Exhibit 3
THIS AMENDED AND RESTATED
MEMORANDUM OF UNDERSTANDING AND
STOCK OPTION AGREEMENT (the
"Agreement") is entered into
effective as of December 30, 1996,
by and among the officers and other
key managers of GUITAR CENTER, INC.
identified on the signature pages
hereto (collectively, "Management")
and CHASE VENTURE CAPITAL
ASSOCIATES, L.P. ("CVCA"), XXXXX
FARGO SMALL BUSINESS INVESTMENT
COMPANY ("Xxxxx") and WESTON
PRESIDIO CAPITAL II, L.P. ("Weston"
and, collectively with CVCA and
Xxxxx, the "Funds").
Neither this Agreement nor the Units issuable upon exercise hereof
have been registered under the Securities Act of 1933, as amended, and may not
be pledged, hypothecated, sold, transferred or otherwise disposed of in the
absence of an effective registration under such Act or an effective exemption
therefrom and otherwise in compliance with this Agreement and the Stockholders
Agreement (as defined herein).
1. Defined Terms. As used herein, the following terms shall have the
following respective meanings:
"Common Stock" shall mean the common stock, par value $.01 per
share, of the Company.
"Company" shall mean Guitar Center, Inc., a Delaware
corporation, and any successor thereto.
"Junior preferred Stock" shall mean the Junior Preferred
Stock, par value $.01 and liquidation preference $100 per share.
"Unit" shall mean an investment unit consisting of (i) one
share of Common Stock and (ii) 0.99 share of Junior Preferred Stock.
2. Grant of options. The Funds, severally and not jointly, hereby grant
to Management the option to acquire an aggregate of 30,188.68 Units presently
held by them (the "Options"), in each case for an exercise price of $39.75 per
Unit in cash (the "Exercise Price"). Such Options are granted by the Funds as
follows:
OPTIONS
-------
CVCA 22,641.52
Xxxxx 4,312.66
Weston 3,234.50
--------
30,188.68
Such Options are granted by the Funds to Management in accordance with the
schedule attached hereto as Exhibit A. Each such grant shall, to the extent
mathematically possible, be deemed granted by each Fund to each member of
Management in the same ratio as granted by the Funds (i.e., 75.00% by Chase,
14.29% by Xxxxx and 10.71% by Weston). At the election of the Funds, any
delivery of Units or other securities hereunder may be rounded to the nearest
whole share.
Each such Option shall be exercisable upon the first to occur of (i) receipt of
the approval, if any, required under the Stockholders Agreement (as defined) as
contemplated by Section 10 or (ii) a Qualified Public Offering (as defined in
the Stockholders Agreement) and shall be exercisable at any time thereafter
through and including 5:00 p.m., Los Angeles time, on December 30, 2001 (the
"Expiration Date"); provided, however, that Options under this Agreement (i) may
only be exercised on two separate occasions, (ii) may only be exercised by
written notice of members of Management owning not less than 66-2/3% of the
unexercised Options as identified on Exhibit A and (iii) must be exercised pro
rata by each member of Management. Such Optione shall be exercised by delivery
of the relevant Exercise Price in cash and written notice of exercise to the
Funds and the members of Management who did not initiate such exercise pursuant
to the procedures provided in Section 14 (the "Exercise Notice"). The Exercise
Notice shall also indicate the time and place of the closing of the exercise,
which time and place shall be reasonably acceptable to the Funds. Such notice
shall be irrevocable, except that closing may be conditioned upon the
consummation of a related public offering or a sale of the Company, in which
event the such exercise shall be deemed not to be effective if such public
offering or sale of the Company is not consummated. The express intention of the
foregoing provisions is to require that the Options granted hereunder be
exercised on no more than two separate instances and that each such exercise be
pro rata among each member of Management and each Fund.
3. No Transfer. The Options granted hereby may not, directly or indirectly,
be transferred, conveyed, assigned, pledged, hypothecated or otherwise disposed
of by any member of Management without the prior written consent of each Fund
(which may be granted or withheld in each such person's discretion); provided,
however, that the rights granted hereby may be exercised by any legatee,
devisee, heir or other transferee upon the death of any member of Management.
4. Stock Dividends, Splits, Reclassifications, etc. The number of Units
subject to the Options granted herein, as well as the related Exercise Price,
shall be proportionally adjusted from time to time, as appropriate, to give
effect to any, stock split, stock dividend, reclassification, split-up,
split-off, recapitalization, merger or other similar transaction involving the
Common Stock or Junior Preferred Stock of the Company, as the case may be.
Notwithstanding the foregoing, no adjustments shall be made for any distribution
of cash or property in respect of the Units prior to exercise of the related
Option.
5. Reservation; No Liens. Until the first to occur of the exercise of all
Options granted hereunder or the earlier occurrence of the Expiration Date, the
Funds shall at all times keep available, free and clear of any liens, charges,
security interests or other adverse claim, the number of Units (or other
securities, if required by any adjustment made under Section 4) necessary to
satisfy its obligations hereunder.
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6. Consideration. The Funds have granted the Options in consideration for
the payment by the members of Management of an aggregate of $100 and other
valuable consideration, the receipt of which is hereby acknowledged. Without
limiting the generality of the foregoing, no member of Management is obligated
to provide any future services to any Fund or to the Company in connection with
the grant or exercise of the Options.
7. Several Obligations; Limitations. The obligations of the Funds hereunder
to sell the shares covered by this Agreement to the members of Management as
identified on Exhibit A, shall be several, not joint. Notwithstanding anything
to the contrary herein, under no circumstance shall any of CVCA, Xxxxx or Xxxxxx
be required to sell to any member of Management more than the respective number
of Units identified in the table to Section 2 multiplied by such person's pro
rata interest therein as identified on Exhibit A, subject to adjustment as
provided in Section 4. The foregoing obligations shall be non-recourse
obligations of each Fund.
8. Default on Exercise. Should any member of Management default in the
payment of the Exercise Price upon the exercise of any Options in accordance
with this Agreement and any related Exercise Notice, such Options shall
thereupon be deemed forfeited by such person and shall be exercised by the other
members of Management pro rata in accordance with Exhibit A.
9. Restrictions on Shares. Each member of Management, severally and not
jointly, acknowledges that they are not relying on the Funds or the Company for
any investment, accounting, tax or legal advice in connection with this
Agreement and that each such person has been advised to seek independent counsel
on such matters.
10. Representations to the Funds. In order to document the compliance by
the Funds with applicable federal and state securities laws, each member of
Management, severally and not jointly, hereby confirms to each Fund that:
(a) Each undersigned member of Management is acquiring the Options and
the underlying Units for the undersigned's own account as principal, for
investment purposes only, and not with a view to, or for, resale, distribution
or fractionalization thereof in contravention of applicable law, and no other
person has or will have a direct or indirect beneficial interest in such Units.
(b) Each undersigned member of Management:
(i) understands that the offering and sale of the Options and the
underlying Units is intended to be a transaction not involving any public
offering exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), and the rules promulgated by the
Securities and Exchange Commission thereunder, that neither the Options
nor the underlying Units have been registered under the Securities Act or
any state securities laws, and that any certificates representing the
Units will continue to bear the legends identified in Section 7(a) of the
Stockholders Agreement for so long as such legends are legally required;
(ii) understands and acknowledges that there are substantial risks
of loss of investment involved in an investment in the Units, and that the
investment in the Units is
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an illiquid investment and the undersigned must bear the economic risk of
investment in the Units for an indefinite period of time, and the
undersigned represents and warrants that he has the financial ability to
bear the economic risk of his investment, has adequate means for providing
for his current needs and possible contingencies and has no need for
liquidity with respect to his investment in the Units and that, at this
time, he could bear a complete loss of his investment therein;
(iii) understands that there is no established market for the Units
and there can be, and has been, no assurance that a public market for such
interests will develop either before or after any exercise of the Options;
(iv) has such knowledge and experience in financial and business
matters, including investments of the type represented by the Units, as to
be capable of evaluating the merits of investment in the Company
represented by the Units;
(v) is familiar with the business and affairs of the Company; and
(vi) has not been furnished by the Funds with any oral
representation, warranty or information in connection with the Options or
the Units.
(c) Each undersigned member of Management, severally and not jointly,
recognizes that he may have no control regarding when the Options are exercised,
will be required at such time to pay the Exercise Price or forfeit the
underlying Option, will incur a significant income tax liability at such time of
exercise and has been urged to obtain independent counsel regarding such matters
as set forth in Section 9. Further, each member of Management acknowledges that
each Fund would, as of the date of this Agreement, likely be considered an
"affiliate" of Guitar Center, Inc. for purposes of the federal securities laws
and that such status, under present law, will prevent the commencement of the
"holding period" of the Units provided for in Rule 144(d) under the Securities
Act until the related Option is exercised (potentially resulting in a
significant delay in the ability to resell such Units in the public market, if
any).
(d) Each undersigned member of Management, severally and not jointly,
further represents and warrants that (i) the undersigned is empowered and
authorized to enter into this Agreement, (ii) this Agreement is valid and
binding upon undersigned and is enforceable against the undersigned in
accordance with its terms (subject to the effect of bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other similar
laws relating to or affecting creditors' rights generally and subject to general
principles of equity), and (iii) this Agreement does not conflict with any law,
court or administrative order or material agreement to which the undersigned is
a party or by which any of its assets may be bound.
The foregoing acknowledgements, representations and agreements shall survive the
Closing Date. As a condition to the exercise of any Options, the Funds may
require that each member of Management confirm in writing the foregoing
representations and warranties as well as the acknowledgement set forth in
Section 9 and otherwise require that such sale be in compliance with all
applicable securities laws and such compliance be documented to the reasonable
satisfaction of the Funds.
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11. Binding Agreement. Subject to Section 3 hereof, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
permitted successors, assigns, personal representatives, heirs and legatees.
12. Conforming Waiver Under Stockholders Agreement. To the extent that the
grant of the Options hereunder is deemed a "Transfer" as that term is used in
the Stockholders Agreement, dated as of June 5, 1996 (the "Stockholders
Agreement"), or if the exercise thereof shall occur prior to the termination of
the transfer restrictions contained in Stockholders Agreement, the parties
hereto, which represent holders of the "Requisite Stockholders Shares" as
defined thereunder, hereby consent to the treatment of the transactions
contemplated hereby as a "Permitted Transfer" pursuant to Section 5 thereof and
agree to use their respective best efforts to cause such waiver to be approved
by the Company. The consent and agreements provided herein shall apply in a
similar manner in the event that any other stockholder of the Company elects to
grant one or more comparable options to executive management of the Company
(i.e., any such transfer shall also be treated as a "Permitted Transfer," and
the related Units will continue to be subject to the Stockholders Agreement in
the hands of Management). In all other respects, the Stockholders Agreement
shall remain in full force and effect with respect to the Units. Upon request,
each member of Management, severally and not jointly, will execute the
appropriate written joinder agreement required by Section 5 of the Stockholders
Agreement.
13. Conforming Assignment of Rights under the Registration Rights
Agreement. In connection with the exercise or anticipated exercise of any of the
Options, the Funds shall, to the full extent permitted thereby, assign to the
members of Management all rights held by the Funds under the Registration Rights
Agreement, dated as of June 5, 1996, by and among the Company and the
stockholders identified therein (the "Registration Rights Agreement"), with
respect to the "Registrable Shares,' to be transferred. As a condition to any
such assignment, each member of Management, severally and not jointly, agrees to
make the written undertaking required by Section 18(b) of the Registration
Rights Agreement to the effect that such shares, in their hands, continue to be
entitled to the benefits of, and subject to the obligations of, such agreement.
The Funds and the members of Management will cooperate fully to effect such
assignment.
14. Notices. Any notice required or permitted to be given pursuant to this
Agreement shall be in writing and shall be deemed given upon personal delivery
or, if mailed, upon the expiration of 48 hours after mailing by any form of
United States mail requiring a return receipt, postage prepaid and addressed
(a) to CVCA,' Xxxxx or Xxxxxx at the address shown for such party on
the signature pages hereof and (b) to any member of Management at the principal
executive office of the Company. Such address may changed by any party hereto by
the giving of written notice to the other parties setting forth the new address
for the giving of notices pursuant to this Agreement.
15. Amendments. This Agreement may be amended at any time by the written
agreement and consent of each of the Funds and by the members of Management
holding not less than 66-2/3% of the unexercised Options as set forth on Exhibit
A.
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16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to principles
of conflicts of laws.
17. Mutual Waiver of Jury Trial. Each party hereto hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, trial by jury in any suit, action or proceeding arising hereunder.
18. Withholdining Taxes. In the event that the Company determines that it
is required to withhold federal, state or local income taxes as a result of the
exercise of any Options, each member of Management, severally and not jointly,
shall make arrangements reasonably satisfactory to the Company to enable the
Company to satisfy such requirements.
19. Entire Agreement. This Agreement constitutes the entire agreement and
understanding among the parties pertaining to the subject matter hereof and
supersedes any and all prior agreements, whether written or oral, relating
thereto. Without limiting the generality of the foregoing, this Agreement
supersedes any and all prior agreements or other understandings between the
Funds and any member of Management regarding the grant of options by the Funds
to any such person, each of which is hereby terminated without any remaining
liability thereunder. This Agreement shall have no effect on any other
arrangements that any member of Management may have with the Company regarding
issuance of stock of the Company.
20. Further Assurances. Each party hereto shall do and perform or cause to
be done and performed all further acts and things and shall execute and deliver
all other agreements, certificates, instruments and documents as any other party
hereto reasonably may request in order to carry out the intent and accomplish
the purposes of this Agreement and the consummation of the transactions
contemplated hereby. Upon request, each member of Management shall deliver a
written spousal consent, in form and substance satisfactory to the Funds,
acknowledging and agreeing to the provisions of this Agreement.
21. No Rights as a Stockholder. No member of Management shall be, nor have
any rights or privileges of, a stockholder of the Company with respect to any
shares purchasable upon exercise of any Option unless and until certificates
representing such shares have been duly transferred by the Funds. At all times
prior thereto, the Funds, as the case may be, shall be the record holders of
such shares with sole right to take any action with respect thereto as any such
Fund shall choose and which is not in contravention of this Agreement.
22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
when taken together shall constitute one and the same instrument.
(Signature Pages Follow)
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first written above.
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: Chase Capital Partners,
General Partner
By:
----------------------------------
General Partner
000 Xxxxxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attn: Chief Administrative Officer
XXXXX FARGO SMALL BUSINESS
INVESTMENT COMPANY, INC.
By:
----------------------------------
Xxxxxx X. Xxxxx
Managing Director
000 Xxxxx Xxxxx Xxxxxx
00xx Xxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
WESTON PRESIDIO CAPITAL II, L.P.
By: Weston Presidio Capital Management
II, L.P.
Its General Partner
By:
----------------------------------
Xxxxxxx X. Xxxxxxx General Partner
000 Xxxxxxx Xxxxxx
Xxxxx 0000
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000
Consent to Section 10 is hereby
confirmed:
CBCAPITAL INVESTORS, INC.
By:
----------------------------------
Authorized Signatory
MANAGMENT:
----------------------------------
Xxxxx Xxxxxx
----------------------------------
Xxxxx Xxxxxxxxx
----------------------------------
Xxxxx Xxxxxxx
----------------------------------
Xxxxx Xxxx
----------------------------------
Xxxx Xxxxxxxx
----------------------------------
Xxxxxx Xxxxxx
----------------------------------
Xxxx Xxxxxxx
----------------------------------
Xxxx Xxxxxxx
----------------------------------
Xxxxx Xxxxxxxxx
----------------------------------
Xxxxx Xxxxxx
----------------------------------
Xxx Xxxxxx
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----------------------------------
Xxxxxxx Xxxxxxxx
----------------------------------
Xxxx XxXxxxx
----------------------------------
Xxx Xxxxxx
----------------------------------
Xxxx XxXxxxxxx
----------------------------------
Xxxxxx Xxxxxxxx
----------------------------------
Xxx Xxxxxxx
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EXHIBIT A:
[TO COME]
10
GUITAR.EX
EXHIBIT A: Units Available: 30,188,68
OPTIONS HELD BY MANAGEMENT
NAME UNITS PERCENT
---------------------------- -------------------- -----------------------
Xxxxx Xxxxxx 11,949.665 39.583%
Xxxxx Xxxxxxxxx 11.949.665 39.583%
Xxxxx Xxxxxxx 419.290 1.389%
Xxxxx Xxxx 419.290 1.389%
Xxxx Xxxxxxxx 419.290 1.389%
Xxxxxx Xxxxxx 419,290 1.389%
Xxxx Xxxxxxx 419.290 1.389%
Xxxx Xxxxxxx 419.290 1.389%
Xxxxx Xxxxxxxxx 419.290 1.389%
Xxxxx Xxxxxx 000.000 1.389%
Xxx Xxxxxx 419.290 1.389%
Xxxxxxx Xxxxxxxx 419.290 1.389%
Xxxx XxXxxxx 419.290 1.389%
Xxx Xxxxxx 419.290 1.389%
Xxxx XxXxxxxxx 419.290 1.389%
Xxxxxx Xxxxxxxx 419.290 1.389%
Xxxx Xxxxxxx 419.290 1.389%
-------------------- -----------------------
TOTALS 30,188.680 100.000%
==================== =======================
This Exhibit shall be appropriately updated after the first exercise of the
Agreement in the event that less than all Options are exercised at that time.
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AMENDMENT AND CONSENT
Effective as of November 9, 1998
Reference is made to that certain Amended and Restated Memorandum of
Understanding and Stock Option Agreement dated as of December 30, 1996 (the
"Stock Option"). Capitalized but undefined terms shall have the meanings
provided in the Stock Option.
It is hereby confirmed that the Stock Option is amended to delete the
entry for Xxxx Xxxxxxx on Exhibit A to the Stock Option and to hereafter reduce
the number of Units covered by the Stock Option from 30,188.68 to 29,769.39. The
obligations of CVCA, Xxxxx and Xxxxxx set forth in Section 2 of the Stock Option
shall be proportionately reduced and the terminated options shall not be
reissued. Except for the termination of the rights of Xxxx Xxxxxxx as provided
herein, the Stock Option remains in full force and effect.
The miscellaneous provisions contained in Sections 16, 17, 19, 20 and
22 shall apply to this Amendment and Consent.
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
and Consent as required by Section 15 of the Stock Option, effective as of the
first date set forth above.
-----------------------------
Xxxx Xxxxxxx
-----------------------------
Xxxxxx Xxxxxxx (to the extent of any interest in the Stock Option)
-----------------------------
Xxxxx Xxxxxx
-----------------------------
Xxxxx Xxxxxxxxx
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CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: Chase Capital Partners
General Partner
By:
----------------------------------------
Xxxxx X. Xxxxxxxx
Authorized Signatory
XXXXX FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.
By:
----------------------------------------
Xxxxxx X. Xxxxx
Managing Director
WESTON PRESIDIO CAPITAL II, L.P.
By: Weston Presidio Capital Management, L.P.
General Xxxxxx
By:
----------------------------------------
Xxxxxxx X. Xxxxxxx General Partner
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