<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
WHEREHOUSE ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[WHEREHOUSE LOGO]
WHEREHOUSE ENTERTAINMENT, INC.
19701 HAMILTON AVENUE
TORRANCE, CALIFORNIA 90502-1334
September 25, 1998
Dear Stockholder:
We cordially invite you to attend the Annual Meeting of Stockholders, which
will be held on Wednesday, October 21, 1998 at The Westin Los Angeles Hotel,
5400 W. Century Boulevard, Los Angeles, California at 10:00 a.m. (local time).
The following notice of meeting identifies each business item for your
action. These items are the election of a Board of Directors, the approval of
the 1998 Stock Incentive Plan, as amended and the ratification of Deloitte &
Touche LLP as the Company's independent public accountants and auditors for the
fiscal year ending January 31, 1999. The Board of Directors recommends that you
vote FOR each of these items. We have also included a proxy statement that
contains more information about these items and the meeting.
We hope that you will be able to attend the meeting. If so, please let us
know by checking the appropriate box on the form of proxy. However, whether or
not you plan to attend in person, please complete, sign, date and return the
enclosed proxy card(s) promptly to ensure that your shares will be represented.
If you do attend the meeting and wish to vote your shares personally, you may
revoke your proxy.
Your vote is important. We encourage you to sign and return your proxy card
in the enclosed envelope promptly so that your shares will be represented and
voted at the meeting even if you cannot attend.
Thank you for your continued interest in Wherehouse Entertainment, Inc.
Sincerely yours,
/s/ ANTONIO C. ALVAREZ, II
Antonio C. Alvarez, II
Chairman of the Board and
Chief Executive Officer
IF YOU CANNOT BE PRESENT AND DESIRE TO HAVE YOUR STOCK VOTED AT THE ANNUAL
MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD(S) AS PROMPTLY
AS POSSIBLE AND RETURN IT (THEM) IN THE ENCLOSED PRE-ADDRESSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU RECEIVE MORE THAN ONE
PROXY CARD BECAUSE YOU OWN SHARES REGISTERED IN DIFFERENT NAMES OR AT DIFFERENT
ADDRESSES, EACH PROXY CARD SHOULD BE COMPLETED AND RETURNED.
<PAGE> 3
WHEREHOUSE ENTERTAINMENT, INC.
19701 HAMILTON AVENUE
TORRANCE, CALIFORNIA 90502-1334
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 21, 1998
------------------------
TO THE STOCKHOLDERS OF
WHEREHOUSE ENTERTAINMENT, INC.
The Annual Meeting of Stockholders of Wherehouse Entertainment, Inc. (the
"Company") will be held at The Westin Los Angeles Hotel, 5400 W. Century
Boulevard, Los Angeles, California on Wednesday, October 21, 1998 at 10:00 a.m.
(local time) for the following purposes:
1. To elect a Board of Directors of the Company, each to serve until the
Company's Annual Meeting of Stockholders to be held in 1999 and until
his or her successor has been duly elected and qualified (Proposal 1);
2. To approve and adopt the 1998 Stock Incentive Plan, as amended (Proposal
2);
3. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent public accountants and auditors for the fiscal year ending
January 31, 1999 (Proposal 3); and
4. To transact such other business as may properly come before the meeting
or any adjournments thereof.
The Board of Directors set September 18, 1998 as the record date for the
Annual Meeting. This means that owners of Company Common Stock at the close of
business on that date are entitled to (1) receive notice of the Annual Meeting
and (2) vote at the Annual Meeting and any adjournments or postponements of the
Annual Meeting.
By Order of the Board of Directors,
/s/ ROBERT S. KELLEHER
Robert S. Kelleher
Chief Financial Officer
Torrance, California
September 25, 1998
<PAGE> 4
STOCKHOLDERS SHOULD READ THE ENTIRE PROXY STATEMENT
CAREFULLY PRIOR TO RETURNING THEIR PROXIES
------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS OF
WHEREHOUSE ENTERTAINMENT, INC.
------------------------
TO BE HELD OCTOBER 21, 1998
This Proxy Statement is furnished to stockholders by the Board of Directors
of Wherehouse Entertainment, Inc. (the "Company" or "Wherehouse") in connection
with the solicitation of proxies for use at the Annual Meeting of Stockholders
of the Company to be held at The Westin Los Angeles Hotel, 5400 W. Century
Boulevard, Los Angeles, California on Wednesday, October 21, 1998 at 10:00 a.m.
(local time), and at any adjournments or postponements of the meeting. The
Company's principal executive offices are located at 19701 Hamilton Avenue,
Torrance, California and its telephone number is (310) 538-2314. This Proxy
Statement, Notice of Annual Meeting and the accompanying proxy card(s) are being
first mailed to stockholders on or about September 25, 1998 and the Company's
Annual Report for the fiscal year ended January 31, 1998 is being mailed to
stockholders together with this Proxy Statement. The Annual Report is not to be
regarded as proxy soliciting material or as a communication by means of which
any solicitation of proxies by the Company is to be made.
GENERAL INFORMATION, VOTING RIGHTS AND VOTING PROCEDURES
The Board of Directors has fixed September 18, 1998 as the record date (the
"Record Date") for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting or any adjournments or postponements of the
meeting. On the Record Date, 10,744,829 shares of Common Stock of the Company
(the "Common Stock") were outstanding and entitled to vote at the meeting. The
Common Stock is the only class of stock of the Company that is outstanding and
entitled to vote at the Annual Meeting. Each share of Common Stock entitles the
holder thereof to one vote on each matter to be voted on at the Annual Meeting.
Voting by Proxy. Stockholders who own shares registered in different names
or at different addresses will receive more than one proxy card. A STOCKHOLDER
WHO DOES NOT PLAN TO ATTEND THE MEETING MUST SIGN AND RETURN EACH OF THE PROXY
CARDS RECEIVED TO ENSURE THAT ALL OF THE SHARES OWNED BY SUCH STOCKHOLDER ARE
REPRESENTED AT THE ANNUAL MEETING. Each accompanying proxy card that is properly
signed and returned to the Company and not revoked will be voted in accordance
with the instructions contained therein.
Revoking Proxies. Any stockholder who gives a proxy may revoke it at any
time before it is exercised by delivery to the General Counsel of the Company,
either in person or by mail, of a written notice of revocation. Attendance at
the Annual Meeting will not in itself constitute revocation of the proxy.
Authority of Proxy Holders. Unless contrary instructions are given, the
persons designated as proxy holders in the accompanying proxy card(s) (or their
substitutes) will vote FOR the election of the Board of Directors of the
Company, FOR the approval and adoption of the 1998 Stock Incentive Plan, as
amended (the "Plan") and FOR the approval of Deloitte & Touche LLP as the
Company's independent public accountants and auditors for the fiscal year ending
January 31, 1999. Unless contrary instructions are given, the persons designated
as proxy holders in the accompanying proxy card(s) or their substitutes will use
their discretion with regard to any other matters (of which the Company is not
now aware) that may be properly presented at the meeting or any adjournments or
postponements of the meeting and all matters incident to the conduct of the
meeting.
Quorum. The presence at the meeting, in person or by proxy, of a majority
of the shares of Common Stock outstanding on the Record Date will constitute a
quorum. Assuming the presence of a quorum, the directors nominated will be
re-elected by a plurality of the votes cast by the stockholders entitled to vote
at the meeting. Assuming the presence of a quorum, the approval and adoption of
the Plan and the approval of the appointment of Deloitte & Touche LLP as the
Company's independent accountants and auditors will require a majority of votes
cast by the stockholders represented and entitled to vote at the meeting.
1
<PAGE> 5
Abstentions; Broker Nonvotes. Votes cast by proxy or in person at the
Annual Meeting will be counted by the persons appointed by the Company to act as
the inspectors of election for the meeting. Abstentions will be treated as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. If a broker or nominee indicates on its proxy that it does
not have discretionary authority to vote on a particular matter as to certain
shares, those shares will be counted for general quorum purposes, but will not
be counted as represented at the meeting in determining the number of shares
necessary for approval of that matter.
Unmarked Proxies. Any unmarked proxies, including those submitted by
brokers or nominees, will be voted in favor of the proposals and nominees of the
Board of Directors, as indicated in the accompanying proxy card.
2
<PAGE> 6
SECURITY OWNERSHIP OF 5% HOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
The Common Stock is the only outstanding class of voting securities of the
Company. The following table sets forth, as of September 1, 1998, the number and
percentage of shares of Common Stock beneficially owned by (i) each person known
to Wherehouse to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each director of Wherehouse, (iii) each named
executive officer, and (iv) all directors and executive officers of Wherehouse
as a group. Unless otherwise indicated in a footnote, each person listed below
possesses sole voting and investment power with respect to the shares indicated
as beneficially owned by them, subject to community property laws where
applicable. The percentage of ownership in the following table does not include
the additional estimated 77,727 shares that may be issued pursuant to the
Reorganization Plan after September 1, 1998.
<TABLE>
<CAPTION>
PERCENTAGE OF
ALL
NUMBER OF SHARES COMMON STOCK
NAME BENEFICIALLY OWNED(1)(2) OUTSTANDING(3)
---- ------------------------ --------------
<S> <C> <C>
Stephen Feinberg........................................ 6,943,561(4) 58.22%
450 Park Avenue, 28th Floor
New York, New York 10022
Antonio C. Alvarez, II
c/o Wherehouse Entertainment, Inc. (5)
19701 Hamilton Avenue
Torrance, California 90502-1334
AND
Bryan Marsal
c/o Alvarez & Marsal, Inc. (6)
885 Third Avenue, Suite 1700
New York, New York 10022-4834
A&M Investment Associates #3, LLC..................... 2,093,380(7) 17.55%
c/o Alvarez & Marsal, Inc.
885 Third Avenue, Suite 1700
New York, New York 10022-4834
A&M Investment Associates #4, LLC..................... 385,542(8) 3.23%
A&M Investment Associates #8, LLC..................... 16,000(9) *
--------- -----
Total for Antonio C. Alvarez, II and Bryan
Marsal 2,494,922(5)(6) 20.92%
Robert C. Davenport..................................... 0(10) 0
Jonathan Gallen......................................... 372,974(11) 3.13%
Joseph B. Smith......................................... 0 0
Joseph J. Radecki, Jr................................... 0 0
Hugh G. Hilton.......................................... 0(7) 0
Robert S. Kelleher...................................... 0 0
Barbara C. Brown........................................ 0 0
All Directors and Executive Officers, as a
Group (8 persons)....................................... 2,867,896 24.05%
</TABLE>
- ---------------
* Less than 1%.
(1) On September 1, 1998, there were 10,744,829 shares of Common Stock
outstanding.
(2) The number of shares listed as beneficially owned by each named person (and
the Directors and Executive Officers group) includes shares of Common Stock
underlying options, warrants and rights (including conversion rights)
exercisable as of or within 60 days after September 1, 1998, as follows:
<TABLE>
<S> <C>
A&M Investment Associates #3, LLC........................... 993,380
Antonio C. Alvarez, II, Bryan Marsal
Jonathan Gallen............................................. 134,039
Stephen Feinberg............................................ 53,256
All Directors and Executive Officers as a group (8
persons).................................................. 1,127,419
</TABLE>
None of these options, warrants, or rights were issued pursuant to the 1998
Stock Incentive Plan that stockholders are being asked to approve in Proposal 2.
3
<PAGE> 7
(3) Common stock not outstanding but which underlies options, warrants and
rights (including conversion rights) exercisable as of or within 60 days
after September 1, 1998 is deemed to be outstanding for the purpose of
computing the percentage of Common Stock beneficially owned by each named
person (and the Directors and Executive Officers as a group), but is not
deemed to be outstanding for any other person.
(4) This information was obtained from a Schedule 13D -- Amendment No. 1 filed
with the Securities and Exchange Commission (the "Commission") regarding
Mr. Feinberg's beneficial ownership as of August 13, 1998. Ownership is
described as follows: Cerberus Partners, L.P., a Delaware limited
partnership, owns 1,637,091 shares of Common Stock and 3,528 warrants (the
"Warrants") of the Company (each Warrant is exercisable for one share of
the Common Stock); Cerberus International, Ltd., a corporation organized
under the laws of the Bahamas, owns 1,924,182 shares of Common Stock and
23,280 Warrants; Ultra Cerberus Fund, Ltd., a corporation organized under
the laws of the Bahamas, owns 153,278 shares of Common Stock and 5,291
Warrants, all over which Mr. Feinberg possesses sole voting and dispositive
power. Various other private investment funds for which Mr. Feinberg
possesses dispositive authority over the securities of the Company (the
"Funds") own in the aggregate 3,175,608 shares of the Common Stock and
21,157 Warrants.
(5) As disclosed on a Schedule 13D -- Amendment No. 2 filed with the Commission
on September 16, 1997, and on a Form 4 filed with the Commission on June
10, 1998, Antonio C. Alvarez, II is a managing member of A&M #3, A&M #4,
and A&M #8 (as each is defined below), and therefore may be deemed to be
the beneficial owner of Common Stock held by any one or more of these
entities. Mr. Alvarez disclaims beneficial ownership of the shares held by
A&M #3, A&M #4, and A&M #8, except to the extent of his pecuniary interest
therein.
(6) As disclosed on a Schedule 13D -- Amendment No. 2 filed with the Commission
on September 16, 1997, and on a Form 4 filed with the Commission on June
10, 1998, Bryan Marsal is a managing member of A&M #3, A&M #4, and A&M #8,
and therefore may be deemed to be the beneficial owner of Common Stock held
by any one or more of these entities. Bryan Marsal disclaims beneficial
ownership of the shares held by A&M #3, A&M #4, and A&M #8, except to the
extent of his pecuniary interest therein.
(7) A&M Investment Associates #3 is a Delaware limited liability company ("A&M
#3"). The share total includes A&M #3 Options (as defined below) to
purchase 993,380 shares of Common Stock, exercisable within 60 days of
September 1, 1998. The A&M #3 Options are subject to adjustment. Mr. Hilton
possesses a pecuniary interest in A&M #3. Mr. Hilton disclaims beneficial
ownership of shares of Common Stock held by A&M #3, except to the extent of
his pecuniary interest therein.
(8) A&M Investment Associates #4, LLC is a Delaware limited liability company
("A&M #4").
(9) A&M Investment Associates #8, LLC is a Delaware limited liability company
("A&M #8").
(10) Mr. Davenport is a managing director of Cerberus Partners, L.P., and may be
deemed to be the beneficial owner of all of the shares of Common Stock held
by Cerberus Partners, L.P. Mr. Davenport disclaims any beneficial ownership
in the shares of Common Stock held by Cerberus Partners, L.P.
(11) Mr. Gallen is the managing member of Pequod LLC, the general partner of
Pequod Investments, L.P., which beneficially owns 205,379 shares of Common
Stock, including 73,000 options. Mr. Gallen is also President of Ahab
Capital Management, Inc., which is an investment advisor to Pequod
International, Ltd. Pequod International, Ltd. is the beneficial owner of
167,595 shares of Common Stock, which total includes 61,039 options. As
such, Mr. Gallen may be deemed to be the beneficial owner of the shares of
Common Stock held by Pequod Investments, L.P. and Pequod International,
Ltd. Mr. Gallen has sole voting and investment power over Common Stock
owned by Pequod Investments, L.P. and Pequod International, Ltd. Mr. Gallen
disclaims beneficial ownership in the shares of Common Stock held by Pequod
Investments, L.P. and Pequod International, Ltd., except to the extent of
his pecuniary interest therein.
4
<PAGE> 8
PROPOSAL 1
ELECTION OF DIRECTORS
BOARD OF DIRECTORS
The Board of Directors of the Company is comprised of five members.
RECOMMENDATION OF THE BOARD OF DIRECTORS CONCERNING THE ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES LISTED BELOW TO HOLD OFFICE UNTIL THE COMPANY'S NEXT ANNUAL MEETING OF
STOCKHOLDERS AND UNTIL HIS SUCCESSOR IS DULY ELECTED AND QUALIFIED. Unless
authority to do so is withheld, the persons named in the enclosed proxy card(s)
(or their substitutes) will vote the shares represented thereby FOR the election
of each of the nominees listed below, all of whom are currently members of your
Board of Directors. If any nominee becomes unavailable or is unable to serve as
a director, which is not anticipated, the persons named as proxies (or their
substitutes) will have full discretion and authority to vote or refrain from
voting for any other nominee in accordance with their judgment.
NOMINEES FOR ELECTION
<TABLE>
<CAPTION>
AGE AT YEAR
NAME SEPTEMBER 25, 1998 FIRST ELECTED
---- ------------------ -------------
<S> <C> <C>
Antonio C. Alvarez, II............................... 50 1997
Robert C. Davenport.................................. 31 1996
Jonathan Gallen...................................... 38 1997
Joseph Radecki....................................... 40 1997
Joseph B. Smith...................................... 70 1997
</TABLE>
Antonio C. Alvarez, II, Chief Executive Officer, Chairman of the Board and
Director of Wherehouse since January 30, 1997. Mr. Alvarez is a principal of
Alvarez & Marsal, Inc., a New York based management consulting company. Mr.
Alvarez's recent experience includes acting as adviser to the bank lenders to
Camelot Music, Inc., a mall-based music retailer. Mr. Alvarez served as
Phar-Mor, Inc.'s President and Chief Operating Officer from September 1992
through February 1993, as acting Chief Financial Officer from August 1992 to
December 1992, and as Chief Executive Officer from February 1993 through
Phar-Mor's emergence from Chapter 11 bankruptcy in October 1995. Mr. Alvarez
serves as the Chief Executive Officer, Chairman of the Board and Director of
Wherehouse pursuant to a Management Services Agreement between Wherehouse and
Alvarez & Marsal, Inc.
Robert C. Davenport, Director since November 15, 1996. Mr. Davenport is a
Managing Director of Cerberus Partners, L.P., a New York based investment fund,
a position he has held since February 1996. From March 1994 until February 1996,
he was a private investor. From 1990 through 1994, he was with Vestar Capital
Partners, Inc. ("Vestar"), an investment fund, where he served as a vice
president. Prior to joining Vestar in 1990, Mr. Davenport was an analyst in the
Mergers and Acquisitions Group at Drexel Burnham Lambert in New York.
Jonathan Gallen, Director since January 30, 1997. Mr. Gallen is the sole
managing member of Pequod LLC, the general partner of Pequod Investments, L.P.
Pequod is a distressed securities fund which invests in publicly traded debt,
private debt, trade claims, large and middle-market bank loans, distressed real
estate and public and private equity. Prior to opening Pequod, from February
1993 through February 1994, Mr. Gallen worked with Stephen Feinberg, the
principal of Feinberg Management, L.P. ("FMLP"), observing, training and
learning investment techniques, procedures and philosophies. Mr. Gallen received
no compensation from FMLP. Mr. Gallen has served on the Board of Directors of
Harvest Foods since April 1995 and the Board of Directors of Fruehauf Trailer
Corporation since October 1996.
Joseph Radecki, Director since February 20, 1997. Mr. Radecki is currently
Managing Director of CIBC Oppenheimer Corp., an investment bank. From 1990 to
1998, Mr. Radecki was an Executive Vice
5
<PAGE> 9
President and Director of Financial Restructurings of Jefferies & Company, Inc.
From 1983 until 1990, Mr. Radecki was First Vice President in the International
Capital Markets Group at Drexel Burnham Lambert, Inc., where he specialized in
financial restructurings and recapitalizations. Mr. Radecki has served as a
member of the Board of Directors of Service America Corporation, Bucyrus
International, Inc. and ECO-Net.
Joseph B. Smith, Director since January 30, 1997. Mr. Smith is currently
the Chairman of Unison Productions, a consulting and production company, a
position he has held since April 1994. Mr. Smith served as President and Chief
Executive Officer of Capitol Industries-EMI Music, Inc. from 1987 until 1993.
Mr. Smith serves as a director of Westwood One, Inc.
MEETINGS AND COMPENSATION OF DIRECTORS
During the fiscal year ended January 31, 1998, there were six meetings of
the Board of Directors. All of the directors attended all meetings, except for
Mr. Smith, who attended five meetings.
Cash Compensation of Directors. Two non-employee members of the Board of
Directors each received a fee of $5,000 for his services. The directors are also
reimbursed for reasonable expenses incurred in connection with his or her
attending Board meetings. Directors who are officers or employees of the Company
are not paid any additional compensation for their services as a director.
COMMITTEES OF THE BOARD OF DIRECTORS
There are two standing committees of the Board of Directors of the Company:
the Audit Committee and the Compensation Committee.
Audit Committee. Messrs. Radecki, Davenport and Gallen, none of whom is an
officer or employee of the Company, are the current members of the Audit
Committee. The Audit committee is responsible for monitoring and reviewing
accounting methods adopted by the Company, internal accounting procedures and
controls and audit plans. The Audit Committee recommends to the Board of
Directors the engagement of Company's independent auditors and monitors the
scope and results of the Company's audits, the internal accounting controls of
the Company, and the audit practices and professional services furnished by the
Company's independent auditors. The Audit Committee, which was established in
April 1997, held one meeting during the fiscal year ended January 31, 1998.
Compensation Committees. Messrs. Davenport, Radecki, and Smith, none of
whom is a current or former officer or employee of the Company, are the current
members of the Compensation Committee. The Compensation Committee is responsible
for reviewing and approving, or recommending approval by the full board of
directors, all compensation arrangements for the officers of the Company. The
Compensation Committee's goal is to ensure that the officers and key management
personnel of the Company are effectively compensated with salaries, supplemental
compensation and benefits that are equitable and competitive. The Compensation
Committee, which was established in April 1997, held two meetings during the
fiscal year ended January 31, 1998, one of which was attended by all members of
the Compensation Committee and one of which was attended by Mssrs. Davenport and
Radecki. Mr. Smith, who was unavailable for one meeting, participated in a
meeting of the Compensation Committee in February 1998 at which the results of
the meeting he missed were revisited.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended January 31, 1998,
certain compensation paid by Wherehouse or accrued for such fiscal year, to the
Chief Executive Officer ("CEO") and the three next most highly compensated
executive officers (the "Named Executive Officers"). All cash compensation with
respect to Antonio C. Alvarez, II was paid to Alvarez & Marsal, Inc., a
consulting firm of which Antonio C. Alvarez, II is a principal. All other
compensation paid with respect to Antonio C. Alvarez, II was paid to A&M
Investments #3, LLC, an affiliate of Alvarez & Marsal, Inc.
6
<PAGE> 10
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- ------------
OTHER SECURITIES ALL
FISCAL ANNUAL UNDERLYING OTHER
YEAR ENDED SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION JANUARY 31, ($) ($) ($)(1) (#) ($)
--------------------------- ----------- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Antonio C. Alvarez, II........ 1998 -- -- 600,000(2) -- --
Chairman, Chief Executive 1997 -- -- 389,452(3) 993,380(5) --
Officer 1996 -- -- -- -- --
Hugh G. Hilton................ 1998 -- -- (4) (5) --
Senior Vice President, 1997 -- -- -- -- --
Chief Operating Officer 1996 -- -- -- -- --
Robert S. Kelleher............ 1998 141,346 122,000 -- -- 158(6)
Senior Vice President, 1997 -- -- -- -- --
Chief Financial Officer 1996 -- -- -- -- --
Barbara C. Brown.............. 1998 175,000 75,000 -- -- 12,270(7)
Senior Vice President, 1997 175,000 -- -- -- 10,441(8)
Store Operations 1996 171,538 16,000 -- -- 6,847(9)
</TABLE>
- ---------------
(1) In accordance with SEC rules, the compensation described in this table does
not include medical, group life insurance or other benefits received by the
Named Executive Officers which are available generally to all salaried
employees of the Company, and certain perquisites and other personal
benefits received by the Named Executive Officers that do not in the
aggregate exceed the lesser of $50,000 or 10% of any such officer's salary
and bonus disclosed in this table.
(2) Mr. Alvarez commenced serving as Chairman of the Board and Chief Executive
Officer of Wherehouse pursuant to a Management Services Agreement dated as
of January 31, 1997. The Management Services Agreement has been extended for
one year pursuant to an extension and amendment thereof dated as of February
1, 1998. Under the Management Services Agreement, as described further under
"Description of Employment Contracts, Termination of Employment and Change
in Control Arrangements" on page 8 of this proxy statement, Alvarez & Marsal
Inc. also received $190,000 for the services of Mr. Mark Alvarez and Ms.
Karen Marsal.
(3) This amount represents consulting fees paid by the senior lenders under Old
Wherehouse's bank credit agreement (the "Senior Lenders") to Alvarez &
Marsal, Inc. prior to January 31, 1997 (the "Plan Effective Date"), which
amount was reimbursed by Wherehouse to the Senior Lenders.
(4) Mr. Hilton serves the Company under the Management Services Agreement with
Alvarez & Marsal, Inc. In January 1998, Mr. Hilton was appointed Chief
Operating Officer by the Board of Directors. The Company did not pay any
separate compensation for Mr. Hilton to Alvarez & Marsal, Inc. for the year
ended January 31, 1998. Effective February 1, 1998, the Company has agreed,
pursuant to an amendment to the Management Services Agreement, to compensate
separately Alvarez & Marsal, Inc. for Mr. Hilton's services.
(5) In connection with the Management Services Agreement, Wherehouse issued
options to purchase 993,380 shares of Common Stock, subject to adjustment,
to A&M Investment Associates #3, LLC (an affiliate of Alvarez & Marsal,
Inc.) of which Mr. Alvarez is a principal, pursuant to a Non-Transferable
Stock Option Agreement dated as of January 31, 1997. Mr. Hilton possesses a
pecuniary interest in A&M Investment Associates #3, LLC.
(6) Includes $158 paid on behalf of Mr. Kelleher and his family for medical
expenses not covered by the Company's group medical insurance plans.
(7) Includes $1,895 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $7,153 of premiums paid for term life insurance and $3,222 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
7
<PAGE> 11
(8) Includes $1,538 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $7,153 of premiums paid for term life insurance and $1,750 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
(9) Includes $3,236 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $1,828 of premiums paid for term life insurance and $1,783 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
OPTION VALUES
No options were exercised by any of the Named Executive Officers during the
fiscal year ended January 31, 1998. The following table sets forth certain
information with respect to the Named Executive Officers of the Company
concerning the number of shares covered by both exercisable and unexercisable
stock options held as of January 31, 1998. None of the Named Executive Officers
held any stock appreciation rights at such time and none of the Named Executive
Officers exercised any stock options during the fiscal year ended January 31,
1998. No established trading market exists for the Common Stock. As of January
31, 1998, the Company calculated the book value of each share of Common Stock to
be $8.45. This book value of $8.45 per share is utilized to calculate the value
of unexercised in-the-money options. It is not intended to represent the price
at which shares of the Common Stock trade.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END(#) OPTIONS AT FY-END($)
--------------------------- ---------------------------
NAME EXERCISEABLE/UNEXERCISEABLE EXERCISEABLE/UNEXERCISABLE
---- --------------------------- ---------------------------
<S> <C> <C>
Antonio C. Alvarez, II................ 567,646(1)/425,734(1) 0/0
Hugh G. Hilton........................ (2) 0/0
Robert S. Kelleher.................... 0 0/0
Barbara C. Brown...................... 0/0 0/0
</TABLE>
- ---------------
(1) Wherehouse entered into a Non-Transferable Stock Option Agreement (the
"Option Agreement") with A&M Investment Associates #3, LLC ("A&M #3"), an
affiliate of Alvarez & Marsal, Inc., of which Antonio C. Alvarez, II is a
principal. Pursuant to the terms of the Option Agreement, on January 31,
1997, Wherehouse granted to A&M #3 three tranches of options (the "A&M #3
Options") to acquire in the aggregate, 993,380 shares of Common Stock,
subject to adjustment upon certain events. See "Certain Relationships and
Related Transactions" at page 12 of this Proxy Statement.
(2) In connection with the Management Services Agreement, Wherehouse issued
options to purchase 993,380 shares of Common Stock to A&M #3 pursuant to the
Option Agreement dated as of January 31, 1997. Mr. Hilton possesses a
pecuniary interest in A&M #3. See "Certain Relationships and Related
Transactions" at page 12 of this Proxy Statement.
DESCRIPTION OF EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS
Antonio C. Alvarez, II serves as Chairman of the Board and Chief Executive
Officer, Hugh Hilton serves as Senior Vice President and Chief Operating
Officer, Karen Marsal serves as Vice President, Administrative Services and
Special Projects and Mark Alvarez serves as Vice President, Latin Merchandising
of Wherehouse, all pursuant to a Management Services Agreement, dated as of
January 31, 1997, as amended February 1, 1998, among Wherehouse, Alvarez &
Marsal, Inc. ("A&M"), Antonio C. Alvarez, II, the Support Employees described
therein, A&M #3 and Cerberus Partners, L.P. (the "Management Services
Agreement"). Under the Management Services Agreement, A&M #3 currently receives
(i) $600,000 annually as compensation for the services of Antonio C. Alvarez, II
and the services of other personnel
8
<PAGE> 12
supplied by A&M as needed, and (ii) $450,000 annually as compensation for the
services of Mr. Hilton, Ms. Marsal and Mr. Mark Alvarez. A&M is also eligible to
receive discretionary incentive bonuses for the services of Mr. Hilton, Ms.
Marsal and Mr. Mark Alvarez, not to exceed an annual aggregate amount of
$180,000 payable to A&M for the services of all such persons. The Management
Services Agreement, as amended, now provides that it will expire on October 14,
1999, subject to further extension or earlier termination under certain
conditions. Mark Alvarez is the son of Antonio C. Alvarez, II.
Prior to the Plan Effective Date, Antonio C. Alvarez, II served as a
consultant to the Senior Lenders pursuant to a letter agreement dated as of
October 14, 1996 between A&M, Antonio C. Alvarez, II and the Senior Lenders (the
"Interim Agreement"). Pursuant to the Interim Agreement, the Senior Lenders
agreed to pay A&M a consulting fee of $50,000 per month plus the hourly fees of
those employees of A&M providing assistance to Antonio C. Alvarez, II in the
performance of his consulting responsibilities. The Senior Lenders paid $389,452
to A&M pursuant to the Interim Agreement prior to January 31, 1997. Under the
Management Services Agreement, the Company agreed to reimburse, and has
reimbursed, the Senior Lenders for the amounts paid by the Senior Lenders to A&M
pursuant to the Interim Agreement.
In order to retain its key management employees during the period of
deteriorating financial condition and instability prior to the bankruptcy filing
date, in July of 1995, Wherehouse Dissolution Co. ("Old Wherehouse") entered
into agreements with 13 of its officers that provided certain security in the
event of a "Change of Control" and the subsequent termination of such employee's
employment or a significant reduction in such employee's responsibilities (the
"Change of Control Agreements"). After the bankruptcy filing date, Old
Wherehouse entered into Change of Control Agreements with five additional
officers. The Change of Control Agreements were approved by the Bankruptcy Court
on December 1, 1995. As of January 31, 1997, 15 agreements were in effect and
those agreements called for payments of up to $1.9 million if certain events (as
described therein) occurred. During the period ended January 31, 1998, an
aggregate amount of $928,000 was paid pursuant to the terms of such Change of
Control agreements. As of February 1998, the Change of Control agreements
provided to the remaining officers were no longer in effect.
9
<PAGE> 13
PERFORMANCE GRAPH
Wherehouse Entertainment, Inc. Common Stock is not listed on a securities
exchange or traded in the over-the-counter market, nor is there an established
trading market for such shares. The Company learns of trades through beneficial
ownership reports of its directors and large holders, and occasionally receives
information regarding trades from a broker. Based on such information, it
appears that shares have been traded for the following prices, in the following
amounts, on the following dates:
<TABLE>
<CAPTION>
TRADE DATE # OF SHARES PRICE
---------- ----------- ------
<S> <C> <C>
8/20/97......................... 580,704 $10.37
8/20/97......................... 25,000 $10.37
9/2/97.......................... 970,704 $10.37
9/2/97.......................... 385,542 $10.37
2/5/98.......................... 1,200 $12.00
3/5/98.......................... 20,000 $14.50
3/6/98.......................... 1,000 $12.00
4/3/98.......................... 20,000 $15.00
4/22/98......................... 80,000 $14.88
5/11/98......................... 9,565 $16.13
5/26/98......................... 20,000 $17.06
5/28/98......................... 16,000 $14.88
6/12/98......................... 10,000 $16.82
</TABLE>
These values are not intended to represent the price at which those shares
would trade if a public market existed for the Company's stock. As of September
1, 1998, 10,744,829 shares of the registrant's voting stock were issued and
outstanding. All but 1,100,000 of those shares were issued pursuant to a
bankruptcy plan of reorganization. As of September 1, 1998, there were 865
holders of the Company stock.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION+
The Compensation Committee (for the purposes of this report only, the
"Committee"), established in 1997, currently consists of Messrs. Davenport,
Radecki, and Smith, none of whom are current or former officers or employees of
the Company. The Compensation Committee is responsible for determining the
compensation levels of officers of the Company. The following report addresses
the Committee's objectives and its actions and decisions with respect to
compensation for the fiscal year ending January 31, 1998. Changes made or
anticipated for the fiscal year ending January 31, 1999 are also discussed.
COMPENSATION PHILOSOPHY
The general philosophy of the Compensation Committee is to link the
compensation of the Company's executive officers to compensation levels paid at
comparable companies and to measures of individual and Company performance that
contribute to increased value for the Company's stockholders. The focus of the
Company's compensation program for executives is on both annual and long-term
incentives and consists of three key elements:
- a base salary;
- annual bonus compensation; and
- equity awards; including stock options.
- ---------------
+ The Compensation Committee Report shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filings of the Company pursuant to the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to
the extent the Company specifically incorporates the report by reference
therein. The report shall not be deemed soliciting material or otherwise deemed
filed under either such Act.
10
<PAGE> 14
The Compensation Committee believes that this three-part approach best
serves the interests of the Company and its stockholders. The variable annual
bonus permits individual performance to be recognized on an annual basis, and is
based, in significant part, on an evaluation of the contribution made by the
officer to Company performance, as well as the attainment of strong financial
performance. Additional equity awards relate a significant portion of long-term
remuneration directly to stock performance.
BASE SALARY. Salaries paid to executive officers (other than the Chief
Executive Officer and Support Employees subject to the Management Services
Agreement) are reviewed annually by the Chief Executive Officer based upon his
assessment of the nature of the position and the contribution, experience and
Company tenure of the executive officer. Annual salary recommendations are then
made to the Committee by the Chief Executive Officer. The Committee reviews and
then approves, with any modifications it deems appropriate, such
recommendations.
Salaries were paid to the Chief Executive Officer, Mr. Hugh Hilton, Ms.
Karen Marsal, and Mr. Mark Alvarez in accordance with the Management Services
Agreement. Under the Management Services Agreement, as amended, A&M #3 currently
receives (i) $600,000 annually as compensation for the services of Antonio C.
Alvarez, II and the services of other personnel supplied by A&M as needed, and
(ii) $450,000 annually as compensation for the services of Mr. Hilton, Ms.
Marsal and Mr. Mark Alvarez.
ANNUAL BONUS COMPENSATION. Annual bonuses for the fiscal year ended January
31, 1998 were granted to executive officers of the Company (other than the Chief
Executive Officer) under the Company's Corporate Bonus Plan approved by the
Board in April 1997. The Corporate Bonus Plan provided for a Company-wide bonus
pool based upon the achievement of a specified EBITDA performance target for the
fiscal year. In April 1998, the Committee and the Board approved the bonus pool
calculation, as well as individual bonus recommendations made by the Chief
Executive Officer. The Board and Committee also permitted the Chief Executive
Officer to make subsequent minor revisions to the individual bonuses based upon
a review of the bonus schedule with the Chief Financial Officer.
For the fiscal year ending January 31, 1999, the Committee and the Board
have approved a new bonus plan ("Corporate Bonus Plan #2"), subject to revision
in the event of an acquisition or merger or other event, which provides for
officer bonus opportunities relative to an EBITDA target. Pursuant to the
Amended Management Services Agreement, A&M is entitled to receive additional
incentive fees for the services of Mr. Mark Alvarez, Mr. Hugh Hilton, and Ms.
Karen Marsal under Corporate Bonus Plan #2 (not to exceed 40% of the base fee
payable to A&M for that person's services) for the fiscal year ending January
31, 1999, but only if, and to the extent, the EBITDA performance target is met.
STOCK OPTIONS. In connection with the Management Services Agreement and
consummation of the Reorganization Plan, Wherehouse entered into a
Non-Transferable Stock Option Agreement (the "Option Agreement") with A&M #3, an
affiliate of Alvarez & Marsal, Inc., of which Antonio C. Alvarez, II is a
principal. The Option Agreement, as amended, provides for the grant to A&M #3 of
options representing in the aggregate the right to purchase 10% of (i) the
shares of Common Stock issued under the Reorganization Plan, (ii) the A&M #3
Shares, and (iii) the shares underlying these options. The A&M #3 Options vest
monthly in equal installments through October 31, 1998 and all unexercised A&M
#3 Options expire on January 31, 2003, subject to prior vesting or termination
as set forth in the Management Services Agreement. The Company presently
estimates that after all adjustments, the A&M #3 Options will consist of (i)
options to acquire 407,667 shares at an exercise price of $8.63 per share, (ii)
options to acquire 407,667 shares at an exercise price of $10.45 per share, and
(iii) options to acquire 407,667 shares at an exercise price of $12.72 per
share. The exact number of shares underlying these options and the exercise
price will depend on the final resolution of claims under the Reorganization
Plan. The Option Agreement provides that such adjustments will be made
periodically as deemed practicable and that an interim adjustment will be made
on September 30, 1998.
On April 7, 1998 and on September 22, 1998, the Compensation Committee
granted, and the Board also approved, subject to stockholder approval of the
Plan and qualification of the offering by the California Commissioner of
Corporations, grants of Nonqualified Stock Options ("NQSO's"), as described
further in "Options Granted Subject to Stockholder Approval of the Plan" at page
16 of this Proxy Statement. The
11
<PAGE> 15
Compensation Committee believes that the grants of these options, for a total of
343,000 shares of Common Stock, was advisable to reasonably compensate the
recipients for the value of their services and to provide additional incentives
to them to increase the value of the Company.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Under the Management Services Agreement, dated as of January 31, 1997, as
amended February 1, 1998, A&M received, for the fiscal year ended January 31,
1998, $600,000 as compensation for the services of Antonio C. Alvarez, II and
the services of other personnel supplied by A&M, as needed, and $190,000, which
was charged against the bonus pool under the Corporate Bonus Plan, for the
services Ms. Marsal and Mr. Mark Alvarez.
In amending the Management Services Agreement, as described further under
"Description of Employment Contracts, Termination of Employment and Change in
Control Arrangements" on page 8 of this proxy statement, the Committee took note
that: (1) the compensation levels proposed for the Alvarez & Marsal, Inc.
("A&M") personnel was in the range of the compensation paid for comparable
executives by other specialty retailers, according to public records, (2) the
compensation proposed under the Management Services Agreement for Mr. Alvarez
and other A&M employees is generally lower than what A&M typically charges, (3)
the Company recorded strong performance, particularly in contrast to prior
periods, and exceeded projections for operating performance and cash flow, and
(4) the term of the Management Services Agreement provides beneficial
continuity.
SECTION 162(m) CONSIDERATIONS
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") limits the tax deductibility to the Company of compensation in excess of
$1.0 million in any year for certain executive officers, except for qualified
"performance-based compensation" under the Section 162(m) rules. No covered
executive's compensation for these purposes exceeded $1.0 million for the fiscal
year ended January 31, 1998. The Compensation Committee considers the Section
162(m) rules as a factor with respect to compensation matters, but does not
necessarily plan to limit compensation to amounts deductible under Section
162(m).
THE COMPENSATION COMMITTEE
Robert C. Davenport
Joseph Radecki
Joseph B. Smith
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of Wherehouse's Board of
Directors are Messrs. Davenport, Radecki and Smith. None of the members of the
Board's Compensation Committee is or has been an officer or employee of the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Management Services Agreement and a Stock Subscription
Agreement dated as of January 31, 1997 (the "Stock Subscription Agreement"),
Wherehouse agreed to sell, and A&M #3 agreed to buy, at a purchase price of
$6,340,000 ($1,000,000 in cash from A&M #3, plus a secured recourse promissory
note in the principal amount of $335,000 and a secured non-recourse promissory
note in the amount of $5,005,000 (collectively, the "Promissory Notes")),
1,100,000 shares of Common Stock (the "A&M #3 Shares") (subject to adjustment
upward or downward to represent 10% of the sum of (i) the shares of Common Stock
ultimately issued under the Reorganization Plan plus (ii) the number of shares
of Common Stock issued to A&M #3). The Promissory Notes bear interest at 7% per
annum during the first four years and 11% per annum during the fifth through
seventh years, mature on January 31, 2004 and have no scheduled
12
<PAGE> 16
interest or principal amortization until their maturity date. The Promissory
Notes are secured by a first priority pledge of the A&M #3 Shares pursuant to a
Stock Pledge Agreement dated as of January 31, 1997.
In addition, Wherehouse and A&M #3 entered into a Non-Transferable Stock
Option Agreement dated as of January 31, 1997, as amended, (the "Option
Agreement"), pursuant to which Wherehouse issued to A&M #3 three tranches of
options to purchase shares of Common Stock (the "A&M #3 Options"; and, together
with the A&M #3 Shares, the "A&M #3 Securities"). The Option Agreement, as
amended, provides for the grant to A&M #3 of options representing in the
aggregate the right to purchase 10% of (i) the shares of Common Stock issued
under the Reorganization Plan, (ii) the A&M #3 Shares, and (iii) the shares
underlying these options. The A&M #3 Options vest monthly in equal installments
through October 31, 1998 and all unexercised A&M #3 Options expire on January
31, 2003, subject to prior vesting or termination as set forth in the Management
Services Agreement. The Company presently estimates that after all adjustments,
the A&M #3 Options will consist of (i) options to acquire 407,667 shares at an
exercise price of $8.63 per share, (ii) options to acquire 407,667 shares at an
exercise price of $10.45 per share, and (iii) options to acquire 407,667 shares
at an exercise price of $12.72 per share. The exact number of shares underlying
these options and the exercise price will depend on the final resolution of
claims under the Reorganization Plan. THE OPTION AGREEMENT PROVIDES THAT SUCH
ADJUSTMENTS WILL BE MADE PERIODICALLY AS DEEMED PRACTICABLE AND THAT AN INTERIM
ADJUSTMENT WILL BE MADE ON SEPTEMBER 30, 1998.
Wherehouse also granted certain registration rights to A&M #3 with respect
to the A&M #3 Securities pursuant to a Registration Rights Agreement dated as of
January 31, 1997 (the "A&M Registration Rights Agreement"). Under the A&M
Registration Rights Agreement, A&M #3 has the right to make one demand
registration and two piggyback registrations in respect of the A&M #3
Securities.
Wherehouse also granted certain registration rights to the Senior Lenders
as of the Plan Effective Date with respect to Common Stock acquired by such
Senior Lenders, pursuant to a Registration Rights Agreement dated as of January
31, 1997 (the "Senior Lenders Registration Rights Agreement"). Under the Senior
Lenders Registration Rights Agreement, the holders of a requisite number of
shares issued to the Senior Lenders have the right to make two demand
registrations and to participate in two piggyback registrations in respect of
the such shares of Common Stock.
Under the Management Services Agreement, as described further under
"Description of Employment Contracts, Termination of Employment and Change in
Control Arrangements" on page 8 of this proxy statement, Alvarez and Marsal,
Inc. receives compensation for the services of Mr. Mark Alvarez. Mr. Mark
Alvarez is the son of Mr. Antonio C. Alvarez, II, the Chief Executive Officer.
Jefferies & Company, Inc., of which Mr. Radecki was an Executive Vice
President and Director of Financial Restructurings, served as the financial
consultant to Old Wherehouse in its bankruptcy case, and served as financial
advisor to Wherehouse. Mr. Radecki is currently Managing Director of CIBC
Oppenheimer Corp., an investment bank. CIBC Oppenheimer Corp. has acted as a
financial advisor to the Company during 1998 with respect to the proposed
acquisition of Blockbuster Music, and, pursuant to an engagement letter dated
September 22, 1998, may receive a fee of $600,000, plus expenses, if the
acquisition is completed.
PROPOSAL 2
APPROVAL OF 1998 STOCK INCENTIVE PLAN, AS AMENDED
In April 1998, the Board adopted the 1998 Stock Incentive Plan, which the
Board amended on September 22, 1998 to increase the maximum number of shares
that may be issued under the 1998 Stock Incentive Plan (as amended, the "Plan")
the effectiveness of which was conditioned by the Board upon stockholder
approval and qualification of the Plan by the California Commissioner of
Corporations. Capitalized terms used but not defined herein have the meanings
assigned to them in the Plan.
13
<PAGE> 17
The Plan can be reviewed on the Securities and Exchange Commission's Web
site at http://www.sec.gov and may be obtained from the Company. Requests for
copies of the Plan should be directed to:
General Counsel
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502
Telephone: (310) 538-2314
Stockholders are being asked to approve the Plan.
For purposes of determining the number of shares to charge against the
share limits under the Plan, shares relating to any award (or part of an award)
that fails to vest, expires, is not exercised or is cancelled or reacquired will
again become available for award purposes under the Plan, subject to certain
limits (if applicable) in respect of performance-based awards for purposes of
Section 162(m) of the Internal Revenue Code. Any subsequent use of those shares
is subject to the individual grant limits during any period and to aggregate
plan limits on shares issued. Awards settled in cash are not charged against the
share limits of the Plan. Upon a stock-for-stock exercise, share offset or stock
settlement of an Option or Stock Appreciation Right ("SAR"), only the net number
of new shares issued will be charged against the share limits.
A maximum of 600,000 shares of the Corporation's Common Stock ("Common
Stock") may be issued under the Plan (subject to adjustment upon the occurrence
of certain events which affect the Common Stock). The Plan provides that, during
any calendar year, a maximum of 125,000 shares of Common Stock may be subject to
Plan Options and SARs granted to any individual, subject to certain
anti-dilution adjustments.
ANY OPTIONS GRANTED UNDER THE PLAN PRIOR TO THE ANNUAL MEETING ARE SUBJECT
TO STOCKHOLDER APPROVAL OF THE PLAN. (SEE "CONDITIONAL OPTIONS GRANTED SUBJECT
TO STOCKHOLDER APPROVAL OF THE PLAN" BELOW.)
SUMMARY DESCRIPTION OF THE PLAN
The principal terms of the Plan are summarized below. The following summary
is qualified in its entirety by reference to the full text of the Plan.
Purpose. The purpose of the Plan is to promote the success of the Company
and the interests of its stockholders by attracting, motivating, retaining and
rewarding officers, employees and directors with awards and incentives for high
levels of individual performance and improved financial performance of the
Company.
Eligible Persons. Eligible Persons under the Plan generally include
directors, officers and employees of the Company.
As of September 1, 1998, there were approximately 3,378 officers and
employees of the Company and its Subsidiaries and five Directors, all of whom
are Eligible Persons under the Plan. The Board or committee, as described below,
retains the power to determine the particular Eligible Persons to whom
discretionary Awards will be granted.
Administration. The Plan will be administered by the Board or by one or
more committees appointed by the Board (the appropriate acting body is referred
to as the "Committee"), currently the Compensation Committee, and all Awards to
Eligible Persons will be authorized by the Board or the Committee. See
"Committees of the Board of Directors" at page 6 of this Proxy Statement. The
applicable Committee will have broad authority under the Plan:
- to select the participants;
- to determine the number of shares that are to be subject to Awards and
the terms and conditions of such Awards, including the price (if any) to
be paid for the shares or the Award;
- to permit the recipient of any Award to pay the exercise or purchase
price of the Common Stock or the Award in cash, by the delivery of
previously owned shares of Common Stock or by offset (withholding
14
<PAGE> 18
shares otherwise to be delivered on exercise, which shares shall be
valued at their fair market value as of the date of exercise);
- to reprice Awards and amend other Award terms, and to extend benefits
under an Award; and
- to make certain adjustments to an outstanding Award and authorize the
conversion, succession or substitution of an Award in connection with
certain reorganizations or Change in Control Events (as generally
described below under "Acceleration of Awards; Possible Early Termination
of Awards").
Types of Awards. The Plan authorizes the grant of Options and Stock
Appreciation Rights ("SARs"), collectively "Awards". Generally speaking, an
Option or SAR will expire not more than 10 years after the date of grant. The
Committee determines the applicable vesting schedule for each Award, subject,
prior to the Company's Common Stock becoming Listed, to any minimum vesting
requirements set forth in the California Regulations. The Company may settle
Awards in cash or shares of the Company's Common Stock.
Transfer Restrictions. Subject to customary exceptions, Awards under the
Plan are not transferable by the recipient other than by will or the laws of
descent and distribution and are generally exercisable only by the recipient.
The Committee, however, may permit the transfer of an Award if the transferor
presents satisfactory evidence that the transfer is for estate and/or tax
planning purposes and without consideration (other than nominal consideration).
Shares issued pursuant to Awards, so long as the Corporation's Common Stock is
not Listed, will be "restricted securities" and legended, and are subject to a
right of first refusal whereby the shares must first be offered to the
Corporation prior to any transfer.
Adjustments. As is customary in incentive plans of this nature, the number
and kind of shares available under the Plan and the outstanding Awards, as well
as exercise or purchase prices and other share limits, are subject to adjustment
in the event of certain reorganizations, mergers, combinations, consolidations,
recapitalizations, reclassifications, stock splits, stock dividends, asset sales
or other similar events, or extraordinary dividends or distributions of property
to the Company's stockholders.
The Plan will not limit the authority of the Board or other Committee to
grant Awards or authorize any other compensation, with or without reference to
the Common Stock, under any authority.
Stock Options. An Option is the right to purchase shares of Common Stock at
a future date at a fixed or variable exercise price (the "Option Price") during
a specified term not to exceed 10 years. The Committee must designate each
Option granted as either an Incentive Stock Option ("ISO") or a Nonqualified
Stock Option ("NQSO"). The Option Price per share will be determined by the
Committee at the time of grant, but in the case of ISO's will not be less than
100% of the fair market value of a share of Common Stock on the date of grant
(110% in the case of a beneficial holder of more than 10% of the total combined
voting power of all classes of stock of the Company). ISO's are taxed
differently and are subject to more restrictive terms and amounts by the Code
and the Plan. The Plan includes a minimum option price of 85% of grant date fair
market value on all Non-Qualified Stock Options ("NQSO's"). Full payment for
shares purchased on the exercise of any Option must be made at the time of such
exercise, in cash, shares already owned or other lawful consideration (including
an offset of shares subject to the Option as the Committee may approve, or
payment through authorized third party payment procedures.)
Stock Appreciation Rights. An SAR is the right to receive payment of an
amount equal to the excess of the fair market value of a share of Common Stock
on the date of exercise of the SAR over the base price of the SAR. The base
price of each SAR will be established by the Committee at the time of grant of
the SAR and generally will be subject to the same pricing limits as Options.
SARs may be granted in connection with Options, in which case the base price (if
below market) may not be lower than the Option Exercise Price, or independently.
15
<PAGE> 19
Acceleration of Awards; Possible Early Termination of Awards. Generally,
upon the Change in Control Event, each Option and SAR will become immediately
exercisable. A Change in Control Event under the Plan generally includes
(subject to certain exceptions)
- a more than 50% change in ownership of the Company;
- certain changes in a majority of the Board;
- certain mergers or consolidations approved by the Company's stockholders,
or stockholder approval of a liquidation of the Company or sale of
substantially all of the Company's assets.
- A Change in Control could also be triggered if any new person acquires
greater than 30% ownership, and the current 5% owners (see "Security
Ownership of 5% Holders, Directors and Executive Officers" on page 3 of
this proxy) do not retain at least 30%.
In certain circumstances, Awards that are fully accelerated and that are
not exercised or settled at or prior to a Change in Control Event in which the
Company does not survive generally would or could be terminated. If the vesting
of an Award has been accelerated expressly in anticipation of an event or
subject to shareholder approval of an event and the Committee or the Board later
determines that the event will not occur, the Committee may rescind the effect
of the acceleration as to any then outstanding and unexercised or otherwise
unvested Awards.
Termination of or Changes to the Plan. The Board may amend or terminate the
Plan at any time and in any manner, including a manner that increases, within
Plan aggregate limits, awards to officers and directors. Unless required by
applicable law, stockholder approval of amendments will not be required. No new
Awards may be granted under the Plan after April 7, 2008, although the
applicable Plan provisions and authority of the Committee will continue as to
any then outstanding Awards. (This authority includes authority to amend
outstanding options.) As noted above, outstanding Options and other Awards may
be amended, but the consent of the holder is required if the amendment
materially and adversely affects the holder.
Securities Underlying Awards. The fair market value of the Common Stock as
of April 7, 1998 was $11.88 per share. The Company plans to register under the
Securities Act of 1933, as amended, the Common Stock available under the Plan,
prior to the time that any shares are issued thereunder.
OPTIONS GRANTED SUBJECT TO STOCKHOLDER APPROVAL OF THE PLAN
On April 7, 1998 and on September 22, 1998, the Compensation Committee
granted, and the entire Board approved, subject to stockholder approval of the
Plan and qualification by the California Commissioner, the options summarized in
the following table (the "Conditional Options"):
THE CONDITIONAL OPTIONS ARE SUBJECT TO STOCKHOLDER APPROVAL OF THE PLAN. IF
THE PLAN IS NOT APPROVED BY STOCKHOLDERS, THE CONDITIONAL OPTIONS WILL NOT
BE EFFECTIVE.
CONDITIONAL OPTIONS GRANTED
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING OPTIONS
NAME OF OPTIONEE GRANTED(#)
---------------- -------------------
<S> <C>
Robert S. Kelleher.......................................... 50,000(1)
Barbara C. Brown............................................ 28,000(1)
Executive Officers as a Group (4 persons)................... 78,000(1)(2)
Employees (other than Executive Officers)................... 265,000(3)
</TABLE>
- ---------------
(1) Such Conditional Options were granted on April 7, 1998 at an exercise price
of $12.00 and vest over 5 years at a rate of 20% each year.
(2) Executive Officers as a group (4 persons) includes Antonio C. Alvarez, II
and Hugh G. Hilton, who have not been granted any options under the Plan.
16
<PAGE> 20
(3) 215,000 of such Conditional Options were granted on April 7, 1998 to
employees (other than Executive Officers) at exercise prices ranging from
$12.00 per share to $18.00 per share, and vest over 5 years at a rate of 20%
each year. An additional 50,000 of such Conditional Options were granted on
September 22, 1998 to employees (other than Executive Officers) at an
exercise price of $18.00 per share, and vest over 5 years at a rate of 20%
each year.
OTHER SPECIFIC BENEFITS
The grant of other Awards under the Plan in the future and the nature of
any such Awards are subject to the Committee's discretion. Except as reported
above, the number, amount and type of Awards to be received by or allocated to
Eligible Persons under the Plan in the future cannot be determined.
FEDERAL INCOME TAX TREATMENT OF AWARDS UNDER THE PLAN
The federal income tax consequences of the Plan under current federal law
are summarized in the following discussion of general tax principles applicable
to the Plan. This summary is not intended to be exhaustive and does not describe
state or local tax consequences.
The Company is generally entitled to deduct and the optionee recognizes
taxable income in an amount equal to the difference between the Option Price and
the fair market value of the shares at the time of exercise of a Non-Qualified
Stock Option. With respect to Incentive Stock Options, the Company is generally
not entitled to a deduction nor does the participant recognize income, either at
the time of grant or exercise or (provided the participant holds the shares at
least 2 years after grant and 1 year after exercise) at any later time. Rather,
the participant receives capital gains treatment on the difference between his
or her basis and ultimate sales price. SARs are taxed and deductible in
substantially the same manner as Options. In each of the foregoing cases, the
Company will generally have a corresponding deduction at the time the
participant recognizes income.
If an Award is accelerated under the Plan in connection with a change in
control (as this term is used under the Code), the Company may not be permitted
to deduct the portion of the compensation attributable to the acceleration
("parachute payments") if it exceeds certain threshold limits under the Code,
and certain related excise taxes may be triggered. Furthermore, if compensation
attributable to Awards is not "performance-based" within the meaning of Section
162(m) of the Code, the Company may not be permitted to deduct aggregate
compensation that is not performance-based, to the extent it exceeds $1,000,000
in any tax year.
VOTE REQUIRED
The Board has approved the Plan and believes it to be in the best interest
of the Company and its stockholders. Approval of the Plan requires the
affirmative vote of a majority of the Common Stock present, or represented, and
entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF
THE 1998 STOCK INCENTIVE PLAN, AS AMENDED.
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<PAGE> 21
PROPOSAL 3
RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS AND AUDITORS
Upon the recommendation of the Audit Committee, the Board of Directors of
the Company has appointed Deloitte & Touche LLP as the Company's independent
public accountants and auditors for the fiscal year ending January 31, 1999,
subject to stockholder approval. Previously, Ernst & Young LLP served as the
Company's independent public accountants and auditors.
Ernst & Young LLP's report on the Registrant's financial statements for the
past two fiscal years did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. Services that will be provided to the Company and its
subsidiaries by Deloitte & Touche LLP with respect to the fiscal year ending
January 31, 1999 include the examination of the Company's consolidated financial
statements, services related to filings with the SEC and consultations on
various tax and other matters.
In connection with the audits of the Registrant for each of the two fiscal
years ended January 31, 1998, and in the subsequent interim periods, there were
no "reportable events" as that term is described in Item 304(a)(1)(v) of
Regulation S-K and no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures that, if not resolved to the satisfaction of Ernst & Young
LLP, would have caused them to make reference to the matter in their report.
The Registrant has authorized Ernst & Young LLP to fully respond to any
inquiries by the Registrant's new independent auditor, Deloitte & Touche LLP.
A representative of Deloitte & Touche LLP and a representative of Ernst &
Young LLP will be present at the Annual Meeting to respond to appropriate
questions and to make such statements as either may desire.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS AND AUDITORS FOR THE FISCAL YEAR ENDING JANUARY 31, 1999.
MISCELLANEOUS
OTHER MATTERS
If any other matters properly come before the meeting, it is the intention
of the proxy holders to vote in their discretion on such matters pursuant to the
authority granted in the proxy and permitted under applicable law.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
its executive officers, and persons holding more than 10% of the Common Stock
are required to report their initial ownership of the Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
(the "Commission"). Specific due dates for these reports have been established,
and the Company is required to disclose any failure to file by these dates. All
of these filing requirements were satisfied during the year ended January 31,
1998, except that Bryan Marsal (an individual who may be deemed to beneficially
own more than 10% of the Common Stock because he is a principal of A&M
Investment Associates #3, LLC -- see "Security Ownership of 5% Owners, Directors
and Executive Officers" above) and Stephen Feinberg inadvertently were late in
filing one report each, relating to one transaction.
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<PAGE> 22
COST OF SOLICITING PROXIES
The expenses of preparing and mailing the Notice of Annual Meeting, the
Proxy Statement and the proxy card(s) will be paid by the Company. In addition
to the solicitation of proxies by mail, proxies may be solicited by directors,
officers and employees of the Company (who will receive no additional
compensation) by personal interviews, telephone, telegraph and facsimile. The
Company has not retained, and does not intend to retain, any other entities to
assist in the solicitation of proxies. It is anticipated that banks, custodians,
nominees and fiduciaries will forward proxy soliciting material to beneficial
owners of the Company's Common Stock and that such persons will be reimbursed by
the Company for their expenses incurred in so doing.
FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS
Enclosed with this Proxy Statement is the Annual Report of the Company for
the fiscal year ending January 31, 1998. The Annual Report is enclosed for the
convenience of stockholders only and should not be viewed as part of the proxy
solicitation material. If any person who was a beneficial owner of Common Stock
of the Company on the Record Date for the 1998 Annual Meeting desires additional
copies of the Company's Annual Report, it will be furnished without charge upon
receipt of a written request. The request should identify the person making the
request as a stockholder of the Company and should be directed to:
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Attention: General Counsel
Telephone requests may be directed to General Counsel at (310) 538-2314 ext.
2841. Telephone requests relating to the Plan may be directed to General Counsel
at (310) 538-2314 ext. 2841.
PROPOSALS OF STOCKHOLDERS
The 1999 Annual Meeting of stockholders is presently expected to be held in
September 1999. To be considered for inclusion in the Company's Proxy Statement
for the 1999 Annual Meeting, proposals of stockholders intended to be presented
at the Meeting must be received by the General Counsel, Wherehouse
Entertainment, Inc., 19701 Hamilton Avenue, Torrance, California 90502-1334, a
reasonable time before the Company mails its proxy materials for the 1999 Annual
Meeting.
Notice of a shareholder proposal (other than in respect of a nominee for
election to the Board of Directors) submitted outside the processes of Rule
14a-8 (i.e., a proposal to be presented at the 1999 Annual Shareholders' Meeting
but not submitted for inclusion in the Company's proxy statement) will be
considered untimely under the SEC's proxy rules if not received a reasonable
time before the Company mails its proxy materials for the 1999 Annual Meeting.
19
<PAGE> 23
Appendix A
WHEREHOUSE ENTERTAINMENT, INC.
1998 STOCK INCENTIVE PLAN
1. THE PLAN
1.1 PURPOSE. The purpose of this Plan is to promote the success of the
Company and the interests of its stockholders by attracting, motivating,
retaining and rewarding directors, officers, employees and other
eligible persons through the grant of equity incentives. Capitalized
terms used herein are defined in Section 5.
1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE.
1.2.1 COMMITTEE. This Plan will be administered by and all Awards will
be authorized by the Committee. Action of the Committee with
respect to the administration of this Plan will be taken pursuant
to a majority vote or by written consent of its members.
1.2.2 PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the
express provisions of this Plan and any express limitations on
the delegated authority of the Committee, the Committee will have
the authority to:
(a) determine eligibility and the particular Eligible Persons
who will receive Awards;
(b) grant Awards to Eligible Persons, determine the price at
which securities will be offered or awarded and the amount
of securities to be offered or awarded to any of such
persons, and determine the other specific terms and
conditions of such Awards consistent with the express
limits of this Plan, and establish the installments (if
any) in which such Awards will become exercisable or will
vest, or determine that no delayed exercisability or
vesting is required, and establish the events of
termination or reversion of such Awards;
(c) approve the forms of Award Agreements (which need not be
identical either as to type of Award or among
Participants);
(d) construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and
Eligible Persons under this Plan, further define the terms
used in this Plan, and prescribe, amend and rescind rules
and regulations relating to the administration of this
Plan;
(e) cancel, modify, or waive the Company's rights with respect
to, or modify, discontinue, suspend, or terminate any or
all outstanding Awards held by Eligible Persons, subject
to any required consent under Section 4.6;
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<PAGE> 24
(f) accelerate or extend the exercisability or extend the term
of any or all such outstanding Awards within the maximum
ten-year term of Awards under Section 1.5; and
(g) make all other determinations and take such other action
as contemplated by this Plan or as may be necessary or
advisable for the administration of this Plan and the
effectuation of its purposes.
1.2.3 BINDING DETERMINATIONS. Any action taken by, or inaction of, the
Company, the Board or the Committee relating or pursuant to this
Plan will be within the absolute discretion of that entity or
body and will be conclusive and binding upon all persons. Subject
only to compliance with the express provisions hereof, the Board
and Committee may act in their absolute discretion in matters
within their authority related to this Plan. No director, officer
or agent of the Company will be liable for any action or
determination taken, made or omitted in good faith under this
Plan.
1.2.4 RELIANCE ON EXPERTS. In making any determination or in taking or
not taking any action under this Plan, the Committee or the
Board, as the case may be, may obtain and may rely upon the
advice of experts, including employees of and professional
advisors to the Company.
1.2.5 BIFURCATION OF PLAN ADMINISTRATION; DELEGATION. Subject to the
limits set forth in the definition of "Committee" in Section 5,
the Board may delegate different levels of authority to different
Committees with administration and grant authority under this
Plan, provided that each designated Committee granting any
Options hereunder shall consist exclusively of a member or
members of the Board. A majority of the members of the acting
Committee shall constitute a quorum. The vote of a majority of a
quorum or the unanimous written consent of the Committee shall
constitute action by the Committee. A Committee may delegate
ministerial, non-discretionary functions to individuals who are
officers or employees of the Company, even if not directors.
1.3 PARTICIPATION. Awards may be granted by the Committee only to those
persons that the Committee determines to be Eligible Persons. An
Eligible Person who has been granted an Award may, if otherwise
eligible, be granted additional Awards if the Committee so determines.
1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS.
1.4.1 SHARES AVAILABLE. Subject to the provisions of Section 4.3, the
capital stock that may be delivered under this Plan will be
shares of Wherehouse Entertainment, Inc.'s Common Stock. The
Shares may be delivered for any lawful consideration.
1.4.2 SHARE LIMITS. The maximum number of shares of Common Stock that
may be delivered pursuant to Awards granted to Eligible Persons
under this Plan will not exceed 600,000 SHARES (the "SHARE
LIMIT"). The maximum number of Shares subject to those Awards
that are granted during any calendar year to any one
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<PAGE> 25
individual will be limited to 125,000. Each of the foregoing
numerical limits will be subject to adjustment as contemplated
by this Section 1.4 and Section 4.3.
1.4.3 SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS.
No Award may be granted under this Plan unless, on the date of
grant, the sum of (i) the maximum number of Shares issuable at
any time pursuant to such Award, plus (ii) the number of Shares
that have previously been issued pursuant to Awards granted under
this Plan, other than reacquired Shares available for reissue
consistent with any applicable legal limitations, plus (iii) the
maximum number of Shares that may be issued at any time after
such date of grant pursuant to Awards that are outstanding on
such date, does not exceed the Share Limit. Shares that are
subject to or underlie Awards that expire or for any reason are
canceled or terminated, are forfeited, fail to vest, or for any
other reason are not paid or delivered under this Plan, as well
as reacquired Shares, will again, except to the extent prohibited
by law, be available for subsequent Awards under this Plan.
Except as limited by law (including Section 162(m)), if an Award
is or may be settled only in cash, such Award need not be counted
against any of the limits under this Section 1.4.
1.5 AWARD PERIOD. Any Award and all rights thereunder shall expire not more
than 10 years after the date of grant; provided, however, that any
payment of cash or delivery of stock pursuant to an Award may be delayed
until a future date if specifically authorized by the Committee in
writing.
1.6 VESTING; LIMITS ON AND PROVISIONS FOR EXERCISE; OTHER LIMITATIONS.
1.6.1 VESTING. Unless the Committee otherwise expressly provides in the
applicable Award Agreement (and, to the extent consistent with
the California Regulations, if applicable), each Award shall vest
and become exercisable as to 20% of the aggregate number of
Shares subject to the Award on each of the first through fifth
anniversaries of the applicable Award Date. Once exercisable, the
Award remains exercisable until its expiration or termination in
accordance with the terms of the Award or this Plan.
1.6.2 EXERCISE PROCEDURE. Any exercisable Award will be deemed to be
exercised when the Company receives written notice of such
exercise from the Participant in a form approved by the Committee
specifying the number of Shares with respect to which the Award
is being exercised, together with any required payment made in
accordance with Section 2.2.2. In addition, the Participant must
provide any written statements required pursuant to Section 4.4
of the Plan.
1.6.3 FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests will
be disregarded, but may be accumulated. The Committee, however,
may determine in the case of Eligible Persons that cash, other
securities, or other property will be paid or transferred in lieu
of any fractional share interests.
1.7 TRANSFER AND OTHER LIMITATIONS ON AWARDS; EXCEPTIONS.
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<PAGE> 26
1.7.1 LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly
provided in (or pursuant to) this Section 1.7, by applicable law
and by the Award Agreement, as the same may be amended, (i) all
Awards are non-transferable and will not be subject in any manner
to sale, transfer, anticipation, alienation, assignment, pledge,
encumbrance or charge; (ii) Awards will be exercised only by the
Participant; and (iii) amounts payable or shares issuable
pursuant to an Award will be delivered only to (or for the
account of) the Participant.
1.7.2 EXCEPTIONS. Subject to any limitations in connection with
qualification of the Plan, the Committee may permit Awards to be
exercised by and paid only to certain persons or entities related
to the Participant pursuant to such conditions and procedures as
the Committee may establish. Any permitted transfer will be
subject to the condition that the Committee receive evidence
satisfactory to it that the transfer is being made in good faith
to related persons for estate and/or tax planning purposes and
without consideration (other than nominal consideration).
Incentive Stock Options, however, will be subject to any and all
additional transfer restrictions applicable under the Code.
1.7.3 FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. Subject to any
limitations in connection with qualification of the Plan, the
exercise and transfer restrictions in Section 1.7.1 will not
apply to:
(a) transfers to the Company,
(b) the designation of a beneficiary to receive benefits if
the Participant dies or, if the Participant has died,
transfers to or exercises by the Participant's
beneficiary, or, in the absence of a validly designated
beneficiary, transfers by will or the laws of descent and
distribution,
(c) except in the case of Incentive Stock Options, transfers
pursuant to a QDRO if approved or ratified by the
Committee,
(d) if the Participant has suffered a disability that renders
the Participant unable to legally act on his or her own
behalf, permitted transfers or exercises on behalf of the
Participant by the Participant's legal representative, or
(e) following Listing, the authorization by the Committee of
"cashless exercise" procedures with third parties who
provide financing for the purpose of (or who otherwise
facilitate) the exercise of Awards consistent with
applicable laws and the express authorization of the
Committee.
1.7.4 ADDITIONAL RESTRICTIONS ON SHARES. Unless the Committee otherwise
provides in the applicable Award Agreement, the transfer of
Shares acquired pursuant to the exercise or vesting of an Award
or any interest therein shall be subject to the restrictions in
Appendix A. The committee may from time to time, subject to any
applicable California Regulations, impose additional restrictions
on the transfer of Shares in the applicable Award Agreement.
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<PAGE> 27
Notwithstanding the foregoing, the Committee may, by express
provision in the related Award Agreement, provide that the
provisions of Section 1.1 of Appendix A of this Plan shall not
apply to an Award.
1.8 REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. Subject to
Section 1.4 and Section 4.6 and the specific limitations on Awards
contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible
Person any adjustment in the exercise or purchase price, the vesting
schedule, the number of shares subject to, or the restrictions upon or
the term of, an Option or SAR granted under this Plan by cancellation of
an outstanding Award and a subsequent regranting of an Award by
amendment, by substitution of an outstanding Award, by waiver or by
other legally valid means. Such amendment or other action may result,
among other changes, in an exercise or purchase price that is higher or
lower than the exercise, base or purchase price of the original or prior
Award, provide for a greater or lesser number of Shares subject to the
Award, or, if Listed at the time of the Committee's action, provide for
a longer or shorter vesting or exercise period.
2. OPTIONS.
2.1 GRANTS. One or more Options may be granted under this Section 2 to any
Eligible Person. Subject to the express provisions of this Plan, the
Committee will determine the number of shares of Common Stock subject to
each Option, and the exercise price or purchase price to be paid for the
Shares. Each Option will be evidenced by an Award Agreement signed by
the Company and, if required by the Committee by the Participant. Each
Option granted will be designated in the applicable Award Agreement, by
the Committee, as either an Incentive Stock Option, subject to Section
2.3, or a Nonqualified Stock Option.
2.2 OPTION PRICE.
2.2.1 PRICING LIMITS. The purchase price per Share covered by each
Option will be determined by the Committee at the time of the
Award, but will not be less than the greater of (i) the par value
thereof, or (ii) 85% of the Fair Market Value of the Common Stock
on the date of grant. In the case of Incentive Stock Options, the
purchase price per Share will not be less than 100% (110% in the
case of any Participant described in Section 2.4) of the Fair
Market Value of the Common Stock on the date of grant. Prior to
Listing, or, in the case of any ISO, an Option shall not be
granted to any person who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of
Wherehouse Entertainment, Inc. or its parent or subsidiary
corporations, unless the purchase price per Share covered by the
Option is at least 110% of the Fair Market Value of the Common
Stock on the date of grant.
2.2.2 PAYMENT PROVISIONS. The purchase price of any Shares purchased on
exercise of an Option granted under this Section 2 will be paid
in full at the time of each purchase in one or a combination of
the following methods:
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<PAGE> 28
(i) in cash or by electronic funds transfer;
(ii) by certified or cashier's check payable to the order of
the Company;
(iii) by notice and third party payment in such manner as may be
authorized by the Committee (including through delivery of
properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale proceeds necessary to
pay the exercise price and any applicable tax withholding
under Section 4.5);
(iv) if authorized by the Committee, cancellation of
indebtedness or conversion of other securities; or
(v) by the delivery of Shares already owned by the
Participant, but the Committee may, in its absolute
discretion, limit the Participant's ability to exercise an
Award by delivering such Shares, and any Shares delivered
that were initially acquired upon exercise of a stock
option must have been owned by the Participant for at
least six months as of the date of delivery. Shares of
Common Stock used to satisfy the exercise price of an
Option will be valued at their Fair Market Value on the
date of exercise.
2.2.3 DELIVERY CONDITION. The Company will not be obligated to deliver
certificates for the Shares unless and until it receives full
payment of the exercise price and of any related withholding
obligations.
2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS.
2.3.1 $100,000 LIMIT. To the extent that the aggregate Fair Market
Value of stock with respect to which Incentive Stock Options
first become exercisable by a Participant in any calendar year
exceeds $100,000, taking into account both Common Stock subject
to Incentive Stock Options under this Plan and stock subject to
incentive stock options under all other plans of the Company or
other includable parent or subsidiary corporations (as these
terms are used under Section 422(d) and defined in Section 424(d)
and (f) of the Code), such options will be treated as
Nonqualified Stock Options. For this purpose, the Fair Market
Value of the stock subject to options will be determined as of
the date the options were awarded. In reducing the number of
options treated as incentive stock options to meet the $100,000
limit, the most recently granted options will be reduced first.
To the extent a reduction of simultaneously granted options is
necessary to meet the $100,000 limit, the Committee may, in the
manner and to the extent permitted by law, designate which Shares
are to be treated as shares acquired pursuant to the exercise of
an Incentive Stock Option.
2.3.2 OTHER CODE LIMITS. Incentive Stock Options may only be granted to
employees of the Company or of a qualified subsidiary who satisfy
the other eligibility requirements of the Code. There will be
imposed in any Award Agreement relating to Incentive Stock
Options such other terms and conditions as from time
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<PAGE> 29
to time are required in order that the Option be an "incentive
stock option" as that term is defined in Section 422 of the
Code.
2.3.3 ISO NOTICE OF SALE REQUIREMENT. Any employee who exercises an
Incentive Stock Option shall give prompt written notice to the
Company of any sale or other transfer of the shares acquired upon
exercise if the sale or other transfer occurs within one year
after the exercise date or two years after the Award Date.
2.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to any
person who, at the time the Option is granted, owns (or is deemed to own
under Section 424(d) of the Code) shares of outstanding Common Stock
possessing more than 10% of the total combined voting power of all
classes of stock of Wherehouse Entertainment, Inc., unless the exercise
price of the Option is at least 110% of the Fair Market Value of the
stock subject to the Option and the Option by its terms is not
exercisable after the expiration of five years from the date the Option
is granted.
2.5 OPTIONS FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options may be
granted to Eligible Persons under this Plan in substitution for employee
stock options granted by other entities to persons who are or who will
become Eligible Persons in respect of the Company, in connection with a
distribution, merger or reorganization by or with the granting entity or
an affiliated entity, or the acquisition by the Company, directly or
indirectly, of all or a substantial part of the stock or assets of the
employing entity.
3. STOCK APPRECIATION RIGHTS
3.1 GRANTS. The Committee may grant to any Eligible Person Stock
Appreciation Rights ("SARs") either concurrently with the grant of
Option or in respect of an outstanding Option, in whole or in part, or
independently of any Option. Any SAR granted in connection with an
Incentive Stock Option will contain such terms as may be required to
comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder, unless the holder otherwise agrees.
3.2 PRICING LIMITS. The pricing restrictions applicable to Options under
Section 2.2.1 of this Plan shall apply as well to the base or reference
price of SARs granted under this Plan.
3.3 EXERCISE OF STOCK APPRECIATION RIGHTS.
3.3.1 EXERCISABILITY. Unless the Award Agreement or the Committee
otherwise provides, a Stock Appreciation Right related to an
Option will be exercisable at such time or times, and to the
extent, that the related Option will be exercisable.
3.3.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock
Appreciation Right is exercised, only the actual number of
delivered shares of Common Stock will be charged against the
maximum amount of Common Stock that may be delivered pursuant to
Awards under this Plan. The number of shares subject to the Stock
Appreciation Right and the related Option of the Participant
will, however, be reduced by the number of underlying shares as
to which the exercise related, unless the Award Agreement
otherwise provides.
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<PAGE> 30
3.3.3 STAND-ALONE SARS. A Stock Appreciation Right granted
independently of any other Award will be exercisable pursuant to
the terms of the Award Agreement.
3.4 PAYMENT.
3.4.1 AMOUNT. Unless the Committee otherwise provides, upon exercise of
a Stock Appreciation Right and the attendant surrender of an
exercisable portion of any related Award, the Participant will be
entitled to receive, subject to Section 4.5, payment of an amount
determined by multiplying
(a) the difference obtained by subtracting the exercise
or base reference price per share of Common Stock
under the related Award (if applicable) or the
initial share value specified in the Award, from
the Fair Market Value of a share of Common Stock on
the date of exercise of the Stock Appreciation
Right, by
(b) the number of shares with respect to which the
Stock Appreciation Right has been exercised.
3.4.2 FORM AND TERMS OF PAYMENT. The Committee, in its sole discretion,
will determine the form in which payment will be made of the
amount determined under Section 3.4.1 above, either solely in
cash, solely in shares of Common Stock (valued at Fair Market
Value on the date of exercise of the Stock Appreciation Right),
or partly in such shares and partly in cash, subject to such
other terms and conditions as the Committee may impose in the
Award Agreement.
3.5 LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant to any
Eligible Person Stock Appreciation Rights exercisable only upon or in
respect of a change in control or any other specified event ("LIMITED
SARS") and such Limited SARs may relate to or operate in tandem or
combination with or substitution for Options, or other SARs or on a
stand-alone basis, and may be payable in cash or shares based on the
spread between the base price of the SAR and a price based upon or equal
to the Fair Market Value of the Shares during a specified period, at a
specified time within a specified period before, after or including the
date of such event, or a price related to consideration payable to
Stockholders generally in connection with the event.
4. OTHER PROVISIONS.
4.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.
4.1.1 EMPLOYMENT STATUS. Status as an Eligible Person will not be
construed as a commitment that any Award will be granted under
this Plan to an Eligible Person or to Eligible Persons generally.
4.1.2 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in any
other documents related to this Plan or to any Award) will confer
upon any Eligible
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Person or other Participant any right to continue in the employ
or other service of the Company or constitute any contract or
agreement of employment or other service, nor will interfere in
any way with the right of the Company to otherwise change such
person's compensation or other benefits or to terminate the
employment or other service of such person, with or without
cause, but nothing contained in this Plan or any related
document will adversely affect any independent contractual right
of such person without the Participant's consent.
4.1.3 PLAN NOT FUNDED. Awards payable under this Plan will be payable
in Shares or from the general assets of the Company, and (except
as provided in Section 1.4.3) no special or separate reserve,
fund or deposit will be made to assure payment of such Awards. No
Participant, Beneficiary or other person will have any right,
title or interest in any fund or in any specific asset (including
Shares, except as expressly otherwise provided) of the Company by
reason of any Award hereunder. Neither the provisions of this
Plan (or of any related documents), nor the creation or adoption
of this Plan, nor any action taken pursuant to the provisions of
this Plan will create, or be construed to create, a trust of any
kind or a fiduciary relationship between the Company and any
Participant, Beneficiary or other person. To the extent that a
Participant, Beneficiary or other person acquires a right to
receive payment pursuant to any Award hereunder, such right will
be no greater than the right of any unsecured general creditor of
the Company.
4.2 EFFECTS OF TERMINATION OF EMPLOYMENT/SERVICE; DISCRETIONARY PROVISIONS.
4.2.1 RESIGNATION OR DISMISSAL. Unless otherwise provided in the Award
Agreement and subject to earlier termination or expiration
pursuant to or as contemplated by Section 1.5, 4.3, or 4.9, if
the Participant's employment by (or other service specified in
the Award Agreement to) the Company terminates for any reason
(including termination by the Company for cause) (the date of
such termination being referred to as the "SEVERANCE DATE") other
than due to Total Disability, Retirement or death, the
Participant will have until the date which is 30 days after his
or her Severance Date to exercise any Award (or portion thereof)
to the extent that it is exercisable on the Severance Date. In
such cases, the Award, to the extent not exercisable on the
Severance Date, will terminate.
4.2.2 DEATH, RETIREMENT OR DISABILITY. Unless otherwise provided in the
Award Agreement and subject to earlier termination or expiration
pursuant to or as contemplated by Section 1.5, 4.3, or 4.9, if
the Participant's employment by (or specified service to) the
Company terminates as a result of Total Disability, Retirement or
death, the Participant, the Participant's Personal Representative
or the Participant's Beneficiary, as the case may be, will have
until the date which is six months after the Participant's
Severance Date to exercise any Award (or portion thereof) to the
extent that it is exercisable on the Severance Date (or becomes
exercisable in connection with the Participant's death or Total
Disability pursuant to Section 1.6). The Award, to the extent not
exercisable as of the Severance Date, will terminate.
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4.2.3 COMMITTEE DISCRETION. Notwithstanding the foregoing provisions of
this Section 4.2, in the event of, or in anticipation of, a
termination of employment with the Company for any reason, other
than discharge for cause, the Committee may increase the portion
of the Participant's Award available to the Participant, or
Participant's Beneficiary or Personal Representative, as the case
may be, or, subject to the provisions of Section 1.5, extend the
exercisability period upon such terms as the Committee determines
and expressly sets forth in or by amendment to the Award
Agreement.
4.2.4 TERMINATION OF CONSULTING OR AFFILIATE SERVICES. If the
Participant is not an Eligible Employee or director and provides
services as an Other Eligible Person, the Committee shall be the
sole judge of whether the Participant continues to render
services to the Company, unless a contract or the Award Agreement
otherwise provides. In these circumstances, if the Committee
notifies the Participant in writing that a termination of
services of the Participant for purposes of this Plan has
occurred, then (unless the contract or Award Agreement otherwise
expressly provides), the Participant's termination of services
for purposes of Section 4 shall be the date which is 10 days
after the Committee's mailing of the notice or, in the case of a
Termination For Cause, the date of the mailing of the notice.
4.2.5 EVENTS NOT DEEMED TERMINATIONS OF SERVICE. Unless Company policy
or the Committee otherwise provides, the employment or service
relationship shall not be considered terminated in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of
absence authorized by the Company or the Committee; provided that
unless reemployment upon the expiration of such leave is
guaranteed by contract or law, such leave is for a period of not
more than 90 days. In the case of any Eligible Employee on an
approved leave of absence, continued vesting of the Award while
on leave from the employ of the Company shall be suspended,
unless the Committee otherwise provides or applicable law
otherwise requires. In no event shall an Award be exercised after
the expiration of the term set forth in the Award Agreement.
4.2.6 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan
and any Award hereunder, if an entity ceases to be a Subsidiary,
a termination of employment and service will be deemed to have
occurred with respect to each Eligible Person in respect of such
Subsidiary who does not continue as an Eligible Person in respect
of another entity within the Company who does not continue as an
Eligible Person in respect of another entity within the Company.
4.3 ADJUSTMENTS; ACCELERATION.
4.3.1 ADJUSTMENTS. Upon or in contemplation of any reclassification,
recapitalization, stock split (including a stock split in the
form of a stock dividend) or reverse stock split
("reclassification"); any merger, combination, consolidation, or
other reorganization ("reorganization"); any spin-off, split-up,
or similar extraordinary dividend distribution in respect of the
Common Stock (whether in the form of
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securities or property); ("spin-off") any exchange of the Common
Stock or any similar, unusual or extraordinary corporate
transaction in respect of the Common Stock ("other event"); or a
sale of all or substantially all the assets of Wherehouse
Entertainment, Inc. as an entirety ("asset sale"); then the
Committee shall, in such manner, to such extent (if any) and at
such time as it deems appropriate and equitable in the
circumstances:
(a) proportionately adjust any or all of (i) the number and type
of Shares (or other securities) that thereafter may be made the
subject of Awards (including the specific maxima and numbers of
Shares set forth elsewhere in this Plan), (ii) the number, amount
and type of Shares (or other securities or property) subject to
any or all outstanding Awards, (iii) the purchase or exercise
price of any or all outstanding Awards, or (iv) the securities,
cash or other property deliverable upon exercise of any
outstanding Awards, or
(b) in the case of a reclassification, reorganization, spin-off,
exchange or asset sale, make provision for a cash payment or for
the substitution or exchange of any or all outstanding Awards or
the cash, securities or property deliverable to the holder of any
or all outstanding Awards based upon the distribution or
consideration payable to holders of the Common Stock upon or in
respect of such event.
In each case, with respect to Incentive Stock Options, no such
adjustment will be made that would cause this Plan to violate
Section 422 or 424(a) of the Code or any successor provisions
without the written consent of the holders materially adversely
affected thereby. In any of such events, the Committee may take
such action prior to such event to the extent that the Committee
deems the action necessary to permit the Participant to realize
the benefits intended to be conveyed with respect to the
underlying shares in the same manner as is available to common
stockholders generally.
4.3.2 ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Upon the
occurrence of a Change in Control Event, each Award will become
immediately exercisable. The Committee may accord any Eligible
Person a right to refuse any acceleration, whether pursuant to
the Award Agreement or otherwise, in such circumstances as the
Committee may approve. Any acceleration of Awards will comply
with applicable legal requirements and, if necessary to
accomplish the purposes of the acceleration or if the
circumstances require, may be deemed by the Committee to occur
(subject to Section 4.3.4) a limited period of time not greater
than 30 days before the event.
4.3.3 POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Award to
acquire Common Stock under this Plan has been fully accelerated
as required or permitted by Section 4.3.2, but is not exercised
prior to (i) a dissolution of the Company, or (ii) an event
described in Section 4.3.1 that the Company does not survive, or
(iii) the consummation of an event described in Section 4.3.1
involving a Change in Control Event approved by the Board, the
Award will terminate, subject to any
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provision that has been expressly made by the Board, by the
Committee, through a plan of reorganization approved by the
Board, or otherwise for the survival, substitution, assumption,
exchange or other settlement of the Award.
4.3.4 POSSIBLE RESCISSION OF ACCELERATION. If the vesting of an Award
has been accelerated expressly in anticipation of an event or
upon (or subject to) stockholder approval of an event (whether or
not such approval constituted a Change in Control Event) and the
Committee or the Board later determines that the event did not or
will not occur, the Committee may rescind the effect of the
acceleration as to any then outstanding and unexercised Awards.
4.3.5 ACCELERATION UPON TERMINATION OF SERVICE IN ANTICIPATION OF, OR
FOLLOWING A CHANGE IN CONTROL. Unless the Committee otherwise
provides prior to a Change in Control Event, if any Participant's
employment or other specified service is terminated by the
Participant's death or Disability or by the Company for any
reason other than For Cause either expressly in anticipation of a
Change in Control Event, then all Awards held by the Participant
shall be deemed fully vested immediately prior to the date of
termination, irrespective of the vesting provisions of the
Participant's Award Agreement.
4.3.6 GOLDEN PARACHUTE LIMITATIONS. Unless otherwise specified in an
Award Agreement, no Award will be accelerated under this Plan to
an extent or in a manner that would not be fully deductible by
the Company for federal income tax purposes because of Section
280G of the Code, nor will any payment hereunder be accelerated
if any portion of such accelerated payment would not be
deductible by the Company because of Section 280G of the Code. If
a holder would be entitled to benefits or payments hereunder and
under any other plan or program that would constitute "parachute
payments" as defined in Section 280G of the Code, then the holder
may by written notice to the Company designate the order in which
such parachute payments will be reduced or modified so that the
Company is not defined federal income tax deductions for any
"parachute payments" because of Section 280G of the Code.
4.4 COMPLIANCE WITH LAWS.
4.4.1 GENERAL. This Plan, the granting and vesting of Awards under this
Plan and the offer, issuance and delivery of Shares or other
securities, and/or the payment of money under this Plan or under
Awards granted hereunder are subject to compliance with all
applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities laws
and federal margin requirements) and to such approvals by any
listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in
connection therewith. Any securities delivered under this Plan
will be subject to such restrictions, and to any restrictions the
Committee may require to preserve a pooling of interests under
generally accepted accounting principles. The person acquiring
any securities under this Plan will, if requested by the Company,
provide such assurances and representations to the Company as the
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Company may deem necessary or desirable to assure compliance with
all applicable legal and accounting requirements.
4.4.2 COMPLIANCE WITH SECURITIES LAWS. No Participant shall sell,
pledge or otherwise transfer Shares acquired pursuant to an Award
or any interest in such Shares, except in accordance with the
express terms of this Plan, Appendix A of this Plan, and, as to
Awards issued after a Listing, any applicable Award Agreement.
4.4.3 FINANCIAL STATEMENT DELIVERY. The Company shall deliver annually
to Participants, financial statements of the Company sufficient
to satisfy the requirements of Section 260.140.46 of the
Regulations adopted under the California Corporate Securities
Law, to the extent required and applicable to the Participants in
this Plan.
4.5 TAX WITHHOLDING.
4.5.1 TAX WITHHOLDING. Upon any exercise, vesting, or payment of any
Award or upon the disposition of Shares acquired pursuant to the
exercise of an Incentive Stock Option prior to satisfaction of
the holding period requirements of Section 422 of the Code, the
Company shall have the right at its option to (i) require the
Participant (or Personal Representative or Beneficiary, as the
case may be) to pay or provide for payment of the amount of any
taxes which the Company may be required to withhold with respect
to such Award event or payment, or (ii) deduct from any amount
payable in cash the amount of any taxes which the Company may be
required to withhold with respect to such cash payment. In any
case where a tax is required to be withheld in connection with
the delivery of Shares under this Plan, the Committee may in its
sole discretion (subject to Section 4.4) grant (either at the
time of the Award or thereafter) to the Participant the right to
elect, pursuant to such rules and subject to such conditions as
the Committee may establish, to have the Company reduce the
number of Shares to be delivered by (or otherwise reacquire) the
appropriate number of Shares valued at their then Fair Market
Value, to satisfy such withholding obligation, determined in each
case as of the trading day next preceding the applicable date of
exercise, vesting or payment.
4.5.2 TAX LOANS. If so provided in the Award Agreement or otherwise
authorized by the Committee, the Company may, to the extent
permitted by law, authorize a short-term loan of not more than
nine months to an Eligible Person in the amount of any taxes that
the Company may be required to withhold with respect to Shares
received (or disposed of, as the case may be) pursuant to a
transaction described in Section 4.5.1. The tax loan will be for
a term, at a rate of interest and pursuant to such other terms
and conditions as the Committee, under applicable law (including
any applicable margin requirements), may establish.
4.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION.
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4.6.1 BOARD AUTHORIZATION. The Board may, at any time, terminate or,
from time to time, amend, modify or suspend this Plan, in whole
or in part. No Awards may be granted during any suspension of
this Plan or after termination of this Plan, but the Committee
will retain jurisdiction as to Awards then outstanding in
accordance with the terms of this Plan.
4.6.2 STOCKHOLDER APPROVAL. To the extent then required under Sections
422 and 424 of the Code or any other applicable law, or deemed
necessary or advisable by the Board, any amendment to this Plan
shall be subject to stockholder approval.
4.6.3 AMENDMENTS TO AWARDS. Without limiting any other express
authority of the Committee under but subject to the express
limits of this Plan, the Committee by agreement or resolution may
waive conditions of or limitations on Awards to Eligible Persons
that the Committee in the prior exercise of its discretion has
imposed, without the consent of a Participant, and may make other
changes to the terms and conditions of Awards that do not affect
in any manner materially adverse to the Participant, the
Participant's rights and benefits under an Award.
4.6.4 LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment,
suspension or termination of this Plan or change of or affecting
any outstanding Award will, without written consent of the
Participant, affect in any manner materially adverse to the
Participant any rights or benefits of the Participant or
obligations of the Company under any Award granted under this
Plan prior to the effective date of such change. Changes intended
to comport with changes in law or contemplated by Section 4.3
will not be deemed to constitute changes or amendments for
purposes of this Section 4.6.
4.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized
by the Committee or this Plan, a Participant will not be entitled to any
privilege of stock ownership as to any Shares not actually delivered to
and held of record by the Participant. No adjustment will be made for
dividends or other rights as a stockholder for which a record date is
prior to such date of delivery.
4.8 EFFECTIVE DATE OF THE PLAN. This Plan is effective upon its approval by
the Board, (the "Effective Date") subject to approval by the
stockholders of the Company within twelve months after the date of such
Board approval.
4.9 TERM OF THE PLAN. Unless earlier terminated by the Board, this Plan will
terminate at the close of business on the day before the tenth
anniversary of the Effective Date (the "TERMINATION DATE") and no Awards
may be granted under this Plan after that date. Unless otherwise
expressly provided in this Plan or in an applicable Award Agreement, any
Award granted prior to the termination date may extend beyond such date,
and all authority of the Committee with respect to Awards hereunder,
including the authority to amend an Award, will continue during any
suspension of this Plan and in respect of Awards outstanding on the
termination date.
4.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY.
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4.10.1 CHOICE OF LAW. This Plan, the Awards all documents evidencing
Awards and all other related documents will be governed by, and
construed in accordance with, the laws of the State of Delaware.
4.10.2 CONSTRUCTION.
(a) SECTION 25110. This Plan and the grant of Awards shall be
construed in accordance with the California Regulations to
the extent required and applicable to Participants in this
Plan.
(b) RULE 16B-3. It is the intent of the Company that the
Awards and transactions permitted by Awards generally
satisfy and be interpreted in a manner that, in the case
of Participants who are or may be subject to Section 16 of
the Exchange Act, satisfies the applicable requirements of
Rule 16b-3 so that such persons (unless they otherwise
agree) will be entitled to the benefits of Rule 16b-3 or
other exemptive rules under Section 16 of the Exchange Act
in respect of those transactions and will not be subjected
to avoidable liability.
(c) SECTION 162(m). It is the further intent of the Company
that (to the extent the Company or an Award under this
Plan may be or become subject to limitations on
deductibility under Section 162(m) of the Code) any Award
granted with an exercise or base price not less than Fair
Market Value on the date of grant and held by a person
subject to Section 162(m) of the Code will qualify as
performance-based compensation or otherwise be exempt from
deductibility limitations under Section 162(m) of the
Code, to the extent that the Committee authorizing the
Award (or the payment thereof, as the case may be)
satisfies any applicable administrative requirements
thereof. This Plan will be interpreted consistent with
such intent.
4.10.3 SEVERABILITY. If a court of competent jurisdiction holds any
provision invalid and unenforceable, the remaining provisions of
this Plan will continue in effect.
4.11 CAPTIONS. Captions and headings are given to the sections and
subsections of this Plan solely as a convenience to facilitate
reference. Such headings will not be deemed in any way material or
relevant to the construction or interpretation of this Plan or any
provision.
4.12 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan will limit or be deemed to
limit the authority of the Board or the Committee to grant awards or
authorize any other compensation, with or without reference to the
Common Stock, under any other plan or authority.
5. DEFINITIONS.
"AWARD" means an Option or Stock Appreciation Right or any combination thereof,
whether alternative or cumulative, authorized by and granted under this Plan.
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"AWARD AGREEMENT" means any writing setting forth the terms of an Award that has
been authorized by the Committee.
"AWARD DATE" means the date upon which the Committee took the action granting an
Award or such later date as the Committee designates as the Award Date at the
time of the Award.
"BENEFICIARY" means the person, persons, trust or trusts designated by a
Participant, or, in the absence of a designation, entitled by will or the laws
of descent and distribution, to receive the benefits specified in the Award
Agreement and under this Plan if the Participant dies, and means the
Participant's executor or administrator if no other Beneficiary is designated
and able to act under the circumstances.
"BOARD" means the Board of Directors of Wherehouse Entertainment, Inc, or a
similar governing body of its successor or successors.
"CALIFORNIA REGULATIONS" means Title 10 of the California Code of Regulations,
as amended from time to time.
"CHANGE IN CONTROL EVENT" means any of the following:
(a) Any Person, other than an Excluded Person, becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of Wherehouse Entertainment, Inc.
representing more than 50% of the combined voting power of
Wherehouse Entertainment, Inc.'s then outstanding securities
entitled to then vote generally in the election of directors of
the Company; or
(b) Approval by the stockholders of Wherehouse Entertainment, Inc. of
a plan of merger, consolidation, or reorganization of Wherehouse
Entertainment, Inc. or for sale or other disposition of all or
substantially all of Wherehouse Entertainment, Inc.'s
consolidated assets as an entirety (collectively, a "Business
Combination"), other than a Business Combination (i) in which all
or substantially all of the holders of Voting Stock will hold or
receive, directly or indirectly 50% or more of the voting stock
of the entity resulting from the Business Combination (or a
parent company), and (ii) after which no Person (other than any
one or more of the Excluded Persons) will own more than 50% of
the voting stock of the resulting entity (or a parent company)
who did not own directly or indirectly at least that amount of
Voting Stock immediately before the Business Combination, and
(iii) after which one or more Excluded Persons will own an
aggregate number of shares of the voting stock at least equal to
the aggregate number of shares of voting stock owned by any other
Person who is not an Excluded Person (except for any person
described in and satisfying the conditions of Rule 13d-1(b)(1)
under the Exchange Act), if any, and who will own more than 30%
of the voting stock.
(c) Approval by the stockholders of Wherehouse Entertainment, Inc. of
the dissolution or liquidation of Wherehouse Entertainment, Inc.;
or
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(d) During any period not longer than two consecutive years,
individuals who at the beginning of such period constituted the
Board cease to constitute at least a majority thereof, unless the
election, or the nomination for election by Wherehouse
Entertainment, Inc.'s stockholders, of each new Board member was
approved by a vote of at least three-fourths of the Board members
then still in office who were Board members at the beginning of
such period (including for these purposes, new members whose
election or nomination was so approved).
For purposes of this definition, "Person" means as such term is used in
Sections 13(d) and 14(d) of the Exchange Act but excluding any person
described in and satisfying the conditions of Rule 13d-1(b)(1)
thereunder.
"CODE" means the Internal Revenue Code of 1986, as amended from time to time.
"COMMISSION" means the Securities and Exchange Commission.
"COMMITTEE" means the Board or any one or more committees of director(s)
appointed by the Board to administer this Plan with respect to the Awards within
the scope of authority delegated by the Board.
(a) In respect of any decision of the Committee made at a time when
the Participant affected by the decision may be subject to
Section 162(m) of the Code, and the Award subject to such
decision is intended to satisfy the requirements for exemption
therefrom, the decision shall be approved by a committee
comprised of "outside directors" (as this term is defined in
Section 162(m)) to the extent required by Section 162(m).
(b) In respect of any decision of the Committee made at a time when
the Participant affected by the decision may be subject to
Section 16(b) of the Exchange Act, and the Award subject to such
decision is intended to satisfy the requirements for exemption
therefrom, the decision shall be approved by the Board or by a
committee comprised of Non-Employee Directors (as this term is as
defined in Rule 16b-3 of the Exchange Act) to the extent required
by Rule 16b-3.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of Wherehouse
Entertainment, Inc. and such other securities or property as may become the
subject of Awards, or become subject to Awards, pursuant to an adjustment made
under Section 4.3 of this Plan.
"COMPANY" means Wherehouse Entertainment, Inc., a Delaware Corporation, its
successors, and/or its Subsidiaries, as the context requires, provided that with
respect to the Common Stock, or the grant exercise, or disposition of an Award
or the provisions of Sections 4.3.1, 4.3.3, 4.4, 4.10, and Appendix A, Company
means only Wherehouse Entertainment, Inc. and its successors.
"ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or employee of
the Company.
"ELIGIBLE PERSON" means an Eligible Employee, any director, or any Other
Eligible Person, as determined by the Committee.
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time
to time.
"EXCLUDED PERSON" means a Person, as defined in the definition of "Change in
Control," with beneficial ownership of more than 5% of the Common Stock of
Wherehouse Entertainment, Inc. on the Effective Date (or any affiliate,
successor, heir, descendant or related party of or to such Person).
"FAIR MARKET VALUE" on any date means (a) if the stock is listed or admitted to
trade on a national securities exchange, the closing price of the stock on the
Composite Tape, as published in the Western Edition of The Wall Street Journal,
of the principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (b) if the
stock is not listed or admitted to trade on a national securities exchange, the
last price for the stock on such date, as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market
Reporting System or a similar organization if the NASD is no longer reporting
such information; and (c) if the stock is not listed or admitted to trade on a
national securities exchange and is not reported on the National Market
Reporting System, the value as established by the Committee at such time for
purposes of this Plan.
"INCENTIVE STOCK OPTION" means an Option that is designated and intended as an
incentive stock option within the meaning of Section 422 of the Code, the award
of which contains such provisions (including but not limited to the receipt of
stockholder approval of this Plan, if the award is made prior to such approval)
and is made under such circumstances and to such persons as may be necessary to
comply with that section.
"LISTED" or "LISTING" means that point in time in which Wherehouse
Entertainment, Inc.'s Common Stock is listed, or authorized for listing, on the
New York Stock Exchange or the American Stock Exchange, or listed on the
National Market System of the NASDAQ Stock Market or any successor to any of
such entities; or listed, or authorized for listing on a national securities
exchange (or tier or segment thereof) that has listing standards that the
California Commissioner determines by rule (on its own initiative or on the
basis of a petition) are substantially similar to the listing standards
applicable to securities described above.
"NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an officer or
employee of the Company.
"NONQUALIFIED STOCK OPTION" means an Option that is designated as a Nonqualified
Stock Option and will include any Option intended as an Incentive Stock Option
that fails to meet the applicable legal requirements thereof. Any Option granted
hereunder that is not designated as an incentive stock option will be deemed to
be designated a nonqualified stock option under this Plan and not an incentive
stock option under the Code.
"OPTION" means an option to purchase Common Stock granted under this Plan. The
Committee will designate any Option granted to an Eligible Person as a
Nonqualified Stock Option or an Incentive Stock Option.
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"OTHER ELIGIBLE PERSON" means (a) any individual consultant or advisor or agent
who renders or has rendered bona fide services (other than services in
connection with the offering or sale of securities of the Company in a capital
raising transaction) to the Company, and who (to the extent provided in the next
sentence) is selected to participate in this Plan by the Committee; or (b) any
director of the Company. A person who is neither an employee, officer nor
director who provides bona fide services to the Company may be selected as an
Other Eligible Person only if such person's participation in this Plan would not
adversely affect (c) the Company's eligibility to use Form S-8 to register under
the Securities Act of 1933, as amended, the offering of shares issuable under
this Plan by the Company or (d) the Company's compliance with any other
applicable laws, including the California Regulations.
"PARTICIPANT" means an Eligible Person who has been granted an Award under this
Plan.
"PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability
or incompetence of a Participant, has acquired on behalf of the Participant, by
legal proceeding or otherwise, the power to exercise the rights or receive
benefits under this Plan by virtue of having become the legal representative of
the Participant.
"PLAN" means this Wherehouse Entertainment, Inc. 1998 Stock Incentive Plan, as
it may be amended from time to time.
"QDRO" means a qualified domestic relations order as defined in Section 414(p)
of the Code or Title I, Section 206(d)(3) of ERISA (to the same extent as if
this Plan were subject thereto), or the applicable rules thereunder.
"RETIREMENT" means retirement with the consent of the Company, or from active
service as an employee or officer of the Company on or after attaining (a) age
55 with ten or more years of service, or (b) age 65.
"RULE 16B-3" means Rule 16b-3 as promulgated by the Commission pursuant to the
Exchange Act, as amended from time to time.
"SECTION 16 PERSON" means a person subject to Section 16(a) of the Exchange Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to time.
"SHARE" shall mean a share of Common Stock.
"SUBSIDIARY" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by Wherehouse Entertainment, Inc.
"TOTAL DISABILITY" means, in the case of an ISO, a "total and permanent
disability" within the meaning of Section 22(e)(3) of the Code and, with respect
to Awards other than ISO's, disabilities, infirmities, afflictions, or
conditions as the Committee may include.
19
<PAGE> 42
APPENDIX A
CALIFORNIA SECURITIES LAW RESTRICTIONS ON SALE AND
TRANSFER OF SHARES BY PARTICIPANTS
AND
COMPANY'S RIGHT OF
FIRST REFUSAL
THE PROVISIONS OF SECTION 2 OF THIS APPENDIX A SHALL TERMINATE UPON A LISTING.
CAPITALIZED TERMS NOT DEFINED ARE USED AS DEFINED IN THE PLAN.
1. SECURITIES LAW RESTRICTIONS ON SALE AND TRANSFER OF SHARES.
No Participant shall sell, pledge or otherwise transfer Shares
acquired pursuant to an Award or any interest in such Shares or in the Awards
except (a) in accordance with any applicable securities laws and this Appendix
A, or (b) to the Company. Any sale or transfer, or purported sale or transfer,
of any Shares acquired pursuant to an Award or any interest therein other than
to the Company shall be null and void, unless the terms, conditions and
provisions of this Appendix A are strictly observed. The restrictions under this
Appendix shall not apply to any merger of the Company or to any tender offer to
all stockholders that is approved by the Board.
2. RIGHT OF FIRST REFUSAL.
The Company shall have the right of first refusal, as set forth
below, to purchase Shares acquired pursuant to an Award, before the Shares (or
any interest in them) can be validly transferred to any other person or entity.
2.1 NOTICE OF INTENT TO SELL. Before there can be a valid sale or
transfer of any Shares (or any interest in them) acquired
pursuant to an Award by any holder thereof, the holder shall
first give notice in writing to the Company by postage pre-paid
registered or certified U.S. Mail of his or her intention to sell
or transfer such Shares (the "OPTION NOTICE") addressed as
follows (or to such other representatives of the Company or such
other address as the Company shall have duly noticed in writing
to such stockholder), or by actual delivery in person to:
General Counsel
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
The Option Notice shall specify the number of Shares to be sold
or transferred, the price per Share and the terms upon which such
holder intends to make such sale or transfer. If the payment
terms set forth in the Option Notice differ from payment by check
at closing, the Company shall have the option, as set forth
herein, of providing for payment at closing in a fair value
equivalent. The determination of a fair value equivalent shall be
made in the Company's best judgment and such determination shall
be mailed or delivered to the selling or
A-1
<PAGE> 43
transferring stockholder (the "COMPANY'S NOTICE") within five (5)
days of its receipt of the Option Notice. Should the selling or
transferring stockholder disagree with the Company's
determination of a fair value equivalent, he or she shall have
the right ("Retraction Right") to retract such sale or transfer
and the offer of Shares pursuant to the Option Notice (such
retraction to be made in writing and sent via postage pre-paid
registered or certified U.S. Mail to the Company as above
provided within 15 days after the date of the Company's Notice).
2.2 OPTION TO PURCHASE. Subject to the selling stockholder's
Retraction Right, during the 60-day period commencing upon
receipt of the Option Notice by the Company (the "OPTION
PERIOD"), the Company shall have an option to purchase any or all
of the Shares specified in the Option Notice at the price offered
therein.
2.3 PURCHASE OF SHARES. Not more than 30 days after receipt of the
Option Notice, the Company shall give written notice to the
stockholder desiring to sell or transfer Shares of the number of
such Shares which will be purchased (or, if no Shares are to be
purchased, stating such fact) by the Company pursuant to the
terms of this Section 2 (the "PURCHASE NOTICE"). Purchases
pursuant to this Section 2 shall be consummated within 30 days
after delivery of the Purchase Notice to the selling stockholder,
but in no event later than the expiration of the Option Period.
The purchase price shall be paid at the closing (a) by check; or
(b), if the payment terms set forth in the Option Notice differ
from payment by check at closing, in accordance with the payment
terms as set forth in the Option Notice or fair value equivalent
as set forth in the Company's Notice; against surrender by the
selling stockholder of a stock certificate evidencing the number
of Shares specified in the Option Notice, with duly endorsed
stock powers.
2.4 ABILITY TO SELL UNPURCHASED SHARES. Unless all of the Shares
referred to in the Option Notice are to be purchased as indicated
in the Purchase Notice, the stockholder desiring to sell or
transfer may dispose of any Shares referred to in the Option
Notice that are not to be purchased by the Company to the person
or persons specified in the Option Notice during a period of 20
days commencing upon his or her receipt of the Purchase Notice;
provided, however, that he or she shall not sell or transfer such
Shares at a lower price or on terms more favorable to the
purchaser or transferee than those specified in the Option
Notice, and provided that such transfer is consistent with the
other provisions and limitations of the Plan and this Appendix A.
If the transfer is not consummated within such 20 day period,
such stockholder shall again offer such Shares to the Company
pursuant to the terms of this Section 2 prior to any sale or
transfer to any other person.
2.5 LIMITATIONS ON TRANSFEREES. In addition to the limitations under
Section 2, no Shares acquired pursuant to an Award may be
transferred unless the proposed transferee (a) agrees with the
Company in writing to be bound by the terms of this Appendix A
and the Plan applicable to the Shares, and (b) is the same person
or persons as specified in the Option Notice.
A-2
<PAGE> 44
3. MISCELLANEOUS.
3.1 ASSIGNMENT. Notwithstanding anything to the contrary, the Company
may assign any or all of its repurchase rights under this
Appendix A to one or more stockholders or successors of
Wherehouse Entertainment, Inc.
3.2 LEGENDS. The Company may require that all certificates evidencing
Shares issued or delivered under the Plan shall bear the
following legends and any other appropriate or required legends
under applicable laws:
"THESE SHARES WERE ISSUED UNDER THE COMPANY'S 1998 STOCK
INCENTIVE PLAN."
"OWNERSHIP OF THIS CERTIFICATE AND THE SHARES EVIDENCED BY THIS
CERTIFICATE AND ANY INTEREST THEREIN ARE SUBJECT TO SUBSTANTIAL
RESTRICTIONS ON TRANSFER UNDER APPLICABLE LAW AND UNDER
AGREEMENTS WITH THE COMPANY, INCLUDING A RIGHT OF FIRST REFUSAL.
COPIES OF THESE DOCUMENTS ARE AVAILABLE FOR REVIEW AT THE OFFICE
OF THE SECRETARY OF THE COMPANY."
NO TRANSFER OF SUCH SECURITIES WILL BE PERMITTED UNLESS, IN THE
OPINION OF COUNSEL TO THE COMPANY, THE TRANSFER COMPLIES WITH
APPLICABLE FEDERAL AND STATE SECURITIES LAWS."
A-3
<PAGE> 45
PROXY
WHEREHOUSE ENTERTAINMENT, INC.
PROXY FOR COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
I hereby appoint Antonio C. Alvarez, II and Robert C. Davenport, and
each of them or either of them, with full power to act without the other and
with full power of substitution, my true and lawful attorneys and proxies, to
vote all of the shares of common stock of Wherehouse Entertainment, Inc. (the
"Company") which the undersigned may be entitled to vote and to act for me in my
name, place and stead at the Annual Meeting of Stockholders of the Company to be
held at The Westin Los Angeles Hotel, 5400 W. Century Boulevard, Los Angeles,
California, on Wednesday, October 21, 1998 at 10:00 a.m. local time, and any
adjournments or postponements thereof, for the purpose of considering and voting
upon the following:
1. ELECTION OF DIRECTORS.
[ ] FOR the nominees listed below [ ] WITHHOLD AUTHORITY to vote for
the nominees listed below
(INSTRUCTIONS: If you wish to withhold authority to vote for any
individual nominee, strike a line through the nominee's name in the list below):
Antonio C. Alvarez, II Robert C. Davenport Jonathan Gallen
Joseph J. Radecki, Jr. Joseph B. Smith
2. APPROVAL AND ADOPTION OF THE 1998 STOCK INCENTIVE PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS AND
AUDITORS FOR THE FISCAL YEAR ENDING JANUARY 31, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. OTHER BUSINESS: In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting.
(Please sign and date the reverse side.)
<PAGE> 46
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS MADE, FOR ITEMS 1, 2 AND 3, AND AS SAID PROXIES DEEM ADVISABLE ON
SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
Note: Please sign exactly as your name appears on this proxy card. If
shares are held jointly, each holder should sign. Executors,
administrators, trustees, guardians, attorneys and agents should give
their full titles. If the stockholder is a corporation, sign in full
corporate name by the authorized officer.
_______________________________________
Signature
_______________________________________
Signature (if jointly held)
Dated: ______________________, 1998
