<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 June 30, 1999
( ) 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
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(Address of principal executive offices) (Zip Code)
(818) 735-8800
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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 August 11, 1999, 22,072,590 shares of our Common Stock, $.01 par value,
were outstanding.
1
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - June 30,
1999 and December 31, 1998 ........................................3
Condensed Consolidated Statements of Operations -
Three months ended June 30, 1999 and 1998..........................4
Condensed Consolidated Statements of Income -
Six months ended June 30, 1999 and 1998............................5
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 ...........................6
Notes to Condensed Consolidated Financial Statements ..............7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .....................11
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................17
Part II. Other Information
Item 1. Not Applicable
Item 2. Changes in Securities and Use of Proceeds................17
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders......17
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K ........................17
2
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
<S> C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 880 $ 472
Inventories, net of reserves 147,930 126,957
Accounts receivable, net of reserves 15,551 13,614
Prepaid expenses and deposits 2,990 3,324
Pre-opening costs and other current assets - 2,850
--------- ---------
Total current assets 167,351 147,217
Property and equipment, net 50,284 42,410
Goodwill, net 4,541 4,618
Deferred tax assets 10,431 10,431
Deposits and other assets, non-current 4,962 3,382
--------- ---------
$ 237,569 $ 208,058
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,894 $ 35,152
Accrued expenses and other current liabilities 14,269 15,934
Merchandise advances 7,164 7,147
Line of credit 49,828 20,850
Current portion of long term debt 264 527
--------- ---------
Total current liabilities 105,419 79,610
Rent equalization 1,737 1,570
Long term debt 67,946 80,663
--------- ---------
Total liabilities 175,102 161,843
Stockholders' equity
Common stock, $0.01 par value,
authorized 55,000,000 shares, issued and
outstanding 22,072,590 at June 30, 1999 and
20,092,943 at December 31, 1998, respectively 221 201
Additional paid in capital 242,251 228,195
Accumulated deficit (180,005) (182,181)
--------- ---------
Total stockholders' equity 62,467 46,215
--------- ---------
$ 237,569 $ 208,058
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
--------- ---------
<S> C> <C>
Net sales $ 139,186 $114,540
Cost of goods sold, buying and occupancy 102,340 83,135
--------- --------
Gross profit 36,846 31,405
Selling, general and administrative 30,591 26,597
Transaction and conversion costs 3,627 -
--------- --------
Operating income 2,628 4,808
Interest expense, net 2,576 2,335
Interest expense to related parties 201 308
Other - (324)
--------- --------
Income (loss) before income taxes (149) 2,489
Income taxes - 168
--------- --------
Net income (loss) $ (149) $ 2,321
========= =========
Net income (loss) per share
Basic $ (0.01) $ 0.11
========= =========
Diluted $ (0.01) $ 0.10
========= =========
Weighted average shares outstanding
Basic 22,072 21,510
========= =========
Diluted 22,072 23,149
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
--------- --------
<S> <C> <C>
Net sales $274,624 $222,249
Cost of goods sold, buying and occupancy 202,729 161,836
-------- --------
Gross profit 71,895 60,413
Selling, general and administrative 59,141 51,243
Transaction and conversion costs 3,627 -
-------- --------
Operating income 9,127 9,170
Interest expense, net 5,029 4,489
Interest expense to related parties 501 587
Other - (324)
-------- --------
Income before income taxes and cumulative effect
of a change in accounting principle 3,597 4,418
Income taxes 2,099 303
-------- --------
Income before cumulative effect of a change in
accounting principle 1,498 4,115
Cumulative effect of changing accounting principle
to write-off pre-opening costs, net of tax 1,074 -
-------- --------
Net income $ 424 $ 4,115
======== ========
Net income per share
Basic
Income before cumulative effect of a change
in accounting principle $ 0.07 $ 0.19
Cumulative effect of changing accounting
principle to write-off pre-opening costs (0.05) -
-------- --------
Net income $ 0.02 $ 0.19
======== ========
Diluted
Income before cumulative effect of a change
in accounting principle $ 0.07 $ 0.18
Cumulative effect of changing accounting
principle to write-off pre-opening costs (0.05) -
-------- --------
Net income $ 0.02 $ 0.18
======== ========
Weighted average shares outstanding
Basic 22,067 21,409
======== ========
Diluted 22,623 22,932
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 424 $ 4,115
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,726 2,508
Amortization of deferred financing fees 120 120
Gain on sale of property - (324)
Cumulative change in accounting principle pre-opening
cost write-off 1,652 -
Changes in operating assets and liabilities:
Accounts receivable (1,937) 1,431
Merchandise inventories (20,973) (19,787)
Prepaid expenses 334 (1,794)
Other assets (517) (594)
Accounts payable (1,258) (1,696)
Accrued expenses and other current liabilities (1,665) (6,077)
Other long term liabilities 167 276
Merchandise advances 17 945
------- --------
Net cash provided by (used in) operating activities (19,910) (20,877)
INVESTING ACTIVITIES
Proceeds from sale of property - 733
Purchase of property and equipment (8,868) (11,263)
Payment for purchase of Rhythm City, Inc.,
net of cash acquired - (507)
------- --------
Net cash used in investing activities (8,868) (11,037)
FINANCING ACTIVITIES
Net change in revolving debt facility 28,978 21,574
Proceeds from exercise of stock options 208 599
Warrant underwriting - (87)
Borrowings from related party debt - 3,155
------- --------
Net cash provided by financing activities 29,186 25,241
Net increase (decrease) in cash and cash equivalents 408 (6,673)
Cash and cash equivalents at beginning of year 472 8,370
------- --------
Cash and cash equivalents at end of period $ 880 $ 1,697
======== ========
NON CASH INVESTING ACTIVITIES
Contribution of land and building 1,750 -
Borrowings under capital lease 890 -
Related party debt converted to common stock 13,870 -
</TABLE>
See accompanying notes to condensed consolidated 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, ("Guitar Center" or the "Company"), as of June
30, 1999, and the results of operations and cash flows for the six
months ended June 30, 1999 and 1998. The accompanying 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, 1998 and the Musician's
Friend audited financial statements and notes thereto for the year
ended December 31, 1998 contained in the Form 8-K/A filed August 11,
1999.
The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the full
year.
2. Merger
On May 28, 1999, we acquired all of the stock of Musician's Friend,
Inc., a Delaware corporation ("Musician's Friend"), pursuant to a
merger agreement. Each share of Musician's Friend common stock was
converted into approximately 10.02 shares of Guitar Center common
stock. In total, 1,959,970 shares of common stock were issued and
stock options to purchase 250,505 shares of common stock were
assumed. The assumed stock options have exercise prices of $19.96 to
$21.96 per share, with a weighted average exercise price of $20.31.
Under the terms of the merger agreement, 30% of the total shares issued
were placed in escrow for general indemnification purposes and for
indemnification against damages related to specific tax issues.
The merger was accounted for under the pooling of interests method.
Accordingly, the financial statements of Guitar Center have been
restated for all periods to include the results of Musician's Friend.
The following reflects net sales and net income (loss) of the
previously separate companies for the period before the combination
was consummated and for the period ending June 30, 1998, which are
included in the current combined net sales and net income (loss) (in
thousands):
<TABLE>
<CAPTION>
Five Months Ended Two Months Ended
May 28, 1999 May 28, 1999
Guitar Center Musician's Friend Guitar Center Musician's Friend
1999 1999 1999 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 185,403 43,411 $ 75,499 17,878
Net income (loss) $ 5,241 (3,044) $ 2,420 (794)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
Guitar Center Musician's Friend Guitar Center Musicians Friend
1998 1998 1998 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 91,260 23,280 $ 176,476 45,773
Net income (loss) $ 4,856 (2,535) $ 9,076 (4,961)
</TABLE>
Due to the seasonal nature of these business segments, especially
retail operations, the above net revenue and operating results for the
second quarter and the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the
full year.
3. Accounting Policies
REVENUE RECOGNITION
Retail sales are recognized at the time of sale, net of a provision for
estimated returns. Mail order and Internet sales are recognized when
the related products are shipped to customers, net of a provision for
estimated returns. Previously, we entered into numerous installment
transactions in our catalog and Internet business. Such programs
were substantially terminated in the fourth quarter of 1998.
ADVERTISING
We expense retail advertising as incurred. Mail order catalog costs are
capitalized on a catalog by catalog basis and are amortized over the
expected period of future benefits, not to exceed five months, under
the provisions of SOP 93-7.
4. Income Taxes
As a result of the $72.4 million loss incurred in connection with
the recapitalization completed in fiscal 1996, the Company had a net
operating loss carryforward for federal income taxes of
approximately $41.8 million as of December 31, 1998. A provision for
income taxes of $2.1 million has been made in the condensed
consolidated statement of operations for the six months ended June
30, 1999.
Income taxes for the three and six months ended June 30, 1999 include
income taxes provided on the income of Guitar Center prior to the
merger with Musician's Friend. The losses incurred by Musician's
Friend prior to the merger have not been utilized to offset income
from Guitar
7
<PAGE>
Center, nor has a deferred tax benefit been recorded due to
uncertainty concerning the realizability of such benefit.
From 1994 through 1997, Musician's Friend business was operated by
Musician's Friend Trust, an Oregon business trust (the "Trust"),
which, as a trust, claimed it was not subject to federal and state
income taxes. Accordingly, Musician's Friend has not recorded
provisions for income taxes since the Trust's income or loss was
attributable to the individual beneficiaries of the Trust and its
related trusts.
During 1998, the Internal Revenue Service ("IRS") took the position
that the Trust was an association which is taxable as a corporation
and not as a trust. Accordingly, the IRS asserted that the Trust was
required to file its tax returns and pay income taxes at corporate
rates in effect. Alternatively, the IRS contended that the Trust and
related beneficiary were formed to avoid federal income taxes which
were legally owed by the Trust and the individuals involved. As a
result, the IRS issued reports to the the Trust claiming taxes due
of $4,443,000 for the years 1994 - 1996, with penalties aggregating
$1,286,000 and related interest. No claims relating to 1997 have
been quantified to date in the IRS reports. The Musician's Friend
business was operated as an S corporation for years prior to 1994.
Accordingly, Musician's Friend's taxable income for 1994 and prior
years had been attributed to the owners. Effective January 1, 1998,
the Trust contributed the Musician's Friend business to a Delaware
corporation taxable as a C corporation. By the express terms of the
contribution agreement, that corporation did not assume any
liability of the Trust or its beneficiaries for prior period taxes.
The trust is contesting the positions of the IRS. Guitar Center has
not provided for income tax expense related to this matter in its
consolidated financial statements because its subsidiary, Musician's
Friend, Inc., did not assume any liabilities related to this dispute
when it was formed in January 1998 and therefore Guitar Center
believes the liability related to any resolution of this matter
properly resides with the Trust and its beneficiaries. As with any
form of litigation, however, there is uncertainty regarding the
ultimate outcome of this matter. Accordingly, pursuant to the merger
agreement, 20% of the shares otherwise issuable to the former
stockholders of Musician's Friend have been placed in escrow pending
resolution of this matter.
5. Line of Credit
In July 1999, we terminated our prior credit facility and entered
into a new $60 million secured revolving line of credit (the "1999
Facility") with Wells Fargo Bank which is available through July 1,
2004. This increased availability had been made available from and
after June 1, 1999, as an amendment to the prior facility. The 1999
Facility provides for revolving credit or term loan borrowings up to
$60 million in the aggregate. The 1999 Facility is secured by
specified inventory, receivables, and intellecutal property rights. A
fee of 0.25% is assessed on the unused portion of the 1999 Facility.
Under the terms of the 1999 Facility and its predecessor, we are
subject to various financial and other covenants. We were in
compliance with such covenants at June 30, 1999. Borrowings under
the 1999 Facility bear interest at either the prime rate or at LIBOR
plus 1.5%, at our option, with interest due monthly. At June 30,
1999, we had $49.8 million outstanding under our 1999 Facility.
8
<PAGE>
6. Transaction costs
Transaction and store conversion costs totaled $3.6 million
during the three months ended June 30, 1999. These costs relate
to the merger with Musician's Friend during the second quarter of
1999 and principally include financial advisory fees, legal and
accounting fees, and a severance accrual for a former Musician's Friend
executive.
7. Change in Accounting for Store Pre-Opening Costs
Effective January 1, 1999, we adopted AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5), which
requires all store pre-opening costs to be expensed as incurred. As
result of this adoption, we recorded a charge for the cumulative effect
of this change in accounting principle, of $1,074,000 (net of taxes of
$578,000), in the Statement of Operations for the period ending
June 30, 1999 relative to the adoption of SOP 98-5.
The following illustrates the pro forma amounts assuming the new
accounting policy for pre-opening costs was applied retroactively:
($ in 000's, except per share data)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Net income .............................. $1,498 $3,912
Net income per share:
Basic ................................. $ 0.07 $ 0.18
Diluted ............................... $ 0.07 $ 0.17
</TABLE>
9
<PAGE>
8. Segment Information
In accordance with the requirements of SFAS 131, "Disclosures about
Segements of and Enterprise and Related Information," our reportable
business are retail (stores) and direct response (catalog and
Internet). Management evaluates segment performance based primarily
on revenue and net income.
Sales, net income, and total assets are summarized as follows for
the second quarters and six months ended June 30, 1999 and June 30,
1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Retail Direct Response Retail Direct Response
1999 1999 Total 1999 1999 Total
---------- ------------------ ------- ---------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 122,431 16,755 139,186 $ 240,494 34,130 274,624
Net Income (loss) 1,872 (2,021) (149) 4,275 (3,851) 424
Total Assets $ 219,598 17,971 237,569 $ 219,598 17,971 237,569
Three Months Ended Six Months Ended
Retail Direct Response Retail Direct Response
1998 1998 Total 1998 1998 Total
---------- ------------------ ------- ---------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 95,261 19,279 114,540 $ 184,232 38,017 222,249
Net Income (loss) 4,722 (2,401) 2,321 8,534 (4,419) 4,115
Total Assets $ 158,107 25,728 183,835 $ 158,107 25,728 183,835
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We operated 61 retail locations in 32 major markets and 3 stores in
secondary markets as of June 30, 1999, and with the acquisition of Musician's
Friend, we now operate the largest direct response channel (catalog and
Internet) in the musical instruments industry in the United States. From 1994 to
1998, our net sales grew at an annual compound rate of 32.3%, principally due to
the comparable store sales growth of our Guitar Center stores averaging 15.2%
per year, the opening of new stores, and a 26.0% increase in the direct
response channel. Our management believes such volume increases are the result
of the continued success of the implementation of our business strategy,
continued growth in the music products industry and increasing consumer
awareness of the Guitar Center name. We do not expect comparable store sales to
continue to increase at historical rates.
We opened twelve Guitar Center stores in 1998 and, as of June 30,
1999, had opened seven additional Guitar Center stores this year. Presently,
we expect to open an additional five Guitar Center stores during the
remainder of 1999. We opened four stores in 1998 under the Musician's Friend
brand and opened one additional Musician's Friend store in January of 1999.
Of the nine Musician's Friend retail locations acquired, we currently
anticipate rebranding seven of the nine stores to the Guitar Center name and
format. This conversion process will take approximately nine months and will
encompass three stages, back room infrastructure, store remodeling, and
remerchandising. As of June 30, 1999, we have completed stage one of the
conversion for one retail location. The two small Musician's Friend locations
will likely continue to operate under the Musician's Friend brand. However,
all retail locations are being integrated with the existing Guitar Center
stores infrastructure. 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.
We believe the infrastructure is in place to support our needs for the
immediate foreseeable future, including our present expansion plans. We will
continue to pursue our 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 this clustering
strategy results in some transfer of sales from existing stores to new
locations. As we enter new markets, management expects that we will initially
incur higher administrative and promotional costs per store than is currently
experienced in established markets. We also expect competition to continue to
increase over time as other music products retailers attempt to execute
national growth strategies.
The following table sets forth historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 26.5 27.4 26.2 27.2
Selling, general, and administrative expenses 22.0 23.2 21.6 23.1
Transaction cost & conversion costs 2.6 - 1.3 -
----- ----- ----- -----
Operating income 1.9 4.2 3.3 4.1
Interest expense, net 1.9 2.0 1.8 2.0
Interest expense to related parties 0.1 0.3 0.2 0.3
Other - (0.3) - (0.2)
Income before income taxes and cumulative
effect of a change in accounting principle (0.1) 2.2 1.3 2.0
Income taxes - 0.2 0.8 0.1
----- ----- ----- -----
Income before cumulative effect of a
change in accounting principle (0.1) 2.0 0.6 1.9
Cumulative effect of a change in accounting
principle to write-off pre-opening costs, net of - - 0.4 -
----- ----- ----- -----
Net income (loss) (0.1) 2.0 0.2 1.9
----- ----- ----- -----
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1998.
Net sales increased to $139.2 million for the three months ended
June 30, 1999, from $114.6 million for the comparable prior period, a 21.5%
increase. Net sales from retail stores totaled $122.4 million, an increase of
$27.2 million, or 28.5%. Sales from new stores contributed $20.9 million, or
77% of the increase. Comparable store sales increased 7%. Comparable stores
sales growth have been adversely effected due to softness in the market for
high-technology products, competition in selected markets, including
locations where we have opened additional Guitar Center stores to build out
important markets, and a change in our direct mail strategy implemented in
1999 that is being reversed. Our management is presently anticipating
comparable store sales growth of 5 to 7 percent for the immediate future. The
foregoing guidance is subject to the qualifications set forth below under
"Forward Looking Statements; Business Risks." Net sales from the catalog and
Internet channel totaled $16.8 million, a $2.5 million decrease from the
second quarter of 1998. The reduction in sales was primarily due to the
substantial termination of the inhouse installment credit program in the
fourth quarter of 1998 and its impact on the average order size of catalog
transactions. This reduction was partially offset by a 234% increase in
Internet sales in the second quarter of 1999 compared to the same period in
1998.
Gross profit dollars for the three months ended June 30, 1999 compared
to 1998 increased 17.3% to $36.9 million from $31.4 million. Gross profit as a
percentage of net sales for the three months ended June 30, 1999 compared to
1998 decreased to 26.5% from 27.4%. Gross profit margin percentage for the
retail stores after buying and occupancy costs was 26.0% compared to 27.9% in
the second quarter of 1998. The reduction in gross profit margin quarter over
quarter is due to increased occupancy costs due to the number of stores less
than two years old (27 stores out of 64 stores), increased freight expense as
more stores are opened on the East Coast, a reduction in selling margin due to
special buys that were made in the second quarter of 1998 that were not
available in the second quarter of 1999, and a general increase in the cost of
certain products. The gross profit margin for the catalog / Internet division
was 30.1% for the quarter compared to 25.0% in the second quarter of 1998. In
1998 significant markdowns were required to clear excess catalog and Internet
inventories. Markdowns of the same magnitude have not been required to date in
1999. Additionally, during 1998 higher than average shrink occurred in the
unit's distribution facilities.
Selling, general and administrative expenses for the three months ended
June 30, 1999 compared to 1998 increased 15.0% to $30.6 million from $26.6
million. Selling, general and administrative expenses, for the three months
ended June 30, 1999 compared to 1998 decreased to 22.0%, as a percentage of
sales, from 23.2%. Selling, general and administrative expenses for the retail
stores in the second quarter, inclusive of pre-opening costs and corporate
general and administrative expenses, was 20.7% as a percentage of sales compared
to 20.9% in last year's second quarter. These results reflect the leveraging of
corporate expenses, partially offset by higher store level selling, general and
administrative expenses due to the number of stores that are less than two years
old. Selling, general and administrative expenses for the catalog / Internet
division were 31.6% as a percentage of sales in the second quarter compared to
34.6% in the same period last year. In 1998 Musician's Friend incurred
substantial bad debt expense related to its inhouse installment credit program.
This program was substantially terminated in the fourth quarter of 1998.
Transaction and store conversion costs totaled $3.6 million, or 2.6%
of sales during the three months ended June 30, 1999. These costs relate to
the acquisition of Musician's Friend during the second quarter of 1999 and
principally include financial advisory fees ($1.3 million), legal and
accounting fees ($1.2 million), and a severance accrual for a former
Musician's Friend executive ($0.8 million).
Operating income for the three months ended June 30, 1999 was $2.6
million compared to $4.8 million for the same three months of 1998, a decrease
of 45.3%. The decrease is principally the result of the transaction and
conversion costs discussed above. As a percentage of sales, operating income was
1.9% and 4.2% in the three months ended June 30, 1999 and 1998, respectively.
Interest expense, net for the three months ended June 30, 1999
increased to $2.8 million from $2.6 million in the same period of 1998. Interest
expense includes interest to related parties of $0.2 million and $0.3 million
for the three months ended June 30, 1999, respectively.
12
<PAGE>
In the quarter ended June 30, 1999, no provision for income taxes was
recorded due to the loss for the period. In the prior period, minimal income
taxes were charged to income as we recognized the benefit of our tax net
operating loss carryforward. As the majority of the tax benefits related to the
net operating loss carryforward had been recognized as of December 31, 1998, the
Company's effective tax rate for the three month ended June 30 represents the
combined federal and state rates expected to be realized for the full year,
offset partially by the recognition of the remaining NOL.
Net loss for the three months ended June 30, 1999 was ($149,000),
compared to net income of $2.3 million in the second quarter of 1998,
principally as a result of the effect of the transaction and conversion costs as
discussed above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1998.
Net sales increased to $274.6 million for the six months ended June
30, 1999, from $222.2 million for the comparable prior period, a 23.6%
increase. Net sales from retail stores totaled $240.5 million, an increase of
$56.3 million, or 30.5%. Sales from new stores contributed $41.3 million, or
73% of the increase. Comparable store sales increased 8%. Comparable stores
sales growth has been adversely effected due to softness in the market for
high-technology products, competition in selected markets, including
locations where we have opened additional Guitar Center stores to build out
important markets, and a change in our direct mail strategy implemented in
early 1999 that is being reversed. Net sales from the catalog and Internet
channel totaled $34.1 million, a $3.9 million decrease from the six months
ended June 30, 1998. The reduction in sales was primarily due to the
substantial termination of the inhouse installment credit program in the
fourth quarter of 1998 and its impact on the average order size of catalog
transactions. This reduction was partially offset by a 192% increase in
Internet sales in the six months ended June 30, 1999 compared to the same
period in 1998.
Gross profit dollars for the six months ended June 30, 1999 compared to
1998 increased 19.0% to $71.9 million from $60.4 million. Gross profit as a
percentage of net sales for the six months ended June 30, 1999 compared to 1998
decreased to 26.2% from 27.2%. Gross profit margin percentage for the retail
stores after buying and occupancy costs was 25.9% compared to 27.5% in the six
months ended June 30, 1998. The reduction in gross profit margin quarter over
quarter is due to increased occupancy costs due to the number of stores less
than two years old (27 stores out of 64 stores), increased freight expense as
more stores are opened on the East Coast, a reduction in selling margin due to
special buys that were made in the second quarter of 1998 that were not
available in the second quarter of 1999, and a general increase in the cost of
certain products. The gross profit margin for the catalog / Internet division
was 28.2% for the six months ended June 30, 1999 compared to 25.6% in the six
months ended June 30, 1998. In 1998 significant markdowns were required to clear
excess catalog and Internet inventories. Markdowns of the same magnitude have
not been required to date in 1999. Additionally, during 1998 higher than average
shrink occurred in the unit's distribution facilities.
Selling, general and administrative expenses for the six months ended
June 30, 1999 compared to 1998 increased 15.4% to $59.1 million from $51.2
million. Selling, general and administrative expenses, for the six months ended
June 30, 1999 compared to 1998 decreased to 21.5%, as a percentage of sales,
from 23.1%. Selling, general and administrative expenses for the retail stores
in the second quarter, inclusive of pre-opening costs and corporate general and
administrative expenses, was 20.0% as a percentage of sales compared to 20.7% in
the six months ended June 30, 1998. These results reflect the leveraging of
corporate expenses, partially offset by higher store level selling, general and
administrative expenses due to the number of stores that are less than two years
old. Selling, general and administrative expenses for the catalog / Internet
division were 32.4% in the six months ended June 30, 1999 compared to 34.6% in
the same period last year. In 1998 Musician's Friend incurred substantial bad
debt expense related to its inhouse installment credit program. This program was
substantially terminated in the fourth quarter of 1998.
Transaction and store conversion costs totaled $3.6 million, or 1.3%
of sales during the six months ended June 30, 1999. These costs relate to the
acquisition of Musician's Friend during the second quarter of 1999 and
principally include financial advisory fees ($1.3 million), legal and
accounting fees ($1.2 million), and a severance accrual for a former
Musician's Friend executive ($0.8 million).
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Operating income for the six months ended June 30, 1999 was $9.1
million compared to $9.2 million for the same six months of 1998. The decrease
is principally the result of the transaction and conversion costs discussed
above, principally offset by the increase in sales. As a percentage of sales,
operating income was 3.3% and 4.1% in the six months ended June 30, 1999 and
1998, respectively.
Interest expense, net for the six months ended June 30, 1999 increased
to $5.5 million from $5.1 million in the same period of 1998. Interest expense
includes interest to related parties of $0.5 million and $0.6 million for the
six months ended June 30, 1999, respectively.
In the quarter ended June 30, 1999, no provision for income taxes was
recorded due to the loss for the period. In the prior period, minimal income
taxes were charged to income as we recognized the benefit of our tax net
operating loss carryforward. As the majority of the tax benefits related to the
net operating loss carryforward had been recognized as of December 31, 1998, the
Company's effective tax rate for the six month ended June 30 represents the
combined federal and state rates expected to be realized for the full year,
offset partially by the recognition of the remaining NOL.
Net income for the six months ended June 30, 1999 was $0.4 million,
compared to $4.1 million in the same period of 1998, principally as a result of
the effect of the transaction and conversion costs as discussed above, and
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
On May 13, 1999, we completed the merger with Musician's Friend
("MF"). Each outstanding share of MF common stock was converted into the
right to receive approximately 10.02 shares of Guitar Center common stock. In
connection with the merger we issued an aggregate of 1,959,970 shares of
common stock and assumed options (from Musician's Friend) to purchase 250,505
shares of common stock. In addition, we refinanced MF's outstanding
obligations under its secured credit facility in the aggregate amount of
approximately $17.3 million and incurred transaction expenses of
approximately $3.6 million. The source of funds was borrowings under our
credit facility. In July 1999, we terminated our prior credit facility (1997
Credit Facility) and entered into the 1999 Credit Facility which allows for
borrowings up to $60 million and expires on July 1, 2004. This increased
availability had been made available from and after June 1, 1999 as an
amendment to the prior facility. The 1999 Facility is secured by specified
inventory, receivables, and intellectual property rights. A fee of 0.25% is
assessed on the unused portion of the 1999 Facility. The agreement underlying
the 1999 Credit Facility includes certain restrictive covenants, which among
other things, require us to maintain certain financial ratios. We were in
compliance with respect to such requirements as of June 30, 1999. MF also has
outstanding capital leases of approximately $1.0 million related to computer
equipment financings which will remain in place.
Our need for liquidity will arise primarily from interest payable on
indebtedness and the funding of capital expenditures and working capital
requirements, as well as possible acquisitions. We have historically financed
our operations through internally generated funds and borrowings under our
credit facilities. We have no mandatory payments of principal on the $66.7
million Senior Notes outstanding prior to their final maturity in 2006. As of
June 30, 1999, we had $49.8 million outstanding under our credit facility
with Wells Fargo Bank, excluding $170,000 outstanding on standby letters of
credit, and had available borrowings of approximately $10 million.
For the six months ended June 30, 1999, cash used by operating
activities was $19.9 million, most of which represented addition to
inventory. Cash used in investing activities totaled $8.9 million. Cash
provided by financing activities totaled $29.2 million, which principally
consisted of borrowings under the credit facility.
We intend to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. During the six months ended
June 30 1999, we opened eight new stores of which one was operated by
Musician's Friend. Each new store typically has required approximately $1.8
million for gross inventory. Historically, our cost of capital improvements
for an average new store has been approximately $850,000, consisting of
leasehold improvements, fixtures and equipment. We are currently evaluating
the costs of remodeling the large format Musician's Friend store locations
that will be rebranded to the Guitar Center name. Inventory requirements for
these locations should not significantly change. The costs to provide the
additional system technology to all nine of the Musician's Friend
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stores will approximate $85,000 each. We are also currently evaluating
additional capital and strategic requirements related to improving the
technology for the Internet business. Such costs could be significant.
Our expansion strategy is to continue to increase our market share in
existing markets and to penetrate strategically selected markets. We opened a
total of 12 stores in 1998 and 8 stores in 1997, and currently anticipate
opening approximately five additional stores in 1999 and approximately 16 stores
in 2000. In preparation for this expansion, we have dedicated a substantial
amount of our resources over the past several years to building the
infrastructure necessary to support a large national chain. In addition, we have
developed a methodology for targeting prospective store sites which includes
analyzing demographic and psychographic characteristics of a potential store
location. We also believe there may be attractive opportunities to expand by
selectively acquiring existing music products retailers. However, in the music
industry there are only a small number of companies that would strategically and
financially be a beneficial opportunity for us to acquire. Our "average" store
is 16,800 square feet, carrying 7,000 SKUs and generating first year sales of
$6,000,000, whereas the "average" industry store is 3,200 square feet, carrying
2,500 SKUs and generating sales of $720,000.
Management believes that our 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 our present plans for expansion as described elsewhere in this
Report. Our capital resources and liquidity are expected to be provided by net
cash flow from operations and borrowings under the 1999 Credit Facility.
Depending upon market conditions, we 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 us, if at all.
SEASONALITY
Our operating 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 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, we 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 including a major software project related to our inventory management
system implemented in April of 1999. As of the date of this Report, we believe
that all of our significant IT systems will be Year 2000 compliant by the end of
1999. We currently do not have a contingency plan with regard to the Year 2000.
During 1999, we will continue to evaluate whether and to what extent contingency
arrangements should be implemented.
We have also endeavored to assess the Year 2000 compliance of the
outside parties upon which we are most dependent, including large vendors of the
products resold in the Guitar Center stores. While we are not aware of any
material compliance difficulties expected by any such supplier, our ability to
obtain accurate information is necessarily limited. A number of our vendors
manufacture their products overseas, also making accurate information difficult
to obtain. Those vendors, as well as ourselves, 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 significant Year 2000 compliance programs underway because
they tend to be dependent on large, proprietary "legacy" computing systems that
are
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particularly susceptible to Year 2000 problems. The success of these
compliance programs will prove important to us and our business.
Based on the assessment efforts to date, however, we do not believe
that the Year 2000 issue will have a material adverse effect on our financial
condition or results of operations. Our beliefs and expectations, however, are
based on assumptions and expectations that ultimately may prove to be
inaccurate. We believe that by the end of 1999, we will be able to fully
determine its most reasonably likely worst case scenarios. Potential sources of
risk include:
- the inability of principal suppliers to be Year 2000 ready,
which could result in delays in product deliveries from such
suppliers;
- 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
- 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, we do not expect the future costs
associated with our Year 2000 efforts to be substantial. To date, we have 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 we have
been implementing since 1995. The Year 2000 issues have been addressed as part
of the overall global system strategies. Our statements concerning future costs
do not include time and costs that may be incurred by us 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 our 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 Guitar Center nor any of our 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
We believe that the relatively moderate rates of inflation experienced
in recent years have not had a significant impact on our net sales or
profitability.
FORWARD LOOKING STATEMENTS; BUSINESS RISKS
This Report contains 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 Guitar Center. These forward-looking statements are
based largely on our current expectations and are subject to risks and
uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating any
of these forward-looking statements include changes in external competitive
market factors, the effectiveness of our promotion and merchandising
strategies, changes in our business strategy or any inability to execute our
business 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
us from competing successfully in existing or future markets. These matters
and other business risks to which Guitar Center is subject are discussed in
our periodic reports and registration statements filed from time to time with
the Securities and Exchange Commission. In particular, a discussion of some
of the business risks that we face is contained under the caption "Item 1.,
Business Risks Related to the Business" on pages 11 through 13 of our 1998
Annual Report on Form 10-K. We do not presently intend to update any of these
forward looking statements.
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ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Guitar Center does not have any assets or liabilities which in its
view impose upon it significant market risk except that it has outstanding
$66.7 million in aggregate principal amount of 11% Senior Notes due 2006.
These senior notes constitute long-term, fixed interest rate obligations for
which market quotations are available.
Part II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) During the quarter ended June 30, 1999, the Registrant
issued shares of common stock in connection with the
acquisition of Musician's Friend, Inc. as more fully
described in footnote No. 2 to the condensed consolidated
financial statements contained in this Report and in the
Form 8-K dated May 28, 1999. These issuances were exempt
from registration under the Securities Act by operation
of Section 4(2) and Regulation D thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The required information with respect to the Annual Meeting of
Stockholders held April 26, 1999 was previously provided with the Form 10-Q
for the quarter ended March 31, 1999.
ITEM 6. EXHIBITS.
(a) Exhibit 2.1 Agreement and Plan of Merger by and
among Guitar Center, Inc., EMIC
Acquisition Corporation, Musician's
Friend, Inc. and the Stockholders of
Musician's Friend, Inc., dated as of
May 13, 1999 (incorporated by reference
from Exhibit 2.1 to the Company's Form
8-K dated May 28, 1999)
Exhibit 10.30 Amended and Restated Registration
Rights Agreement (incorporated by
reference from Exhibit 2.2 to the
Company's Form 8-K dated May 28, 1999)
Exhibit 10.31 Executive Employment Agreement with
Robert V. Eastman,
Effective date May 28, 1999
Exhibit 10.32 Wells Fargo Bank Credit Agreement
Exhibit 11. Income per share.
Exhibit 27. Financial Data Schedule.
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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 14th day of August 1999.
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)
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Exhibit Index
EXHIBIT NO. DESCRIPTION
- ---------- -----------
2.1 Agreement and Plan of Merger by and among Guitar Center,
Inc., EMIC Acquisition Corporation, Musician's Friend, Inc.
and the Stockholders of Musician's Friend, Inc., dated as of
May 13, 1999 (incorporated by reference from Exhibit 2.1 to
the Company's Form 8-K dated May 28, 1999)
10.30 Amended and Restated Registration Rights Agreement
(incorporated by reference from Exhibit 2.2 to the
Company's Form 8-K dated May 28, 1999)
10.31 Executive Employment Agreement with Robert V. Eastman,
Effective date May 28, 1999
10.32 Wells Fargo Bank Credit Agreement
11 Income per share.
27 Financial Data Schedule.
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EXHIBIT 10.31
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made and entered into
as of May 13, 1999 (the "AGREEMENT"), between Musician's Friend, Inc., a
Delaware corporation (the "COMPANY"), and Robert V. Eastman (the "EXECUTIVE").
This Agreement shall become effective concurrently with the occurrence of the
"EFFECTIVE TIME" as such term is defined in that certain Agreement and Plan of
Merger, dated as of May 13, 1999 by and among Guitar Center, Inc. ("PARENT"),
EMIC Acquisition Corporation and the Company (the "MERGER AGREEMENT").
RECITALS:
A. This Agreement is a material inducement for Parent to enter
into the transactions contemplated by the Merger Agreement.
B. Upon the effectiveness of this Agreement, all prior employment
agreements and related understandings between the Company and the Executive
shall be terminated and replaced with this Agreement.
C. Executive desires to render services to the Company upon the
terms and subject to the conditions and other provisions set forth herein.
AGREEMENT:
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; EFFECT OF THIS AGREEMENT.
(a) Upon the terms and subject to the conditions of this
Agreement, effective as of the Effective Time, the Company shall employ the
Executive, and the Executive accepts employment with the Company, for the
period beginning on the Effective Time and ending as provided in paragraph 4
hereof (the "EMPLOYMENT PERIOD").
(b) Upon the occurrence of the Effective Time, this Agreement
shall constitute the sole agreement relating to the employment and
compensation of Executive by the Company and shall supersede all prior
agreements, arrangements and understandings of any sort whatsoever relating
to services provided to the Company (including, without limitation, salary,
bonus, perquisites, stock-based compensation and director's fees), each of
which shall be deemed terminated without any liability to the Company except
for (i) accrued but unpaid regular salary and (ii) unreimbursed business
expenses as of the Effective Time.
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve
initially
<PAGE>
as the Chief Executive Officer of the Company and shall have the normal
duties, responsibilities and authority of the Chief Executive Officer, or
such other duties and responsibilities reasonably consistent therewith with
the Company or any subsidiary, parent, affiliate or division of the Company
("AFFILIATES") as the Board of Directors ("BOARD") of the Company may request
from time to time, subject to the power of the Board and the powers delegated
to the Executive's superiors (if any) by the Board or the executive officers
of Parent.
(b) The Executive shall report to the Chairman of the Board
of Parent, 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 Affiliates. The Executive
shall perform his duties and responsibilities to the best of his abilities in
a diligent, trustworthy, and businesslike manner. Except with the prior
written approval of the Board, Executive during the Employment Period will
not (i) accept any other employment with a third party, (ii) serve on the
board of directors or similar body of any other business entity or (iii)
engage, directly or indirectly, in any other business activity (whether or
not pursued for pecuniary advantage) that in the reasonable determination of
the Board is or may be competitive with, or that might place him in a
competing position to or otherwise conflict with, that of the Company or any
of its Affiliates.
(c) Nothing contained herein shall limit the authority of the
Board or executive officers of Parent to elect one or more officers of the
Company with authority senior to that of Executive with respect to
Executive's duties hereunder.
(d) For purposes of this Agreement, "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 $300,000 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 of up to 50 percent of
Base Salary.
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(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 four weeks paid vacation during each 12-month period worked,
commencing on the date hereof.
4. TERM; SEVERANCE.
(a) Unless renewed by the mutual agreement of the Company and
the Executive, the Employment Period shall end on June 1, 2003 ("SCHEDULED
TERMINATION DATE"); PROVIDED, HOWEVER, that (i) the Employment Period shall
terminate prior to such date upon the Executive's resignation pursuant to
Section 4(f) 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 365
day period or (ii) would reasonably be expected to render the Executive
unable to substantially perform all of his duties for 180 days during any 365
day 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 and
continuation of his medical benefits (or, if such continuation is not
permitted by the Company's insurers beyond the Employment Period, an annual
cash payment equal to the average premium the company pays to obtain health
insurance for an employee), for the period beginning on the date of such
termination and ending on the Scheduled Termination Date, unless the
Executive has breached the provisions of this Agreement, in which case the
provisions of paragraph 12(a)(iii) shall apply. For purposes of this Section
4(b), benefits will not include future participation in any bonus or equity
incentive pool. Such severance payments will be made periodically in the same
amounts and at the same intervals as the Base Salary 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.
(c) If the Employment Period is terminated for any reason
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
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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 and exclusive 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
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 notwithstanding written notice from the Board and
the expiration of a twenty-one (21) day cure period, (ii) the Executive's
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 twenty-one (21) 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 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 twenty-one (21) 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 after consultation with counsel 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 material reduction in the nature
or scope of Executive's responsibilities, or the Executive is
assigned duties that are materially
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inconsistent with his position (in each case, 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 written notice
and an opportunity to cure of not less than twenty-one (21) days, by
the Company to perform any of its obligations to the Executive under
this Agreement.
(h) Upon termination of the Employment Period for any reason,
Executive shall be deemed to have resigned from all offices and
directorships, if any, then held with the Company or any of its Affiliates.
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 on the date hereof
or hereafter 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 files 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 Affiliates 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 or its Affiliates in
connection with their 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)
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inventions, devices, new developments, methods and processes, whether
patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) other
copyrightable works, (xiv) all production methods, processes, technology and
trade secrets, and (xv) all similar and related information in whatever form.
Confidential Information will not include any information that has been
published in a form generally available to the public prior to the date the
Executive proposes to disclose or use such information. Confidential
Information will not be deemed to have been published merely because
individual portions of the information have been separately published, but
only if all material features comprising such information have been published
in combination.
6. INVENTIONS AND PATENTS.
(a) The Executive agrees that all inventions, innovations,
improvements, technical information, systems, software developments, methods,
designs, analyses, drawings, reports, service marks, trademarks, tradenames,
logos and all similar or related information (whether patentable or
unpatentable) which relates to the Company's or any of its Affiliates' 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 Affiliate. 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 Affiliates 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., if applicable, Executive is hereby
advised that paragraph 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 Affiliates
was used and which was developed entirely on Employee's own time; PROVIDED,
HOWEVER, that paragraph 6(a) shall apply if the invention, new development or
method (i) relates to the Company's or any of its Affiliates' 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
Affiliates.
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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, or Parent, as the
case may be, 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 and its Affiliates
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 and its
Affiliates currently conduct business throughout the United States,
including without limitation the areas listed on Exhibit A 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 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
(including, without limitation, through retail stores, by phone, by
mail, by catalog or by Internet or other means of electronic commerce)
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
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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 of the
Company or holder of common stock of Parent 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. Executive also acknowledges that, in
connection with the closing of the transactions contemplated by the Merger
Agreement, Parent acquired all of the equity interests in the Company,
including any previously held directly or indirectly by Executive.
(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. EMPLOYMENT AT-WILL. Subject to the termination obligations, if
any, provided for in this Agreement, Executive hereby agrees that the Company
may dismiss him and terminate his employment with the Company without regard
to (i) any general or specific policies (whether written or oral) of the
Company relating to the employment or termination of its employees, or (ii)
any statements made to Executive, whether made orally or contained in any
document, pertaining to Executive's relationship with the Company, or (iii)
assignment of Cause by the Executive. Inclusion under any benefit plan or
compensation arrangement will not give the Executive any right or claim to
any benefit hereunder except to the extent such right has become fixed under
the express terms of this Agreement.
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 planning 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.
EXECUTIVE
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REPRESENTS AND AGREES THAT HE FULLY UNDERSTANDS HIS RIGHT TO DISCUSS ALL
ASPECTS OF THIS AGREEMENT WITH HIS PRIVATE ATTORNEY, AND THAT TO THE EXTENT,
IF ANY, THAT HE DESIRED, HE AVAILED HIMSELF OF SUCH RIGHT. EXECUTIVE FURTHER
REPRESENTS THAT HE HAS CAREFULLY READ AND FULLY UNDERSTANDS ALL OF THE
PROVISIONS OF THIS AGREEMENT, THAT HE IS COMPETENT TO EXECUTE THIS AGREEMENT,
THAT HIS AGREEMENT TO EXECUTE THIS AGREEMENT HAS NOT BEEN OBTAINED BY ANY
DURESS AND THAT HE FREELY AND VOLUNTARILY ENTERS INTO IT, AND THAT HE HAS
READ THIS DOCUMENT IN ITS ENTIRETY AND FULLY UNDERSTANDS THE MEANING, INTENT
AND CONSEQUENCES OF THIS DOCUMENT.
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:
Musician's Friend, Inc.
931 Chevy Drive
Medford, Oregon 97504
Attention: Board of Directors
Telecopier: (541) 776-1230
with a copy to:
Guitar Center, Inc.
5155 Clareton Drive
Agoura Hills, California 91362
Attention: Chief Executive Officer
Telephone: (818) 735-8800
Telecopier: (818) 735-8833
If to the Executive, to the address noted on the signature page of this
Agreement.
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.
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(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).
(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 twenty-one (21)
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 12(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
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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 OREGON WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE THAT
WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF OREGON TO BE
APPLIED.
(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 Oregon State court or Federal court of
the United States of America sitting in the State of Oregon, 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 Oregon 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 Oregon 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
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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 by a written instrument executed by the Company and
Executive which makes express reference to this Agreement 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.
(j) CONSTRUCTION. The parties participated jointly in the negotiation
and drafting of this Agreement and the language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent.
If an ambiguity or question of intent or interpretation arises, then this
Agreement will accordingly be construed as drafted jointly by the parties to
this Agreement, and no presumption or burden of proof will arise favoring or
disfavoring any party to this Agreement by virtue of the authorship of any of
the provisions of this Agreement.
(Signature Page Follows)
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
MUSICIAN'S FRIEND, INC.
By:____________________________________
Authorized Signatory
EXECUTIVE
_______________________________________
Robert V. Eastman
ADDRESS FOR NOTICE:
_____________________________
_____________________________
_____________________________
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EXHIBIT A
TERRITORY
RETAIL STORES:
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/Santa Clara
County metropolitan areas
San Bernardino/Riverside County metropolitan area
COLORADO:
Denver metropolitan area
CONNECTICUT:
Hartfort metropolitan area
FLORIDA:
Miami metropolitan area
Ft. Lauderdale/Hollywood metropolitan area
GEORGIA:
Atlanta/Marietta metropolitan area
ILLINOIS:
Chicago metropolitan area
LOUISIANA:
New Orleans metropolitan area
MARYLAND:
Baltimore metropolitan area
MASSACHUSETTS:
Boston metropolitan area
MICHIGAN:
Detroit metropolitan area
MINNESOTA:
Minneapolis/St. Paul metropolitan area
A-1
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MISSOURI:
St Louis metropolitan area
NEVADA:
Las Vegas metropolitan area
NEW JERSEY:
Newark metropolitan area
NEW YORK:
New York City metropolitan and tri-state area
OHIO:
Cleveland metropolitan area
Cincinnati metropolitan area
OREGON:
Medford metropolitan area
Eugene metropolitan area
TENNESSEE:
Knoxville metropolitan area
TEXAS:
Dallas/Ft. Worth metropolitan area
Houston metropolitan area
UTAH:
Salt Lake City metropolitan area
VIRGINIA:
Fairfax County, Washington, D.C. metropolitan area
WASHINGTON:
Seattle metropolitan area.
CATALOG AND ELECTRONIC COMMERCE:
The United States of America
A-2
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EXHIBIT 10.32
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of June 30, 1999, by and among GUITAR
CENTER, INC., a Delaware corporation ("GCI"), and MUSICIAN'S FRIEND, INC., a
Delaware corporation ("MFI") (each individually, a "Borrower" and collectively,
"Borrowers"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, GCI and Bank are parties to that certain Credit Agreement
dated as of August 14, 1997, as amended from time to time (the "1997
Agreement"), pursuant to which Bank has provided certain credit accommodations
to GCI; and
WHEREAS, GCI has requested from Bank an increase in and restructuring
of GCI's revolving line of credit granted pursuant to the 1997 Agreement, with
said restructuring to include the addition of MFI as an obligor thereunder, to
assist in financing the costs of GCI's acquisition of MFI and the operation of
MFI as a wholly-owned subsidiary of GCI; and
WHEREAS, Bank has agreed to provide said revolving line of credit
increase and restructuring on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrowers hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. As used herein, the terms defined in the
preceding paragraphs shall have the meanings set forth therein, and the
following terms shall have the meanings set forth after each, with all such
meanings equally applicable to the singular and plural of the terms defined:
"AAA" shall have the meaning set forth in Section 8.13(b) hereof.
"Bankruptcy Code" shall mean the Bankruptcy Reform Act, Title 11 of the
United States Code, as amended or recodified from time to time.
"Business Day" shall mean any day except a Saturday, Sunday or any
other day on which commercial banks in California are authorized or required by
law to close.
<PAGE>
"Change of Law" shall mean any law, treaty, rule, regulation or
determination of a court or governmental authority or any change therein or in
the interpretation or application thereof.
"Commercial Letters of Credit" shall mean sight commercial letters of
credit issued by Bank for the account of either Borrower, as defined more fully
in Section 2.2(b) hereof.
"Dispute" shall have the meaning set forth in Section 8.13(a) hereof.
"EBITDA" shall mean net profit before tax plus interest expense (net of
capitalized interest expense), depreciation expense, recurring non-cash charges
arising from GCI's stock compensation plan, non-recurring non-cash charges, MF
Transaction Costs up to a maximum of $3,500,000 and amortization expense.
"EBITDA Coverage Ratio" shall mean (a) EBITDA, divided by (b) the
aggregate of total interest expense plus the prior period current maturity of
long-term debt and the prior period current maturity of subordinated debt.
"ERISA" shall mean the Employment Retirement Income Security Act of
1974, as amended or recodified from time to time.
"Event of Default" shall have the meaning set forth in Section 7.1
hereof.
"Fixed Charge Coverage Ratio" shall mean (a) the aggregate of EBITDA
plus store operating lease expense, divided by (b) the aggregate of total
interest expense plus store operating lease expense, the prior period current
maturity of long-term debt and the prior period current maturity of subordinated
debt.
"Fixed Rate Term" shall mean a period commencing on a Business Day and
continuing for one (1), two (2), three (3), six (6), nine (9) or twelve (12)
months, as designated by GCI, during which all or a portion of the outstanding
principal balance of the Line of Credit bears interest determined in relation to
LIBOR; provided however, that no Fixed Rate Term may be selected for a principal
amount less than Two Hundred Fifty Thousand Dollars ($250,000); and provided
further, that no Fixed Rate Term shall extend beyond the scheduled maturity date
of the Line of Credit. If any Fixed Rate Term would end on a day which is not a
Business Day, then such Fixed Rate Term shall be extended to the next succeeding
Business Day.
"GAAP" shall mean generally accepted accounting principles as in effect
in the United States from time to time, consistently applied and used
consistently with prior practices (except for changes required by GAAP).
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"Kendall Letter of Credit" shall mean standby letter of credit no.
SAS224663 issued by Bank for the account of GCI and for the benefit of
Kendall-77, Ltd., as defined more fully in Section 2.2(b) hereof.
"Kendall Letter of Credit Agreement" shall mean collectively, the
Application for Standby Letter of Credit executed by GCI in connection with the
Kendall Letter of Credit, a copy of which is attached hereto as EXHIBIT A,
together with the Continuing Standby Letter of Credit Agreement from GCI in the
form of EXHIBIT B-2.
"LIBOR" shall mean the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = BASE LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(a) "Base LIBOR" means the rate per annum for United States
dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate,
with the understanding that such rate is quoted by Bank for the purpose
of calculating effective rates of interest for loans making reference
thereto, on the first day of a Fixed Rate Term for delivery of funds on
said date for a period of time approximately equal to the number of
days in such Fixed Rate Term and in an amount approximately equal to
the principal amount to which such Fixed Rate Term applies. Borrowers
understand and agree that Bank may base its quotation of the Inter-Bank
Market Offered Rate upon such offers or other market indicators of the
Inter-Bank Market as Bank in its discretion deems appropriate
including, but not limited to, the rate offered for U.S.
dollar deposits on the London Inter-Bank Market.
(b) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or
any successor) for "Eurocurrency Liabilities" (as defined in Regulation
D of the Federal Reserve Board, as amended), adjusted by Bank for
expected changes in such reserve percentage during the applicable Fixed
Rate Term.
"Letter of Credit Agreement" shall mean collectively, Bank's standard
Continuing Commercial Letter of Credit Agreement, substantially in the form of
EXHIBIT B-1 attached hereto, and Continuing Standby Letter of Credit Agreement,
substantially in the form of EXHIBIT B-2 attached hereto.
"Letters of Credit" shall mean Commercial Letters of Credit and Standby
Letters of Credit made available under the Line of
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Credit subfeature described in Section 2.2(b) hereof, and shall include the
Kendall Letter of Credit.
"Line of Credit" shall mean a revolving credit accommodation available
to Borrowers in the initial maximum principal amount of $60,000,000, as defined
more fully in Section 2.2 hereof.
"Line of Credit Note" shall mean a promissory note executed by
Borrowers, jointly and severally, to evidence advances under the Line of Credit,
substantially in the form of EXHIBIT C attached hereto.
"Line Maturity Date" shall mean July 1, 2004.
"Loan Documents" shall mean this Agreement, the Kendall Letter of
Credit Agreement, the Letter of Credit Agreement, the Line of Credit Note, and
each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith.
"MF Transaction Costs" shall mean the transaction costs directly
related to GCI's acquisition of MFI (including without limitation, financial
advisory, business consulting, employee severance, legal, accounting and similar
professional fees and expenses) incurred or accrued in the fiscal quarter ending
June 30, 1999.
"Net Funded Debt" shall mean, as of the last day of each fiscal
quarter, (a) the aggregate of the outstanding principal balance under the Line
of Credit, subordinated debt, capitalized leases recorded as such on any
Borrower's or Subsidiary's books and records, and all other indebtedness of any
Borrower or Subsidiary evidenced by a note or similar debt instrument, less (b)
the aggregate of the cash balances and marketable securities maintained by any
Borrower or Subsidiary.
"Permitted Acquisition" shall mean an acquisition by GCI of all or
substantially all of the stock or assets of any person or entity, whether by
direct acquisition, merger or otherwise, that satisfies the following
conditions:
(a) at the time of any acquisition, the company whose stock
or assets are to be acquired shall be engaged in the same or a similar
line of business as GCI;
(b) if the acquisition is of all or substantially all of the
stock of a company, such company shall have no direct and/or contingent
obligations for indebtedness for borrowed money, or all such
obligations for indebtedness for borrowed money shall be assumed by GCI
upon completion of the acquisition;
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(c) at the time of any acquisition, and assumption if
applicable, after giving effect thereto, there shall exist no Event of
Default nor any condition which with the giving of notice or the
passage of time or both would constitute an Event of Default; and
(d) at least seven (7) days prior to closing any such
acquisition, GCI shall have delivered to Bank a proforma compliance
certificate in form and substance satisfactory to Bank, which shows to
Bank's reasonable satisfaction that GCI will be in compliance with all
terms and conditions of this Agreement after giving effect thereto.
"Plan" shall mean a defined employee benefit pension plan, as defined
in ERISA.
"Prime Rate" shall mean at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof in such
internal publication or publications as Bank may designate.
"Senior Notes" shall mean the unsecured obligations of GCI under its
11% Senior Notes due 2006 in the original aggregate principal amount of
$100,000,000, issued pursuant to an Indenture between GCI and U.S. Trust Company
of California, as trustee, dated as of July 2, 1996, as amended and supplemented
prior to the date of this Agreement.
"Standby Letters of Credit" shall mean standby letters of credit issued
by Bank for the account of either Borrower (other than the Kendall Letter of
Credit), as defined more fully in Section 2.2(b) hereof.
"Subsidiary" shall mean each of MFI and any other entity of which GCI
owns directly or indirectly more than fifty percent (50%) of the voting
securities thereof or in which GCI otherwise owns a controlling interest.
"Tangible Net Worth" shall mean (a) the aggregate of total
stockholders' equity plus subordinated debt, less (b) any intangible assets.
"Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000.
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SECTION 1.2. ACCOUNTING PRINCIPLES. Unless the context otherwise
clearly requires, all accounting terms not expressly defined herein shall be
construed in accordance with GAAP and all financial computations required under
this Agreement shall be made on a consolidated basis in accordance with GAAP.
References herein to "fiscal year" and "fiscal quarter" refer to such fiscal
periods of Borrowers.
ARTICLE II
THE CREDIT
SECTION 2.1. 1997 AGREEMENT. The 1997 Agreement shall be canceled
and superseded by this Agreement as of the date first written above.
SECTION 2.2. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrowers under the Line of
Credit from time to time up to and including the Line Maturity Date, not to
exceed at any time the aggregate principal amount of Sixty Million Dollars
($60,000,000), or such lesser amount as may from time to time be available
thereunder, the proceeds of which shall be used first, to refinance the
outstanding principal balance of GCI's revolving credit accommodation granted
pursuant to the 1997 Agreement, and second, to finance (i) general working
capital requirements for Borrowers, and (ii) Permitted Acquisitions by GCI.
Borrowers' obligation to repay advances under the Line of Credit shall be
evidenced by the Line of Credit Note, all terms of which are incorporated herein
by this reference.
(b) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue Letters
of Credit for the account of either Borrower to finance inventory purchases and
for other purposes acceptable to Bank; provided however, that the form and
substance of each Letter of Credit shall be subject to approval by Bank, in its
reasonable discretion; and provided further, that the aggregate undrawn amount
of all outstanding Letters of Credit shall not at any time exceed Ten Million
Dollars ($10,000,000). In addition, Bank has issued the Kendall Letter of Credit
for the account of GCI in support of GCI's real estate lease obligations to
Kendall-77, Ltd. in the face amount of $226,169.83, with an initial expiration
date of February 13, 1997, which expiration date is subject to extension as
provided therein and has been extended to February 13, 2000, and which Bank
hereby acknowledges remains in full force and effect as a Letter of Credit under
this subfeature. Other than the Kendall Letter of Credit, each Letter of Credit
shall be issued for a term not to exceed three hundred sixty-five (365) days, as
designated by the Borrower thereunder,
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and no Letter of Credit shall have an expiration date more than one hundred
eighty (180) days beyond the Line Maturity Date. The undrawn amount of all
Letters of Credit shall be reserved under the Line of Credit and shall not be
available for borrowings thereunder. Other than the Kendall Letter of Credit,
each Letter of Credit shall be subject to the additional terms and conditions
of the Letter of Credit Agreement and related documents, if any, required by
Bank in connection with the issuance thereof. The Kendall Letter of Credit
shall remain subject to the additional terms and conditions of the Kendall
Letter of Credit Agreement. Each draft paid by Bank under a Letter of Credit
shall be deemed an advance under the Line of Credit and shall be repaid by
Borrowers in accordance with the terms and conditions of this Agreement
applicable to such advances; provided however, that if advances under the
Line of Credit are not available, for any reason, at the time any draft is
paid by Bank, then Borrowers shall immediately pay to Bank the full amount of
such draft, together with interest thereon from the date such amount is paid
by Bank to the date such amount is fully repaid by Borrowers, at the rate of
interest applicable to advances under the Line of Credit. In such event
Borrowers agree that Bank, in its sole discretion, may debit any demand
deposit account maintained by either Borrower with Bank for the amount of any
such draft.
(c) BORROWING AND REPAYMENT. Borrowers may from time to time
during the term of the Line of Credit borrow, partially or wholly repay their
outstanding borrowings, and reborrow, subject to all of the limitations,
terms and conditions contained herein or in the Line of Credit Note; provided
however, that the maximum principal amount available under the Line of Credit
shall be reduced automatically without further notice from Bank by Five
Million Dollars ($5,000,000) on each of July 1, 2002 and July 1, 2003; and
provided further, that the total outstanding borrowings under the Line of
Credit shall not at any time exceed the maximum principal amount then
available thereunder in accordance with the terms of this Agreement. The
outstanding principal balance of the Line of Credit, together with all
accrued and unpaid interest thereon, shall be due and payable in full on the
Line Maturity Date.
(d) PREPAYMENT OF ADVANCES.
(i) PRIME RATE. Borrowers may prepay principal on any portion
of the Line of Credit which bears interest determined in relation to the Prime
Rate at any time, in any amount and without penalty.
(ii) LIBOR. Borrowers may prepay principal on any portion of
the Line of Credit which bears interest determined in relation to LIBOR at
any time and in the minimum amount of Two Hundred Fifty Thousand Dollars
($250,000); provided however, that if the outstanding principal balance of
such portion of the Line
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of Credit is less than said amount, the minimum prepayment amount shall be
the entire outstanding principal balance thereof. In consideration of Bank
providing this prepayment option to Borrowers, or if any such portion of the
Line of Credit shall become due and payable at any time prior to the last day
of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrowers shall pay to Bank immediately upon demand a fee which is the sum of
the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures,
calculated as follows for each such month:
(A) DETERMINE the amount of interest which would have
accrued each month on the amount prepaid at the
interest rate applicable to such amount had it
remained outstanding until the last day of the Fixed
Rate Term applicable thereto.
(B) SUBTRACT from the amount determined in (A) above the
amount of interest which would have accrued for the
same month on the amount prepaid for the remaining
term of such Fixed Rate Term at LIBOR in effect on
the date of prepayment for new loans made for such
term and in a principal amount equal to the amount
prepaid.
(C) If the result obtained in (B) for any month is
greater than zero, discount that difference by LIBOR
used in (ii) above.
Borrowers acknowledge that prepayment of LIBOR borrowings may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrowers, therefore, agree to pay the above-described prepayment
fee and agree that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrowers fail to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed).
SECTION 2.3. INTEREST/FEES.
(a) LINE OF CREDIT. The outstanding principal balance of the Line of
Credit, or such portions thereof as GCI shall designate, shall bear interest in
accordance with one of the following options, as selected by GCI pursuant to the
terms of Section 2.4 hereof:
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(i) at a fluctuating rate per annum equal to the Prime Rate in
effect from time to time; or
(ii) at a fixed rate determined by Bank to be one and one-half
percent (1.5%) above LIBOR in effect on the first day of a
Fixed Rate Term.
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the
basis of a 360-day year, actual days elapsed, and shall be payable at the
times and place set forth in the Line of Credit Note and the Kendall Letter
of Credit Agreement. When interest is determined in relation to the Prime
Rate, each change in the rate of interest shall become effective on the date
each Prime Rate change is announced within Bank.
(c) GCI FACILITY FEE. GCI shall pay to Bank the $50,000 remaining
unpaid portion of the facility fee required by the 1997 Agreement at the end
of GCI's 1999 fiscal year; provided however, that upon early termination or
cancellation of this Agreement or the Line of Credit, GCI shall pay in full
the remaining outstanding balance of said facility fee.
(d) COMMITMENT FEE. Borrowers shall pay to Bank a non-refundable
commitment fee for the increase in the Line of Credit equal to $50,000, which
fee shall be due and payable in full immediately upon the signing of this
Agreement.
(e) UNUSED COMMITMENT FEE. Borrowers shall pay to Bank a fee equal
to one-quarter percent (.25%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit during each calendar quarter, or portion thereof, that the Line of
Credit remains available. Said fee shall be calculated by Bank as of the end
of each calendar quarter and shall be due and payable by Borrowers in arrears
upon billing by Bank. Notwithstanding the foregoing, if the average daily
advances under the Line of Credit exceed (i) during the 12-month period
commencing October 1, 1998, the sum of $15,000,000 from October 1, 1998
through the date hereof and $22,500,000 from the date hereof through
September 30, 1999, or (ii) $22,500,000 during any of the following 12-month
periods:
October 1, 1999 through September 30, 2000;
October 1, 2000 through September 30, 2001;
October 1, 2001 through September 30, 2002;
October 1, 2002 through September 30, 2003;
as determined by Bank at the end of each such 12-month period, then on January 1
of the next year, Bank shall refund to Borrowers all unused commitment fee
amounts paid by Borrowers for such 12-month period.
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(f) LETTER OF CREDIT FEES. Borrowers shall pay to Bank (i) fees
upon the issuance, and where applicable each annual anniversary date, of each
Standby Letter of Credit and the Kendall Letter of Credit equal to two
percent (2%) per annum (computed on the basis of a 360-day year, actual days
elapsed) of the face amount thereof, and (ii) fees upon the issuance of each
Commercial Letter of Credit, fees upon the payment or negotiation by Bank of
each draft under any Letter of Credit and fees upon the occurrence of any
other activity with respect to any Letter of Credit (including without
limitation, the transfer, amendment or cancellation of any Letter of Credit)
determined in accordance with Bank's standard fees and charges then in effect
for such activity. Attached hereto as SCHEDULE 2.3 is a list of Bank's
standard fees and charges in effect as of the date hereof.
(g) COLLECTION OF PAYMENTS. Borrowers authorize Bank to collect
all interest and fees due under each Credit by charging GCI's demand deposit
account number 4629-103789 with Bank, or any other demand deposit account
maintained by either Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such demand deposit account to pay all
such sums when due, the full amount of such deficiency shall be immediately
due and payable by Borrowers.
SECTION 2.4. SELECTION OF LINE OF CREDIT INTEREST OPTIONS. At any
time any portion of the Line of Credit bears interest determined in relation
to LIBOR, it may be continued by GCI at the end of the applicable Fixed Rate
Term so that all or a portion thereof bears interest determined in relation
to the Prime Rate or in relation to LIBOR for a new Fixed Rate Term
designated by GCI. At any time any portion of the Line of Credit bears
interest determined in relation to the Prime Rate, GCI may convert all or a
portion thereof so that it bears interest determined in relation to LIBOR for
a Fixed Rate Term designated by GCI. At the time an advance is requested
under the Line of Credit, or at such other time as GCI wishes to select a
LIBOR option for all or a portion thereof, and at the end of each Fixed Rate
Term, GCI shall give Bank notice specifying:
(a) the interest rate option selected by GCI;
(b) the principal amount subject thereto; and
(c) if a LIBOR option is selected, the length of the applicable
Fixed Rate Term.
Any such notice may be given by telephone so long as, (i) with respect to
each selection of a LIBOR option, Bank receives written confirmation from GCI
not later than three (3) Business Days after such telephone notice is given,
and (ii) such notice is given to Bank prior to 10:00 a.m., California time,
on the first day of the Fixed Rate Term. For each LIBOR option
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requested hereunder, Bank will quote the applicable fixed rate to Borrowers
at approximately 10:00 a.m., California time, on the first day of the Fixed
Rate Term. If GCI does not immediately accept the rate quoted by Bank, any
subsequent acceptance by GCI shall be subject to a redetermination by Bank of
the applicable fixed rate; provided however, that if GCI fails to accept any
such rate by 11:00 a.m., California time, on the Business Day such quotation
is given, then the quoted rate shall expire and Bank shall have no obligation
to permit a LIBOR option to be selected on such day. If no specific
designation of interest is made at the time an advance is requested under the
Line of Credit, or at the end of any Fixed Rate Term, GCI shall be deemed to
have made a Prime Rate interest selection for such advance or the principal
amount to which such Fixed Rate Term applied.
SECTION 2.5. ADDITIONAL LIBOR PROVISIONS.
(a) INABILITY TO DETERMINE LIBOR. If Bank at any time shall
determine that for any reason adequate and reasonable means do not exist for
ascertaining LIBOR, then Bank shall promptly give notice thereof to
Borrowers. If such notice is given and until such notice has been withdrawn
by Bank, than (i) no new LIBOR option may be selected by GCI, and (ii) any
portion of the outstanding principal balance of the Line of Credit which
bears interest determined in relation to LIBOR, subsequent to the end of the
Fixed Rate Term applicable thereto, shall bear interest determined in
relation to the Prime Rate.
(b) CHANGE IN LAW: ILLEGALITY. If any Change in Law shall make it
unlawful for Bank (i) to make LIBOR options available hereunder, or (ii) to
maintain interest rates based on LIBOR, then in the former event, any
obligation of Bank to make available such unlawful LIBOR options shall
immediately be canceled, and in the latter event, any such unlawful
LIBOR-based interest rates then outstanding shall be converted, at Bank's
option, so that interest on the portion of the Line of Credit subject thereto
is determined in relation to the Prime Rate; provided however, that if any
such Change in Law shall permit any LIBOR-based interest rates to remain in
effect until the expiration of the Fixed Rate Term applicable thereto, then
such permitted LIBOR-based interest rates shall continue in effect until the
expiration of such Fixed Rate Term. Upon the occurrence of any of the
foregoing events, Borrowers shall pay to Bank immediately upon demand such
amounts as may be necessary to compensate Bank for any fines, fees, charges,
penalties or other costs incurred or payable by Bank as a result thereof and
which are attributable to any LIBOR options made available to Borrowers
hereunder, and any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrowers.
(c) CHANGE IN LAW: INCREASED COSTS. If any Change in Law or
compliance by Bank with any request or directive (whether or
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not having the force of law) from any central bank or other governmental
authority shall:
(i) subject Bank to any tax, duty or other charge with
respect to any LIBOR options, or change the basis of
taxation of payments to Bank of principal, interest,
fees or any other amount payable hereunder (except
for changes in the rate of tax on the overall net
income of Bank); or
(ii) impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar
requirement against assets held by, deposits or other
liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any
office of Bank; or
(iii) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options pursuant hereto and/or to
reduce any amount receivable by Bank in connection therewith, then in any
such case, Borrowers shall pay to Bank immediately upon demand such amounts
as may be necessary to compensate Bank for any additional costs reasonably
incurred by Bank and/or reductions in amounts received by Bank which are
attributable to such LIBOR options. In determining which costs incurred by
Bank and/or reductions in amounts received by Bank are attributable to any
LIBOR options made available to Borrowers pursuant hereto, any reasonable
allocation made by Bank among its operations shall be conclusive and binding
upon Borrowers.
SECTION 2.6. COLLATERAL. As security for all indebtedness of
Borrowers to Bank subject hereto, Borrowers each grant to Bank security
interests of first priority in all their accounts receivable, other rights to
payment, general intangibles, trademarks and inventory, junior solely to (a)
any security interests to which Bank gives its prior written consent as
required by Section 6.8 hereof, and (b) any other security interests listed
on SCHEDULE 6.8 hereto. All of the foregoing shall be evidenced by and
subject to the terms of such security agreements, financing statements and
other documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrowers shall reimburse Bank immediately upon demand
for all costs and expenses reasonably incurred by Bank in connection with any
of the foregoing security, including without limitation, filing and recording
fees and, if necessary, costs of appraisals and audits.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
Borrowers make the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and
final payment, and satisfaction and discharge, of all obligations of each
Borrower to Bank subject to this Agreement.
SECTION 3.1. LEGAL STATUS. Each Borrower and Subsidiary is a
corporation, duly organized and existing and in good standing under the laws
of the state of Delaware, and is qualified or licensed to do business (and is
in good standing as a foreign corporation, if applicable) in all
jurisdictions in which such qualification or licensing is required or in
which the failure to so qualify or to be so licensed could have a material
adverse effect on Borrowers and the Subsidiaries taken as a whole.
SECTION 3.2. AUTHORIZATION AND VALIDITY. Each of the Loan
Documents has been duly authorized, and upon its execution and delivery in
accordance with the provisions hereof will constitute legal, valid and
binding agreements and obligations of the Borrower, Subsidiary or other party
which executes the same, enforceable in accordance with its respective terms.
SECTION 3.3. NO VIOLATION. The execution, delivery and performance
by any Borrower or Subsidiary of each of the Loan Documents do not violate
any provision of any law or regulation, or contravene any provision of the
Certificate of Incorporation or By-Laws of such Borrower or Subsidiary, or
result in any breach of or default under any contract, obligation, indenture
or other instrument to which such Borrower or Subsidiary is a party or by
which such Borrower or Subsidiary may be bound.
SECTION 3.4. LITIGATION. There are no pending, or to the best of
Borrowers' knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could reasonably be expected to have a material
adverse effect on the financial condition or operations of Borrowers and the
Subsidiaries taken as a whole other than those disclosed by Borrowers to Bank
in writing prior to the date hereof.
SECTION 3.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of GCI dated dated March 31, 1999, a true copy of which has been
delivered by GCI to Bank prior to the date hereof, (a) is complete and
correct and
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presents fairly in all material respects the financial condition of GCI
prior to its acquisition of MFI, (b) discloses all liabilities of GCI that
are required to be reflected or reserved against under GAAP, whether
liquidated or unliquidated, fixed or contingent, and (c) has been prepared in
accordance with GAAP, except as otherwise disclosed by GCI therein. Since the
date of such financial statement there has been no material adverse change in
the financial condition of GCI, nor has GCI mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 3.6. INCOME TAX RETURNS. Borrowers have no knowledge of
any pending assessments or adjustments of any Borrower's or Subsidiary's
income tax payable with respect to any year, except any such assessment or
adjustment which any Borrower or Subsidiary is contesting in good faith and
for which such Borrower or Subsidiary has made provision in its financial
statements, to Bank's satisfaction, for eventual payment thereof in the event
such Borrower or Subsidiary is obligated to make such payment.
SECTION 3.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which any Borrower or Subsidiary is a party or by
which Borrower or any Subsidiary may be bound that requires the subordination
in right of payment of any of such Borrower's or Subsidiary's obligations
subject to this Agreement or the other Loan Documents to any other obligation
of such Borrower or Subsidiary.
SECTION 3.8. PERMITS, FRANCHISES. Each Borrower and Subsidiary
possesses, and will hereafter possess, all permits, consents, approvals,
franchises and licenses required and rights to all trademarks, trade names,
patents, and fictitious names, if any, necessary to enable it to conduct the
business in which it is now engaged in compliance with applicable law, except
for any non-compliance which would not have a material adverse effect on the
financial condition or operations of Borrowers and the Subsidiaries taken as
a whole.
SECTION 3.9. ERISA. Each Borrower and Subsidiary is in compliance
in all material respects with all applicable provisions of ERISA; no Borrower
or Subsidiary has violated any provision of any defined employee pension
benefit plan maintained or contributed to by such Borrower or Subsidiary; no
Reportable Event as defined in ERISA has occurred and is continuing with
respect to any Plan initiated by any Borrower or Subsidiary; each Borrower
and Subsidiary has met its minimum funding requirements under ERISA with
respect to each Plan; and each Plan will be able to fulfill its benefit
obligations as they come due in accordance
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with the Plan documents and under generally accepted accounting principles.
SECTION 3.10. OTHER OBLIGATIONS. No Borrower or Subsidiary is in
default on any material obligation for borrowed money, any purchase money
obligation or any other material lease, commitment, contract, instrument or
obligation.
SECTION 3.11. ENVIRONMENTAL MATTERS. Except as disclosed by
Borrowers to Bank in writing prior to the date hereof, each Borrower and
Subsidiary is in compliance in all material respects with all applicable
federal or state environmental, hazardous waste, health and safety statutes,
and any rules or regulations adopted pursuant thereto, which govern or affect
any of such Borrower's or Subsidiary's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery
Act of 1976, and the Federal Toxic Substances Control Act, as any of the same
may be amended, modified or supplemented from time to time. None of the
operations of any Borrower or Subsidiary is the subject of any federal or
state investigation evaluating whether any remedial action involving a
material expenditure is needed to respond to a release of any toxic or
hazardous waste or substance into the environment. No Borrower or Subsidiary
has any material contingent liability in connection with any release of any
toxic or hazardous waste or substance into the environment.
SECTION 3.12. SENIOR NOTES. The Senior Notes remain in full force
and effect in accordance with their terms, and there exists no default, or
condition, act or event which with the giving of notice or the passage of
time or both would constitute a default, under any of the Senior Notes.
ARTICLE IV
CONDITIONS
SECTION 4.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Bank to grant any credit hereunder is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
granting of any credit hereunder shall be satisfactory to Bank's counsel.
(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
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(i) This Agreement and the Line of Credit Note from
Borrowers.
(ii) Corporate Borrowing Resolution from each Borrower.
(iii) Certificate of Incumbency from each Borrower.
(iv) Kendall Letter of Credit Agreement from GCI.
(v) Letter of Credit Agreements from each Borrower.
(vi) All security agreements, UCC Financing Statements,
trademark assignments, landlord's waivers and other
documents from each Borrower as required by Bank for the
creation and perfection of the security interests
specified in Section 2.6 hereof.
(vii) Such other documents as Bank may require under any other
Section of this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material
adverse change, as determined by Bank, in the financial condition or business
of Borrowers taken as a whole, nor any material decline, as determined by
Bank, in the market value of any collateral required hereunder or a
substantial or material portion of the assets of Borrowers taken as a whole.
(d) INSURANCE. Borrowers shall have delivered to Bank evidence of
insurance coverage on all Borrowers' property, in form, substance, amounts,
covering risks and issued by companies reasonably satisfactory to Bank, and
where required by Bank, with loss payable endorsements in favor of Bank.
SECTION 4.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The
obligation of Bank to make each extension of credit requested by Borrowers
hereunder shall be subject to the fulfillment to Bank's satisfaction of each
of the following conditions:
(a) COMPLIANCE. The representations and warranties contained
herein and in each of the other Loan Documents shall be true on and as of the
date of the signing of this Agreement and on the date of each extension of
credit by Bank pursuant hereto, with the same effect as though such
representations and warranties had been made on and as of each such date, and
on each such date, no Event of Default as defined herein, and no condition,
event or act which with the giving of notice or the passage of time or both
would constitute such an Event of Default, shall have occurred and be
continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional
documents which may be required in connection with such extension of credit.
(c) LANDLORD'S WAIVERS. Borrowers shall use their reasonable
best efforts to obtain a Landlord's Waiver substantially in the form of
EXHIBIT D attached
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hereto from the lessor under each new lease entered into by either Borrower
subsequent to the date of this Agreement.
ARTICLE V
AFFIRMATIVE COVENANTS
Borrowers covenant that so long as Bank remains committed to extend
credit to either Borrower pursuant hereto, or any liabilities (whether direct
or contingent, liquidated or unliquidated) of either Borrower to Bank under
any of the Loan Documents remain outstanding, and until payment in full of
all obligations of each Borrower subject hereto, Borrowers shall, and shall
cause each Subsidiary to, unless Bank otherwise consents in writing:
SECTION 5.1. PUNCTUAL PAYMENTS. Punctually pay: (a) all principal,
interest, fees or other liabilities due under any of the Loan Documents at
the times and place and in the manner specified therein, and (b) immediately
upon demand by Bank, the principal amount by which outstanding borrowings
under the Line of Credit at any time exceed any reduced principal amount then
available thereunder.
SECTION 5.2. ACCOUNTING RECORDS. Maintain adequate books and
records in accordance with GAAP, and permit any representative of Bank, at
any reasonable time, to inspect, audit and examine such books and records, to
make copies of the same, and to inspect the properties of each Borrower and
Subsidiary.
SECTION 5.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than ninety (90) days after and as of the end of
each fiscal year, an unqualified financial statement of Borrowers and the
Subsidiaries on a consolidated basis, audited by KPMG Peat Marwick LLP or
another independent certified public accountant of recognized national
standing acceptable to Bank, to include balance sheet, income statement, and
statement of cash flows;
(b) not later than forty-five (45) days after and as of the end of
each fiscal quarter, a condensed financial statement of Borrowers and the
Subsidiaries on a consolidated basis, prepared by GCI, to include balance
sheet, income statement and statement of cash flows, together with a
comparison of same store sales, and a list of all new store locations for
each Borrower and Subsidiary, or other new locations at which any Borrower or
Subsidiary stores any of its inventory, opened or acquired during such fiscal
quarter;
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(c) not later than thirty (30) days after the beginning of each
fiscal year, annual budget information presented on a month by month basis
for the operations of Borrowers and the Subsidiaries on a consolidated basis
during such fiscal year;
(d) from time to time such other information as Bank may
reasonably request.
SECTION 5.4. COMPLIANCE. Preserve and maintain all licenses,
permits, governmental approvals, rights, privileges and franchises necessary
for the conduct of any Borrower's and Subsidiary's business; and comply with
the provisions of all documents pursuant to which any Borrower or Subsidiary
is organized and/or which govern any Borrower's or Subsidiary's continued
existence and with the requirements of all laws, rules, regulations and
orders of any governmental authority applicable to any Borrower or Subsidiary
and/or their respective businesses.
SECTION 5.5. INSURANCE. Maintain and keep in force insurance of
the types and in amounts customarily carried in lines of business similar to
that of each Borrower or Subsidiary, including but not limited to fire,
extended coverage, public liability, flood, property damage and workers'
compensation, with all such insurance carried with companies and in amounts
reasonably satisfactory to Bank, and deliver to Bank from time to time at
Bank's request schedules setting forth all insurance then in effect.
SECTION 5.6. FACILITIES. Keep all properties useful or necessary
to each Borrower's or Subsidiary's business in good repair and condition,
normal wear and tear excepted, and from time to time make necessary repairs,
renewals and replacements thereto so that such properties shall be fully and
efficiently preserved and maintained as reasonably necessary to conduct its
respective business.
SECTION 5.7. TAXES AND OTHER LIABILITIES. Pay and discharge when
due any and all indebtedness, obligations, assessments and taxes, both real
or personal, including without limitation federal and state income taxes and
state and local property taxes and assessments, except such (a) as any
Borrower or Subsidiary may in good faith contest or as to which a bona fide
dispute may arise, and (b) for which such Borrower or Subsidiary has made
provision, to Bank's satisfaction, for eventual payment thereof in the event
such Borrower or Subsidiary is obligated to make such payment.
SECTION 5.8. LITIGATION. Promptly give notice in writing to Bank
of any litigation pending or threatened against any Borrower and/or
Subsidiary with a claim in excess of $2,500,000.
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SECTION 5.9. FINANCIAL CONDITION. Maintain the financial condition
of Borrowers and the Subsidiaries on a consolidated basis as follows using
GAAP, except as modified by the definitions herein; provided however, that
solely for purposes of determining compliance with subsections (a), (c) and
(d) of this Section 5.9 for the fiscal quarters ended June 30, 1999,
September 30, 1999, and December 31, 1999, all calculations which include
financial results for any of Borrowers' fiscal quarters ending up to and
including March 31, 1999, shall be based on GCI's financial statements for
the applicable fiscal quarters delivered to Bank prior to the date hereof,
without giving effect to GCI's acquisition of MFI:
(a) Net Funded Debt divided by EBITDA determined as of each fiscal
quarter end of a rolling 4-quarter basis for said fiscal quarter and the
immediately preceding 3 fiscal quarters, not to exceed 2.5 to 1.0 at each
fiscal quarter end prior to September 30, 2000, and 2.0 to 1.0 at each fiscal
quarter end commencing September 30, 2000.
(b) Tangible Net Worth at each fiscal year end, commencing as of
Borrowers' December 31, 1999 fiscal year end, not less than Borrowers'
Tangible Net Worth at the end of the immediately preceding fiscal year plus
75% of Borrowers' net after tax profit for Borrowers' fiscal year for which
its Tangible Net Worth is being determined.
(c) EBITDA Coverage Ratio determined as of each fiscal quarter end
on a rolling 4-quarter basis for said fiscal quarter and the immediately
preceding 3 fiscal quarters, not less than 2.0 to 1.0 at each fiscal quarter
end prior to September 30, 2000, and 3.5 to 1.0 at each fiscal quarter end
commencing September 30, 2000.
(d) Fixed Charge Coverage Ratio determined as of each fiscal
quarter end on a rolling 4-quarter basis for said fiscal quarter and the
immediately preceding 3 fiscal quarters, not less than 1.5 to 1.0 at each
fiscal quarter end prior to September 30, 2000, and 2.0 to 1.0 at each fiscal
quarter end commencing September 30, 2000.
(e) Income before tax and extraordinary items plus amortization of
goodwill and MF Transaction Costs to a maximum of $3,500,000 not less than $1
during any two successive fiscal quarters or at any fiscal year end.
(f) The aggregate of 80% of Borrowers' accounts receivable and 70%
of Borrowers' inventory, as reflected on Borrowers' consolidated balance
sheet, not less than the outstanding principal balance of the Line of Credit
at each fiscal quarter end.
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SECTION 5.10. NOTICE TO BANK. Promptly (but in no event more than
five (5) days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or
the passage of time or both would constitute an Event of Default; (b) any
change in the name or the organizational structure of any Borrower or
Subsidiary; (c) the occurrence and nature of any Reportable Event or
Prohibited Transaction, each as defined in ERISA, or any funding deficiency
with respect to any Plan; or (d) any termination or cancellation of any
insurance policy which any Borrower or Subsidiary is required to maintain, or
any uninsured or partially uninsured loss through liability or property
damage, or through fire, theft or any other cause affecting any Borrower's
and/or Subsidiary's property in excess of an aggregate of $2,500,000.
SECTION 5.11. PRIMARY DEPOSITORY RELATIONSHIP. Maintain each
Borrower's and Subsidiary's primary depository accounts and relationship with
Bank.
SECTION 5.12. YEAR 2000 COMPLIANCE. Perform all acts reasonably
necessary to ensure that (a) each Borrower and Subsidiary, and any business
in which any Borrower or Subsidiary holds a substantial interest, and (b) to
the extent reasonably necessary to avoid a material adverse effect on
Borrowers and the Subsidiaries taken as a whole, all customers, suppliers and
vendors that are material to Borrowers' and the Subsidiaries' businesses,
taken as a whole, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all systems of each Borrower and Subsidiary and adopting a
detailed plan, with itemized budget, for the remediation, monitoring and
testing of such systems. Borrowers shall, immediately upon request, provide,
and cause each Subsidiary to provide, to Bank such certifications or other
evidence of compliance by each Borrower and/or Subsidiary with the terms
hereof as Bank may from time to time request.
ARTICLE VI
NEGATIVE COVENANTS
Borrowers further covenant that so long as Bank remains committed to
extend credit to either Borrower pursuant hereto, or any liabilities (whether
direct or contingent, liquidated or unliquidated) of either Borrower to Bank
under any of the Loan Documents remain outstanding, and until payment in full of
all obligations of each Borrower subject hereto, Borrowers will not, and will
not permit or cause any Subsidiary to, without Bank's prior written consent:
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SECTION 6.1. USE OF FUNDS. Use any of the proceeds of the Line of
Credit except for the purposes stated in Article II hereof.
SECTION 6.2. OTHER INDEBTEDNESS. Create, incur, assume or permit
to exist any indebtedness or liabilities resulting from indebtedness for
borrowed money, whether secured or unsecured, matured or unmatured,
liquidated or unliquidated, joint or several, except: (a) the liabilities of
any Borrower or Subsidiary to Bank; (b) new liabilities incurred by GCI in
connection with leasehold financing; (c) new liabilities incurred by GCI for
the purchase or refinancing of fixed assets or real property which are
secured by the fixed assets or real property purchased or refinanced; (d) the
liabilities of GCI under the Senior Notes; (e) the liabilities of MFI to GCI
and/or of GCI to MFI for repayment of loans or advances permitted by Section
6.5 hereof; (f) the liabilities of MFI under capital leases of equipment
incurred prior to the date hereof in amounts not to exceed an aggregate of
$1,100,000; (g) new liabilities of GCI for assumed loans or borrowings
incurred in connection with, and as permitted by the definition of, Permitted
Acquisitions; (h) new liabilities incurred by GCI in amounts not to exceed an
aggregate of $5,000,000 at any time outstanding; and (i) any other
liabilities of any Borrower or Subsidiary existing as of, and disclosed to
Bank prior to, the date hereof.
SECTION 6.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. (a) Merge
into or consolidate with any other entity; (b) make any substantial change in
the nature of any Borrower's or Subsidiary's business as conducted as of the
date hereof; (c) acquire all or substantially all of the assets of any other
entity, except Permitted Acquisitions by GCI in amounts not to exceed an
aggregate of $30,000,000 during the term of the Line of Credit; provided
however, that no single Permitted Acquisition with a purchase price in excess
of $15,000,000 may be made without Bank's prior review and approval, in
Bank's reasonable discretion; nor (d) sell, lease, transfer or otherwise
dispose of all or a substantial or material portion of any Borrower's or
Subsidiary's assets except in the ordinary course of its business, other than
transactions between GCI and MFI.
SECTION 6.4. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for
deposit or collection in the ordinary course of business), accommodation
endorser or otherwise for, nor pledge or hypothecate any assets of any
Borrower or Subsidiary as security for, any liabilities or obligations of any
other person or entity, except: (a) any of the foregoing in favor of Bank;
(b) any guaranty by GCI of any liability of MFI; and (c) other contingent
liabilities incurred by GCI in amounts not to exceed an aggregate of
$5,000,000 outstanding at any time.
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SECTION 6.5. LOANS, ADVANCES. Make any loans or advances to any
person or entity, except: (a) any of the foregoing existing as of, and
disclosed to Bank prior to, the date hereof; (b) new loans or advances by GCI
to MFI and/or by MFI to GCI; and (c) additional loans or advances by either
Borrower to other entities in amounts not to exceed an aggregate of
$2,500,000 outstanding at any time.
SECTION 6.6. INVESTMENTS. Make any investments in any person or
entity except: (a) investments by GCI in Permitted Acquisitions; (b) U.S.
dollar investments maturing within one (1) year in (i) marketable direct
obligations of the U.S. government or of any agency thereof and backed by the
full faith and credit of the United States, (ii) marketable direct
obligations of any state of the United States, or any political subdivision
or public instrumentality thereof, which, at the time of acquisition, has the
highest credit rating obtainable from Standard & Poor's Ratings Service
("S&P") or Moody's Investors Service, Inc. ("Moody's"), (iii) commercial
paper or corporate promissory notes which, at the time of acquisition, have
the highest credit rating from S&P or Moody's, and are issued by U.S.,
Australian, Canadian, European or Japanese bank holding companies or
industrial or financial companies, (iv) certificates of deposit issued by,
bankers acceptances of and interest bearing deposits with any U.S.,
Australian, Canadian, European or Japanese commercial bank having capital and
surplus of at least $500,000,000 and which issues (or the parent of which
issues) commercial paper or other short term securities which have the
highest credit rating obtainable from S&P or Moody's, and (v) money market
funds organized under the laws of the United States or any state thereof that
invest solely in the investments described in (i) through (iv) of this
Section 6.6(b); (c) investments by any Borrower or Subsidiary in loans
permitted pursuant to Section 6.5 hereof; and (d) other investments by GCI in
amounts not to exceed an aggregate of $2,500,000 outstanding at any time.
SECTION 6.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend
or distribution either in cash or any other property (other than common
stock) on GCI's stock now or hereafter outstanding; nor redeem, retire,
repurchase or otherwise acquire any shares of any class of GCI's stock now or
hereafter outstanding, except redemptions, retirements, repurchases or other
acquisitions in amounts not to exceed an aggregate of $5,000,000 after the
date of this Agreement.
SECTION 6.8. PLEDGE OF ACCOUNTS AND INVENTORY. Pledge, grant or
permit to exist a security interest in, or lien upon, all or any portion of
any Borrower's or Subsidiary's accounts receivable, general intangibles or
inventory, except: (a) any of the foregoing in favor of Bank; (b) statutory
liens on assets to secure the payment of rent in favor of a landlord of real
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property from which any Borrower or Subsidiary, having used its reasonable
best efforts, has not been able to obtain a Landlord's Waiver; and (c)
security interests or liens granted by MFI and listed on SCHEDULE 6.8
attached hereto.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:
(a) Borrowers shall fail to pay when due (i) any principal or
interest at any time owing under the Line of Credit, or (ii) any fees or
other amounts payable under any of the Loan Documents (other than the amounts
referred to in (i) above) and such failure is not cured within five (5)
Business Days after notice thereof from Bank to Borrowers.
(b) Any financial statement or certificate furnished to Bank in
connection with this Agreement shall prove to be inaccurate when furnished in
a manner which, once corrected, reflects a material adverse change in the
financial condition or operation of Borrowers and the Subsidiaries taken as a
whole, or any representation or warranty made by any Borrower, Subsidiary or
other party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other
Loan Document (other than those referred to in subsections (a) and (b)
above), and with respect to any such default which by its nature can be
cured, such default shall continue for a period of thirty (30) days from the
first to occur of (i) the date either Borrower first had knowledge, or using
normal due diligence reasonably should have known, of such default, or (ii)
notice thereof is given by Bank to Borrowers.
(d) Any default in the payment or performance of any obligation, or
any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which any Borrower and/or
Subsidiary has incurred any debt or other liability to Bank in any amount, or
to any other person or entity involving amounts of $2,500,000 or more,
individually or in the aggregate, and with respect to any such default which
by its nature can be cured, such default shall continue past the end of the
cure period, if any, applicable thereto.
(e) The occurrence of any of the following involving amounts of
$2,500,000 or more, individually or in the aggregate,
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and which is not satisfied, discharged or stayed within forty-five (45) days
from the date thereof: (i) the filing of a notice of judgment lien against
any Borrower and/or Subsidiary; (ii) the recording of any abstract of
judgment against any Borrower and/or Subsidiary in any county in which such
Borrower or Subsidiary has an interest in real property; (iii) the service of
a notice of levy and/or of a writ of attachment or execution, or other like
process, against the assets of any Borrower and/or Subsidiary; or (iv) the
entry of a judgment against any Borrower and/or Subsidiary.
(f) GCI or MFI shall become insolvent, or shall suffer or consent
to or apply for the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall generally fail to pay
its debts as they become due, or shall make a general assignment for the
benefit of creditors; Borrower or MFI shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Code, or
under any state or federal law granting relief to debtors, whether now or
hereafter in effect; or any involuntary petition or proceeding pursuant to
the Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against GCI or MFI; or GCI or MFI shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition; or GCI or MFI shall be adjudicated a bankrupt, or an order for
relief shall be entered against GCI or MFI by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for
debtors.
(g) The dissolution or liquidation of GCI or MFI; or GCI or MFI, or
any of its respective directors or stockholders, shall take action seeking to
effect the dissolution or liquidation of GCI or MFI, except the liquidation
of any MFI into Borrower.
SECTION 7.2. REMEDIES. Upon the occurrence of any Event of
Default, at Bank's option and upon notice to Borrowers: (a) all indebtedness
of Borrowers under each of the Loan Documents, any term thereof to the
contrary notwithstanding, shall become immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are hereby
expressly waived by each Borrower; (b) the obligation, if any, of Bank to
extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (c) Bank shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all security for any
extension of credit hereunder and to exercise any or all of the rights of a
beneficiary or secured party pursuant to applicable law. All
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rights, powers and remedies of Bank may be exercised at any time by Bank and
from time to time after the occurrence of an Event of Default, are cumulative
and not exclusive, and shall be in addition to any other rights, powers or
remedies provided by law or equity.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. NO WAIVER. No delay, failure or discontinuance of
Bank in exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy; nor shall
any single or partial exercise of any such right, power or remedy preclude,
waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power or remedy. Any waiver, permit, consent or
approval of any kind by Bank of any breach of or default under any of the
Loan Documents must be in writing and shall be effective only to the extent
set forth in such writing.
SECTION 8.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any
provision of this Agreement must be in writing delivered to each party at the
following address:
BORROWERS: c/o GUITAR CENTER, INC.
5155 Clareton Drive
Agoura Hills, CA 91301
Attn: Chief Financial Officer
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
Warner Ranch Regional Commercial Banking Office
6001 Topanga Canyon Blvd., Suite 205
Woodland Hills, CA 91367
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 8.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrowers shall
pay to Bank immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees
(to include outside counsel fees and all allocated costs of Bank's in-house
counsel), reasonably expended or incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and the other Loan Documents to
a maximum of $25,000, Bank's continued
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administration hereof and thereof, and the preparation of any amendments and
waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the
collection of any amounts which become due to Bank under any of the Loan
Documents, and (c) the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation, any
action for declaratory relief, whether incurred at the trial or appellate
level, in an arbitration proceeding or otherwise, and including any of the
foregoing incurred in connection with any bankruptcy proceeding (including
without limitation, any adversary proceeding, contested matter or motion
brought by Bank or any other person) relating to any Borrower or any other
person or entity.
SECTION 8.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the heirs, executors,
administrators, legal representatives, successors and assigns of the parties;
provided however, that Borrowers may not assign or transfer their interests
hereunder without Bank's prior written consent.
SECTION 8.5. PARTICIPATION; SYNDICATION. Bank, without notice to
Borrowers and without any further consent from Borrowers, reserves the right
to:
(a) sell, assign, transfer, negotiate or grant participations in
all or any part of, or any interest in, Bank's rights and benefits under each
of the Loan Documents; and/or
(b) assign all or any part of the Line of Credit, and Bank's
rights, benefits and obligations under each of the Loan Documents with
respect thereto, to one or more lenders in a syndicate for which Bank is the
agent. To facilitate any such actual or potential assignment by Bank,
Borrowers hereby agree that (i) Bank, at any time after the date hereof and
in its sole discretion, may elect to redocument this Agreement and the other
Loan Documents in order to conform the Loan Documents to the standards
generally accepted in the commercial loan syndication market at such time;
(ii) Borrowers shall, and shall cause each Subsidiary to, cooperate fully
with Bank to complete and close any such redocumentation and, if requested by
Bank, to assist in Bank's syndication efforts; and (iii) Borrowers shall pay
to Bank immediately upon demand the full amount of all costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel), expended or incurred by Bank in
connection with any such redocumentation and/or syndication efforts, and
Borrowers acknowledge that the cap on fees set forth in Section 8.3(a) hereof
does not pertain to Borrowers' obligations under this Section 8.5.
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In connection with any of the foregoing, Bank may disclose all documents and
information which Bank now has or may hereafter acquire relating to any
extension of credit hereunder, any Borrower or Subsidiary or its respective
business, or any collateral required hereunder; provided however, that Bank
first obtains, and provides to Borrowers a copy of, a confidentiality agreement
from the prospective assignee which identifies Borrowers as intended third party
beneficiaries.
SECTION 8.6. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
other Loan Documents constitute the entire agreement among Borrowers and Bank
with respect to the extension of credit described herein and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof, including without limitation, the 1997 Agreement.
This Agreement may be amended or modified only in writing signed by each
party hereto.
SECTION 8.7. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 8.8. TIME. Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.
SECTION 8.9. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
SECTION 8.10. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall
constitute one and the same Agreement.
SECTION 8.11. OBLIGATIONS JOINT AND SEVERAL. All obligations of
Borrowers under this Agreement and the other Loan Documents shall be joint
and several.
SECTION 8.12. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to the conflicts of laws provisions thereof.
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SECTION 8.13. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall
be resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered
by the American Arbitration Association ("AAA") or such other administrator
as the parties shall mutually agree upon in accordance with the AAA
Commercial Arbitration Rules. All Disputes submitted to arbitration shall be
resolved in accordance with the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice of law provision
in any of the Loan Documents. The arbitration shall be conducted at a
location in Los Angeles County, California selected by the AAA or other
administrator. If there is any inconsistency between the terms hereof and any
such rules, the terms and procedures set forth herein shall control. All
statutes of limitation applicable to any Dispute shall apply to any
arbitration proceeding. All discovery activities shall be expressly limited
to matters directly relevant to the Dispute being arbitrated. Judgment upon
any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed
to be a waiver by any party that is a bank of the protections afforded to it
under 12 U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of
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any such remedy shall not waive the right of any party to compel arbitration
or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must
be active members of the California State Bar or retired judges of the state
or federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages,
costs, fees and expenses). By submission to a single arbitrator, each party
expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be
decided by majority vote of a panel of three arbitrators; provided however,
that all three arbitrators must actively participate in all hearings and
deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific, written
findings of fact and conclusions of law. In such arbitrations (i) the
arbitrators shall not have the power to make any award which is not supported
by substantial evidence or which is based on legal error, (ii) an award shall
not be binding upon the parties unless the findings of fact are supported by
substantial evidence and the conclusions of law are not erroneous under the
substantive law of the state of California, and (iii) the parties shall have
in addition to the grounds referred to in the Federal Arbitration Act for
vacating, modifying or correcting an award the right to judicial review of
(A) whether the findings of fact rendered by the arbitrators are supported by
substantial evidence, and (B) whether the conclusions of law are erroneous
under the substantive law of the state of California. Judgment confirming an
award in such a proceeding may be entered only if a court determines the
award is supported by substantial evidence and not based on legal error under
the substantive law of the state of California.
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(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan Documents or
any relationship between the parties.
-30-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
WELLS FARGO BANK,
GUITAR CENTER, INC. NATIONAL ASSOCIATION
By: ___________________ By: ___________________
Title: ________________ Title: ________________
MUSICIAN'S FRIEND, INC.
By: ___________________
Title: ________________
-31-
<PAGE>
EXHIBIT 11
GUITAR CENTER, INC.
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of change
in accounting principle $ (149) $ 2,321 $ 1,498 $ 4,115
Cumulative effect of change in accounting
principle - write-off of pre-opening costs - - 1,074 -
------- ------- ------- -------
Net income (149) 2,321 424 4,115
======= ======= ======= =======
Weighted average shares outstanding
Basic 22,072 21,510 22,067 21,409
======= ======= ======= =======
Diluted 22,072 23,149 22,623 22,932
======= ======= ======= =======
Income per common share
Basic
Income before cumulative effect of change
in accounting principle $ (0.01) $ 0.11 $ 0.07 $ 0.19
Cumulative effect of change in accounting
principle - write-off of pre-opening costs - - (0.05) -
------- ------- ------- -------
Net income $ (0.01) $ 0.11 $ 0.02 $ 0.19
======= ======= ======= =======
Diluted
Income before cumulative effect of change
in accounting principle $ (0.01) $ 0.10 $ 0.07 $ 0.18
Cumulative effect of change in accounting
principle - write-off of pre-opening costs - - (0.05) -
------- ------- ------- -------
Net income $ (0.01) $ 0.10 $ 0.02 $ 0.18
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 880
<SECURITIES> 0
<RECEIVABLES> 15,773
<ALLOWANCES> 222
<INVENTORY> 147,930
<CURRENT-ASSETS> 167,351
<PP&E> 71,958
<DEPRECIATION> 21,674
<TOTAL-ASSETS> 237,569
<CURRENT-LIABILITIES> 105,419
<BONDS> 67,946
0
0
<COMMON> 221
<OTHER-SE> 62,246
<TOTAL-LIABILITY-AND-EQUITY> 237,569
<SALES> 274,624
<TOTAL-REVENUES> 274,624
<CGS> 202,729
<TOTAL-COSTS> 62,768
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,530
<INCOME-PRETAX> 3,597
<INCOME-TAX> 2,099
<INCOME-CONTINUING> 1,498
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,074<F1>
<NET-INCOME> 424
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
<FN>
<F1>Represents a charge for pre-opening costs recorded as a cumulative effect of a
change in accounting principle, net of tax.
</FN>
</TABLE>
