iii) the commission by the Executive of any act
of fraud, theft or criminal dishonesty with respect to the Company or any of its
Subsidiaries or affiliates, or the conviction of the Executive of any felony,
(iv) the commission of any act involving moral turpitude which (A) brings the
Company or any of its affiliates into public disrepute or disgrace, or (B)
causes material injury to the customer relations, operations or the business
prospects of the Company or any of its affiliates, and (v) material breach by
the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of paragraph 5, 6 or 7 hereof, not cured within
thirty (30) days after written notice to Executive from the Board; PROVIDED,
HOWEVER, that in the event of an intentional breach of the provisions of
paragraph 5, 6 or 7 hereof, the Executive shall not have the opportunity to
cure.
(f) The Executive may within ninety (90) days, after giving written
notice to the Company and the Company's failure to cure, voluntarily terminate
employment with the Company upon any event giving rise to Reasonable
Justification for such voluntary termination.
(g) For purposes of this Agreement, "Reasonable Justification" shall
mean any voluntary termination by the Executive of his employment with the
Company within ninety (90) days after the occurrence of any of the following
events:
(i) the Executive is directed to perform an act that the
Executive reasonably believes to be in contravention of law, or which the
Executive reasonably believes would subject the Company and himself to
material liability, despite his express written objection addressed to the
Board with respect to such action;
(ii) there has been any change (on other than a temporary basis)
without the Executive's consent in the
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Executive's title or any material reduction in the nature or scope of
his responsibilities, or the Executive is assigned duties that are
materially inconsistent with his position (other than on a temporary
basis);
(iii) there is any material reduction in the Executive's
compensation or benefits (other than reductions in benefits that generally
effect all employees entitled to such benefits ratably);
(iv) the Executive is required by the Company, after written
objection by the Executive, to relocate his principal place of employment
outside a radius of fifty miles from his place of employment immediately
prior to such relocation; or
(v) there is a material failure, after notice and an opportunity
to cure, by the Company to perform any of its obligations to the Executive
under this Agreement.
(h) If at any time during the Employment Period, there is a Sale of
the Company (as defined in that certain Stockholders Agreement, dated as of June
5, 1996, by and among the Company and certain of its stockholders), Executive
may resign within ninety (90) days of the occurrence of such event by notifying
the Company in writing.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose to a third party or use for his
personal benefit or for the benefit of a third party, at any time, either during
the Employment Period or thereafter, any Confidential Information (as defined
below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance in good
faith of duties assigned to the Executive by the Company. The Executive will
take all reasonable and appropriate steps to safeguard Confidential Information
and to protect it against disclosure, misuse, espionage, loss and theft. The
Executive shall deliver to the Company at the termination of the Employment
Period or at any time the Company may request all memoranda, notes, plans,
records, reports, computer tapes and software and other documents and data (and
copies thereof) relating to the Confidential Information, Work Product (as
defined below) or the business of the Company or any of its Subsidiaries which
the Executive may then possess or have under his control.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to
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(i) information, observations and data obtained by the Executive while
employed by the Company (including those obtained prior to the date of this
Agreement) concerning the business or affairs of the Company, (ii) products
or services, (iii) fees, costs and pricing structures, (iv) designs, (v)
analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and
business methods, (xi) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xii) customers and clients and customer or client lists, (xiii)
other copyrightable works, (xiv) all production methods, processes,
technology and trade secrets, and (xv) all similar and related information in
whatever form. Confidential Information will not include any information
that has been published in a form generally available to the public prior to
the date the Executive proposes to disclose or use such information.
Confidential Information will not be deemed to have been published merely
because individual portions of the information have been separately
published, but only if all material features comprising such information have
been published in combination.
6. INVENTIONS AND PATENTS.
(a) The Executive agrees that all inventions, innovations,
improvements, technical information, systems, software developments, methods,
designs, analyses, drawings, reports, service marks, trademarks, tradenames,
logos and all similar or related information (whether patentable or
unpatentable) which relates to the Company's or any of its Subsidiaries' actual
or anticipated business, research and development or existing or future products
or services and which are conceived, developed or made by the Executive (whether
or not during usual business hours and whether or not alone or in conjunction
with any other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement) together with all patent
applications, letters patent, trademark, tradename and service mark applications
or registrations, copyrights and reissues thereof that may be granted for or
upon any of the foregoing (collectively referred to herein as, the "Work
Product") belong to the Company or such Subsidiary. The Executive will promptly
disclose such Work Product as may be susceptible of such manner of communication
to the Board and perform all actions reasonably requested by the Board (whether
during or after the Employment Period) to establish and confirm such ownership
(including, without limitation, the execution and delivery of assignments,
consents, powers of attorney and other instruments) and to provide reasonable
assistance to the Company or any of its Subsidiaries in connection with the
prosecution of any applications for patents, trademarks, trade names, service
marks or reissues thereof or in the prosecution or defense of interferences
relating to any Work Product.
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(b) CALIFORNIA EMPLOYEE PATENT ACT NOTIFICATION. In accordance with
Section 2872 of the California Employee Patent Act, West's Cal. Lab. Code
Section 2870 ET. SEQ., Executive is hereby advised that subparagraph 6(a) does
not apply to any invention, new development or method (and all copies and
tangible embodiments thereof) made solely by Executive for which no equipment,
facility, material, Confidential Information or intellectual property of the
Company or any of its Subsidiaries was used and which was developed entirely on
Employee's own time; PROVIDED, HOWEVER, that subparagraph 6(a) shall apply if
the invention, new development or method (i) relates to the Company's or any of
its Subsidiaries' actual or demonstrably anticipated businesses or research and
development, or (ii) results from any work performed by Executive for the
Company or any of its Subsidiaries.
7. NON-COMPETE AND NON-SOLICITATION.
(a) The Executive acknowledges and agrees with the Company that
during the course of the Executive's involvement and/or employment with, or
ownership of options and/or Common Stock in, the Company, such Executive has had
and will continue to have the opportunity to develop relationships with existing
employees, vendors, suppliers, customers and other business associates of the
Company which relationships constitute goodwill of the Company, and the Company
would be irreparably damaged if the Executive were to take actions that would
damage or misappropriate such goodwill. Accordingly, the Executive agrees as
follows:
(i) The Executive acknowledges that the Company currently
conducts its business throughout the United States, including without
limitation the areas listed on Exhibit B attached hereto (the "Territory").
Accordingly, during the period commencing on the date hereof and ending on
the later of (x) the termination of the Employment Period or (y) if the
Executive was terminated without Cause or resigns with Reasonable
Justification, the third anniversary of the date of this Agreement (such
period is referred to herein as the "Non-Compete Period"), the Executive
shall not, directly or indirectly, enter into, engage in, assist, give or
lend funds to or otherwise finance, be employed by or consult with, or have
a financial or other interest in, any business which engages in selling at
retail musical instruments, pro-audio equipment or related accessories
within the Territory (the "Line of Business"), whether for or by himself or
as a representative for any other Person.
(ii) Notwithstanding the foregoing, the aggregate ownership by
the Executive of no more than two percent (on a fully-diluted basis) of the
outstanding equity securities of any entity, which securities are traded on
a national or foreign securities exchange, quoted on the Nasdaq Stock
Market or other automated quotation system, and which entity
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competes with the Company (or any part thereof) within the Territory,
shall not (by itself) be deemed to be giving or lending funds to,
otherwise financing or having a financial interest in a competitor. In
the event that any entity in which the Executive has any financial or
other interest directly or indirectly enters into the Line of Business
during the Non-Compete Period, the Executive shall divest all of his
interest (other than any amount permitted to be held pursuant to the first
sentence of this Section 7 (a)(ii)) in such entity within thirty (30) days
after learning that such entity has entered the Line of Business.
(iii) The Executive covenants and agrees that during the
Non-Compete Period, the Executive will not, directly or indirectly, either
for himself or for any other person or entity, solicit any employee of the
Company (other than such Executive's personal assistant or secretary) or
any Subsidiary to terminate his or her employment with the Company or any
Subsidiary or employ any such individual during his or her employment with
the Company or any Subsidiary and for a period of six months after such
individual terminates his or her employment with the Company or any
Subsidiary.
(b) The Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to the business of
the Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits as an employee or holder of Common
Stock of the Company and as otherwise provided hereunder to clearly justify such
restrictions which, in any event (given his education, skills and ability), the
Executive does not believe would prevent him from otherwise earning a living.
(c) The provisions of this Section 7 shall terminate in the event the
Company fails to make any payments required by Section 4(b) and such failure
remains uncured for a period equal to at least thirty (30) days after written
notice of such event from Executive.
8. INDEMNIFICATION. The Company and the Executive are entering into
an Indemnification Agreement on the date hereof in substantially the form
attached hereto of Annex A.
9. INSURANCE. The Company may, for its own benefit, maintain
"keyman" life and disability insurance policies covering the Executive, provided
the same does not prevent Executive from obtaining reasonable amounts of
insurance for his family or estate planing needs. The Executive will cooperate
with the Company and provide such information or other assistance as the Company
may reasonably request in connection with the Company obtaining and maintaining
such policies.
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10. EXECUTIVE REPRESENTATION. The Executive hereby represents and
warrants to the Company that (a) the execution, delivery and performance of this
Agreement by the Executive does not and will not conflict with, breach, violate
or cause a default under any agreement, contract or instrument to which the
Executive is a party or any judgment, order or decree to which the Executive is
subject, (b) the Executive is not a party to or bound by any employment
agreement, consulting agreement, non-compete agreement, confidentiality
agreement or similar agreement with any other person or entity and (c) upon the
execution and delivery of this Agreement by the Company and the Executive, this
Agreement will be a valid and binding obligation of the Executive, enforceable
in accordance with its terms.
11. NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim or other communication hereunder shall be delivered personally to the
recipient, delivered by United States Post Office mail (postage prepaid and
return receipt requested), telecopied to the intended recipient at the number
set forth therefor below (with hard copy to follow), or sent to the recipient by
reputable express courier service (charges prepaid) and addressed to the
intended recipient as set forth below:
If to the Company, to:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telephone: (818) 735-8800
Telecopier: (818) 735-4923
With copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400; and
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Harvey M. Eisenberg, Esq.
Telephone: (212) 408-2400
Telecopier: (212) 408-2420
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Sidley & Austin
555 W. Fifth St.
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: (213) 896-6600
If to the Executive, to:
Bruce Ross
3264 Casino Drive
Thousand Oaks, California 91362
Telephone: (805) 241-0384
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
12. GENERAL PROVISIONS.
(a) SEVERABILITY/ENFORCEMENT.
(i) It is the desire and intent of the parties hereto that the
provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if
such provision could be more narrowly drawn so as not to be invalid,
prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction. Without limiting the generality
of the preceding sentence, if at the time of enforcement of paragraph 5, 6
or 7 of this Agreement, a court holds that the restrictions stated therein
are unreasonable under circumstances then existing, the parties hereto
agree that the maximum period, scope or geographical area reasonable under
such circumstances shall be substituted for the stated period, scope or
area and that the failure of all or any of such provisions to be
enforceable shall not impair or affect the obligations of
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the Company to pay compensation or severance obligations under this
Agreement.
(ii) Because the Executive's services are unique and because the
Executive has access to Confidential Information and Work Product, the
parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement by the Executive. Therefore, in the event of
a breach or threatened breach of this Agreement, the Company or its
successors or assigns may, in addition to other rights and remedies
existing in their favor, apply to any court of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce,
or prevent any violations of, the provisions hereof (without posting a bond
or other security).
(iii) In addition to the foregoing, and not in any way in
limitation thereof, or in limitation of any right or remedy otherwise
available to the Company, if the Executive materially violates any
provision of paragraph 5, 6 or 7 (and such violation, if unintentional on
the part of the Executive, continues for a period of thirty (30) days
following receipt of written notice from the Company), any severance
payments then or thereafter due from the Company to the Executive may be
terminated forthwith and upon such election by the Company, the Company's
obligation to pay and the Executive's right to receive such severance
payments shall terminate and be of no further force or effect. The
Executive's obligations under paragraphs 5, 6 or 7 of this Agreement shall
not be limited or affected by, and such provisions shall remain in full
force and effect notwithstanding the termination of any severance payments
by the Company in accordance with this paragraph 11(a)(iii). The exercise
of the right to terminate such payments shall not be deemed to be an
election of remedies by the Company and shall not in any manner modify,
limit or preclude the Company from exercising any other rights or seeking
any other remedies available to it at law or in equity.
(b) COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and all other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by the
Executive and the Company and their respective successors, assigns, heirs,
representatives and estate; PROVIDED, HOWEVER, that the rights and obligations
of the Executive under this Agreement shall not be assigned without the prior
written consent of the Company.
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(d) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF CALIFORNIA, OR ANY OTHER JURISDICTION), THAT WOULD CAUSE THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE APPLIED. IN
FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF CALIFORNIA WILL
CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER
SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE
LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(e) JURISDICTION, ETC.
(i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California State court or Federal court of the United
States of America sitting in the State of California, and any appellate
court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such California State court
or, to the extent permitted by law, in such Federal court. Each of the
parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law. Nothing in
this Agreement shall affect any right that any party may otherwise have to
bring any action or proceeding relating to this Agreement in the courts of
any jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement in
any California State or Federal court. Each of the parties hereto
irrevocably waives, to the fullest extent permitted by law, the defense of
an inconvenient forum to the maintenance of such action or proceeding in
any such court.
(iii) The Company and the Executive further agree that the mailing
by certified or registered mail, return receipt requested, of any process
required by any such court shall constitute valid and lawful service of
process against them, without the necessity for service by any other means
provided by law.
(f) AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company, the
Executive and the Investors, and no
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course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement or any provision hereof.
(g) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO
SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING HEREUNDER.
(h) HEADINGS. The section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ LARRY THOMAS
------------------------
Name: Larry Thomas
Title: President
/s/ BRUCE ROSS
------------------------
Bruce Ross
<PAGE>
EXHIBIT A
OPTIONS TO BE GRANTED
TO EXECUTIVE
---------------------
Defined terms used herein, but not defined herein, shall have the
meaning ascribed to them in the attached Employment Agreement or the Company's
1996 Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached Agreement, the
Company shall grant Executive an option to acquire 8,669 shares of Common Stock
pursuant to the Plan.
2. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(c) of the Plan on 12/31/96 and Executive is still employed by the
Company at such time, then the Company shall grant Executive an option to
receive 10% of such Shares Available for Award.
3. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(c) of the Plan on 12/31/97 and Executive is still employed by the
Company at such time, then the Company shall grant Executive an option to
receive 10% of such Shares Available for Award.
4. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(c) of the Plan on 12/31/98 and Executive is still employed by the
Company at such time, then the Company shall grant Executive an option to
receive 10% of such Shares Available for Award.
5. If any Reserved Shares become Shares Available for Award pursuant
to Section 7(e) of the Plan and Executive is still employed by the Company at
such time, the Company shall grant to Executive an option to acquire that number
of such Shares Available for Award equal to (x) the lesser of 8,669 or 10% of
such Shares Available for Award MINUS (y) the number of Shares Available for
Award that were subject to the options issued pursuant to paragraphs 2, 3 and 4
above. Any share numbers referred to in this paragraph 5 shall be subject to
adjustment as contemplated by Section 11 of the Plan.
6. All options issued pursuant to this Agreement shall be
exercisable for $1.00 per share of Common Stock.
7. All options issued pursuant to this Agreement prior to the
Company's initial public offering shall be NQOs.
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EXHIBIT B
TERRITORY
CALIFORNIA:
Los Angeles County metropolitan areas
Orange County metropolitan areas
San Diego County metropolitan areas
San Francisco/Alameda/Contra Costa/Marin/San Mateo
County metropolitan areas
San Bernardino/Riverside County metropolitan area
TEXAS:
Dallas/Ft. Worth metropolitan area
Houston metropolitan area
FLORIDA:
Miami metropolitan area
Ft. Lauderdale/Hollywood metropolitan area
ILLINOIS:
Chicago metropolitan area
MASSACHUSETTS:
Boston metropolitan area
MICHIGAN:
Detroit metropolitan area
MINNESOTA:
Minneapolis/St. Paul metropolitan area
2
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ANNEX A
Form of Indemnification Agreement.
3
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INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of June 5,
1996, by and between Guitar Center Management Company, Inc., a California
corporation (the "Corporation"), and the undersigned director or officer of the
Company ("Indemnitee"), with reference to the following facts:
A. Indemnitee is currently serving as a director or officer of the
Corporation.
B. The Corporation and Indemnitee recognize the substantial increase
in corporate litigation in general, subjecting officers and directors to
expensive litigation risks at the same time as the availability and coverage of
liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available to be
adequate under the present circumstances to protect him or her against the risks
associated with his or her service to the Corporation and the Corporation
recognizes that Indemnitee and other officers and directors of the Corporation
may not be willing to continue to serve as officers or directors without
additional protection.
D. The Corporation desires to attract and retain the services of
highly qualified individuals, including Indemnitee, to serve as officers and
directors of the Corporation and thus desires to indemnify its officers and
directors to provide them with the maximum protection permitted by law.
E. The execution and delivery of this Agreement is a condition to
the closing of those certain transactions contemplated by that certain Agreement
(the "Purchase Agreement"), dated as of May 1, 1996, by and among the
Corporation, the securityholders of the Corporation named therein and certain
other parties.
THEREFORE, IN CONSIDERATION OF the foregoing premises, the Corporation
and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
1.1. THIRD PARTY PROCEEDINGS.
The Corporation shall indemnify the Indemnitee if Indemnitee is or was
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Corporation to procure a judgment in its favor)
by reason of the fact that Indemnitee is or was a director, officer or agent of
the Corporation, or any subsidiary of the Corporation, by reason of any action
or inaction on the part of Indemnitee while an officer, director or agent or by
reason of the fact that Indemnitee is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation
partnership,
<PAGE>
joint venture, trust or other enterprise, against expenses (including subject
to Section 13, attorneys' fees and any expenses of establishing a right to
indemnification pursuant to this Agreement or under California law),
judgments, fines, settlements (if such settlement is approved in advance by
the Corporation, which approval shall not be unreasonably withheld) and other
amounts actually and reasonably incurred by Indemnitee in connection with
such proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Corporation and, in the case of a criminal proceeding, if Indemnitee had no
reasonable cause to believe Indemnitee's conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not, of itself, create
a presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests
of the Corporation, or with respect to any criminal proceedings, would not
create a presumption that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
1.2. PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify Indemnitee if Indemnitee was or is a
party or is threatened to be made a party to any threatened, pending or
completed action by or in the right of the Corporation or any subsidiary of the
Corporation to procure a judgment in its favor by reason of the fact that
Indemnitee is or was a director, officer or agent of the Corporation, or any
subsidiary of the Corporation, by reason of any action or inaction on the part
of Indemnitee while an officer, director or agent or by reason of the fact that
Indemnitee is or was serving at the request of the Corporation as a director,
officer or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including subject to Section 13, attorneys'
fees and any expenses of establishing a right to indemnification pursuant to
this Agreement or under California law) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of the proceeding if Indemnitee acted in good faith and in a manner Indemnitee
believed to be in or not opposed to the best interests of the Corporation and
its shareholders, except that no indemnification shall be made with respect to
any claim, issue or matter to which Indemnitee shall have been adjudged to have
been liable to the Corporation in the performance of Indemnitee's duty to the
corporation and its shareholders, unless and only to the extent that the court
in which such proceeding is or was pending shall determine upon application
that, in view of all the circumstances of the case, Indemnitee is fairly and
reasonably entitled to indemnity for expenses and then only to the extent that
the court shall determine.
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1.3. SUCCESSFUL DEFENSE ON MERITS.
To the extent that Indemnitee has been successful on the merits in
defense of any proceeding referred to in Sections 1.1 or 1.2 above, or in
defense of any claim, issue or matter therein, the Corporation shall indemnify
Indemnitee against expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in connection therewith. An Indemnitee shall be deemed
to have been successful on the merits, if the Plaintiff in the action does not
prevail in obtaining the relief sought in the suit or action of demanded in the
claim.
1.4. CERTAIN TERMS DEFINED.
For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans, references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan,
and references to "proceeding" shall include any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative. References to "corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, or agent of
such a constituent corporation or who, being or having been such a director,
officer, or agent of another corporation, partnership, joint venture, trust or
other enterprise shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as such person
would if he or she had served the resulting or surviving corporation in the same
capacity.
2. AGREEMENT TO SERVE.
Indemnitee agrees to serve or continue to serve as a director and/or
officer of the Corporation for so long as he or she is duly elected or appointed
or until such time as he or she voluntarily resigns. The terms of any existing
employment agreement between Indemnitee and the Corporation shall continue in
effect but shall be modified or supplemented by the terms of this Agreement.
Nothing contained in this Agreement is intended to create in Indemnitee any
right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
3.1. ADVANCEMENT OF EXPENSES.
The Corporation shall advance all expenses incurred by Indemnitee in
connection with the investigation, defense, settlement (excluding amounts
actually paid in settlement of any action, suit or proceeding) or appeal of any
civil or criminal action, suit or proceeding referenced in Sections 1.1 or 1.2
hereof. Indemnitee hereby undertakes to repay such amounts advanced only if,
and to the extent that, it shall be determined ultimately that Indemnitee is not
entitled to be indemnified by the
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Corporation as authorized hereby. The advances to be made hereunder shall be
paid by the Corporation to Indemnitee within 20 days following delivery of a
written request therefor by Indemnitee to the Corporation.
3.2. NOTICE OF CLAIM.
Indemnitee shall, as a condition precedent to his or her right to be
indemnified under this Agreement, give the Corporation notice in writing as soon
as practicable of any claim made against Indemnitee for which indemnification
will or could be sought under this Agreement; PROVIDED, HOWEVER, that the
failure to give such notice shall not affect the Indemnitee's rights hereunder
except and only to the extent such failure prejudiced the Corporation's ability
to successfully defend the matter subject to such notice. Notice to the
Corporation shall be directed to the President and the Secretary of the
Corporation at the principal business office of the Corporation with copies to
O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York
10112, Attention: Harvey M. Eisenberg, Esq. (or such other address as the
Corporation shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Corporation such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
3.3. ENFORCEMENT RIGHTS.
Any indemnification provided for in Sections 1.1, 1.2 or 1.3 shall be
made no later than 60 days after receipt of the written request of Indemnitee.
If a claim or request under this Agreement, under any statute, or under any
provision of the Corporation's Articles of Incorporation or Bylaws providing for
indemnification is not paid by the Corporation, or on its behalf, within 60 days
after written request for payment thereof has been received by the Corporation,
Indemnitee may, but need not, at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim or request, and subject to
Section 13, Indemnitee shall also be entitled to be paid for the expenses
(including attorneys' fees) of bringing such action. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in connection with any action, suit or proceeding in advance of its
final disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable law for the Corporation to indemnify
Indemnitee for the amount claimed, but the burden of proving such defense shall
be on the Corporation, and Indemnitee shall be entitled to receive interim
payments of expenses pursuant to Section 3.1 unless and until such defense may
be finally adjudicated by court order or judgment for which no further right of
appeal exists. The parties hereto intend that if the Corporation contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be a decision for the court, and no presumption regarding
whether the applicable standard has been met will arise based on any
determination or lack of determination of such by the Corporation
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<PAGE>
(including its Board of Directors (the "Board") or any subgroup thereof,
independent legal counsel or its shareholders).
3.4. ASSUMPTION OF DEFENSE.
In the event the Corporation shall be obligated to pay the expenses of
any proceeding against the Indemnitee, the Corporation, if appropriate, shall be
entitled to assume the defense of such proceeding with counsel approved by
Indemnitee which approval shall not be unreasonably withheld, upon the delivery
to Indemnitee of written notice of its election so to do. After delivery of
such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Corporation, the Corporation will not be liable to Indemnitee
under this Agreement for any fees of counsel subsequently incurred by Indemnitee
with respect to the same proceeding, unless (i) the employment of counsel by
Indemnitee is authorized by the Corporation, (ii) Indemnitee shall have
reasonably concluded, based upon written advice of counsel, that there may be a
conflict of interest of such counsel retained by the Corporation between the
Corporation and Indemnitee in the conduct of such defense, or (iii) the
Corporation ceases or terminates the employment of such counsel with respect to
the defense of such proceeding, in any of which events then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Corporation. At
all times, Indemnitee shall have the right to employ other counsel in any such
proceeding at Indemnitee's expense, and to participate in the defense of the
proceeding or claim through such counsel.
3.5. NOTICE TO INSURERS.
If, at the time of the receipt of a notice of a claim pursuant to
Section 3.2 hereof, the Corporation has director and officer liability insurance
in effect, the Corporation shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Corporation shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
3.6. SUBROGATION.
In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee, who shall do all things that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Corporation
effectively to bring suit to enforce such rights.
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4. EXCEPTIONS.
Notwithstanding any other provision herein to the contrary, the
Corporation shall not be obligated pursuant to the terms of this Agreement:
4.1. EXCLUDED ACTS.
To indemnify Indemnitee (i) as to circumstances in which indemnity is
expressly prohibited pursuant to California law, or (ii) for any acts or
omissions or transactions from which a director may not be relieved of liability
pursuant to California law; or (iii) any act or acts of bad faith or willful
misconduct; or
4.2. CLAIMS INITIATED BY INDEMNITEE.
To indemnify or advance expenses to Indemnitee with respect to
proceedings or claims initiated or brought voluntarily by Indemnitee and not by
way of defense, except with respect to proceedings brought to establish or
enforce a right to indemnification under this Agreement or any other statute or
law or as otherwise required under the Corporations Code of California, but such
indemnification or advancement of expenses may be provided by the Corporation in
specific cases if the Board has approved the initiation or bringing of such
suit; or
4.3. LACK OF GOOD FAITH.
To indemnify Indemnitee for any expenses incurred by the Indemnitee
with respect to any proceeding instituted by Indemnitee to enforce or interpret
this Agreement, if a court of competent jurisdiction determines that such
proceeding was not made in good faith or was frivolous; or
4.4. INSURED CLAIMS.
To indemnify Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in settlement) which have been paid directly to
Indemnitee by an insurance carrier under a policy of officers' and directors'
liability insurance maintained by the Corporation; or
4.5. BREACHES OF AGREEMENTS.
To indemnify Indemnitee for expenses or liabilities (including
indemnification obligations of Indemnitee) of any type whatsoever arising from
his breach of the Purchase Agreement, an employment agreement with the
Corporation (if any) or any other agreement with the Corporation or any of its
subsidiaries; or
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4.6. CLAIMS UNDER SECTION 16(b).
To indemnify Indemnitee for expenses and the payment of profits
arising from the purchase and sale by Indemnitee of securities in violation of
Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar
successor statute.
5. PARTIAL INDEMNIFICATION.
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Corporation for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by the Indemnitee
in the investigation, defense, appeal or settlement of any civil or criminal
action, suit or proceeding, but not, however, for the total amount thereof, the
Corporation shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
6.1. SCOPE.
In the event of any change in any applicable law, statute or rule
which narrows the right of a California corporation to indemnify a member of its
Board or an officer, such changes, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement shall have no effect on
this Agreement or the parties' rights and obligations hereunder. Nothing in
this Agreement is intended to relieve Indemnitee from any obligations he may
have pursuant to the Purchase Agreement, an employment agreement (if any) or any
other agreement with the Corporation or its subsidiaries.
6.2. NON-EXCLUSIVITY.
Nothing herein shall be deemed to diminish or otherwise restrict any
rights to which Indemnitee may be entitled under the Corporation's Amended and
Restated Articles of Incorporation, the Corporation's Amended and Restated
Bylaws, any agreement, any vote of shareholders or disinterested directors, or,
except as expressly provided herein, under the laws of the State of California.
7. MUTUAL ACKNOWLEDGMENT.
Both the Corporation and Indemnitee acknowledge that, in certain
instances, Federal law or applicable public policy may prohibit the Corporation
from indemnifying its directors and officers under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Corporation has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Corporation's right under public policy
to indemnify Indemnitee.
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8. OFFICER AND DIRECTOR LIABILITY INSURANCE.
The Corporation shall, from time to time, make the good faith
determination whether or not it is practicable for the Corporation to obtain and
maintain a policy or policies of insurance with reputable insurance companies
providing the officers and directors of the Corporation with coverage for losses
from wrongful acts, or to ensure the Corporation's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Corporation will weigh the costs of obtaining such insurance coverage
against the protection afforded by such coverage. Notwithstanding the
foregoing, the Corporation shall have no obligation to obtain or maintain such
insurance if the Corporation determined in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Corporation.
9. SEVERABILITY.
Nothing in this Agreement is intended to require or shall be construed
as requiring the Corporation to do or fail to do any act in violation of
applicable law. The Corporation's inability, pursuant to court order, to
perform its obligations under this Agreement shall not constitute a breach of
this Agreement. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify Indemnitee to the fullest extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
10. EFFECTIVE DATES.
This Agreement shall be effective as of the date set forth on the
first page.
11. COVERAGE.
The provisions of this Agreement shall continue as to Indemnitee for
any action taken or not taken while serving in an indemnified capacity even
though Indemnitee may have ceased to serve in such capacity at the time of any
action, suit or other covered proceeding. This Agreement shall be binding upon
the Corporation and its successors and assigns and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
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12. NOTICE.
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if delivered by
hand and receipted for by the addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are aa shown on the signature page of this Agreement or aa subsequently
modified by written notice.
13. ATTORNEYS' FEES.
In the event that any action is instituted by Indemnitee under this
Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be
entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless as a
part of such action, the court of competent jurisdiction determines that the
action was not instituted in good faith or was frivolous. In the event of an
action instituted by or in the name of the Corporation under this Agreement, or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that Indemnitee's defenses to such
action were not made in good faith or were frivolous.
14. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, as applied to contracts between California
residents entered into and to be performed entirely within California.
15. CONSENT TO JURISDICTION.
The Corporation and Indemnitee each hereby irrevocably consent to the
jurisdiction of the courts of the State of California for all purposes in
connection with any action or proceeding which arises out of or relates to this
Agreement and agree that any action instituted under this Agreement shall be
brought only in the state courts in the State of California.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, all of
which taken together shall constitute one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GUITAR CENTER MANAGEMENT Address:
COMPANY, INC.
5155 Clareton Drive
Agoura Hills, CA 91301
By:
--------------------------
Title:
-----------------------
INDEMNITEE Address:
- ------------------------------ -----------------------
(Signature)
- ------------------------------ -----------------------
<PAGE>
AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement made the 5th day of June,
1996 (the "Agreement"), between Guitar Center Management Company, Inc., a
California corporation (the "Company"), and Bruce Ross (the "Executive") is
entered into this 15th day of October 1996.
WHEREAS, the Company has amended its 1996 Performance Stock Option Plan
(the "Plan");
WHEREAS, material provisions of the Agreement relate to the Executive's
rights to receive options issued pursuant to the Plan;
WHEREAS, the parties wish to amend the Agreement in order to set forth
provisions consistent with the intent of the Agreement and to modify certain
provisions relating to the grant of options under the Plan;
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Section 3(e) of the Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"(e) the Company shall issue Executive options to acquire
units for the purchase of shares of Common Stock and Junior
Preferred Stock as described in the amounts and on the dates
set forth on Exhibit A hereto."
<PAGE>
Section 2. Exhibit A to the Agreement is hereby deleted in its entirety
and the following is hereby inserted in lieu thereof and shall constitute
Exhibit A to the Agreement:
"Exhibit A
Defined terms used herein, but not defined herein,
shall have the meaning ascribed to them in the attached
Employment Agreement or the Company's Amended and Restated
1996 Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached
Agreement, the Company shall grant Executive an option to
acquire 8,669 Units pursuant to the Plan with the Units to
vest 1/3 after one year, 2/3 after two years, 100% after 3
years.
2. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/97 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
3,000 of such Units Available for Award with the Units to
vest 1/2 after one year and 100% after two years.
3. If any Renewed Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/31/98 and
Executive is
<PAGE>
still employed by the Company at such time, then the Company
shall grant Executive an option to receive 2,000 of such Units
Available for Award with the Units to vest 100% after one year.
4. If any Reserved Units become Units Available for
Award pursuant to Section 7(c) of the Plan on 12/30/99 and
Executive is still employed by the Company at such time,
then the Company shall grant Executive an option to receive
3,668 of such Units Available for Award with the Units to
vest immediately upon grant.
5. If any Reserved Units become Units Available for
Award pursuant to Section 7(e) of the Plan and Executive is
still employed by the Company at such time, the Company
shall grant to Executive an option to acquire that number of
such Units Available for Award equal to (x) the lesser of
8,669 or 10% of such Units Available for Award minus (y) the
number of Units Available for Award that were subject to the
options issued pursuant to paragraphs 2, 3 and 4 above.
6. Any share numbers referred to in this Exhibit A
shall be subject to adjustment as contemplated by Section 11
of the Plan.
<PAGE>
7. All options issued pursuant to this Agreement hall
be exercisable for $100 per Unit.
8. All options issued pursuant to this Agreement
prior to the Company's initial public offering shall be
NQOs."
Section 3. This Amendment shall be effective as of June 5, 1996.
Section 4. Except as provided for in this Amendment Number 1 all of the
provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Number 1 to the Agreement.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By: /s/ MARTY ALBERTSON
Name: Marty Albertson
Title: Chief Executive Officer
/s/ BRUCE ROSS
------------------------------------
BRUCE ROSS
<PAGE>
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
This Amendment No. 2, dated as of January 30, 1997 (this "AMENDMENT
NO. 2"), between Guitar Center, Inc., a Delaware corporation (the "COMPANY"),
and the undersigned executive of the Company (the "EXECUTIVE") amends the
Employment Agreement between the parties hereto entered into on June 5, 1996 and
amended on October 15, 1996 pursuant to Amendment No. 1 thereto (as so amended,
the "AGREEMENT"). All capitalized terms not otherwise defined herein shall have
the meanings ascribed to such terms in the Company's Amended and Restated 1996
Performance Stock Option Plan, as amended (the "PLAN").
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.
B. The Agreement provides that, at certain times on or after
December 31, 1997, if any Reserved Units become Units Available for Award and if
the Executive is still employed by the Company at such times, then the Company
shall grant to the Executive certain options to purchase Units.
C. It is and always has been the intention of the parties that the
ability of the Executive to receive additional options under the Plan survive an
IPO and, further, that such options be earned and vested in the event Executive
is still in the employ of the Company on the fifth anniversary of date of the
Agreement.
D. The parties desire to enter into this Amendment No. 2 to document
accurately the understandings of the parties and to describe the necessary
amendments and waivers to the Plan to accommodate such intent.
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:
<PAGE>
1. AMENDMENT TO EXHIBIT A. Exhibit A of the Agreement is hereby deleted
in its entirety and the following is hereby inserted in lieu thereof and shall
constitute Exhibit A to the Agreement:
"Exhibit A
Defined terms used herein, but not defined herein, shall have the
meaning ascribed to them in the attached Employment Agreement or, if
not defined in the attached Employment Agreement, shall have the
meanings ascribed to them in the Company's Amended and Restated 1996
Performance Stock Option Plan, as amended (the "PLAN"):
1. INITIAL GRANT SUBJECT ONLY TO TIME VESTING. Effective June 3,
1996, the Company granted the Executive an option to acquire 8,669 Units
pursuant to the Plan. Such Units shall vest 1/3 after one year from the
date of grant, 2/3 after two years from the date of grant, and 100% after 3
years from the date of grant.
2. ADDITIONAL GRANT SUBJECT TO TIME VESTING WITH ACCELERATION UPON
ATTAINMENT OF CERTAIN PERFORMANCE OBJECTIVES.
(a) GENERAL. The Company agrees to grant the Executive an option to
acquire 8,669 Units pursuant to the Plan, all such options to vest on June
5, 2001 provided that Executive is employed by the Company on such date,
unless such vesting is accelerated upon the attainment of the performance
objectives set forth in subsection (b), below. This option may be
exercised only to the extent it has vested in accordance with the terms
described herein.
(b) ACCELERATION OF VESTING. Notwithstanding the five-year time
vesting provision provided in subsection (a), the vesting of the option to
acquire 8,669 Units provided for in this Section 2 shall be accelerated as
follows:
(i) If, pursuant to Section 7(c) of the Plan, the Calculated
Corporate Value for the fiscal year ended December 31, 1997 is equal
to or greater than the applicable Corporate Value Target increased (or
decreased) by the positive (or negative) amount equal to the
Cumulative Adjustment Amount as of such date, then options to acquire
1,500 Units shall vest on December 31, 1998 and options to acquire
1,500 Units shall vest on December 31, 1999 provided, in each case,
that Executive is employed by the Company on such date.
(ii) If, pursuant to Section 7(c) of the Plan, the Calculated
Corporate Value for the fiscal year ended December 31, 1998 is equal
to or greater than the applicable Corporate Value Target increased (or
decreased) by the positive (or negative) amount equal to the
Cumulative Adjustment Amount as of such date, then options to acquire
5,000 Units shall vest on December 31, 1999 provided that (x)
Executive is employed by the Company on such date and (y) such
accelerated vesting shall be reduced for any options accelerated by
operation of Section 2(b)(i).
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(iii) If, pursuant to Section 7(c) of the Plan, the Calculated
Corporate Value for the fiscal year ended December 31, 1999 is equal
to or greater than the applicable Corporate Value Target increased (or
decreased) by the positive (or negative) amount equal to the
Cumulative Adjustment Amount as of such date, then options to acquire
8,669 Units shall vest on December 31, 1999 provided that (x)
Executive is employed by the Company on December 31, 1999 and (y) such
accelerated vesting shall be reduced for any options accelerated by
operation of Section 2(b)(i) or 2(b)(ii).
(iv) Notwithstanding the foregoing subsections (b)(i) through
(b)(iii), if there is a Sale of the Company, then:
(1) All options, if any, that have been accelerated by
virtue of attainment of the performance objectives contained in
subsections (b)(i), (b)(ii) or (b)(iii) shall be deemed vested
and exercisable in connection with such Sale of the Company,
notwithstanding the fact that the time vesting provisions
specified therein have not occurred. By way of example, if the
Corporate Value Target for December 31, 1997 is attained and a
Sale of the Company occurs on March 15, 1998, then the full 3,000
options related to the December 31, 1997 Corporate Value Target
shall be exercisable in connection with the Sale of the Company
regardless of the terms of such sale; and
(2) The Company shall compute whether or not any Reserved
Units would have become Units Available for Award pursuant to
Section 7(e) of the Plan, such calculations to assume that the
Plan remained in effect at all times from its initial
effectiveness through and including such Sale of the Company,
notwithstanding any actual termination of such provision by
operation of Section 7(g) of the Plan. If, pursuant to such
calculation, there would have been Units Available for Award upon
such Sale of the Company, then additional options shall be
exercisable in connection with the Sale of the Company equal to:
(x) the lesser of 8,669 or 10% of such Units Available for Award,
minus (y) the number of options the vesting of which became
accelerated upon attainment of the provisions of clauses (i)
through (iii) (I.E., which options already would be exercisable
in connection with such Sale of the Company by operation of
clause (1), above).
(c) ALTERNATIVE ACCELERATION EVENTS. It is expressly agreed that the
acceleration provisions of Section 4(b) of the Agreement and the proviso to
Section 5(c) of the Plan (collectively, the "GENERAL ACCELERATION
PROVISIONS") shall not apply to any option granted pursuant to this Section
2 except to the extent of the options, if any, accelerated by attainment of
the performance objectives established in Sections 2(b)(i) or 2(b)(ii)
which have not satisfied the time vesting provisions set forth therein.
Specifically, it is agreed that such General
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Acceleration Provisions shall not be applicable to the five year time
vesting period set forth in Section 2(a) (I.E., such five year period
shall not be accelerated upon (x) the termination of Executive's
employment for any reason, whether with or without cause or with or
without notice, or (y) any Sale of the Company other than by operation
of Section 2(b)(iv)).
3. EXERCISE PRICE. All options issued pursuant to this Agreement
shall be exercisable for $100 per Unit.
4. DEFINITION OF UNIT. The Executive and the Company understand and
agree that the one share of Common Stock and the 0.99 of a share of Junior
Preferred Stock that constitute one Unit are as of June 5, 1996. Any unit
numbers and exercise price amounts referred to in this Exhibit A shall be
subject to adjustment as contemplated by Section 11 of the Plan.
5. TYPE OF OPTIONS. All options issued pursuant to this Agreement
shall be NSOs."
* * * * * * * *
2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective
upon the receipt of the approval of the Committee, the Board of Directors and
the Requisite Stockholders, in each case pursuant to the Plan and the
Stockholders Agreement.
3. EFFECTIVE DATE. Subject to the satisfaction of the conditions set
forth in Section 2, this Amendment No. 2 shall be effective as of the date of
the Agreement.
4. ENTIRE AGREEMENT. This Amendment No. 2 and those documents expressly
referred to herein embody the complete agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersede any prior
understandings, agreements or representations by or between the parties, written
or oral, with respect to the subject matter hereof.
5. GOVERNING LAW. This Amendment No. 2 shall be governed by and
construed in accordance with the internal laws of the State of California,
without giving effect to any choice of law or conflicts of law provisions
thereof.
6. HEADINGS. The section headings contained in this Amendment No. 2 are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Amendment No. 2.
7. FULL FORCE AND EFFECT. Except as provided for in this Amendment No.
2, all of the provisions of the Agreement shall remain in full force and effect.
(Signature Page Follows)
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 to be duly executed.
GUITAR CENTER, INC.
By /s/ LARRY THOMAS
----------------------------------
President
BRUCE ROSS
/s/ BRUCE ROSS
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S-1
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Exhibit 10.9
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 5th day of June, 1996 (the
"Agreement") with an effective date of July 1, 1996, between GUITAR CENTER
MANAGEMENT COMPANY, INC., a California corporation (the "Company"), and Barry F.
Soosman (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is a condition to the closing of the Stock Purchase Agreement (the
"Purchase Agreement") of even date herewith by and among the Company, Chase
Venture Capital Associates, L.P., Wells Fargo Small Business Investment Company,
Inc., Weston Presidio Capital II, L.P. (collectively, the "Investors"), and the
security holder of the Company.
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company shall employ the Executive, and the
Executive accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the date hereof and ending
as provided in paragraph 4 hereof (the "Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve
initially as the Vice President-Corporate Development and General Counsel of the
Company and shall have the normal duties, responsibilities and authority of the
Vice President-Corporate Development and General Counsel, subject to the power
of the board of directors of the Company (the "Board") and the powers delegated
to the Executive's superiors (if any) by the Board.
(b) The Executive shall report to the Board or its designee, and
the Executive shall devote his best efforts and substantially all of his
business time, attention and energies (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its Subsidiaries (as defined below). The Executive shall
perform his duties and responsibilities to the best of his abilities in a
diligent, trustworthy, and businesslike manner. During the Employment Period,
the Executive shall not engage in any business activity which, in the reasonable
judgment of the Board, materially conflicts with the duties of the Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage; PROVIDED, HOWEVER, that nothing herein is intended to
prohibit Executive from managing his own investment portfolio; PROVIDED
FURTHER, HOWEVER, that the Company acknowledges that the Executive may devote
such time that the Executive deems appropriate to his real estate and law
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enterprise, including, without limitation, his "of counsel" relationship with
Buchalter, Nemer, Fields & Younger, so long as Executive shall at all times
adequately fulfill his obligations pursuant to this Section 2(b).
(c) For purposes of this Agreement, (i) "SUBSIDIARIES" shall
mean any corporation of which the securities having a majority of the voting
power in electing directors are, at the time of determination, owned by the
Company, directly or through one or more Subsidiaries; and (ii) "Person" shall
be construed broadly and shall include, without limitation, an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, a limited liability company and a governmental entity or any
department or agency thereof.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's base salary
shall be $225,000 per annum or such higher rate as the Board (excluding the
Executive if he should be a member of the Board at the time of such
determination) may designate from time to time (the "Base Salary"), which salary
shall be payable in such installments as is the policy of the Company with
respect to its senior executive employees and shall be subject to Federal, state
and local withholding and other payroll taxes. In addition, during the
Employment Period, the Executive shall be entitled to participate in all
employee benefit programs for which all executives of the Company are generally
eligible and the Executive shall be eligible to participate in all insurance
plans available generally to all executives of the Company.
(b) In addition to the Base Salary, for each fiscal year ending
during the Employment Period, Executive shall also be eligible to receive an
annual bonus at the discretion of the Board.
(c) The Company shall reimburse the Executive for all reasonable
expenses incurred by him in the course of performing his duties under this
Agreement which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and documenting
such expenses. The Company shall reimburse the Executive for all bar dues and
real estate broker license fees. The Company shall reimburse the executive for
all library and reference materials and the cost of any continuing education and
seminars approved by the President of the Company.
(d) During the Employment Period, the Executive shall be entitled
to 3 weeks paid vacation during each 12-month period worked, commencing on the
date hereof.
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(e) The Company shall issue Executive options to acquire shares of
Common Stock in the amounts and on the dates set forth on A hereto.
(f) Notwithstanding any benefit provided to the Executive as
provided in Section 3(a) hereinabove, the Company shall pay or provide, at a
minimum, at the Company's expense, an automobile allowance of $800.00 per month
and a car phone including monthly access fees.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and the
Executive, the Employment Period shall end on December 31, 1999; PROVIDED,
HOWEVER, that (i) the Employment Period shall terminate prior to such date
upon the Executive's resignation pursuant to the provisions of Section 4(f) or
4(g) hereof, or the death or Disability (as hereinafter defined) of Executive;
and (ii) the Employment Period may be terminated by the Company at any time
prior to such date for Cause (as defined below) or without Cause. For purposes
of this Agreement the term "DISABILITY" means any long-term disability or
incapacity which (i) renders the Executive unable to substantially perform all
of his duties hereunder for 180 days during any 18-month period or (ii) would
reasonably be expected to render the Executive unable to substantially perform
all of his duties for 180 days during any 18-month period, in each case as
determined by the Board (excluding the Executive if he should be a member of the
Board at the time of such determination) in its good faith judgment after
seeking and reviewing advice from a qualified physician.
(b) If the Employment Period is terminated by the Company without
Cause or by the Executive with Reasonable Justification, the Executive shall be
entitled to receive as severance the Base Salary, an annual cash bonus equal to
the last annual bonus (excluding any portion thereof that the President of the
Company considered extraordinary and non-recurring) he received prior to
termination (such bonus to be pro-rated for any partial year), and continuation
of his medical benefits (or, if such continuation is not permitted by the
Company's insurers beyond the Employment Period, an annual cash payment equal to
the average premium the company pays to obtain health insurance for an
employee), for the period beginning on the date of such termination and ending
on December 31, 1999, unless the Executive has breached the provisions of this
Agreement, in which case the provisions of paragraph 11(a)(iii) shall apply.
For purposes of this Section 4(b), benefits will not include future
participation in any discretionary bonus or equity incentive pool, other than
continuation of annual cash bonuses as contemplated in the previous sentence.
Such severance payments will be made periodically in the same amounts and at the
same intervals as the Base Salary, annual bonus and benefits (as applicable)
were paid immediately prior to termination of employment. Executive shall have
no duty to mitigate any damages which Executive may suffer
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as a result of such termination nor shall the severance benefits payable be
reduced by any sums actually earned by Executive as a result of any other
employment obtained by Executive during the original Employment Period. In
addition, if the Employment Period is terminated by the Company without Cause,
all stock options held by the Executive may immediately vest pursuant to the
terms of the agreements by which such options were issued.
(c) If the Employment Period is terminated for any reason
(including pursuant to paragraph 4(h)) other than by the Company without Cause
or by the Executive with Reasonable Justification, the Executive shall be
entitled to receive only the Base Salary and then only to the extent such amount
has accrued through the date of termination.
(d) Except as otherwise expressly required by law (e.g., COBRA) or
as specifically provided herein, all of the Executive's rights to salary,
severance, benefits, bonuses and other amounts hereunder (if any) accruing after
the termination of the Employment Period shall cease upon such termination. In
the event that the Employment Period is terminated by the Company without Cause
or by the Executive with Reasonable Justification, the Executive's sole remedy
shall be to receive the severance payments and benefits described in paragraph
4(b) hereof.
(e) For purposes of this Agreement, "Cause" means (i) the repeated
failure by the Executive to perform such lawful duties consistent with
Executive's position as are reasonably requested by the Board as documented in
writing to the Executive, (ii) the Executive's repeated material neglect of his
duties on a general basis (other than as a result of illness or disability),
notwithstanding written notice of objection from the Board and the expiration of
a thirty (30) day cure period, (iii) the commission by the Executive of any act
of fraud, theft or criminal dishonesty with respect to the Company or any of its
Subsidiaries or affiliates, or the conviction of the Executive of any felony,
(iv) the commission of any act involving moral turpitude which (A) brings the
Company or any of its affiliates into public disrepute or disgrace, or (B)
causes material injury to the customer relations, operations or the business
prospects of the Company or any of its affiliates, and (v) material breach by
the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of paragraph 5, 6 or 7 hereof, not cured within
thirty (30) days after written notice to Executive from the Board; PROVIDED,
HOWEVER, that in the event of an intentional breach of the provisions of
paragraph 5, 6 or 7 hereof, the Executive shall not have the opportunity to
cure.
(f) The Executive may within ninety (90) days, after giving
written notice to the Company and the Company's failure to cure, voluntarily
terminate employment with the Company upon any event giving rise to Reasonable
Justification for such voluntary termination.
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(g) For purposes of this Agreement, "Reasonable Justification"
shall mean any voluntary termination by the Executive of his employment with the
Company within ninety (90) days after the occurrence of any of the following
events:
(i) the Executive is directed to perform an act that the
Executive reasonably believes to be in contravention of law, or which the
Executive reasonably believes would subject the Company and himself to
material liability, despite his express written objection addressed to the
Board with respect to such action;
(ii) there has been any change (on other than a temporary
basis) without the Executive's consent in the Executive's title or any
material reduction in the nature or scope of his responsibilities, or the
Executive is assigned duties that are materially inconsistent with his
position (other than on a temporary basis);
(iii) there is any material reduction in the Executive's
compensation or benefits (other than reductions in benefits that generally
effect all employees entitled to such benefits ratably);
(iv) the Executive is required by the Company, after written
objection by the Executive, to relocate his principal place of employment
outside a radius of fifty miles from his place of employment immediately
prior to such relocation; or
(v) there is a material failure, after notice and an
opportunity to cure, by the Company to perform any of its obligations to
the Executive under this Agreement.
(h) If at any time during the Employment Period, there is a Sale
of the Company (as defined in that certain Stockholders Agreement, dated as of
June 5, 1996, by and among the Company and certain of its stockholders),
Executive may resign within ninety (90) days of the occurrence of such event by
notifying the Company in writing.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose to a third party or use for
his personal benefit or for the benefit of a third party, at any time, either
during the Employment Period or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance in good
faith of duties assigned to the Executive by the Company. The Executive will
take all reasonable and appropriate steps to safeguard Confidential Information
and
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to protect it against disclosure, misuse, espionage, loss and theft. The
Executive shall deliver to the Company at the termination of the Employment
Period or at any time the Company may request all memoranda, notes, plans,
records, reports, computer tapes and software and other documents and data (and
copies thereof) relating to the Confidential Information, Work Product (as
defined below) or the business of the Company or any of its Subsidiaries which
the Executive may then possess or have under his control.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) information, observations and data obtained by the
Executive while employed by the Company (including those obtained prior to the
date of this Agreement) concerning the business or affairs of the Company, (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and business
methods, (xi) inventions, devices, new developments, methods and processes,
whether patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) other copyrightable
works, (xiv) all production methods, processes, technology and trade secrets,
and (xv) all similar and related information in whatever form. Confidential
Information will not include any information that has been published in a form
generally available to the public prior to the date the Executive proposes to
disclose or use such information. Confidential Information will not be deemed
to have been published merely because individual portions of the information
have been separately published, but only if all material features comprising
such information have been published in combination.
6. INVENTIONS AND PATENTS.
(a) The Executive agrees that all inventions, innovations,
improvements, technical information, systems, software developments, methods,
designs, analyses, drawings, reports, service marks, trademarks, tradenames,
logos and all similar or related information (whether patentable or
unpatentable) which relates to the Company's or any of its Subsidiaries' actual
or anticipated business, research and development or existing or future products
or services and which are conceived, developed or made by the Executive (whether
or not during usual business hours and whether or not alone or in conjunction
with any other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement) together with all patent
applications, letters patent, trademark, tradename and service mark applications
or registrations, copyrights and reissues thereof that may be
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granted for or upon any of the foregoing (collectively referred to herein as,
the "Work Product") belong to the Company or such Subsidiary. The Executive
will promptly disclose such Work Product as may be susceptible of such manner of
communication to the Board and perform all actions reasonably requested by the
Board (whether during or after the Employment Period) to establish and confirm
such ownership (including, without limitation, the execution and delivery of
assignments, consents, powers of attorney and other instruments) and to provide
reasonable assistance to the Company or any of its Subsidiaries in connection
with the prosecution of any applications for patents, trademarks, trade names,
service marks or reissues thereof or in the prosecution or defense of
interferences relating to any Work Product.
(b) CALIFORNIA EMPLOYEE PATENT ACT NOTIFICATION. In accordance
with Section 2872 of the California Employee Patent Act, West's Cal. Lab.
Code Section 2870 ET SEQ., Executive is hereby advised that subparagraph 6(a)
does not apply to any invention, new development or method (and all copies
and tangible embodiments thereof) made solely by Executive for which no
equipment, facility, material, Confidential Information or intellectual
property of the Company or any of its Subsidiaries was used and which was
developed entirely on Employee's own time; PROVIDED, HOWEVER, that
subparagraph 6(a) shall apply if the invention, new development or method (i)
relates to the Company's or any of its Subsidiaries' actual or demonstrably
anticipated businesses or research and development, or (ii) results from any
work performed by Executive for the Company or any of its Subsidiaries.
7. NON-COMPETE AND NON-SOLICITATION.
(a) The Executive acknowledges and agrees with the Company that
during the course of the Executive's involvement and/or employment with, or
ownership of options and/or Common Stock in, the Company, such Executive has had
and will continue to have the opportunity to develop relationships with existing
employees, vendors, suppliers, customers and other business associates of the
Company which relationships constitute goodwill of the Company, and the Company
would be irreparably damaged if the Executive were to take actions that would
damage or misappropriate such goodwill. Accordingly, the Executive agrees as
follows:
(i) The Executive acknowledges that the Company currently
conducts its business throughout the United States, including without
limitation the areas listed on Exhibit B attached hereto (the
"Territory"). Accordingly, during the period commencing on the date
hereof and ending on the later of (x) the termination of the Employment
Period or (y) if the Executive was terminated without Cause or resigns
with Reasonable Justification, December 31, 1999 (such period is referred
to herein as the "Non-Compete
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Period"), the Executive shall not, directly or indirectly, enter into,
engage in, assist, give or lend funds to or otherwise finance, be employed
by or consult with, or have a financial or other interest in, any business
which engages in selling at retail musical instruments, pro-audio
equipment or related accessories within the Territory (the "Line of
Business"), whether for or by himself or as a representative for any other
Person.
(ii) Notwithstanding the foregoing, the aggregate ownership
by the Executive of no more than two percent (on a fully-diluted basis) of
the outstanding equity securities of any entity, which securities are
traded on a national or foreign securities exchange, quoted on the Nasdaq
Stock Market or other automated quotation system, and which entity
competes with the Company (or any part thereof) within the Territory,
shall not (by itself) be deemed to be giving or lending funds to,
otherwise financing or having a financial interest in a competitor. In
the event that any entity in which the Executive has any financial or
other interest directly or indirectly enters into the Line of Business
during the Non-Compete Period, the Executive shall divest all of his
interest (other than any amount permitted to be held pursuant to the first
sentence of this Section 7(a)(ii)) in such entity within thirty (30) days
after learning that such entity has entered the Line of Business.
(iii) The Executive covenants and agrees that during the
Non-Compete Period, the Executive will not, directly or indirectly, either
for himself or for any other person or entity, solicit any employee of the
Company (other than such Executive's personal assistant or secretary) or
any Subsidiary to terminate his or her employment with the Company or any
Subsidiary or employ any such individual during his or her employment with
the Company or any Subsidiary and for a period of six months after such
individual terminates his or her employment with the Company or any
Subsidiary.
(b) The Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to the business of
the Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits as an employee or holder of Common
Stock of the Company and as otherwise provided hereunder to clearly justify such
restrictions which, in any event (given his education, skills and ability), the
Executive does not believe would prevent him from otherwise earning a living.
(c) The provisions of this Section 7 shall terminate in the event
the Company fails to make any payments required by Section 4(b) and such failure
remains uncured for a period equal
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to at least thirty (30) days after written notice of such event from Executive.
8. INDEMNIFICATION. The Company and the Executive are entering
into an Indemnification Agreement on the date hereof in substantially the form
attached hereto of Annex A.
9. INSURANCE. The Company may, for its own benefit, maintain
"keyman" life and disability insurance policies covering the Executive, provided
the same does not prevent Executive from obtaining reasonable amounts of
insurance for his family or estate planing needs. The Executive will cooperate
with the Company and provide such information or other assistance as the Company
may reasonably request in connection with the Company obtaining and maintaining
such policies.
10. EXECUTIVE REPRESENTATION. The Executive hereby represents
and warrants to the Company that (a) the execution, delivery and performance of
this Agreement by the Executive does not and will not conflict with, breach,
violate or cause a default under any agreement, contract or instrument to which
the Executive is a party or any judgment, order or decree to which the Executive
is subject, (b) the Executive is not a party to or bound by any employment
agreement, consulting agreement, non-compete agreement, confidentiality
agreement or similar agreement with any other person or entity and (c) upon the
execution and delivery of this Agreement by the Company and the Executive, this
Agreement will be a valid and binding obligation of the Executive, enforceable
in accordance with its terms.
11. NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim or other communication hereunder shall be delivered personally to the
recipient, delivered by United States Post Office mail (postage prepaid and
return receipt requested), telecopied to the intended recipient at the number
set forth therefor below (with hard copy to follow), or sent to the recipient by
reputable express courier service (charges prepaid) and addressed to the
intended recipient as set forth below:
If to the Company, to:
Guitar Center Management Company, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telephone: (818) 735-8800
Telecopier: (818) 735-4923
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With copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400; and
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Harvey M. Eisenberg, Esq.
Telephone: (212) 408-2400
Telecopier: (212) 408-2420
Sidley & Austin
555 W. Fifth St.
Los Angeles, California 90013-1010
Attention: Moshe Kupietzky, Esq.
Telecopier: (213) 896-6600
If to the Executive, to:
Barry Soosman
852 Country Valley Road
Westlake Village, CA 91362
Telephone: (805) 373-1937
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
12. GENERAL PROVISIONS.
(a) SEVERABILITY/ENFORCEMENT.
(i) It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, if any
particular provision of this Agreement shall be adjudicated by a court of
competent jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of this Agreement or affecting
the validity or enforceability of such provision in any other
jurisdiction. Notwithstanding the foregoing, if such
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provision could be more narrowly drawn so as not to be invalid, prohibited
or unenforceable in such jurisdiction, it shall, as to such jurisdiction,
be so narrowly drawn, without invalidating the remaining provisions of
this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Without limiting the generality of
the preceding sentence, if at the time of enforcement of paragraph 5, 6 or
7 of this Agreement, a court holds that the restrictions stated therein
are unreasonable under circumstances then existing, the parties hereto
agree that the maximum period, scope or geographical area reasonable under
such circumstances shall be substituted for the stated period, scope or
area and that the failure of all or any of such provisions to be
enforceable shall not impair or affect the obligations of the Company to
pay compensation or severance obligations under this Agreement.
(ii) Because the Executive's services are unique and because
the Executive has access to Confidential Information and Work Product, the
parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement by the Executive. Therefore, in the event of
a breach or threatened breach of this Agreement, the Company or its
successors or assigns may, in addition to other rights and remedies
existing in their favor, apply to any court of competent jurisdiction for
specific performance and/or injunctive or other relief in order to
enforce, or prevent any violations of, the provisions hereof (without
posting a bond or other security).
(iii) In addition to the foregoing, and not in any way in
limitation thereof, or in limitation of any right or remedy otherwise
available to the Company, if the Executive materially violates any
provision of paragraph 5, 6 or 7 (and such violation, if unintentional on
the part of the Executive, continues for a period of thirty (30) days
following receipt of written notice from the Company), any severance
payments then or thereafter due from the Company to the Executive may be
terminated forthwith and upon such election by the Company, the Company's
obligation to pay and the Executive's right to receive such severance
payments shall terminate and be of no further force or effect. The
Executive's obligations under paragraphs 5, 6 or 7 of this Agreement shall
not be limited or affected by, and such provisions shall remain in full
force and effect notwithstanding the termination of any severance payments
by the Company in accordance with this paragraph 11(a)(iii). The exercise
of the right to terminate such payments shall not be deemed to be an
election of remedies by the Company and shall not in any manner modify,
limit or preclude the Company from exercising any other rights or seeking
any other remedies available to it at law or in equity.
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(b) COMPLETE AGREEMENT. This Agreement, those documents
expressly referred to herein and all other documents of even date herewith
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive and the Company and their respective successors, assigns,
heirs, representatives and estate; PROVIDED, HOWEVER, that the rights and
obligations of the Executive under this Agreement shall not be assigned without
the prior written consent of the Company.
(d) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE
(WHETHER OF THE STATE OF CALIFORNIA, OR ANY OTHER JURISDICTION), THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF
CALIFORNIA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT,
EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(e) JURISDICTION, ETC.
(i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California State court or Federal court of the United
States of America sitting in the State of California, and any appellate
court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such California State court
or, to the extent permitted by law, in such Federal court. Each of the
parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law. Nothing
in this Agreement shall affect any right that any party may otherwise have
to bring any action or proceeding relating to this Agreement in the courts
of any jurisdiction.
(ii) Each of the parties hereto irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection that it may now or hereafter have to the
laying of venue of any suit, action or
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proceeding arising out of or relating to this Agreement in any California
State or Federal court. Each of the parties hereto irrevocably waives, to
the fullest extent permitted by law, the defense of an inconvenient forum
to the maintenance of such action or proceeding in any such court.
(iii) The Company and the Executive further agree that the
mailing by certified or registered mail, return receipt requested, of any
process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any
other means provided by law.
(f) AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and the Investors, and no course of conduct or failure or delay in
enforcing the provisions of this Agreement shall affect the validity, binding
effect or enforceability of this Agreement or any provision hereof.
(g) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY
DO SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING HEREUNDER.
(h) HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
GUITAR CENTER MANAGEMENT
COMPANY, INC.
By: /s/ LARRY THOMAS
-------------------------------------
Name:
Title:
/s/ BARRY SOOSMAN
-------------------------------------
Barry F. Soosman
<PAGE>
EXHIBIT A
OPTIONS TO BE GRANTED
TO EXECUTIVE
Defined terms used herein, but not defined herein, shall have the
meaning ascribed to them in the attached Employment Agreement or the Company's
1996 Performance Stock Option Plan (the "Plan").
1. Within 15 days after the execution of the attached
Agreement, the Company shall grant Executive an option to acquire 8,669
shares of Common Stock pursuant to the Plan.
2. If any Reserved Shares become Shares Available for Award
pursuant to Section 7(c) of the Plan on 12/31/96 and Executive is still
employed by the Company at such time, then the Company shall grant
Executive an option to receive 10% of such Shares Available for Award.
3. If any Reserved Shares become Shares Available for Award
pursuant to Section 7(c) of the Plan on 12/31/97 and Executive is still
employed by the Company at such time, then the Company shall grant
Executive an option to receive 10% of such Shares Available for Award.
4. If any Reserved Shares become Shares Available for Award
pursuant to Section 7(c) of the Plan on 12/31/98 and Executive is still
employed by the Company at such time, then the Company shall grant
Executive an option to receive 10% of such Shares Available for Award.
5. If any Reserved Shares become Shares Available for Award
pursuant to Section 7(e) of the Plan and Executive is still employed by
the Company at such time, the Company shall grant to Executive an option
to acquire that number of such Shares Available for Award equal to (x) the
lesser of 8,669 or 10% of such Shares Available for Award MINUS (y) the
number of Shares Available for Award that were subject to the options
issued pursuant to paragraphs 2, 3 and 4 above. Any share numbers
referred to in this paragraph 5 shall be subject to adjustment as
contemplated by Section 11 of the Plan.
6. All options issued pursuant to this Agreement shall be
exercisable for $1.00 per share of Common Stock.
7. All options issued pursuant to this Agreement prior to
the Company's initial public offering shall be NQOs.
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EXHIBIT B
TERRITORY
CALIFORNIA:
Los Angeles County metropolitan areas
Orange County metropolitan areas
San Diego County metropolitan areas
San Francisco/Alameda/Contra Costa/Marin/San Mateo
County metropolitan areas
San Bernardino/Riverside County metropolitan area
TEXAS:
Dallas/Ft. Worth metropolitan area
Houston metropolitan area
FLORIDA:
Miami metropolitan area
Ft. Lauderdale/Hollywood metropolitan area
ILLINOIS:
Chicago metropolitan area
MASSACHUSETTS:
Boston metropolitan area
MICHIGAN:
Detroit metropolitan area
MINNESOTA:
Minneapolis/St. Paul metropolitan area
<PAGE>
ANNEX A
Form of Indemnification Agreement.
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of June 5,
1996, by and between Guitar Center Management Company, Inc., a California
corporation (the "Corporation"), and the undersigned director or officer of the
Company ("Indemnitee"), with reference to the following facts:
A. Indemnitee is currently serving as a director or officer of
the Corporation.
B. The Corporation and Indemnitee recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available to
be adequate under the present circumstances to protect him or her against the
risks associated with his or her service to the Corporation and the Corporation
recognizes that Indemnitee and other officers and directors of the Corporation
may not be willing to continue to serve as officers or directors without
additional protection.
D. The Corporation desires to attract and retain the services of
highly qualified individuals, including Indemnitee, to serve as officers and
directors of the Corporation and thus desires to indemnify its officers and
directors to provide them with the maximum protection permitted by law.
E. The execution and delivery of this Agreement is a condition to
the closing of those certain transactions contemplated by that certain Agreement
(the "Purchase Agreement"), dated as of May 1, 1996, by and among the
Corporation, the securityholders of the Corporation named therein and certain
other parties.
THEREFORE, IN CONSIDERATION OF the foregoing premises, the
Corporation and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
1.1. THIRD PARTY PROCEEDINGS.
The Corporation shall indemnify the Indemnitee if Indemnitee is or
was a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Corporation to procure a judgment in its favor)
by reason of the fact that Indemnitee is or was a director, officer or agent of
the Corporation, or any subsidiary of the Corporation, by reason of any action
or inaction on the part of Indemnitee while an officer, director or agent or by
reason of the fact that
<PAGE>
Indemnitee is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including subject to Section 13,
attorneys' fees and any expenses of establishing a right to indemnification
pursuant to this Agreement or under California law), judgments, fines,
settlements (if such settlement is approved in advance by the Corporation, which
approval shall not be unreasonably withheld) and other amounts actually and
reasonably incurred by Indemnitee in connection with such proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in or not opposed to the best interests of the Corporation and, in the case
of a criminal proceeding, if Indemnitee had no reasonable cause to believe
Indemnitee's conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that Indemnitee did not
act in good faith and in a manner which Indemnitee reasonably believed to be in
or not opposed to the best interests of the Corporation, or with respect to any
criminal proceedings, would not create a presumption that Indemnitee had
reasonable cause to believe that Indemnitee's conduct was unlawful.
1.2. PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify Indemnitee if Indemnitee was or is a
party or is threatened to be made a party to any threatened, pending or
completed action by or in the right of the Corporation or any subsidiary of the
Corporation to procure a judgment in its favor by reason of the fact that
Indemnitee is or was a director, officer or agent of the Corporation, or any
subsidiary of the Corporation, by reason of any action or inaction on the part
of Indemnitee while an officer, director or agent or by reason of the fact that
Indemnitee is or was serving at the request of the Corporation as a director,
officer or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including subject to Section 13, attorneys'
fees and any expenses of establishing a right to indemnification pursuant to
this Agreement or under California law) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of the proceeding if Indemnitee acted in good faith and in a manner Indemnitee
believed to be in or not opposed to the best interests of the Corporation and
its shareholders, except that no indemnification shall be made with respect to
any claim, issue or matter to which Indemnitee shall have been adjudged to have
been liable to the Corporation in the performance of Indemnitee's duty to the
corporation and its shareholders, unless and only to the extent that the court
in which such proceeding is or was pending shall determine upon application
that, in view of all the circumstances of the case, Indemnitee is fairly and
reasonably entitled to
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indemnity for expenses and then only to the extent that the court shall
determine.
1.3. SUCCESSFUL DEFENSE ON MERITS.
To the extent that Indemnitee has been successful on the merits in
defense of any proceeding referred to in Sections 1.1 or 1.2 above, or in
defense of any claim, issue or matter therein, the Corporation shall indemnify
Indemnitee against expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in connection therewith. An Indemnitee shall be deemed
to have been successful on the merits, if the Plaintiff in the action does not
prevail in obtaining the relief sought in the suit or action of demanded in the
claim.
1.4. CERTAIN TERMS DEFINED.
For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans, references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan,
and references to "proceeding" shall include any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative. References to "corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, or agent of
such a constituent corporation or who, being or having been such a director,
officer, or agent of another corporation, partnership, joint venture, trust or
other enterprise shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as such person
would if he or she had served the resulting or surviving corporation in the same
capacity.
2. AGREEMENT TO SERVE.
Indemnitee agrees to serve or continue to serve as a director and/or
officer of the Corporation for so long as he or she is duly elected or appointed
or until such time as he or she voluntarily resigns. The terms of any existing
employment agreement between Indemnitee and the Corporation shall continue in
effect but shall be modified or supplemented by the terms of this Agreement.
Nothing contained in this Agreement is intended to create in Indemnitee any
right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
3.1. ADVANCEMENT OF EXPENSES.
The Corporation shall advance all expenses incurred by Indemnitee in
connection with the investigation, defense, settlement (excluding amounts
actually paid in settlement of any action, suit or proceeding) or appeal of any
civil or criminal
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action, suit or proceeding referenced in Sections 1.1 or 1.2 hereof. Indemnitee
hereby undertakes to repay such amounts advanced only if, and to the extent
that, it shall be determined ultimately that Indemnitee is not entitled to be
indemnified by the Corporation as authorized hereby. The advances to be made
hereunder shall be paid by the Corporation to Indemnitee within 20 days
following delivery of a written request therefor by Indemnitee to the
Corporation.
3.2. NOTICE OF CLAIM.
Indemnitee shall, as a condition precedent to his or her right to be
indemnified under this Agreement, give the Corporation notice in writing as soon
as practicable of any claim made against Indemnitee for which indemnification
will or could be sought under this Agreement; PROVIDED, HOWEVER, that the
failure to give such notice shall not affect the Indemnitee's rights hereunder
except and only to the extent such failure prejudiced the Corporation's ability
to successfully defend the matter subject to such notice. Notice to the
Corporation shall be directed to the President and the Secretary of the
Corporation at the principal business office of the Corporation with copies to
O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York
10112, Attention: Harvey M. Eisenberg, Esq. (or such other address as the
Corporation shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Corporation such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
3.3. ENFORCEMENT RIGHTS.
Any indemnification provided for in Sections 1.1, 1.2 or 1.3 shall
be made no later than 60 days after receipt of the written request of
Indemnitee. If a claim or request under this Agreement, under any statute, or
under any provision of the Corporation's Articles of Incorporation or Bylaws
providing for indemnification is not paid by the Corporation, or on its behalf,
within 60 days after written request for payment thereof has been received by
the Corporation, Indemnitee may, but need not, at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim or request,
and subject to Section 13, Indemnitee shall also be entitled to be paid for the
expenses (including attorneys' fees) of bringing such action. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in connection with any action, suit or proceeding in advance
of its final disposition) that Indemnitee has not met the standards of conduct
which make it permissible under applicable law for the Corporation to indemnify
Indemnitee for the amount claimed, but the burden of proving such defense shall
be on the Corporation, and Indemnitee shall be entitled to receive interim
payments of expenses pursuant to Section 3.1 unless and until such defense may
be finally adjudicated by court order or judgment for which no further right of
appeal exists. The parties hereto intend that
4
<PAGE>
if the Corporation contests Indemnitee's right to indemnification, the question
of Indemnitee's right to indemnification shall be a decision for the court, and
no presumption regarding whether the applicable standard has been met will arise
based on any determination or lack of determination of such by the Corporation
(including its Board of Directors (the "Board") or any subgroup thereof,
independent legal counsel or its shareholders).
3.4. ASSUMPTION OF DEFENSE.
In the event the Corporation shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Corporation, if appropriate, shall
be entitled to assume the defense of such proceeding with counsel approved by
Indemnitee which approval shall not be unreasonably withheld, upon the delivery
to Indemnitee of written notice of its election so to do. After delivery of
such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Corporation, the Corporation will not be liable to Indemnitee
under this Agreement for any fees of counsel subsequently incurred by Indemnitee
with respect to the same proceeding, unless (i) the employment of counsel by
Indemnitee is authorized by the Corporation, (ii) Indemnitee shall have
reasonably concluded, based upon written advice of counsel, that there may be a
conflict of interest of such counsel retained by the Corporation between the
Corporation and Indemnitee in the conduct of such defense, or (iii) the
Corporation ceases or terminates the employment of such counsel with respect to
the defense of such proceeding, in any of which events then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Corporation. At
all times, Indemnitee shall have the right to employ other counsel in any such
proceeding at Indemnitee's expense, and to participate in the defense of the
proceeding or claim through such counsel.
3.5. NOTICE TO INSURERS.
If, at the time of the receipt of a notice of a claim pursuant to
Section 3.2 hereof, the Corporation has director and officer liability insurance
in effect, the Corporation shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Corporation shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
3.6. SUBROGATION.
In the event of payment under this Agreement, the Corporation shall
be subrogated to the extent of such payment to all of the rights of recovery of
the Indemnitee, who shall do all things that may be necessary to secure such
rights, including the
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<PAGE>
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.
4. EXCEPTIONS.
Notwithstanding any other provision herein to the contrary, the
Corporation shall not be obligated pursuant to the terms of this Agreement:
4.1. EXCLUDED ACTS.
To indemnify Indemnitee (i) as to circumstances in which indemnity
is expressly prohibited pursuant to California law, or (ii) for any acts or
omissions or transactions from which a director may not be relieved of liability
pursuant to California law; or (iii) any act or acts of bad faith or willful
misconduct; or
4.2. CLAIMS INITIATED BY INDEMNITEE.
To indemnify or advance expenses to Indemnitee with respect to
proceedings or claims initiated or brought voluntarily by Indemnitee and not by
way of defense, except with respect to proceedings brought to establish or
enforce a right to indemnification under this Agreement or any other statute or
law or as otherwise required under the Corporations Code of California, but such
indemnification or advancement of expenses may be provided by the Corporation in
specific cases if the Board has approved the initiation or bringing of such
suit; or
4.3. LACK OF GOOD FAITH.
To indemnify Indemnitee for any expenses incurred by the Indemnitee
with respect to any proceeding instituted by Indemnitee to enforce or interpret
this Agreement, if a court of competent jurisdiction determines that such
proceeding was not made in good faith or was frivolous; or
4.4. INSURED CLAIMS.
To indemnify Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in settlement) which have been paid directly to
Indemnitee by an insurance carrier under a policy of officers' and directors'
liability insurance maintained by the Corporation; or
4.5. BREACHES OF AGREEMENTS.
To indemnify Indemnitee for expenses or liabilities (including
indemnification obligations of Indemnitee) of any type whatsoever arising from
his breach of the Purchase Agreement, an employment agreement with the
Corporation (if any) or any other agreement with the Corporation or any of its
subsidiaries; or
6
<PAGE>
4.6. CLAIMS UNDER SECTION 16(b).
To indemnify Indemnitee for expenses and the payment of profits
arising from the purchase and sale by Indemnitee of securities in violation of
Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar
successor statute.
5. PARTIAL INDEMNIFICATION.
If Indemnitee ia entitled under any provision of this Agreement to
indemnification by the Corporation for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by the Indemnitee
in the investigation, defense, appeal or settlement of any civil or criminal
action, suit or proceeding, but not, however, for the total amount thereof, the
Corporation shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
6.1. SCOPE.
In the event of any change in any applicable law, statute or rule
which narrows the right of a California corporation to indemnify a member of its
Board or an officer, such changes, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement shall have no effect on
this Agreement or the parties' rights and obligations hereunder. Nothing in
this Agreement is intended to relieve Indemnitee from any obligations he may
have pursuant to the Purchase Agreement, an employment agreement (if any) or any
other agreement with the Corporation or its subsidiaries.
6.2. NON-EXCLUSIVITY.
Nothing herein shall be deemed to diminish or otherwise restrict any
rights to which Indemnitee may be entitled under the Corporation's Amended and
Restated Articles of Incorporation, the Corporation's Amended and Restated
Bylaws, any agreement, any vote of shareholders or disinterested directors, or,
except as expressly provided herein, under the laws of the State of California.
7. MUTUAL ACKNOWLEDGMENT.
Both the Corporation and Indemnitee acknowledge that, in certain
instances, Federal law or applicable public policy may prohibit the Corporation
from indemnifying its directors and officers under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Corporation has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification
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<PAGE>
to a court in certain circumstances for a determination of the Corporation's
right under public policy to indemnify Indemnitee.
8. OFFICER AND DIRECTOR LIABILITY INSURANCE.
The Corporation shall, from time to time, make the good faith
determination whether or not it is practicable for the Corporation to obtain and
maintain a policy or policies of insurance with reputable insurance companies
providing the officers and directors of the Corporation with coverage for losses
from wrongful acts, or to ensure the Corporation's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Corporation will weigh the costs of obtaining such insurance coverage
against the protection afforded by such coverage. Notwithstanding the
foregoing, the Corporation shall have no obligation to obtain or maintain such
insurance if the Corporation determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Corporation.
9. SEVERABILITY.
Nothing in this Agreement is intended to require or shall be
construed as requiring the Corporation to do or fail to do any act in violation
of applicable law. The Corporation's inability, pursuant to court order, to
perform its obligations under this Agreement shall not constitute a breach of
this Agreement. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify Indemnitee to the fullest extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
10. EFFECTIVE DATES.
This Agreement shall be effective as of the date set forth on the
first page.
11. COVERAGE.
The provisions of this Agreement shall continue as to Indemnitee for
any action taken or not taken while serving in an indemnified capacity even
though Indemnitee may have ceased to serve in such capacity at the time of any
action, suit or other covered proceeding. This Agreement shall be binding upon
the Corporation and its successors and assigns and shall inure to the
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benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and
assigns.
12. NOTICE.
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if delivered by
hand and receipted for by the addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement or as subsequently
modified by written notice.
13. ATTORNEYS' FEES.
In the event that any action is instituted by Indemnitee under this
Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be
entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless as a
part of such action, the court of competent jurisdiction determines that the
action was not instituted in good faith or was frivolous. In the event of an
action instituted by or in the name of the Corporation under this Agreement, or
to enforce or interpret any of the forms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that Indemnitee's defenses to such
action were not made in good faith or were frivolous.
14. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, as applied to contracts between California
residents entered into and to be performed entirely within California.
15. CONSENT TO JURISDICTION.
The Corporation and Indemnitee each hereby irrevocably consent to
the jurisdiction of the courts of the State of California for all purposes in
connection with any action or proceeding which arises out of or relates to this
Agreement and agree that any action instituted under this Agreement shall be
brought only in the state courts in the State of California.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, all of
which taken together shall constitute one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
GUITAR CENTER MANAGEMENT Address:
COMPANY, INC.
5155 Clareton Drive
Agoura Hills, CA 91301
By:
--------------------------------
Title:
-----------------------------
INDEMNITEE Address:
----------------------------------
- ----------------------------------- ----------------------------------
(Signature)
- -----------------------------------
<PAGE>
AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement made the 5th day of June,
1996 (the "Agreement"), between Guitar Center Management Company, Inc., a
California corporation (the "Company"), and Barry Soosman (the "Executive") is
entered into this 15th day of October 1996.
WHEREAS, the Company has amended its 1996 Performance Stock Option Plan
(the "Plan");
WHEREAS, material provisions of the Agreement relate to the Executive's
rights to receive options issued pursuant to the Plan;
WHEREAS, the parties wish to amend the Agreement in order to set forth
provisions consistent with the intent of the Agreement and to modify certain
provisions relating to the grant of options under the Plan;
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section I. Section 3(e) of the Agreement is hereby deleted in its
entirety and the following is hereby inserted in lieu thereof:
"(e) the Company shall issue Executive options to acquire
units for the purchase of shares of Common Stock and Junior
Preferred Stock as described in the amounts and on the dates
set forth on Exhibit A hereto."
<PAGE>
Section II. Exhibit A to the Agreement is hereby deleted in its entirety
and the following is hereby inserted in lieu thereof and shall constitute
Exhibit A to the Agreement:
"Exhibit A"
Defined terms used herein, but not defined herein, shall have the
meaning ascribed to them in the attached Employment Agreement or the
Company's Amended and Restated 1996 Performance Stock Option Plan (the
"Plan").
A. Within 15 days after the execution of the attached
Agreement, the Company shall grant Executive an option to acquire
8,669 Units pursuant to the Plan with the Units to vest 1/3 after one
year, 2/3 after two years, 100% after 3 years.
B. If any Reserved Units become Units Available for Award
pursuant to Section 7(c) of the Plan on 12/31/97 and Executive is
still employed by the Company at such time, then the Company shall
grant Executive an option to receive 3,000 of such Units Available for
Award with the Units to vest 1/2 after one year and 100% after two
years.
C. If any Reserved Units become Units Available for Award
pursuant to Section 7(c) of the Plan on 12/31/98 and Executive is
still employed by the Company at such time, then the Company shall
grant Executive an option to receive 2,000 of
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such Units Available for Award with the Units to vest 100% after one year.
D. If any Reserved Units become Units Available for Award
pursuant to Section 7(c) of the Plan on 12/30/99 and Executive is
still employed by the Company at such time, then the Company shall
grant Executive an option to receive 3,668 of such Units Available for
Award with the Units to vest immediately upon grant.
E. If any Reserved Units become Units Available for Award
pursuant to Section 7(e) of the Plan and Executive is still employed
by the Company at such time, the Company shall grant to Executive an
option to acquire that number of such Units Available for Award equal
to (x) the lesser of 8,669 or 10% of such Units Available for Award
MINUS (y) the number of Units Available for Award that were subject to
the options issued pursuant to paragraphs 2, 3 and 4 above.
F. Any share numbers referred to in this Exhibit A shall be
subject to adjustment as contemplated by Section 11 of the Plan.
G. All options issued pursuant to this Agreement shall be
exercisable for $100 per Unit.
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H. All options issued pursuant to this Agreement prior to the
Company's initial public offering shall be NQOs."
Section III. This Amendment shall be effective as of June 5, 1996.
Section IV. Except as provided for in this Amendment Number 1 all of the
provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment
Number 1 to the Agreement.
GUITAR CENTER MANAGEMENT COMPANY, INC.
By: /s/ MARTY ALBERTSON
-------------------------------------
Name: Marty Albertson
Title: Chief Executive Officer
/s/ BARRY SOOSMAN
-----------------------------------------
BARRY SOOSMAN
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AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
This Amendment No. 2, dated as of January 30, 1997 (this "AMENDMENT
NO. 2"), between Guitar Center, Inc., a Delaware corporation (the "COMPANY"),
and the undersigned executive of the Company (the "EXECUTIVE") amends the
Employment Agreement between the parties hereto entered into on June 5, 1996 and
amended on October 15, 1996 pursuant to Amendment No. 1 thereto (as so amended,
the "AGREEMENT"). All capitalized terms not otherwise defined herein shall have
the meanings ascribed to such terms in the Company's Amended and Restated 1996
Performance Stock Option Plan, as amended (the "PLAN").
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.
B. The Agreement provides that, at certain times on or after
December 31, 1997, if any Reserved Units become Units Available for Award and if
the Executive is still employed by the Company at such times, then the Company
shall grant to the Executive certain options to purchase Units.
C. It is and always has been the intention of the parties that the
ability of the Executive to receive additional options under the Plan survive an
IPO and, further, that such options be earned and vested in the event Executive
is still in the employ of the Company on the fifth anniversary of date of the
Agreement.
D. The parties desire to enter into this Amendment No. 2 to document
accurately the understandings of the parties and to describe the necessary
amendments and waivers to the Plan to accommodate such intent.
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:
<PAGE>
1. AMENDMENT TO EXHIBIT A. Exhibit A of the Agreement is hereby deleted
in its entirety and the following is hereby inserted in lieu thereof and shall
constitute Exhibit A to the Agreement:
"Exhibit A
Defined terms used herein, but not defined herein, shall have the
meaning ascribed to them in the attached Employment Agreement or, if
not defined in the attached Employment Agreement, shall have the
meanings ascribed to them in the Company's Amended and Restated 1996
Performance Stock Option Plan, as amended (the "PLAN"):
1. INITIAL GRANT SUBJECT ONLY TO TIME VESTING. Effective June 3,
1996, the Company granted the Executive an option to acquire 8,669 Units
pursuant to the Plan. Such Units shall vest 1/3 after one year from the
date of grant, 2/3 after two years from the date of grant, and 100% after 3
years from the date of grant.
2. ADDITIONAL GRANT SUBJECT TO TIME VESTING WITH ACCELERATION UPON
ATTAINMENT OF CERTAIN PERFORMANCE OBJECTIVES.
(a) GENERAL. The Company agrees to grant the Executive an option to
acquire 8,669 Units pursuant to the Plan, all such options to vest on June
5, 2001 provided that Executive is employed by the Company on such date,
unless such vesting is accelerated upon the attainment of the performance
objectives set forth in subsection (b), below. This option may be
exercised only to the extent it has vested in accordance with the terms
described herein.
(b) ACCELERATION OF VESTING. Notwithstanding the five-year time
vesting provision provided in subsection (a), the vesting of the option to
acquire 8,669 Units provided for in this Section 2 shall be accelerated as
follows:
(i) If, pursuant to Section 7(c) of the Plan, the Calculated
Corporate Value for the fiscal year ended December 31, 1997 is equal
to or greater than the applicable Corporate Value Target increased (or
decreased) by the positive (or negative) amount equal to the
Cumulative Adjustment Amount as of such date, then options to acquire
1,500 Units shall vest on December 31, 1998 and options to acquire
1,500 Units shall vest on December 31, 1999 provided, in each case,
that Executive is employed by the Company on such date.
(ii) If, pursuant to Section 7(c) of the Plan, the Calculated
Corporate Value for the fiscal year ended December 31, 1998 is equal
to or greater than the applicable Corporate Value Target increased (or
decreased) by the positive (or negative) amount equal to the
Cumulative Adjustment Amount as of such date, then options to acquire
5,000 Units shall vest on December 31, 1999 provided that (x)
Executive is employed by the Company on such date and (y) such
accelerated vesting shall be reduced for any options accelerated by
operation of Section 2(b)(i).
2
<PAGE>
(iii) If, pursuant to Section 7(c) of the Plan, the Calculated
Corporate Value for the fiscal year ended December 31, 1999 is equal
to or greater than the applicable Corporate Value Target increased (or
decreased) by the positive (or negative) amount equal to the
Cumulative Adjustment Amount as of such date, then options to acquire
8,669 Units shall vest on December 31, 1999 provided that (x)
Executive is employed by the Company on December 31, 1999 and (y) such
accelerated vesting shall be reduced for any options accelerated by
operation of Section 2(b)(i) or 2(b)(ii).
(iv) Notwithstanding the foregoing subsections (b)(i) through
(b)(iii), if there is a Sale of the Company, then:
(1) All options, if any, that have been accelerated by
virtue of attainment of the performance objectives contained in
subsections (b)(i), (b)(ii) or (b)(iii) shall be deemed vested
and exercisable in connection with such Sale of the Company,
notwithstanding the fact that the time vesting provisions
specified therein have not occurred. By way of example, if the
Corporate Value Target for December 31, 1997 is attained and a
Sale of the Company occurs on March 15, 1998, then the full 3,000
options related to the December 31, 1997 Corporate Value Target
shall be exercisable in connection with the Sale of the Company
regardless of the terms of such sale; and
(2) The Company shall compute whether or not any Reserved
Units would have become Units Available for Award pursuant to
Section 7(e) of the Plan, such calculations to assume that the
Plan remained in effect at all times from its initial
effectiveness through and including such Sale of the Company,
notwithstanding any actual termination of such provision by
operation of Section 7(g) of the Plan. If, pursuant to such
calculation, there would have been Units Available for Award upon
such Sale of the Company, then additional options shall be
exercisable in connection with the Sale of the Company equal to:
(x) the lesser of 8,669 or 10% of such Units Available for Award,
minus (y) the number of options the vesting of which became
accelerated upon attainment of the provisions of clauses (i)
through (iii) (I.E., which options already would be exercisable
in connection with such Sale of the Company by operation of
clause (1), above).
(c) ALTERNATIVE ACCELERATION EVENTS. It is expressly agreed that the
acceleration provisions of Section 4(b) of the Agreement and the proviso to
Section 5(c) of the Plan (collectively, the "GENERAL ACCELERATION
PROVISIONS") shall not apply to any option granted pursuant to this Section
2 except to the extent of the options, if any, accelerated by attainment of
the performance objectives established in Sections 2(b)(i) or 2(b)(ii)
which have not satisfied the time vesting provisions set forth therein.
Specifically, it is agreed that such General
3
<PAGE>
Acceleration Provisions shall not be applicable to the five year time
vesting period set forth in Section 2(a) (I.E., such five year period
shall not be accelerated upon (x) the termination of Executive's
employment for any reason, whether with or without cause or with or
without notice, or (y) any Sale of the Company other than by operation
of Section 2(b)(iv)).
3. EXERCISE PRICE. All options issued pursuant to this Agreement
shall be exercisable for $100 per Unit.
4. DEFINITION OF UNIT. The Executive and the Company understand and
agree that the one share of Common Stock and the 0.99 of a share of Junior
Preferred Stock that constitute one Unit are as of June 5, 1996. Any unit
numbers and exercise price amounts referred to in this Exhibit A shall be
subject to adjustment as contemplated by Section 11 of the Plan.
5. TYPE OF OPTIONS. All options issued pursuant to this Agreement
shall be NSOs."
* * * * * * * *
2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective
upon the receipt of the approval of the Committee, the Board of Directors and
the Requisite Stockholders, in each case pursuant to the Plan and the
Stockholders Agreement.
3. EFFECTIVE DATE. Subject to the satisfaction of the conditions set
forth in Section 2, this Amendment No. 2 shall be effective as of the date of
the Agreement.
4. ENTIRE AGREEMENT. This Amendment No. 2 and those documents expressly
referred to herein embody the complete agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersede any prior
understandings, agreements or representations by or between the parties, written
or oral, with respect to the subject matter hereof.
5. GOVERNING LAW. This Amendment No. 2 shall be governed by and
construed in accordance with the internal laws of the State of California,
without giving effect to any choice of law or conflicts of law provisions
thereof.
6. HEADINGS. The section headings contained in this Amendment No. 2 are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Amendment No. 2.
7. FULL FORCE AND EFFECT. Except as provided for in this Amendment No.
2, all of the provisions of the Agreement shall remain in full force and effect.
(Signature Page Follows)
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 to be duly executed.
GUITAR CENTER, INC.
By /s/ LARRY THOMAS
----------------------------------
President
BARRY SOOSMAN
/s/ BARRY SOOSMAN
- ------------------------------------
S-1
<PAGE>
EXHIBIT 10.30
AMENDMENT NO. 2 TO THE
AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
OF
GUITAR CENTER, INC.
(formerly Guitar Center Management Company, Inc.)
A. The Board of Directors and stockholders of Guitar Center, Inc.
(formerly Guitar Center Management Company, Inc.)(the "COMPANY") have previously
adopted and approved the Amended and Restated 1996 Performance Stock Option
Plan, as amended by Amendment No. 1 thereto (the "PLAN").
B. By its terms, the Plan may be modified or amended in any respect by
the Committee with the prior approval of the Board and the prior written consent
of the holders of the Requisite Stockholder Shares (all capitalized but
undefined terms used herein having the meanings provided for in the Plan).
C. The Committee has determined that the Plan may be deemed to be
inconsistent with certain commitments made by the Company to issue options under
the Plan.
D. The Committee, with the prior approval of the Board and the prior
written consent of the holders of the Requisite Stockholder Shares, desires to
correct such inconsistencies.
Based on the foregoing, the following modifications and amendments to the
Plan shall be effective as of June 5, 1996:
1. CALCULATION OF CORPORATE VALUE TARGET. At any time that a Corporate
Value Target shall be determined, such amount shall be increased (or decreased)
by the positive (or negative) amount equal to the Cumulative Adjustment Amount
as of such date.
2. LIMITATION TO THE APPLICATION OF SECTIONS 5(c) AND 7(g). The
following modifications to the Plan are approved in order to permit the Company
to satisfy its obligations under the terms and conditions of the respective
Employment Agreements, dated as of June 5, 1996, as amended, between the Company
and each of Messrs. Bruce Ross and Barry Soosman (the "AGREEMENTS").
(a) The proviso to Section 5(c) shall not apply to options to acquire
up to 17,338 Units granted to Bruce Ross and Barry Soosman pursuant to the
terms and conditions of Section 2 of Exhibit A to the Agreements, except to
the extent expressly provided for therein.
(b) Section 7(g) shall be modified by adding the following exception
as an additional sentence: "Notwithstanding the foregoing, options to
acquire up to an
<PAGE>
additional 17,338 Units shall be granted to Messrs. Bruce Ross and Barry
Soosman under the Plan in satisfaction of the obligations contained in
their respective Employment Agreements, dated as of June 5, 1996, as
amended, it being understood that, upon the occurrence of the Company's
initial public offering, the number of Units included in the successor
stock option plan referred to above shall be reduced, on a Unit-for-Unit
basis, by such amount."
(c) For purposes of Section 5(f), the 17,338 Units covered by Section
2 of Exhibit A to the Agreement shall constitute Units Available for Award.
(d) The Committee is authorized to, and hereby does, approve any
necessary conforming changes in the form of non-qualified stock option
agreement utilized under the Plan, such approval to be evidenced by the
execution thereof by the President or the Executive Vice President.
3. BASIS OF UNIT AND SHARE AMOUNTS. All Unit and related share amounts
expressed in this amendment are as of June 5, 1996 and do not reflect any
required adjustments due to subsequent events (including, without limitation,
the adjustment necessary to give effect to the stock split approved on January
15, 1997).
4. CONDITION TO EFFECTIVENESS. This amendment to the Plan shall be
effective upon approval by the Committee, with the prior approval of the Board
and the prior written consent of the holders of the Requisite Stockholder
Shares. The Corporate Secretary of the Company shall maintain a copy of such
approvals in the records of the Company.
Executed at Agoura Hills, California, effective as of June 5, 1996.
By /s/ LARRY THOMAS
-----------------------------------
President
By /s/ BRUCE ROSS
-----------------------------------
Secretary
<PAGE>
The foregoing is consented to by the undersigned holders of the
Requisite Stockholder Shares as of the effective date set forth above.
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By Chase Capital Partners,
Its General Partner
By /s/ DAVID L. FERGUSON
--------------------------------
David L. Ferguson
General Partner
WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.
By /s/ STEVEN W. BURGE
--------------------------------
Steven W. Burge
Managing Director
WESTON PRESIDIO CAPITAL II, L.P.
By Weston Presidio Capital Management II, L.P.,
Its General Partner
By /s/ MICHAEL P. LAZARUS
--------------------------------
Michael P. Lazarus
General Partner
SCHERR LIVING TRUST
By /s/ RAY SCHERR
--------------------------------
Ray Scherr, Trustee
By /s/ JANET SCHERR
--------------------------------
Janet Scherr, Trustee
S-1
<PAGE>
AMENDMENT NO. 2 TO THE AMENDED AND RESTATED 1996 PERFORMANCE STOCK OPTION PLAN
/s/ LARRY THOMAS
- ----------------------------------
Larry Thomas
/s/ MARTY ALBERTSON
- ----------------------------------
Marty Albertson
THE MARTIN ALBERTSON ANNUITY TRUST
By /s/ MARTY ALBERTSON
--------------------------------
Marty Albertson, Trustee
THE LISA ROSE ANNUITY TRUST
By /s/ MARTY ALBERTSON
--------------------------------
Marty Albertson, Trustee
BARRY F. SOOSMAN AND JODY L. SOOSMAN REVOCABLE TRUST
By /s/ BARRY SOOSMAN
--------------------------------
Barry Soosman, Trustee
S-2
<PAGE>
EXHIBIT 16.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the statements under the heading "Experts" contained in the
Registration Statement on Form S-1 dated February 20, 1997, of Guitar Center,
Inc. and are in agreement with the statements contained in the second paragraph
therein.
ERNST & YOUNG LLP
February 18, 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
February 18, 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 February
20, 1997.
ERNST & YOUNG LLP
Los Angeles, California
February 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GUITAR
CENTER, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 47
<SECURITIES> 0
<RECEIVABLES> 4,062
<ALLOWANCES> (150)
<INVENTORY> 49,705
<CURRENT-ASSETS> 55,269
<PP&E> 14,966
<DEPRECIATION> (10,263)
<TOTAL-ASSETS> 74,849
<CURRENT-LIABILITIES> 27,833
<BONDS> 100,000
15,186
138,610
<COMMON> 36
<OTHER-SE> (207,461)
<TOTAL-LIABILITY-AND-EQUITY> 74,849
<SALES> 213,294
<TOTAL-REVENUES> 213,294
<CGS> 153,222
<TOTAL-COSTS> 153,222
<OTHER-EXPENSES> 113,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,169
<INCOME-PRETAX> (72,270)
<INCOME-TAX> 139
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,409)
<EPS-PRIMARY> (4.10)
<EPS-DILUTED> 0
</TABLE>
