<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File No. 000 - 22207
GUITAR CENTER, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4600862
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 735-8800
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
As of November 5, 1998, 20,084,646 shares of the registrant's Common Stock, $.01
par value, were outstanding.
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 .......... 3
Condensed Consolidated Statements of Income - Three months ended
September 30, 1998 and 1997............................................................... 4
Condensed Consolidated Statements of Income - Nine months ended
September 30, 1998 and 1997................................................................ 5
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 1998 and 1997 ............................................................... 6
Notes to Condensed Consolidated Financial Statements ..................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................................... 8
Part II. Other Information
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K ............................................... 14
</TABLE>
2
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 113 $ 7,755
Accounts receivable 8,329 7,896
Merchandise inventories 97,778 78,898
Prepaid expenses and other current assets 5,032 3,226
-------- --------
Total current assets 111,252 97,775
Property and equipment, net 32,076 22,809
Goodwill, net of accumulated amortization 4,665 4,094
Other assets 8,285 7,946
-------- --------
-------- --------
$156,278 $132,624
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,114 $ 16,863
Accrued expenses and other current liabilities 16,016 19,301
Line of credit 19,924 --
-------- --------
Total current liabilities 45,054 36,164
Other long-term liabilities 1,327 1,017
Long term debt 66,667 66,667
Stockholders' equity
Preferred stock; authorized 5,000,000 shares at
September 30, 1998 and December 31, 1997,
none issued and outstanding -- --
Common stock, $0.01 par value, authorized
55,000,000 shares, issued and outstanding
20,083,790 at September 30, 1998 and
19,338,073 at December 31, 1997, respectively 201 193
Warrants -- 6,500
Additional paid in capital 227,667 220,514
Accumulated deficit (184,638) (198,431)
--------- --------
Total stockholders' equity 43,230 28,776
--------- --------
$156,278 $132,624
--------- --------
--------- --------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Net sales $96,195 $75,948
Cost of goods sold, buying and occupancy 69,210 55,151
------- -------
Gross profit 26,985 20,797
Selling, general and administrative 19,747 15,363
------- -------
Operating income 7,238 5,434
Interest expense, net 2,260 1,896
Income before income taxes 4,978 3,538
Income taxes 261 255
------- -------
Net income $ 4,717 $ 3,283
------- -------
------- -------
Net income per share
Basic $ 0.23 $ 0.17
------- -------
------- -------
Diluted $ 0.22 $ 0.16
------- -------
------- -------
Weighted average shares outstanding
Basic 20,076 19,329
------- -------
------- -------
Diluted 21,000 20,735
------- -------
------- -------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Net sales $ 272,671 $ 205,384
Cost of goods sold, buying and occupancy 196,325 149,353
--------- ---------
Gross profit 76,346 56,031
Selling, general and administrative 55,985 40,494
--------- ---------
Operating income 20,361 15,537
Interest expense, net 6,328 6,955
Gain on sale of assets (324) (535)
Transaction expense -- 731
--------- ---------
Income before income taxes and
extraordinary loss 14,357 8,386
Income taxes 564 1,963
--------- ---------
Income before extraordinary loss 13,793 6,423
Extraordinary loss on early extinguishment of
debt, net of tax $1,679 -- (2,739)
--------- ---------
Net income $ 13,793 $ 3,684
--------- ---------
--------- ---------
Net income per share
Basic $ 0.70 $ 0.19
--------- ---------
--------- ---------
Diluted $ 0.66 $ 0.18
--------- ---------
--------- ---------
Weighted average shares outstanding
Basic 19,658 19,329
--------- ---------
--------- ---------
Diluted 20,869 20,456
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,793 $ 3,684
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,267 2,222
Amortization of deferred financing fees 180 1,303
Gain on sale of property (324) (535)
Changes in operating assets and liabilities:
Accounts receivable (433) (1,108)
Merchandise inventories (18,880) (19,517)
Prepaid expenses (1,806) (1,543)
Other assets (1,090) (214)
Accounts payable (7,749) 537
Accrued expenses and other current liabilities (2,228) 3,512
Other long term liabilities 310 294
-------- -------
Net cash used in operating activities (14,960) (11,365)
INVESTING ACTIVITIES
Proceeds from sale of property 733 893
Purchase of property and equipment (12,940) (6,985)
Payment for purchase of Rhythm City, Inc., net of cash
acquired (1,058) (10,300)
-------- -------
Net cash used in investing activities (13,265) (16,392)
FINANCING ACTIVITIES
Net change in revolving debt facility 19,924 (3,536)
Redemption of senior notes -- (33,333)
Proceeds from sale of stock to management -- 310
Proceeds from initial public offering -- 107,571
Redemption of management common stock -- (18,417)
Redemption of senior preferred stock -- (22,963)
Exercise of stock options 757 --
Warrant underwriting (98) --
-------- -------
Net cash provided by financing activities 20,583 29,632
Net increase (decrease) in cash and cash equivalents (7,642) 1,875
Cash and cash equivalents at beginning of year 7,755 47
-------- -------
Cash and cash equivalents at end of period $ 113 $ 1,922
-------- -------
-------- -------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of Guitar Center, Inc., a
Delaware corporation, and subsidiary ("Guitar Center" or the
"Company"), as of September 30, 1998, and the results of operations and
cash flows for the three and nine months ended September 30, 1998 and
1997. The accompanying consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
The results of operations for the three and nine months ended September
30, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. Income Taxes
As a result of the $72.4 million loss incurred in fiscal 1996, the
Company had a net operating loss carryforward for federal income taxes
of approximately $61.8 million as of December 31, 1997. Accordingly, no
provision for income taxes has been made in the condensed consolidated
statement of operations for the three and nine months ended September
30, 1998, except for certain minimum federal and state taxes.
3. Warrants
In June 1996, Guitar Center, Inc. issued warrants to purchase an
aggregate of 676,325 shares of common stock, par value $0.01 per share,
of the Company. On June 3, 1998, the warrants were exercised and
converted into shares of common stock on a cash-less exercise basis.
The effect to the Company's total stockholders' equity was immaterial.
4. Earnings Per Share
In 1997, the Company adopted SFAS 128, which requires the presentation
of basic and diluted earnings per share. The difference between the
weighted average number of shares outstanding for basic and diluted
earnings per share represents the dilutive effect of the Company's
potential common stock (stock options and warrants outstanding during
the applicable periods).
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Guitar Center operated 44 stores in 23 major markets as of September
30, 1998. From 1993 to 1997, Guitar Center's net sales and operating income
before deferred compensation expense grew at compound annual growth rates of
32.1% and 38.6%, respectively, principally due to comparable store sales
growth averaging 14.9% per year and the opening of new stores. The increases
were principally 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 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 eight stores in 1997, of which two were purchased
by the Company and, as of September 30, 1998, the Company had opened eight
additional stores in 1998. Presently, the Company expects to open an
additional four stores during the remainder of 1998. In preparation for these
additional stores, management had dedicated a substantial amount of resources
over the past several years to building the infrastructure necessary to
support a large, national chain. Management believes the infrastructure is in
place to support its needs for the immediate foreseeable future, including
its present expansion plans. 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's average. As the Company
enters new markets, management expects that it will initially incur higher
administrative and promotional costs per store than it currently experiences
in established markets. Management also expects competition to continue to
increase over time as other music products retailers attempt to execute
national growth strategies.
The following table sets forth certain historical income statement
data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 28.1 27.4 28.0 27.3
Selling, general, and administrative
expenses 20.5 20.2 20.5 19.7
------ ------ ------ ------
Operating income 7.6 7.2 7.5 7.6
Interest expense, net 2.4 2.5 2.3 3.4
Gain on sale of assets -- -- (0.1) (0.3)
Transaction expenses and other -- -- -- 0.4
------ ------ ------ ------
Income before income taxes and
extraordinary item 5.2 4.7 5.3 4.1
Income taxes 0.3 0.3 0.2 1.0
------ ------ ------ ------
Income before extraordinary loss 4.9% 4.4% 5.1% 3.1%
------ ------ ------ ------
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997.
Net sales of the Company increased to $96.2 million for the three
months ended September 30, 1998, from $75.9 million for the comparable prior
period, a 26.7% increase. This growth was attributable to an increase of 10.3%
in comparable store net sales which contributed $7.8 million, or 38.8%, of the
total increase. New store net sales accounted for the balance of the increase in
net store sales. In the opinion of management, the strong comparable store sales
performance in the third quarter of 1998 reflects the effect of successful
promotions. Management does not expect this comparable store sales trend to
continue at this high level.
Gross profit dollars for the three months ended September 30, 1998
compared to 1997 increased 29.8% to $27.0 million from $20.8 million. Gross
profit as a percentage of net sales for the three months ended September 30,
1998 compared to 1997 increased to 28.1% from 27.4%. The increase in gross
profit percentage is primarily due to opportunity buys in merchandise and
improved margins in the pro audio and keyboard segments of the business.
Selling, general and administrative expenses for the three months ended
September 30, 1998 compared to 1997 increased 27.9% to $19.7 million from $15.4
million. The increase in total selling, general and administrative expenses is a
result of certain selling expenses incurred at the store level due to an
increase in the number of stores in 1998 as compared to 1997. As a percentage of
net sales, selling, general and administrative expenses increased to 20.5% from
20.2%. The change in percentage of sales reflects the incremental cost of
staffing newly opened and immature stores, which typically achieve less leverage
than mature stores. In addition, the increase reflects additional corporate
personnel and management information systems expenses associated with the
Company's continuing expansion, although these expenses were approximately flat
with 1997 as a percentage of sales.
Operating income for the three months ended September 30, 1998 was $7.2
million compared to $5.4 million for the same three months of 1997, an increase
of 33.2%. The increase is principally the result of the increase in sales and
gross profit margin percentage derived from both new and existing stores. As a
percentage of sales, operating income for the three months ended September 30,
1998 was 7.6% compared to 7.2% in 1997. The increase is principally related to
the leveraging of fixed expenses and increased selling margin.
Interest expense, net for the three months ended September 30, 1998
increased to $2.3 million from $1.9 million in the same period of 1997. The
interest expense for the third quarter of 1998 consisted of interest on the
Company's 11% Senior Notes due 2006 (the "Senior Notes") and borrowings under
the Company's line of credit.
Net income for the three months ended September 30, 1998 increased to
$4.7 million from $3.3 million for the same period in 1997, principally as a
result of an increase in sales and gross margin, partially offset by an increase
in selling, general and administrative expenses and interest expense. See "Note
2. Income Taxes".
9
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales of the Company increased to $272.7 million for the nine
months ended September 30, 1998 from $205.4 million for the comparable prior
period, a 32.8% increase. This growth was attributable to an increase of 13.7%
in comparable store net sales which contributed $27.9 million, or 41.4% of the
total increase. New store net sales accounted for the balance of the increase in
net store sales.
Gross profit dollars for the nine months ended September 30, 1998
compared to 1997 increased 36.3% to $76.3 million from $56.0 million. Gross
profit as a percentage of net sales for nine months ended September 30, 1998
compared to 1997 increased to 28.0% from 27.3% in the nine months ended
September 30, 1997. The increase in gross profit percentage is primarily due to
opportunity buys in merchandise and improved margins in the pro audio and
keyboard segments of the business.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 compared to 1997 increased 38.3% to $56.0 million from $40.5
million. The increase in total selling, general and administrative expenses is a
result of certain selling expenses incurred at the store level due to an
increase in the number of stores in 1998 as compared to 1997. As a percentage of
net sales, selling, general and administrative expenses increased to 20.5% from
19.7%. The change in percentage of sales reflects the incremental cost of
staffing newly opened and immature stores, which typically achieve less leverage
than mature stores. In addition, the increase reflects additional corporate
personnel and management information systems expenses associated with the
Company's continuing expansion.
Operating income for the nine months ended September 30, 1998 was $20.4
million compared to operating income of $15.5 million for the same nine months
of 1997, an increase of 31.0%. The increase is principally the result of the
increase in sales derived from both new and existing stores. As a percentage of
sales, operating income for the nine months ended September 30, 1998 was 7.5%
compared to 7.6% in 1997. The decrease is related to the increase in selling,
general and administrative expenses, partially offset by the increase in gross
margin.
Interest expense, net for the nine months ended September 30, 1998
decreased to $6.3 million from $7.0 million in the same period of 1997. The
interest expense for the nine months ended September 30, 1998 consisted
principally of interest on the Company's Senior Notes and borrowings under the
Company's line of credit. On April 19, 1997, the Company redeemed, at a premium,
$33.3 million principal amount of the Senior Notes.
In the second quarter of 1997 the Company incurred an extraordinary
charge to operations of $4.4 million, net of tax of $1.7 million, representing
the premium paid on the Senior Notes redeemed plus the write-off of one-third of
the unamortized deferred financing fees.
Net income for the nine months ended September 30, 1998 increased to
$13.8 million from $3.7 million for the same period in 1997, principally as a
result of the effect of the extraordinary charge discussed above, as well as an
increase in sales and gross margin, partially offset by an increase in selling,
general and administrative expenses. See "Note 2. Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
Guitar Center's need for liquidity will arise primarily from interest
payable on its indebtedness and the funding of the Company's capital
expenditures and working capital requirements, as well as possible acquisitions.
The Company has historically financed its operations through internally
generated funds and borrowings under its credit facilities. The Company has no
mandatory payments of principal on
10
<PAGE>
the Senior Notes prior to the their final maturity in 2006. As of September
30, 1998, the Company had $19.9 million outstanding under its Credit
Facility, excluding $0.1 million outstanding on standby letters of credit,
and had available borrowings under the 1997 Credit Facility of approximately
$20.0 million. The agreement underlying the Credit Facility expires July 1,
2004 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 September 30, 1998.
For the nine months ended September 30, 1998, cash used by operating
activities was $15.0 million. Cash used in investing activities totaled $13.3
million, relating principally to the opening of new stores and remodeling of
moved stores. Cash provided by financing activities totaled $20.6 million, which
consisted principally of borrowings under the Credit Facility.
During the second quarter of 1998, the outstanding warrants were
exercised and converted to 376,325 shares of common stock, par value $0.01 per
share. The effect to the Company's total stockholders' equity was immaterial.
During the third quarter of 1998, inventory turn for new product in
mature stores decreased from 3.6 times as of September 30, 1997 to 3.3 times as
of September 30, 1998. Management believes that the increase in inventory
balances has reduced store stockouts which benefited comparable and new store
sales.
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. During the quarter ended
September 30, 1998, the Company opened two new stores. Each new store typically
has required approximately $1.8 million for gross inventory. Historically, the
Company's cost of capital improvements for an average new store has been
approximately $850,000, consisting of leasehold improvements, fixtures and
equipment.
The Company also believes that there may be attractive opportunities to
expand by selectively acquiring existing music products retailers. The Company,
in the ordinary course of its business, regularly evaluates and enters into
negotiations relating to potential acquisition candidates in new and existing
market areas. 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 report, the Company had no existing agreements
or commitments to effect any such acquisition. There can be no assurance that
the Company will be able to identify suitable acquisition candidates available
for sale at reasonable prices, consummate additional acquisitions or
successfully integrate any such acquired companies into its operations.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for 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 net cash flow from operations and borrowings under the Credit
Facility. Depending upon 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.
SEASONALITY
The Company's results are not highly seasonal, although, as with most
retailers, sales in the fourth quarter are typically higher than any other
quarter.
YEAR 2000
The Year 2000 issue is primarily the result of computer programs using
a two-digit format, as opposed to four digits, to indicate the year. Computer
programs that are date dependent are found in the software that operates many IT
systems as well as in the computer based devices which control many types of
electronic equipment. Computer programs that are not Year 2000 compliant will be
unable to interpret
11
<PAGE>
dates beyond the year 1999, which could cause a system failure or other
computer errors, leading to a disruption in the operation of the related IT
systems or electronic equipment.
In 1997, the Company established a project plan to investigate the
Year 2000 compliance of its internal and third party computer system
applications and hardware. The objective was to verify third party compliance
and complete internal compliance prior to year end 1999. All work has been
substantially completed with the exception of a major software project
related to the Company's inventory management system due to be implemented in
the first quarter of 1999. As of the date of this Report, the Company
believes that all of its significant IT systems will be Year 2000 compliant
by the end of 1999. The Company currently does not have a contingency plan
with regard to the Year 2000. During 1999, the Company will continue to
evaluate whether and to what extent contingency arrangements should be
implemented.
The Company has also endeavored to assess the Year 2000 compliance
of the outside parties upon which it is most dependent, including large
vendors of the products resold in the Guitar Center stores. While the Company
is not aware of any material compliance difficulties expected by any such
supplier, its ability to obtain accurate information is necessarily limited.
A number of the Company's vendors manufacture their products overseas, also
making accurate information difficult to obtain. Those vendors, as well as
the Company, are also dependent upon the continued normal functioning of
surface and air transportation, electric utility and voice and data
transmission infrastructure, and the electronic payments systems and other
activities of large financial institutions. Many of these companies have very
large Year 2000 compliance programs underway because they tend to be
dependent on large, proprietary "legacy" computing systems that are
particularly susceptible to Year 2000 problems. The success of these
compliance programs will prove important to the Company and those it does
business with.
Based on the assessment efforts to date, however, the Company does
not believe that the Year 2000 issue will have a material adverse effect on
its financial condition or results of operations. The Company's beliefs and
expectations, however, are based on certain assumptions and expectations that
ultimately may prove to be inaccurate. The Company believes that by the end
of 1999, it will be able to fully determine its most reasonably likely worst
case scenarios. Potential sources of risk include (a) the inability of
principal suppliers to be Year 2000 ready, which could result in delays in
product deliveries from such suppliers, (b) disruption of the distribution
channel, including ports, and transportation vendors, as a result of a
general failure of systems and necessary infrastructure such as electric
power supply, voice and data communications and financial payment systems,
and (c) unexpected failures of systems or devices that are misidentified as
being Year 2000 compliant or which prove unexpectedly to contain
non-compliant, date-dependent computer code.
As of the date of this Report, the Company does not expect the
future costs associated with its Year 2000 efforts to be substantial. To
date, the Company has spent minimal resources on the Year 2000 issue, as
such, primarily due to an already established, long term plan to upgrade and
modernize all systems which it has been implementing since 1995. The Year
2000 issues have been addressed as part of the overall global system
strategies. The Company's statements concerning future costs do not include
time and costs that may be incurred by the Company as a result of the failure
of any third parties, including suppliers, to become Year 2000 compliant, or
costs to implement any contingency plans.
The information above contains forward-looking statements which
reflect the current views of the Company with respect to Year 2000 compliance
and the related costs and possible impact on its financial performance. As
indicated above, these assessments may prove to be inaccurate. The Year 2000
problem is novel. Neither the Company nor any of its suppliers is experienced
at identifying and remediating a problem of this sort which represents a
systemic defect that, if not corrected, will cause the failure of computer
systems and computer-controlled devices that are pervasive in the
infrastructure of business and government.
INFLATION
The Company believes that the relatively moderate rates of inflation
experienced in recent years have not had a significant impact on its net sales
or profitability.
12
<PAGE>
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5,
"REPORTING ON THE COSTS OF START-UP ACTIVITIES" (98-5). The SOP requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred. SOP 98-5 is effective for financial statements for
fiscal years beginning after December 15, 1998. Initial application of the
SOP should be as of the beginning of the fiscal year in which the SOP is
first adopted and should be reported as a cumulative effect of a change in
accounting principle.
The Company expects to adopt SOP 98-5 in the first quarter of 1999.
Management estimates that the Company will incur a cumulative effect of a
change in accounting principle of approximately $1.0 million in the
consolidated statement of operations for the period ending March 31, 1999
relative to the adoption of the SOP.
FORWARD LOOKING STATEMENTS; BUSINESS RISKS
This Report 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, the effectiveness of the Company's
promotion and merchandising strategies, 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 competitive
factors that may prevent the Company from competing successfully in existing
or future markets. These matters and other business risks to which the
Company is subject are discussed in the Company's periodic reports and
registration statements filed from time to time with the Securities and
Exchange Commission. In particular, a discussion of such risks in greater
detail is contained under the caption "Item 1., Business Risks Related to the
Business" on pages 11 through 13 of the Company's 1997 Annual Report on Form
10-K.
13
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS.
(a) Exhibit 10.29 Amended and Restated Employment Agreement
between the Company and Bruce Ross
Exhibit 10.30 Amended and Restated Employment Agreement
between the Company and Barry Soosman
Exhibit 11. Income per share.
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K. The Company filed a Form 8-K dated
June 3, 1998 relating to the conversion of Warrants to
purchase 676,566 shares of Guitar Center, Inc. Common
Stock.
14
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized as of the 5th day of November
1998.
Guitar Center, Inc.
/s/ Bruce L. Ross
Bruce L. Ross, Executive Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
15
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.29 Amended and Restated Employment Agreement between the Company and
Bruce Ross
10.30 Amended and Restated Employment Agreement between the Company and
Barry Soosman
11 Computation of Income Per Share
27 Financial Data Schedule
</TABLE>
16
<PAGE>
EXHIBIT 11
GUITAR CENTER, INC.
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 4,717 $ 3,283 $ 13,793 $ 3,684
Weighted average shares outstanding
Basic 20,076 19,329 19,658 19,329
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dilutive effect of potential common shares 924 1,406 1,211 1,127
---------- ---------- ---------- ----------
Diluted 21,000 20,735 20,869 20,456
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income per common share
Basic $ 0.23 $ 0.17 $ 0.70 $ 0.19
---------- ---------- ---------- ----------
Diluted $ 0.22 $ 0.16 $ 0.66 $ 0.18
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made effective as of July 1, 1998 (the
"AGREEMENT"), between GUITAR CENTER, INC., a Delaware corporation (the
"COMPANY"), and Bruce Ross (the "EXECUTIVE").
This Agreement amends and restates that certain Employment Agreement,
dated as of June 5, 1996, between the Executive and the Company's predecessor,
Guitar Center Management, Inc., as amended by Amendment No. 1 dated October 15,
1996 and Amendment No. 2 dated as of January 30, 1997 (as so amended, the
"ORIGINAL AGREEMENT"). The Original Agreement was executed and delivered in
connection with the closing of the Stock Purchase Agreement (the "PURCHASE
AGREEMENT") dated June 5, 1996 (the "COMMENCEMENT DATE") 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 Commencement Date 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 $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.
(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) Executive has been granted options to acquire shares of
Common Stock under the Company's Amended and Restated 1996 Performance Stock
Option Plan. As set forth on EXHIBIT A hereto, the vesting provisions of
certain of such options are being modified contemporaneous with the execution
and delivery of this Agreement.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and
the Executive, the Employment Period shall end on June 30, 2001; 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
2
<PAGE>
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 June 30, 2001, unless the Executive has breached the provisions of this
Agreement, in which case the provisions of paragraph 11(a)(iii) shall apply.
For purposes of this Section 4(b), benefits will not include future
participation in any discretionary bonus or equity incentive pool, other than
continuation of annual cash bonuses as contemplated in the previous sentence.
Such severance payments will be made periodically in the same amounts and at the
same intervals as the Base Salary, annual bonus and benefits (as applicable)
were paid immediately prior to termination of employment. Executive shall have
no duty to mitigate any damages which Executive may suffer as a result of such
termination nor shall the severance benefits payable be reduced by any sums
actually earned by Executive as a result of any other employment obtained by
Executive during the original Employment Period. In addition, if the Employment
Period is terminated by the Company without Cause, all stock options held by the
Executive shall 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
3
<PAGE>
failure by the Executive to perform such lawful duties consistent with
Executive's position as are reasonably requested by the Board as documented in
writing to the Executive, (ii) the Executive's repeated material neglect of his
duties on a general basis (other than as a result of illness or disability),
notwithstanding written notice of objection from the Board and the expiration of
a thirty (30) day cure period, (iii) the commission by the Executive of any act
of fraud, theft or criminal dishonesty with respect to the Company or any of its
Subsidiaries or affiliates, or the conviction of the Executive of any felony,
(iv) the commission of any act involving moral turpitude which (A) brings the
Company or any of its affiliates into public disrepute or disgrace, or (B)
causes material injury to the customer relations, operations or the business
prospects of the Company or any of its affiliates, and (v) material breach by
the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of paragraph 5, 6 or 7 hereof, not cured within
thirty (30) days after written notice to Executive from the Board; PROVIDED,
HOWEVER, that in the event of an intentional breach of the provisions of
paragraph 5, 6 or 7 hereof, the Executive shall not have the opportunity to
cure.
(f) The Executive may within ninety (90) days, after giving
written notice to the Company and the Company's failure to cure, voluntarily
terminate employment with the Company upon any event giving rise to Reasonable
Justification for such voluntary termination.
(g) For purposes of this Agreement, "REASONABLE JUSTIFICATION"
shall mean any voluntary termination by the Executive of his employment with the
Company within ninety (90) days after the occurrence of any of the following
events:
(i) the Executive is directed to perform an act that the
Executive reasonably believes to be in contravention of law, or which the
Executive reasonably believes would subject the Company and himself to
material liability, despite his express written objection addressed to the
Board with respect to such action;
(ii) there has been any change (on other than a temporary
basis) without the Executive's consent in the Executive's title or any
material reduction in the nature or scope of his responsibilities, or the
Executive is assigned duties that are materially inconsistent with his
position (other than on a temporary basis);
(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.
4
<PAGE>
(h) If at any time during the Employment Period, there is a Sale
of the Company (as defined in that certain Stockholders Agreement, dated as of
June 5, 1996, by and among the Company and certain of its stockholders),
Executive may resign within ninety (90) days of the occurrence of such event by
notifying the Company in writing.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose to a third party or use for
his personal benefit or for the benefit of a third party, at any time, either
during the Employment Period or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance in good
faith of duties assigned to the Executive by the Company. The Executive will
take all reasonable and appropriate steps to safeguard Confidential Information
and to protect it against disclosure, misuse, espionage, loss and theft. The
Executive shall deliver to the Company at the termination of the Employment
Period or at any time the Company may request all memoranda, notes, plans,
records, reports, computer tapes and software and other documents and data (and
copies thereof) relating to the Confidential Information, Work Product (as
defined below) or the business of the Company or any of its Subsidiaries which
the Executive may then possess or have under his control.
(b) As used in this Agreement, the term "CONFIDENTIAL
INFORMATION" means information that is not generally known to the public and
that is used, developed or obtained by the Company in connection with its
business, including but not limited to (i) information, observations and data
obtained by the Executive while employed by the Company (including those
obtained prior to the date of this Agreement) concerning the business or affairs
of the Company, (ii) products or services, (iii) fees, costs and pricing
structures, (iv) designs, (v) analyses, (vi) drawings, photographs and reports,
(vii) computer software, including operating systems, applications and program
listings, (viii) flow charts, manuals and documentation, (ix) data bases, (x)
accounting and business methods, (xi) inventions, devices, new developments,
methods and processes, whether patentable or unpatentable and whether or not
reduced to practice, (xii) customers and clients and customer or client lists,
(xiii) other copyrightable works, (xiv) all production methods, processes,
technology and trade secrets, and (xv) all similar and related information in
whatever form. Confidential Information will not include any information that
has been published in a form generally available to the public prior to the date
the Executive proposes to disclose or use such 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,
5
<PAGE>
analyses, drawings, reports, service marks, trademarks, tradenames, logos and
all similar or related information (whether patentable or unpatentable) which
relates to the Company's or any of its Subsidiaries' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by the Executive (whether or not
during usual business hours and whether or not alone or in conjunction with any
other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement) together with all patent
applications, letters patent, trademark, tradename and service mark applications
or registrations, copyrights and reissues thereof that may be granted for or
upon any of the foregoing (collectively referred to herein as, the "WORK
PRODUCT") belong to the Company or such Subsidiary. The Executive will promptly
disclose such Work Product as may be susceptible of such manner of communication
to the Board and perform all actions reasonably requested by the Board (whether
during or after the Employment Period) to establish and confirm such ownership
(including, without limitation, the execution and delivery of assignments,
consents, powers of attorney and other instruments) and to provide reasonable
assistance to the Company or any of its Subsidiaries in connection with the
prosecution of any applications for patents, trademarks, trade names, service
marks or reissues thereof or in the prosecution or defense of interferences
relating to any Work Product.
(b) CALIFORNIA EMPLOYEE PATENT ACT NOTIFICATION. In accordance
with Section 2872 of the California Employee Patent Act, West's Cal. Lab. Code
Section 2870 et. seq., Executive is hereby advised that subparagraph 6(a) does
not apply to any invention, new development or method (and all copies and
tangible embodiments thereof) made solely by Executive for which no equipment,
facility, material, Confidential Information or intellectual property of the
Company or any of its Subsidiaries was used and which was developed entirely on
Employee's own time; PROVIDED, HOWEVER, that subparagraph 6(a) shall apply if
the invention, new development or method (i) relates to the Company's or any of
its Subsidiaries' actual or demonstrably anticipated businesses or research and
development, or (ii) results from any work performed by Executive for the
Company or any of its Subsidiaries.
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
6
<PAGE>
Reasonable Justification, on or before the third anniversary of the
Commencement Date (such period is referred to herein as the "NON-COMPETE
PERIOD"), the Executive shall not, directly or indirectly, enter into,
engage in, assist, give or lend funds to or otherwise finance, be employed
by or consult with, or have a financial or other interest in, any business
which engages in selling at retail musical instruments, pro-audio
equipment or related accessories within the Territory (the "LINE OF
BUSINESS"), whether for or by himself or as a representative for any other
Person.
(ii) Notwithstanding the foregoing, the aggregate
ownership by the Executive of no more than two percent (on a fully-diluted
basis) of the outstanding equity securities of any entity, which securities
are traded on a national or foreign securities exchange, quoted on the
Nasdaq Stock Market or other automated quotation system, and which entity
competes with the Company (or any part thereof) within the Territory, shall
not (by itself) be deemed to be giving or lending funds to, otherwise
financing or having a financial interest in a competitor. In the event
that any entity in which the Executive has any financial or other interest
directly or indirectly enters into the Line of Business during the
Non-Compete Period, the Executive shall divest all of his interest (other
than any amount permitted to be held pursuant to the first sentence of
this Section 7(a)(ii)) in such entity within thirty (30) days after
learning that such entity has entered the Line of Business.
(iii) The Executive covenants and agrees that during the
Non-Compete Period, the Executive will not, directly or indirectly, either
for himself or for any other person or entity, solicit any employee of the
Company (other than such Executive's personal assistant or secretary) or
any Subsidiary to terminate his or her employment with the Company or any
Subsidiary or employ any such individual during his or her employment with
the Company or any Subsidiary and for a period of six months after such
individual terminates his or her employment with the Company or any
Subsidiary.
(b) The Executive understands that the foregoing restrictions
may limit his ability to earn a livelihood in a business similar to the business
of the Company, but he nevertheless believes that he has received and will
receive sufficient consideration and other benefits as an employee or holder of
Common Stock of the Company and as otherwise provided hereunder to clearly
justify such restrictions which, in any event (given his education, skills and
ability), the Executive 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 have entered into
an Indemnification Agreement substantially in the form filed as Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
7
<PAGE>
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, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telephone: (818) 735-8800
Telecopier: (818) 735-8833
8
<PAGE>
If to the Executive, to:
Bruce Ross
3264 Casino Drive
Thousand Oaks, California 91362
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
12. GENERAL PROVISIONS.
(a) SEVERABILITY/ENFORCEMENT.
(i) It is the desire and intent of the parties hereto
that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction
in which enforcement is sought. Accordingly, if any particular provision
of this Agreement shall be adjudicated by a court of competent jurisdiction
to be invalid, prohibited or unenforceable for any reason, such provision,
as to such jurisdiction, shall be ineffective, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly
drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn,
without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of such provision in any other
jurisdiction. Without limiting the generality of the preceding sentence,
if at the time of enforcement of paragraph 5, 6 or 7 of this Agreement, a
court holds that the restrictions stated therein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum
period, scope or geographical area reasonable under such circumstances
shall be substituted for the stated period, scope or area and that the
failure of all or any of such provisions to be enforceable shall not impair
or affect the obligations of the Company to pay compensation or severance
obligations under this Agreement.
(ii) Because the Executive's services are unique and
because the Executive has access to Confidential Information and Work
Product, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement by the Executive. Therefore, in
the event of a breach or threatened breach of this Agreement, the Company
or its successors or assigns may, in addition to other rights and remedies
existing in their favor, apply to any court of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce,
or prevent any violations of, the provisions hereof (without posting a bond
or other security).
9
<PAGE>
(iii) In addition to the foregoing, and not in any way in
limitation thereof, or in limitation of any right or remedy otherwise
available to the Company, if the Executive materially violates any
provision of paragraph 5, 6 or 7 (and such violation, if unintentional on
the part of the Executive, continues for a period of thirty (30) days
following receipt of written notice from the Company), any severance
payments then or thereafter due from the Company to the Executive may be
terminated forthwith and upon such election by the Company, the Company's
obligation to pay and the Executive's right to receive such severance
payments shall terminate and be of no further force or effect. The
Executive's obligations under paragraphs 5, 6 or 7 of this Agreement shall
not be limited or affected by, and such provisions shall remain in full
force and effect notwithstanding the termination of any severance payments
by the Company in accordance with this paragraph 11(a)(iii). The exercise
of the right to terminate such payments shall not be deemed to be an
election of remedies by the Company and shall not in any manner modify,
limit or preclude the Company from exercising any other rights or seeking
any other remedies available to it at law or in equity.
(b) COMPLETE AGREEMENT. This Agreement, those documents
expressly referred to herein and all other documents of even date herewith
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive and the Company and their respective successors, assigns,
heirs, representatives and estate; PROVIDED, HOWEVER, that the rights and
obligations of the Executive under this Agreement shall not be assigned without
the prior written consent of the Company.
(d) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE
(WHETHER OF THE STATE OF CALIFORNIA, OR ANY OTHER JURISDICTION), THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF
CALIFORNIA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT,
EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
10
<PAGE>
(e) JURISDICTION, ETC.
(i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California State court or Federal court of the United
States of America sitting in the State of California, and any appellate
court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such California State court
or, to the extent permitted by law, in such Federal court. Each of the
parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law. Nothing in
this Agreement shall affect any right that any party may otherwise have to
bring any action or proceeding relating to this Agreement in the courts of
any jurisdiction.
(ii) Each of the parties hereto irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection that it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any California State or Federal court. Each
of the parties hereto irrevocably waives, to the fullest extent permitted
by law, the defense of an inconvenient forum to the maintenance of such
action or proceeding in any such court.
(iii) The Company and the Executive further agree that the
mailing by certified or registered mail, return receipt requested, of any
process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any
other means provided by law.
(f) AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and the Investors, and no course of conduct or failure or delay in
enforcing the provisions of this Agreement shall affect the validity, binding
effect or enforceability of this Agreement or any provision hereof.
(g) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT 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.
11
<PAGE>
(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.
(Signature Page Follows)
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement
as of the date first written above.
GUITAR CENTER, INC.
By: ____________________________________
Larry Thomas
Chief Executive Officer
____________________________________
Bruce Ross
13
<PAGE>
EXHIBIT A
TERMS OF OPTIONS
GRANTED TO EXECUTIVE
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 MADE JUNE 3, 1996. Effective June 3, 1996, the Company
granted the Executive an option to acquire 79,599 shares of Common Stock for a
purchase price of $10.89 per share pursuant to the Plan. To the extent not
previously exercised, these options remain outstanding in accordance with their
respective terms.
2. ADDITIONAL GRANT MADE JANUARY 30, 1997. Effective January 30, 1997,
the Company granted the Executive an option to acquire 79,599 shares of Common
Stock for a purchase price of $10.89 per share pursuant to the terms of Exhibit
A to Amendment No. 2 to the Employment Agreement dated as of June 5, 1996
("EXHIBIT A"). In order to accelerate the time vesting provisions applicable to
such options, the Non-Qualified Stock Option Agreement shall be amended and
restated in the form attached as ANNEX A contemporaneous with the execution of
this Agreement.
A-1
<PAGE>
EXHIBIT B
TERRITORY
ARIZONA:
Phoenix metropolitan area
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
FLORIDA:
Miami metropolitan area
Ft. Lauderdale/Hollywood metropolitan area
GEORGIA:
Atlanta metropolitan area
ILLINOIS:
Chicago metropolitan area
MARYLAND:
Baltimore metropolitan area
MASSACHUSETTS:
Boston metropolitan area
MICHIGAN:
Detroit metropolitan area
MINNESOTA:
Minneapolis/St. Paul metropolitan area
NEW YORK:
New York metropolitan area
TEXAS:
Dallas/Ft. Worth metropolitan area
Houston metropolitan area
WASHINGTON:
Seattle metropolitan area.
B-1
<PAGE>
AMENDED AND RESTATED
NONQUALIFIED STOCK OPTION AGREEMENT
dated as of July 1, 1998 between
GUITAR CENTER, INC.,
(formerly Guitar Center Management Company, Inc.)
(the "COMPANY")
and BRUCE ROSS (the "OPTIONEE").
The Company, acting through a Committee (as defined in the Plan) with
the consent of the Company's Board of Directors (the "BOARD") has granted to the
Optionee an option under the Company's Amended and Restated 1996 Performance
Stock Option Plan, as amended (the "PLAN"), to purchase 79,599 shares of Common
Stock on the terms and subject to the conditions set forth in this option
agreement (the "AGREEMENT"), the Amended and Restated Employment Agreement by
and between the Company and Optionee dated as of July 1, 1998 (the "EMPLOYMENT
AGREEMENT"), and the Plan. This Agreement amends and restates the option
agreement dated as of June 5, 1996, as amended, in full as set forth below:
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement as if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control unless otherwise provided herein. A
copy of the Plan may be obtained from the Company by the Optionee upon request.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Optionee shall have the option
(the "OPTION") to purchase up to 79,599 shares of Common Stock (the "OPTIONS")
at the price of $10.89 per share (the "OPTION PRICE") at the times and in the
manner provided herein. Payment of the Option Price may be made in the manner
specified by Section 10(a) of the Plan. The Option is not intended to qualify
for federal income tax purposes as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
SECTION 3. TERM. The term of the Option (the "OPTION TERM") shall
commence on the date hereof and expire on the tenth anniversary of the Effective
Date, unless the Option shall have sooner been terminated in accordance with the
terms of the Plan (including, without limitation, Section 8 of the Plan) or this
Agreement.
SECTION 4. TIME VESTING. The Option shall vest as follows: (i) 25%
on July 1, 1998; (ii) 25% on December 31, 1998; (iii) 25% on December 31, 1999;
and (iv) 25% on December 31, 2000, subject to acceleration pursuant to the terms
and subject to the limitations of Section 5 of this Agreement.
<PAGE>
SECTION 5. ACCELERATION OF VESTING. Notwithstanding the time vesting
provision provided in Section 4 and notwithstanding the provisions of Section
5(c) of the Plan, the vesting of the Option provided for in this Agreement shall
be accelerated as follows:
(a) upon the death of the Optionee during the Employment Period
(as such term is defined in the Employment Agreement);
(b) upon the Disability (as such term is defined in the
Employment Agreement) of the Optionee during the Employment
Period;
(c) upon a Sale of the Company during the Employment Period; or
(d) upon the termination of the Employment Period by the Company
without Cause (as defined in the Employment Agreement) or by the
Optionee with Reasonable Justification (as defined in the
Employment Agreement).
SECTION 6. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Optionee and may be exercised during the lifetime of the Optionee only by
the Optionee. If the Optionee dies, the Option shall thereafter be exercisable,
during the period specified in Section 8 of the Plan, by his executors or
administrators to the full extent to which the Option was exercisable by the
Optionee at the time of his death. The Option shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of the Option contrary to the
provisions hereof, and the levy of any execution, attachment or similar process
upon the Option, shall be null and void and without effect.
SECTION 7. OPTIONEE'S EMPLOYMENT. Nothing in the Option shall confer
upon the Optionee any right to continue in the employ of the Company or any of
its affiliates or interfere in any way with the right of the Company or its
affiliates or stockholders, as the case may be, to terminate the Optionee's
employment or to increase or decrease the Optionee's compensation at any time,
with or without cause and with or without notice.
SECTION 8. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Guitar Center, Inc.
5155 Clareton Drive
Agoura, California 91301
Attention: Chief Executive Officer
with a copy to the General Counsel.
<PAGE>
(b) if to the Optionee, to him at:
3264 Casino Drive
Thousand Oaks, California 91362
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business after the date of delivery), (ii) in the case
of nationally-recognized overnight courier, on the next business day after the
date sent, (iii) in the case of telecopy transmission, when received (or if not
sent on a business day, on the next business day after the date sent), and (iv)
in the case of mailing, on the third business day following that on which the
piece of mail containing such communication is posted.
SECTION 9. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 10. OPTIONEE'S UNDERTAKING. The Optionee hereby agrees to
take whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement and the Plan.
SECTION 11. MODIFICATION OF RIGHTS. The rights of the Optionee are
subject to modification and termination in certain events as provided in this
Agreement, the Employment Agreement and the Plan.
SECTION 12. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR ROLE (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
<PAGE>
CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW
OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION
WOULD ORDINARILY APPLY.
SECTION 13. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 14. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 15. SEVERABILITY. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 16. 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.
(Signature Page Follows)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Nonqualified Stock Option Agreement effective as of the date first
written above.
GUITAR CENTER, INC.
By:___________________________________
Larry Thomas
Chief Executive Officer
OPTIONEE
______________________________________
Bruce Ross
<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made effective as of July 1, 1998 (the
"AGREEMENT"), between GUITAR CENTER, INC., a Delaware corporation (the
"COMPANY"), and Barry Soosman (the "EXECUTIVE").
This Agreement amends and restates that certain Employment Agreement,
dated as of June 5, 1996, between the Executive and the Company's predecessor,
Guitar Center Management, Inc., as amended by Amendment No. 1 dated October 15,
1996 and Amendment No. 2 dated as of January 30, 1997 (as so amended the
"ORIGINAL AGREEMENT"). The Original Agreement was executed and delivered in
connection with the closing of the Stock Purchase Agreement (the "PURCHASE
AGREEMENT") dated June 5, 1996 (the "COMMENCEMENT DATE") 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 Commencement Date 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 Senior Vice President Corporate Development and General Counsel
of the Company and shall have the normal duties, responsibilities and authority
of the Senior Vice President of 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
<PAGE>
Executive deems appropriate to his real estate and law 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 dues and real
estate broker license fees. The Company shall reimburse the Executive for all
library and reference materials and the cost of continuing education and
seminars approved by the President of the Company.
(d) During the Employment Period, the Executive shall be
entitled to paid vacation consistent with the Company's policy applicable to
executives at the Senior Vice President level generally.
(e) Executive has been granted options to acquire shares of
Common Stock under the Company's Amended and Restated 1996 Performance Stock
Option Plan. As set forth on EXHIBIT A hereto, the vesting provisions of
certain of such options are being modified contemporaneous with the execution
and delivery of this Agreement.
2
<PAGE>
(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 June 30, 2001; 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 June 30, 2001, unless the Executive has breached the provisions of this
Agreement, in which case the provisions of paragraph 11(a)(iii) shall apply.
For purposes of this Section 4(b), benefits will not include future
participation in any discretionary bonus or equity incentive pool, other than
continuation of annual cash bonuses as contemplated in the previous sentence.
Such severance payments will be made periodically in the same amounts and at the
same intervals as the Base Salary, annual bonus and benefits (as applicable)
were paid immediately prior to termination of employment. Executive shall have
no duty to mitigate any damages which Executive may suffer as a result of such
termination nor shall the severance benefits payable be reduced by any sums
actually earned by Executive as a result of any other employment obtained by
Executive during the original Employment Period. In addition, if the Employment
Period is terminated by the Company without Cause, all stock options held by the
Executive shall 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
3
<PAGE>
Reasonable Justification, the Executive shall be entitled to receive only the
Base Salary and then only to the extent such amount has accrued through the date
of termination.
(d) Except as otherwise expressly required by law (E.G., COBRA)
or as specifically provided herein, all of the Executive's rights to salary,
severance, benefits, bonuses and other amounts hereunder (if any) accruing after
the termination of the Employment Period shall cease upon such termination. In
the event that the Employment Period is terminated by the Company without Cause
or by the Executive with Reasonable Justification, the Executive's sole remedy
shall be to receive the severance payments and benefits described in paragraph
4(b) hereof.
(e) For purposes of this Agreement, "CAUSE" means (i) the
repeated failure by the Executive to perform such lawful duties consistent with
Executive's position as are reasonably requested by the Board as documented in
writing to the Executive, (ii) the Executive's repeated material neglect of his
duties on a general basis (other than as a result of illness or disability),
notwithstanding written notice of objection from the Board and the expiration of
a thirty (30) day cure period, (iii) the commission by the Executive of any act
of fraud, theft or criminal dishonesty with respect to the Company or any of its
Subsidiaries or affiliates, or the conviction of the Executive of any felony,
(iv) the commission of any act involving moral turpitude which (A) brings the
Company or any of its affiliates into public disrepute or disgrace, or (B)
causes material injury to the customer relations, operations or the business
prospects of the Company or any of its affiliates, and (v) material breach by
the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of paragraph 5, 6 or 7 hereof, not cured within
thirty (30) days after written notice to Executive from the Board; PROVIDED,
HOWEVER, that in the event of an intentional breach of the provisions of
paragraph 5, 6 or 7 hereof, the Executive shall not have the opportunity to
cure.
(f) The Executive may within ninety (90) days, after giving
written notice to the Company and the Company's failure to cure, voluntarily
terminate employment with the Company upon any event giving rise to Reasonable
Justification for such voluntary termination.
(g) For purposes of this Agreement, "REASONABLE JUSTIFICATION"
shall mean any voluntary termination by the 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);
4
<PAGE>
(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 (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,
5
<PAGE>
(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.
(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
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<PAGE>
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, on or before December 31, 1999 (such period is
referred to herein as the "NON-COMPETE PERIOD"), the Executive shall not,
directly or indirectly, enter into, engage in, assist, give or lend funds
to or otherwise finance, be employed by or consult with, or have a
financial or other interest in, any business which engages in selling at
retail musical instruments, pro-audio equipment or related accessories
within the Territory (the "LINE OF BUSINESS"), whether for or by himself
or as a representative for any other Person.
(ii) Notwithstanding the foregoing, the aggregate
ownership by the Executive of no more than two percent (on a fully-diluted
basis) of the outstanding equity securities of any entity, which securities
are traded on a national or foreign securities exchange, quoted on the
Nasdaq Stock Market or other automated quotation system, and which entity
competes with the Company (or any part thereof) within the Territory, shall
not (by itself) be deemed to be giving or lending funds to, otherwise
financing or having a financial interest in a competitor. In the event
that any entity in which the Executive has any financial or other interest
directly or indirectly enters into the Line of Business during the
Non-Compete Period, the Executive shall divest all of his interest (other
than any amount permitted to be held pursuant to the first sentence of
this Section 7(a)(ii)) in such entity within thirty (30) days after
learning that such entity has entered the Line of Business.
(iii) The Executive covenants and agrees that during the
Non-Compete Period, the Executive will not, directly or indirectly, either
for himself or for any other person or entity, solicit any employee of the
Company (other than such Executive's personal assistant or secretary) or
any Subsidiary to terminate his or her employment with the Company or any
Subsidiary or employ any such individual during his or her employment with
the Company or any Subsidiary and for a period of six months after such
individual terminates his or her employment with the Company or any
Subsidiary.
(b) The Executive understands that the foregoing restrictions
may limit his ability to earn a livelihood in a business similar to the business
of the Company, but he nevertheless believes that he has received and will
receive sufficient consideration and other
7
<PAGE>
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 have entered into
an Indemnification Agreement substantially in the form filed as Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telephone: (818) 735-8800
Telecopier: (818) 735-8833
8
<PAGE>
If to the Executive, to:
Barry Soosman
852 Country Valley Road
Westlake Village, California 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 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).
9
<PAGE>
(iii) In addition to the foregoing, and not in any way in
limitation thereof, or in limitation of any right or remedy otherwise
available to the Company, if the Executive materially violates any
provision of paragraph 5, 6 or 7 (and such violation, if unintentional on
the part of the Executive, continues for a period of thirty (30) days
following receipt of written notice from the Company), any severance
payments then or thereafter due from the Company to the Executive may be
terminated forthwith and upon such election by the Company, the Company's
obligation to pay and the Executive's right to receive such severance
payments shall terminate and be of no further force or effect. The
Executive's obligations under paragraphs 5, 6 or 7 of this Agreement shall
not be limited or affected by, and such provisions shall remain in full
force and effect notwithstanding the termination of any severance payments
by the Company in accordance with this paragraph 11(a)(iii). The exercise
of the right to terminate such payments shall not be deemed to be an
election of remedies by the Company and shall not in any manner modify,
limit or preclude the Company from exercising any other rights or seeking
any other remedies available to it at law or in equity.
(b) COMPLETE AGREEMENT. This Agreement, those documents
expressly referred to herein and all other documents of even date herewith
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive and the Company and their respective successors, assigns,
heirs, representatives and estate; PROVIDED, HOWEVER, that the rights and
obligations of the Executive under this Agreement shall not be assigned without
the prior written consent of the Company.
(d) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE
(WHETHER OF THE STATE OF CALIFORNIA, OR ANY OTHER JURISDICTION), THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF
CALIFORNIA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT,
EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(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
10
<PAGE>
California State court or Federal court of the United States of America
sitting in the State of California, and any appellate court from any
thereof, in any action or proceeding arising out of or relating to this
Agreement or for recognition or enforcement of any judgment, and each of
the parties hereto hereby irrevocably and unconditionally agrees that all
claims in respect of any such action or proceeding may be heard and
determined in any such California State court or, to the extent permitted
by law, in such Federal court. Each of the parties hereto agrees that a
final judgment in any such action or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Nothing in this Agreement shall affect any right
that any party may otherwise have to bring any action or proceeding
relating to this Agreement in the courts of any jurisdiction.
(ii) Each of the parties hereto irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection that it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any California State or Federal court. Each
of the parties hereto irrevocably waives, to the fullest extent permitted
by law, the defense of an inconvenient forum to the maintenance of such
action or proceeding in any such court.
(iii) The Company and the Executive further agree that
the mailing by certified or registered mail, return receipt requested, of
any process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any
other means provided by law.
(f) AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and the Investors, and no course of conduct or failure or delay in
enforcing the provisions of this Agreement shall affect the validity, binding
effect or enforceability of this Agreement or any provision hereof.
(g) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT 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.
(Signature Page Follows)
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Employment Agreement as of the date first written above.
GUITAR CENTER, INC.
By:____________________________________
Name: Larry Thomas
Title: President
____________________________________
Barry Soosman
12
<PAGE>
EXHIBIT A
TERMS OF OPTIONS
GRANTED TO EXECUTIVE
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 MADE JUNE 3, 1996. Effective June 3, 1996, the Company
granted the Executive an option to acquire 79,599 shares of Common Stock for a
purchase price of $10.89 per share pursuant to the Plan. To the extent not
previously exercised, these options remain outstanding in accordance with their
respective terms.
2. ADDITIONAL GRANT MADE JANUARY 30, 1997. Effective June 5, 1996, the
Company granted the Executive an option to acquire 79,599 shares of Common Stock
for a purchase price of $10.89 per share pursuant to the terms of Exhibit A to
Amendment No. 2 to the Employment Agreement dated as of June 5, 1996 ("EXHIBIT
A"). In order to accelerate the time vesting provisions applicable to such
options, the Non-Qualified Stock Option Agreement shall be amended and restated
in the form attached contemporaneous with the execution of this Agreement.
A-1
<PAGE>
EXHIBIT B
TERRITORY
ARIZONA:
Phoenix metropolitan area
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
FLORIDA:
Miami metropolitan area
Ft. Lauderdale/Hollywood metropolitan area
GEORGIA:
Atlanta metropolitan area
ILLINOIS:
Chicago metropolitan area
MARYLAND:
Baltimore metropolitan area
MASSACHUSETTS:
Boston metropolitan area
MICHIGAN:
Detroit metropolitan area
MINNESOTA:
Minneapolis/St. Paul metropolitan area
NEW YORK:
New York Tri-State metropolitan area
TEXAS:
Dallas/Ft. Worth metropolitan area
Houston metropolitan area
WASHINGTON:
Seattle metropolitan area.
B-1
<PAGE>
ANNEX A
AMENDED AND RESTATED
NONQUALIFIED STOCK OPTION AGREEMENT
dated as of July 1, 1998 between
GUITAR CENTER, INC.,
(formerly Guitar Center Management Company, Inc.)
(the "COMPANY")
and BARRY SOOSMAN (the "OPTIONEE").
The Company, acting through a Committee (as defined in the Plan) with
the consent of the Company's Board of Directors (the "BOARD") has granted to the
Optionee an option under the Company's Amended and Restated 1996 Performance
Stock Option Plan, as amended (the "PLAN"), to purchase 79,599 shares of Common
Stock on the terms and subject to the conditions set forth in this option
agreement (the "AGREEMENT"), the Amended and Restated Employment Agreement by
and between the Company and Optionee dated as of July 1, 1998 (the "EMPLOYMENT
AGREEMENT"), and the Plan. This Agreement amends and restates the option
agreement dated as of June 5, 1996, as amended, in full as set forth below:
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement as if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control unless otherwise provided herein. A
copy of the Plan may be obtained from the Company by the Optionee upon request.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Optionee shall have the option
(the "OPTION") to purchase up to 79,599 shares of Common Stock (the "OPTIONS")
at the price of $10.89 per share (the "OPTION PRICE") at the times and in the
manner provided herein. Payment of the Option Price may be made in the manner
specified by Section 10(a) of the Plan. The Option is not intended to qualify
for federal income tax purposes as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
SECTION 3. TERM. The term of the Option (the "OPTION TERM") shall
commence on the date hereof and expire on the tenth anniversary of the Effective
Date, unless the Option shall have sooner been terminated in accordance with the
terms of the Plan (including, without limitation, Section 8 of the Plan) or this
Agreement.
SECTION 4. TIME VESTING. The Option shall vest as follows: (i)
one-third on July 1, 1998; (ii) one-third on December 31, 1998; and (iii)
one-third on December 31, 1999, subject to acceleration pursuant to the terms
and subject to the limitations of Section 5 of this Agreement.
<PAGE>
SECTION 5. ACCELERATION OF VESTING. Notwithstanding the time vesting
provision provided in Section 4 and notwithstanding the provisions of Section
5(c) of the Plan, the vesting of the Option provided for in this Agreement shall
be accelerated as follows:
(a) upon the death of the Optionee during the Employment Period
(as such term is defined in the Employment Agreement);
(b) upon the Disability (as such term is defined in the
Employment Agreement) of the Optionee during the Employment
Period;
(c) upon a Sale of the Company during the Employment Period; or
(d) upon the termination of the Employment Period by the Company
without Cause (as defined in the Employment Agreement) or by the
Optionee with Reasonable Justification (as defined in the
Employment Agreement).
SECTION 6. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Optionee and may be exercised during the lifetime of the Optionee only by
the Optionee. If the Optionee dies, the Option shall thereafter be exercisable,
during the period specified in Section 8 of the Plan, by his executors or
administrators to the full extent to which the Option was exercisable by the
Optionee at the time of his death. The Option shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of the Option contrary to the
provisions hereof, and the levy of any execution, attachment or similar process
upon the Option, shall be null and void and without effect.
SECTION 7. OPTIONEE'S EMPLOYMENT. Nothing in the Option shall confer
upon the Optionee any right to continue in the employ of the Company or any of
its affiliates or interfere in any way with the right of the Company or its
affiliates or stockholders, as the case may be, to terminate the Optionee's
employment or to increase or decrease the Optionee's compensation at any time,
with or without cause and with or without notice.
SECTION 8. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Guitar Center, Inc.
5155 Clareton Drive
Agoura, California 91301
Attention: Chief Executive Officer
with a copy to the Chief Financial Officer
<PAGE>
(b) if to the Optionee, to him at:
852 Country Valley Road
Westlake Village, California 91362
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business after the date of delivery), (ii) in the case
of nationally-recognized overnight courier, on the next business day after the
date sent, (iii) in the case of telecopy transmission, when received (or if not
sent on a business day, on the next business day after the date sent), and (iv)
in the case of mailing, on the third business day following that on which the
piece of mail containing such communication is posted.
SECTION 9. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 10. OPTIONEE'S UNDERTAKING. The Optionee hereby agrees to
take whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement and the Plan.
SECTION 11. MODIFICATION OF RIGHTS. The rights of the Optionee are
subject to modification and termination in certain events as provided in this
Agreement, the Employment Agreement and the Plan.
SECTION 12. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR ROLE (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
<PAGE>
CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW
OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION
WOULD ORDINARILY APPLY.
SECTION 13. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 14. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 15. SEVERABILITY. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 16. 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.
(Signature Page Follows)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Nonqualified Stock Option Agreement effective as of the date first
written above.
GUITAR CENTER, INC.
By:___________________________________
Larry Thomas
Chief Executive Officer
OPTIONEE
______________________________________
Barry Soosman
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 113
<SECURITIES> 0
<RECEIVABLES> 8,515
<ALLOWANCES> 186
<INVENTORY> 97,778
<CURRENT-ASSETS> 111,252
<PP&E> 47,175
<DEPRECIATION> 15,099
<TOTAL-ASSETS> 156,278
<CURRENT-LIABILITIES> 45,054
<BONDS> 66,667
0
0
<COMMON> 201
<OTHER-SE> 43,029
<TOTAL-LIABILITY-AND-EQUITY> 156,278
<SALES> 272,671
<TOTAL-REVENUES> 272,671
<CGS> 196,325
<TOTAL-COSTS> 55,985
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,328
<INCOME-PRETAX> 14,357
<INCOME-TAX> 564
<INCOME-CONTINUING> 13,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,793
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.66
</TABLE>
