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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 Section 240.14a-11(c) or Section 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] Fee not 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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(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
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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
paid 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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[WHEREHOUSE MUSIC LOGO]
WHEREHOUSE ENTERTAINMENT, INC.
19701 HAMILTON AVENUE
TORRANCE, CALIFORNIA 90502-1334
AUGUST 20, 2001
Dear Stockholder:
We cordially invite you to attend our Annual Meeting of Stockholders, which
will be held on Thursday, September 20, 2001 at The Holiday Inn Hotel, 19800 S.
Vermont, Torrance, California at 10:00 a.m. (local time).
At the Annual Meeting, you will be asked to vote upon the election of a
Board of Directors, the approval of our 2001 Stock Incentive Plan (as amended,
the "2001 Plan"), and the ratification of Deloitte & Touche LLP as the Company's
independent public accountants and auditors for the fiscal year ending January
31, 2002. The Board of Directors recommends that you vote FOR each of these
items. We have 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. Whether or not you
plan to attend the meeting, please complete, sign, date, and return the enclosed
proxy card(s) promptly to ensure that your shares will be represented. If, after
returning your proxy card, you wish to attend the meeting and 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.
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WHEREHOUSE ENTERTAINMENT, INC.
19701 HAMILTON AVENUE
TORRANCE, CALIFORNIA 90502-1334
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 20, 2001
------------------------
TO THE STOCKHOLDERS OF
WHEREHOUSE ENTERTAINMENT, INC.
The Annual Meeting of Stockholders of Wherehouse Entertainment, Inc. (the
"Company") will be held at The Holiday Inn Hotel, 19800 S. Vermont, Torrance,
California on Thursday, September 20, 2001 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 2002 and until
his or her successor has been duly elected and qualified (Proposal 1);
2. To approve the Company's 2001 Stock Incentive Plan (the "2001 Plan")
(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, 2002 (Proposal 3); and
4. To transact such other business as may properly come before the meeting.
The Board of Directors fixed August 7, 2001 as the record date for the
Annual Meeting. This means that owners of the Company's Common Stock at the
close of business on that date are entitled to receive notice of and to vote at
the Annual Meeting.
By Order of the Board of Directors,
/s/ Mark A. Velarde
Mark A. Velarde
Executive Vice President,
Chief Financial Officer, Chief
Administrative Officer and
Assistant Secretary
Torrance, California
August 20, 2001
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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 SEPTEMBER 20, 2001
This Proxy Statement is furnished to stockholders of Wherehouse
Entertainment, Inc. (the "Company" or "Wherehouse") by its Board of Directors in
connection with the solicitation of proxies for use at the Annual Meeting of
Stockholders of the Company. The Annual Meeting will be held at The Holiday Inn
Hotel, 19800 S. Vermont, Torrance, California on Thursday, September 20, 2001 at
10:00 a.m. (local time). The Company's principal executive offices are located
at 19701 Hamilton Avenue, Torrance, California and its telephone number is (310)
965-8300. This Proxy Statement, Notice of Annual Meeting, and the accompanying
proxy card(s) are being first mailed to holders of the Company's common stock,
par value $.01 per share ("Common Stock"), on or about August 20, 2001, and the
Company's Annual Report for the fiscal year ended January 31, 2001 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 fixed August 7, 2001 as the record date (the "Record
Date") for the determination of stockholders entitled to receive notice of and
to vote at the Annual Meeting. On the Record Date, 11,026,421 shares of Common
Stock were issued and 11,001,421 were outstanding and entitled to vote at the
meeting. 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. A complete list of stockholders entitled to vote at the
Meeting will be available for examination during normal business hours by any
stockholder, for purposes related to the Meeting, for a period of ten days prior
to the Meeting, at the Company's corporate offices located at 19701 Hamilton
Avenue, Torrance, California 90502-1334.
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 proxy card that is properly signed and
returned to the Company prior to the meeting 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 delivering to the General Counsel of the Company,
either in person or by mail, a written notice of revocation, or by a subsequent
proxy executed by the person executing the prior proxy and delivered prior to or
presented at the meeting or by attendance at the Annual Meeting and voting in
person by the person executing 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 approval of the Company's 2001 Stock Incentive Plan (the "2001
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, 2002. 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 that may be properly presented
at the meeting or, except as otherwise limited by law, any adjournments or
postponements of the meeting and all matters incident to the conduct of the
meeting. The Company is not now aware of any such other matters that may come
before the meeting.
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Quorum. The presence at the meeting, in person or by proxy, of the holders
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 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 of the 2001
Plan will require a majority of votes cast by the stockholders present in person
or represented by proxy and entitled to vote at the meeting. Assuming the
presence of a quorum, 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 present in person or represented by proxy and
entitled to vote at the meeting.
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. In determining whether a proposal has
been approved, abstentions are counted as votes against a proposal and broker
non-votes are not counted as votes for or against a proposal or as votes present
and voting on a proposal.
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.
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
AUGUST 20, FIRST
NAME POSITION 2001 ELECTED
---- -------- ---------- -------
Antonio C. Alvarez, II............... Chief Executive Officer, Chairman 53 1997
of the Board and Director
Robert C. Davenport.................. Director 35 1996
Jonathan Gallen...................... Director 41 1997
Joseph B. Smith...................... Director 73 1997
Joseph J. Radecki, Jr. .............. Director 43 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 Founding
Managing Director of Alvarez & Marsal, Inc., a New York based management
consulting company "A&M"). Mr. Alvarez also serves as Chief Restructuring
Officer of
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The Warnaco Group, Inc., a manufacturer of apparel, fragrances and accessories,
headquartered in New York. Mr. Alvarez's experience includes acting as adviser
to the bank lenders to Camelot Music, Inc., a mall-based music retailer with
over 300 stores. 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, dated as of January 31, 1997, as amended February 1, 1998,
April 30, 1998, May 13, 1999, April 13, 2000, June 27, 2000, and April 26, 2001,
among the Company, A&M, Antonio C. Alvarez, II, the Support Employees described
therein, A&M Investment Associates #3, LLC ("A&M #3"), and Cerberus Partners,
L.P (as so amended, the "Management Services Agreement").
ROBERT C. DAVENPORT, Director since November 15, 1996. Mr. Davenport is a
Managing Director of Cerberus Capital Management, L.P., a New York based
investment fund management firm, 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. Mr. Davenport is a member of the Board of
Directors of CheckOut.com, LLC.
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 Investments, L.P. 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. Mr. Gallen has
served on the Board of Directors of Harvest Foods and Fruehauf Trailer
Corporation.
JOSEPH B. SMITH, Director since January 30, 1997. Mr. Smith is currently
the Chairman of Unison Productions, a consulting and production company. Mr.
Smith has held this position since April 1994. Mr. Smith served as President and
Chief Executive Officer of Capitol Industries-EMI Music, Inc. from 1987 until
1993. Mr. Smith also serves as a director of Westwood One, Inc.
JOSEPH J. RADECKI, JR., Director since February 20, 1997. Mr. Radecki is a
Managing Director of CIBC Oppenheimer Corp.,, an investment bank. From 1990 to
1998, Mr. Radecki was an Executive Vice 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 is currently Chairman of the Board of American
Rice, Inc. and has served as a member of the Board of Directors of Service
America Corporation, Bucyrus International, Inc. and ECO-Net.
MEETINGS AND COMPENSATION OF DIRECTORS
During the fiscal year ended January 31, 2001, there were ten meetings of
the Board of Directors. All of the directors participated in all meetings,
except Mr. Gallen, who did not participate in any of the ten meetings.
Cash Compensation of Directors. Two non-employee members of the Board of
Directors, Messrs. Radecki and Smith, each received a fee of $5,000 per attended
meeting for his services and were reimbursed for reasonable expenses incurred in
connection with attending such meetings. Messrs. Alvarez, Gallen, and Davenport
were not paid any compensation for their services as directors.
COMMITTEES OF THE BOARD OF DIRECTORS
There are three standing committees of the Board of Directors of the
Company: the Audit Committee, the Compensation Committee, and the 162(m)
Committee.
Audit Committee. Messrs. Radecki, Davenport, and Gallen, none of whom is a
current or former officer or employee of the Company, are the current members of
the Audit Committee. The Audit Committee is
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responsible for monitoring and reviewing accounting methods, internal accounting
procedures and controls, and audit plans adopted by the Company. 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 four meetings during the
fiscal year ended January 31, 2001. Mr. Gallen was unable to attend these
meetings. Both other members attended all of the meetings.
Compensation Committee. 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 for approval by the full Board of
Directors, all compensation arrangements for the executive officers of the
Company. The Compensation Committee's goal is to ensure that the executive
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 three meetings during the fiscal year ended January 31, 2001. All members
of the Compensation Committee attended all meetings.
162(m) Committee. Messrs. Gallen and Smith, neither of whom is a current or
former officer or employee of the Company, are the current members of the 162(m)
Committee. The 162(m) Committee is responsible for administering the Company's
1998 Stock Incentive Plan (which was approved by the Company's stockholders at
the 1998 Annual Meeting) with respect to persons whose compensation is subject
to Section 162(m) of the Internal Revenue Code and persons whom the Compensation
Committee identifies as potentially subject to Section 162(m). For these
persons, the 162(m) Committee establishes performance-based goals for granting
awards under the 1998 Stock Incentive Plan and certifies whether or not these
goals have been met. If the 2001 Plan is approved by the stockholders at the
Annual Meeting, the 162(m) Committee will have the same responsibilities with
respect to that Plan. The 162(m) Committee was established in March 1999.
EXECUTIVE OFFICERS
The current executive officers of the Company, each of whom serves in the
indicated capacities at the pleasure of the Board, are as follows:
<Table>
<Caption>
AGE AT
NAME POSITION AUGUST 20, 2001
---- -------- ---------------
Antonio C. Alvarez, Chief Executive Officer, Chairman of the Board 53
II................... and Director
Larry C. Gaines........ President and Chief Operating Officer 53
Mark A. Velarde........ Executive Vice President, Chief Financial 45
Officer, Chief Administrative Officer and
Assistant Secretary
Barbara C. Brown....... Senior Vice President, Store Operations 49
</Table>
ANTONIO C. ALVAREZ, II, Chief Executive Officer, Chairman of the Board and
Director of Wherehouse since January 30, 1997. Mr. Alvarez is a Founding
Managing Director of Alvarez & Marsal, Inc., a New York based management
consulting company "A&M"). Mr. Alvarez also serves as Chief Restructuring
Officer of The Warnaco Group, Inc., a manufacturer of apparel, fragrances and
accessories, headquartered in New York. Mr. Alvarez's experience includes acting
as adviser to the bank lenders to Camelot Music, Inc., a mall-based music
retailer with over 300 stores. 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, dated as of January 31, 1997, as amended February
1, 1998, April 30, 1998, May 13, 1999, and April 13, 2000 (the "Management
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Services Agreement"), among Wherehouse, A&M, Antonio C. Alvarez, II, the Support
Employees described therein, A&M #3, and Cerberus Partners, L.P.
LARRY C. GAINES, President and Chief Operating Officer. Mr. Gaines
commenced serving as President and Chief Operating Officer in May 2001. Mr.
Gaines joined Wherehouse in October 1998 with the Acquisition of Blockbuster
Music. He was appointed Executive Vice President and Chief Operating Officer of
Wherehouse in March 1999 and from January 2000 through April 2001 he has served
as Executive Vice President, Advertising, Marketing and Merchandising. From
January 1998 through October 1998, Mr. Gaines served as President of Blockbuster
Music. From 1981 through 1997, Mr. Gaines was with the Musicland Group, serving
in several senior management positions, most recently as President of Media
Play, a 90-store, big box, full media chain. Previously he was with Cole
National Corporation. Mr. Gaines is a member of the board of directors for the
National Association of Recording Merchants (NARM).
MARK A. VELARDE, Executive Vice President, Chief Financial Officer, Chief
Administrative Officer and Assistant Secretary. On October 1, 1999, Mr. Velarde
became Chief Financial Officer and Assistant Secretary of Wherehouse
Entertainment, Inc. and, in May 2001, was also appointed Chief Administrative
Officer. Mr. Velarde served as Chief Financial Officer and later Chief Operating
Officer, of Telegroup, Inc., a publicly traded telecommunications company during
its Chapter 11 reorganization from 1998 to 1999. From 1994 to 1998, he served in
the capacities of Chief Financial Officer and Acting Chief Operating Officer of
Anthony Manufacturing Company, Inc., a privately held manufacturer of commercial
refrigeration components. During 1992 and 1993, Mr. Velarde was Acting Chief
Executive Officer of Affiliated Medical Enterprises, a debtor-in-possession
which owned and operated a chain of acute care hospitals. Mr. Velarde was a
managing director of Alvarez & Marsal, Inc. which he joined in 1992. From 1988
to 1992, he was cofounder and Executive Vice President of HVK, Inc., a
California-based real estate consulting and investment advisory firm. Prior to
HVK, he was Senior Vice President -- Acquisitions of the pension fund advisory
arm of First Interstate Bancorp, where he worked in acquisitions for 5 years.
BARBARA C. BROWN, Senior Vice President, Store Operations. Ms. Brown joined
Old Wherehouse in 1973. She became Vice President, Sales and Operations in 1986,
and was promoted to Senior Vice President in 1991. Prior to 1986, Ms. Brown
served in a variety of store operations positions including Store Manager,
District Manager, Assistant Vice President, Store Operations, and Associate Vice
President, Store Operations.
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EXECUTIVE COMPENSATION
The following table sets forth, for Fiscal 2001, certain compensation paid
by Wherehouse or accrued for such fiscal year, to the Chief Executive Officer
and the three other executive officers of the Company (the "Named Executive
Officers"). All cash compensation with respect to Antonio C. Alvarez, II was
paid to A&M, 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 #3, an affiliate of A&M.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
YEAR ENDED SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME & PRINCIPAL POSITION JANUARY 31, ($) ($) ($)(1) (#) ($)
------------------------- ----------- ------- ------- ------------ ------------ ------------
Antonio C. Alvarez, II............... 2001 -- -- 600,000(2) -- 1,948(3)
Chairman, Chief 2000 -- -- 600,000(2) -- --
Executive Officer 1999 -- -- 600,000(2) -- --
Larry C. Gaines...................... 2001 286,139 10,807 -- 11,077(4)
President and Chief 2000 280,000 112,000 -- -- 3,796(5)
Operating Officer 1999 -- -- -- -- --
Mark A. Velarde...................... 2001 227,219 3,722 22,674(6)
Executive Vice President, 2000 -- -- -- -- --
Chief Financial Officer 1999 -- -- -- -- --
Chief Administrative Officer and
Assistant Secretary
Barbara C. Brown..................... 2001 183,946 8,090 -- -- 21,968(7)
Senior Vice President, 2000 178,654 54,000 -- -- 22,575(8)
Store Operations 1999 175,000 75,000 -- 28,000 22,334(9)
</Table>
- ---------------
(1) In accordance with Commission 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 in January, 1997 pursuant to the Management Services
Agreement dated as of January 31, 1997. The present term of the Management
Services Agreement will expire on October 14, 2001 pursuant to an extension
and amendment thereof dated as of June 30, 2000.
(3) Includes $1,948 paid on behalf of Mr. Alvarez and his family for medical
expenses not covered by the Company's group medical insurance plan.
(4) Includes $1,895 paid on behalf of Mr. Gaines and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are a $7,200 automobile allowance, $651 of premiums paid for term
life insurance and $1,331 for matching contributions to the Company's 401(k)
plan.
(5) Includes $673 paid on behalf of Mr. Gaines and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are a $2,492 automobile allowance and $631 of premiums paid for
term life insurance.
(6) Includes $13,782 paid on behalf of Mr. Velarde and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are a $7,200 automobile allowance, $222 of premiums paid for term
life insurance, and $1,470 for matching contributions to the Company's
401(k) plan.
(7) Includes $3,467 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 a $7,200 automobile allowance, $7,353 of
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premiums paid for term life insurance and $3,948 for matching contributions
to the Company's 401(k) plan.
(8) Includes $4,415 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 a $7,200 automobile allowance, $7,387 of premiums paid for term
life insurance and $3,573 for matching contributions to the Company's 401(k)
plan.
(9) Includes $4,415 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 a $7,200 automobile allowance, $7,405 of premiums paid for term
life insurance and $3,215 for matching contributions to the Company's 401(k)
plan.
STOCK OPTIONS
In connection with the Management Services Agreement and consummation of
the Reorganization Plan, Wherehouse entered into the Option Agreement (amended
on April 30, 1998 to conform the agreement to the intention of the parties) with
A&M #3, an affiliate of A&M, of which Antonio C. Alvarez, II is a principal. The
Option Agreement provides for the grant to A&M #3 of options (the "A&M #3
Options") representing in the aggregate the right to purchase 10% of (i) the
shares of Common Stock issued under the Reorganization Plan, (ii) certain shares
purchased by A&M #3, and (iii) the shares underlying these options. The A&M #3
Options vested monthly in equal installments through October 31, 1998, and all
unexercised A&M #3 Options expire on January 31, 2003, subject to prior
termination as set forth in the Management Services Agreement. The exact number
of shares underlying these options and the exercise prices 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.
An interim adjustment was made on December 10, 1998 to reflect the resolution of
claims as of September 30, 1998. After such adjustment, the A&M #3 Options
consisted of (i) options to acquire 399,717 shares at an exercise price of
$8.80, (ii) options to acquire 399,717 shares at an exercise price of $10.66,
and (iii) options to acquire 399,717 shares at an exercise price of $12.97. 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.
On April 7, 1998 and on September 18 and 22, 1998, the Company's
Compensation Committee granted, and the entire Board of Directors approved
grants of Nonqualified Stock Options under the Wherehouse 1998 Stock Incentive
Plan for a total of 339,500 shares of Common Stock. Additional grants of
Non-Qualified Stock Options totaling 197,000 and 254,500 were made during Fiscal
2001 and Fiscal 2000, respectively. On April 13, 2000, the Board of Directors
authorized the granting of an additional 264,500 options. As of August 7, 2001,
net of forfeitures, there were 483,000 options outstanding under the Wherehouse
1998 Stock Incentive Plan.
FISCAL YEAR-END OPTION VALUES
No options were exercised by any of the Named Executive Officers during
Fiscal 2001. 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, 2001. None of the Named Executive Officers held any stock appreciation
rights at such time. No established trading market exists for the Common Stock.
As of January 31, 2001, the Company calculated the book value of each share of
Common Stock to be $7.19. This book value of $7.19 per share is utilized to
calculate the value of unexercised in-the-money options in the table below. The
value used is not intended to represent the price at which shares of the Common
Stock trade.
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FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
Antonio Alvarez, II.............. 1,199,151/0(2) $0/0(2)
Larry C. Gaines.................. 20,000/30,000(4) 0/0
Mark A. Velarde.................. 0/50,000(3)/(4) 0/0
Barbara C. Brown................. 16,800/11,200(4) 0/0
</Table>
- ---------------
(1) As noted above, book value was used to calculate the value of unexercised
in-the-money options. If a higher stock value were used to calculate the
value of unexercised options at fiscal year-end, the value of unexercised
options would be higher, as (i) more options would be "in-the-money", and
(ii) each in-the-money option would have a higher value.
(2) Wherehouse entered into the Option Agreement with A&M #3, an affiliate of
A&M, 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 to acquire, in the aggregate, 993,380 shares of
Common Stock, subject to adjustment upon certain events. On April 30, 1998,
the Option Agreement was amended to conform the agreement to the intent of
the parties. Pursuant to the Option Agreement, as amended, and based upon
distributions and cash settlements pursuant to the Reorganization Plan, on
December 10, 1998, the number of options granted to A&M #3 was adjusted such
that the total shares subject to such options was 1,199,151, comprised of:
(i) options to acquire 399,717 shares at an exercise price of $8.80, (ii)
options to acquire 399,717 shares at an exercise price of $10.66, and (iii)
options to acquire 399,717 shares at an exercise price of $12.97.
(3) In connection with the Management Services Agreement, as amended, Wherehouse
issued options to purchase 993,380 shares, subject to adjustment and
subsequently increased to 1,199,151 shares as described in Note 2 above, of
Common Stock to A&M #3 pursuant to the Option Agreement. Mr. Velarde
possesses a pecuniary interest in A&M #3.
(4) These ten year options vest, subject to acceleration in certain
circumstances, in five equal annual installments beginning on April 7, 1999
and have an exercise price of $12.00 per share.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(2)(3) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ------------- ---------------- ----------- ---------- -------- ---------
Mark A. Velarde........... 50,000 25.4% $18.00 4/13/2010 67,563 640,683
</Table>
- ---------------
(1) The amounts under the columns labeled "5%" and "10%" are included pursuant
to certain rules promulgated by the Commission and are not intended to
forecast future appreciation, if any, in the price of the Company's Common
Stock. The amounts are calculated by using the fair market value of $11.88
per share of Common Stock which was the fair market value on the April 7,
1998 initial grant date of options under the Wherehouse 1998 Stock Incentive
Plan (as determined by an appraisal obtained by the Company) and assume
annual compounded stock appreciation rates of 5% and 10% over the full
10-year term of the options.
The appreciation shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise
of the options or the sale of the underlying shares. As set forth in note 2
below, the option grants vest equally over a 5-year period, and the reported
amounts are based on the assumption that the named persons hold the options
granted for their full 10-year term. The actual value of the options will
vary in accordance with the market price of the Company's Common Stock.
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(2) Stock options were granted under the Wherehouse 1998 Stock Incentive Plan at
exercise prices deemed not to be less than the fair market value at the time
of the grant. All options described in this table were to vest in five equal
annual installments on the anniversary of the grant date over a 5-year
period. Vested but unexercised options expire 6 months after a termination
of employment due to retirement, death or total disability; immediately upon
any termination of the individual's employment "for cause"; and 30 days
after a termination of employment for any other reason. Generally, upon a
"Change in Control Event", each option will become immediately exercisable.
A "Change in Control Event" under the Wherehouse 1998 Stock Incentive Plan
generally includes (subject to certain exceptions) (i) a more than 50%
change in ownership of the Company; (ii) certain changes in a majority of
the Board of Directors; (iii) certain mergers or consolidations approved by
the Company's stockholders; or (iv) stockholder approval of a liquidation of
the Company or sale of substantially all of the Company's assets. A "Change
in Control Event" could also be triggered if any new person acquires greater
than 30% ownership of the Company's stock, and certain 5% owners do not
retain at least 30%.
(3) This table does not include the adjustment to the number of shares subject
to the options granted to A&M #3 pursuant to the adjustment provisions of
the Option Agreement, as amended.
DESCRIPTION OF EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS
As of August 7, 2001, Antonio C. Alvarez, II serves as Chairman of the
Board and Chief Executive Officer pursuant to the Management Services Agreement.
Under the Management Services Agreement, A&M currently receives $240,000
annually as compensation for the services of Antonio C. Alvarez, II and the
services of other personnel supplied by A&M as needed. A&M is also eligible to
receive a discretionary incentive bonus for the services of certain individuals.
The Management Services Agreement, as amended, now provides that it will expire
on October 14, 2001, subject to further extension or earlier termination under
certain conditions.
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PERFORMANCE GRAPH
The Company's 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. From time to time, the Company learns of trades through beneficial
ownership reports of its directors and large holders filed with the SEC.
Occasionally, the Company 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
---------- ----------- ------
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
3/6/98.................................................. 658 $ 9.50
3/24/98................................................. 500 $14.25
4/3/98.................................................. 20,000 $15.00
4/22/98................................................. 80,000 $14.88
5/5/98.................................................. 15,000 $16.25
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
9/29/98................................................. 33,000 $14.00
9/29/98................................................. 38,000 $14.00
9/29/98................................................. 3,290 $14.00
9/29/98................................................. 62,000 $14.00
10/15/98................................................ 15,000 $11.75
12/21/98................................................ 19,583 $17.50
3/1/99.................................................. 25,000 $13.50
2/17/00................................................. 250,000 $20.00
</Table>
The foregoing list of trades is not necessarily exclusive, and the Company
takes no responsibility for the accuracy of the information regarding such
trades. These values are not intended to represent the price at which those
shares would trade if a liquid, public market existed for Common Stock. As of
August 7, 2001, 11,047,185 shares of Common Stock were issued, and 11,022,185
shares were outstanding. All but 1,329,236 of those shares were issued pursuant
to the Reorganization Plan. As of August, 7, 2001, there were 858 record holders
of Common 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
- ---------------
* 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 Compensation Committee
Report by reference therein. The report shall not be deemed soliciting
material or otherwise deemed filed under either such Act.
10
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compensation of executive 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 ended January 31, 2001. Changes made or
anticipated for the fiscal year ending January 31, 2002 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-based awards, including stock options.
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 described in 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, or disapproves such
recommendations.
Compensation is paid to A&M for the services of Mr. Antonio C. Alvarez, II
and the services of other personnel supplied by A&M in accordance with the
Management Services Agreement. Under the Management Services Agreement, A&M
currently receives $240,000 annually as compensation for the services of Antonio
C. Alvarez, II and the services of other personnel supplied by A&M as needed.
Annual Bonus Compensation. The Company's corporate bonus plan provides for
officer bonus opportunities relative to the achievement of certain targets
related to earnings before interest, taxes, depreciation and amortization
("EBITDA"). Pursuant to the Management Services Agreement, A&M is eligible to
receive additional incentive fees if the EBITDA performance targets are met
under the corporate bonus plan.
Stock Options. In connection with the Management Services Agreement and
consummation of the Reorganization Plan, Wherehouse entered into the Option
Agreement (amended on April 30, 1998 to conform the agreement to the intention
of the parties) with A&M #3, an affiliate of A&M of which Antonio C. Alvarez, II
is a principal. The Option Agreement provides for the grant to A&M #3 of options
(the "A&M #3 Options") representing in the aggregate the right to purchase 10%
of (i) the shares of Common Stock issued under the Reorganization Plan, (ii)
certain shares purchased by A&M #3, and (iii) the shares underlying these
options. The A&M #3 Options vested monthly in equal installments through October
31, 1998, and all unexercised A&M #3 Options expire on January 31, 2003, subject
to prior termination as set forth in the Management Services Agreement. The
exact number of shares underlying these options and the exercise prices 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. An interim adjustment was made on December 10, 1998 to
reflect the resolution of claims as of September 30, 1998. After such
adjustment, the A&M #3 Options consisted of (i) options to acquire 399,717
shares at an exercise price of $8.80, (ii) options to acquire 399,717 shares at
an exercise price of $10.66, and (iii) options to acquire 399,717 shares at an
exercise price of $12.97. 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
11
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$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.
Additional grants of Non-Qualified Stock Options totaling 197,000 were made
during the fiscal year ended January 31, 2001 under the Wherehouse 1998 Stock
Incentive Plan. On April 13, 2000, the Board of Directors authorized the
granting of an additional 264,500 options. As of April 25, 2001, net of
forfeitures, there were 521,000 options outstanding under the Wherehouse 1998
Stock Incentive Plan. On August 7, 2001, the Board of Directors approved the
Wherehouse 2001 Stock Incentive Plan, subject to shareholder approval. No
options have been granted under the Wherehouse 2001 Stock Incentive Plan.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Under the Management Services Agreement, A&M currently receives $240,000
annually as compensation for the services of Antonio C. Alvarez, II and the
services of other personnel supplied by A&M, as needed.
In extending the Management Services Agreement, the Committee took note
that the Company had achieved a significant improvement in its operating
performance under the direction of Mr. Antonio Alvarez and others provided by
A&M, that A&M had not in prior years sought an increase in the compensation paid
for Mr. Antonio Alvarez or other personnel supplied by A&M, and that the Company
would be well served by continuing this relationship. See "Description of
Employment Contracts, Termination of Employment and Change in Control
Arrangements."
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, 2001.
The Compensation Committee
Robert C. Davenport
Joseph J. Radecki, Jr.
Joseph B. Smith
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Davenport,
Radecki, and Smith. None of the members of the Compensation Committee is or has
been an officer or employee of the Company. Mr. Radecki is currently Managing
Director of CIBC Oppenheimer Corp., an investment bank. CIBC Oppenheimer Corp.
acted as a financial advisor to the Company during 1998 with respect to the
Acquisition of Blockbuster Music by the Company, and, pursuant to an engagement
letter dated September 22, 1998, received a fee of $600,000 from the Company,
plus expenses, upon completion of the Acquisition.
Mr. Davenport is a Managing Director of Cerberus Capital Management, L.P.
In 1998, the Company paid a onetime fee of $900,000 to Cerberus Capital
Management, L.P., an affiliate of Cerberus Partners, L.P., for a commitment to
provide a bridge loan to finance the acquisition of Blockbuster Music in the
event that permanent financing was not in place at the time of the Acquisition.
AUDIT COMMITTEE REPORT
In accordance with its written charter attached to this Proxy Statement as
Exhibit A, adopted by the Board of Directors, the Audit Committee assists the
Board of Directors in fulfilling its oversight responsibilities by reviewing the
financial information which will be provided to the shareholders and others, the
systems of internal controls which management and the Board of Directors have
established, and the audit process.
12
16
The Audit Committee of the Company's Board of Directors is comprised of three
independent directors, using the definition of independence in Sections
303.01(B)(2)(a) and (3) of the New York Stock Exchange's listing standards. The
Audit Committee ("Committee") meets four times a year. The members of the
Committee are listed at the end of this report.
Management is responsible for the Company's internal controls and the
financial reporting process. The independent accountants ("auditors") are
responsible for performing an independent audit of the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and issuing a report thereon. The Committee's responsibility is to monitor these
processes. The Committee meets with the auditors at least four times a year.
In this context the Committee has discussed with the Company's auditors the
overall scope and plans for the independent audit. Management represented to the
Committee that the Company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles. The Committee has
reviewed and discussed with management and the auditors the Company's audited
financial statements, including the auditor's judgments about the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in the financial
statements. The Committee also discussed with the auditors the other matters
required by Statement on Auditing Standards No. 61 "Communication with Audit
Committees" as amended by Statement on Auditing Standards No. 90 "Audit
Committee Communications".
The Company's auditors provided to the Committee the written disclosures
required by Independence Standards Board Standard No. 1 "Independence
Discussions with Audit Committees", and the Committee discussed with the
auditor's their independence from the Company and its management.
Based on the Committee's discussion with management and the auditors and
the Committee's review of the representations of management and the report of
the auditors to the Committee, the Committee recommended to the Board that the
audited consolidated financial statements be included in the Annual Report on
Form 10-K for the year ended January 31, 2001 which was filed with the
Securities and Exchange Commission.
Audit Committee
Joseph J. Radecki, Jr.
Robert C. Davenport
Jonathan Gallen
INDEPENDENT ACCOUNTANTS
During the fiscal year ended January 31, 2001, Deloitte & Touche LLP
provided various audit and non-audit services to the Company. Set forth below
are the aggregate fees billed for those services:
(a) Audit Fees: The aggregate fees billed for professional services
rendered for the audit of the Company's annual financial statements for the
fiscal year ended January 31, 2001 and for the reviews of the financial
statements included in the Company's quarterly reports on Form 10-Q for
that fiscal year were $311,300.
(b) Financial Information Systems: No fees were paid in connection
with the design and implementation of financial information systems.
(c) All Other Fees: The aggregate fees billed by Deloitte & Touche LLP
for services rendered to the Company, other than the services described
above, for the fiscal year ended January 31, 2001 were $222,000.
The Audit Committee has determined that the provision of services covered
in (b) above are compatible with maintaining the independence of Deloitte &
Touche LLP.
13
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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's funds, 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 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 Management Services
Agreement provides that the number of A&M Shares are to be adjusted
periodically, as practicable, based on the shares issued under the
Reorganization Plan. An interim adjustment was made on December 10, 1998 to
reflect the issuance of shares under the Reorganization Plan based on the
resolution of claims as of September 30, 1998. Based on this interim adjustment,
the number of A&M Shares was reduced to 1,079,236. The Company estimates that
approximately 4,700 additional A&M Shares will be issued in the future based on
the adjustment formula. 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 interest or principal
amortization until their maturity date. The Promissory Notes are secured by a
first-priority pledge of the A&M Shares pursuant to a Stock Pledge Agreement
dated as of January 31, 1997.
In addition, in connection with the Management Services Agreement and
consummation of the Reorganization Plan, Wherehouse entered into the Option
Agreement, amended on April 30, 1998 (to conform the agreement to the intention
of the parties) with A&M #3, an affiliate of A&M, of which Antonio C. Alvarez,
II is a principal. The Option Agreement 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 vested
monthly in equal installments through October 31, 1998, and all unexercised A&M
#3 Options expire on January 31, 2003, subject to prior termination as set forth
in the Management Services Agreement. The exact number of shares underlying
these options and the exercise prices 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. An interim
adjustment was made on December 10, 1998 to reflect the resolution of claims as
of September 30, 1998. After such adjustment, the A&M #3 Options consisted of
(i) options to acquire 399,717 shares at an exercise price of $8.80, (ii)
options to acquire 399,717 shares at an exercise price of $10.66, and (iii)
options to acquire 399,717 shares at an exercise price of $12.97. 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.
Wherehouse also granted certain registration rights to A&M #3 with respect
to the A&M Shares 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 Shares and
shares subject to the A&M #3 Options.
Prior to January 31, 1997, the effective date of the Reorganization Plan,
Antonio C. Alvarez, II served as a consultant to the Senior lenders under
Wherehouse Dissolution Company's ("Old Wherehouse") bank credit agreement (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 A&M
employees 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, Wherehouse 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.
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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 the voluntary petition for relief under Chapter
11 of Title 11 of the United States Code in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Case"), and, prior to Mr. Radecki
leaving Jefferies & Company, Inc., it also served as financial advisor to
Wherehouse Entertainment, Inc. ("New Wherehouse"). Mr. Radecki is currently
Managing Director of CIBC World Markets, an investment bank formerly know as
CIBC Oppenheimer Corp. CIBC Oppenheimer Corp. acted as a financial advisor to
the Company during 1998 with respect to the Acquisition of Blockbuster Music,
and, pursuant to an engagement letter dated September 22, 1998, received a fee
of $600,000, plus expenses, upon completion of the Acquisition.
In 1998, the Company paid a one-time fee of $0.9 million to Cerberus
Capital Management, L.P. for a commitment to provide a bridge loan to finance
the acquisition of Blockbuster Music in the event that permanent financing was
not in place at the time of the Acquisition. Cerberus Capital Management, L.P.
is a limited partnership controlled by Mr. Stephen Feinberg, who is a beneficial
owner of greater than 5% of Common Stock of Wherehouse. Mr. Davenport, a
Managing Director of Cerberus Capital Management, L.P., is a director of
Wherehouse.
Madeleine LLC, a Delaware limited liability company ("Madeleine"), has
entered into a participation agreement with Congress Financial Corporation
(Western), pursuant to which Madeleine has agreed to purchase a 100% undivided
interest in all of Congress Financial Corporation (Western)'s right, title and
interest in and to any loans under the $10.0 million Tranche B revolving line of
credit under the Company's amended loan agreement with Congress Financial
Corporation (Western) (the "Congress Facility"). On October 26, 1998, Madeleine
received $100,000 of the closing fee for the Congress Facility. Madeleine will
receive up to $100,000 annually from Congress Financial Corporation (Western) as
its portion of the annual commitment fee and unused line fee for Tranche B. Mr.
Feinberg is the managing member of Madeleine and the general partner of Cerberus
Partners, L.P.
PROPOSAL 2
APPROVAL OF THE 2001 STOCK INCENTIVE PLAN
On August 7, 2001 the Board approved the 2001 Stock Incentive Plan (as
amended, the "2001 Plan"), the effectiveness of which was conditioned by the
Board upon stockholder approval. The 2001 Plan is attached to this Proxy
Statement as Exhibit B. Capitalized terms used but not defined herein have the
meanings assigned to them in the Plan.
SUMMARY DESCRIPTION OF THE 2001 PLAN
The principal terms of the 2001 Plan are summarized below. The following
summary is qualified in its entirety by reference to the full text of the 2001
Plan.
Purpose. The purpose of the 2001 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 2001 Plan generally include
directors, officers and employees of the Company. As of August 7, 2001, there
were approximately 5,850 officers and employees of the Company and its
Subsidiaries and five Directors, all of whom are Eligible Persons under the 2001
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 2001 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
15
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Committee. See "Committees of the Board of Directors" at page 5 of this Proxy
Statement. The applicable Committee will have broad authority under the 2001
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 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 2001 Plan authorizes the grant of Options and Stock
Appreciation Rights ("SARs" and, collectively with Options, "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
2001 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 2001
Planning purposes and without consideration (other than nominal consideration).
Shares issued pursuant to Awards, so long as the Company'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 Company prior
to any transfer.
Adjustments. As is customary in incentive plans of this nature, the number
and kind of shares available under the 2001 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 2001 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 2001 Plan. The 2001 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
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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.
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 2001 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 and
- 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 2001 Plan. The Board may amend or
terminate the 2001 Plan at any time and in any manner, including a manner that
increases, within 2001 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 2001 Plan after
, 2011, although the applicable 2001 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.
Shares Available for Grant. The maximum number shares of Common Stock may
be issued under the 2001 Plan approved by the Company's Board of Directors
(subject to shareholder approval and adjustment upon the occurrence of certain
events which affect the Common Stock) and the Company's 1998 Stock Incentive
Plan may not exceed, in the aggregate, 800,000 shares. The 2001 Plan provides
that, during any calendar year, other than the calendar ending December 31,
2001, a maximum of 125,000 shares of Common Stock may be subject to 2001 Plan
Options and SARs granted to any individual, subject to certain anti-dilution
adjustments.
For purposes of determining the number of shares to charge against the
share limits under the 2001 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 2001 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 2001 Plan limits on shares issued. Awards settled in cash are not
charged against the share limits of the 2001 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.
OPTIONS GRANTED SUBJECT TO STOCKHOLDER APPROVAL OF THE 2001 PLAN
No options have been granted under the 2001 Plan.
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OTHER SPECIFIC BENEFITS
The grant of other Awards under the 1998 Plan and the 2001 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 plans in the future
cannot be determined.
The 1998 Plan was filed with the Securities and Exchange Commission on
September 28, 1998 as an exhibit to the Company's Definitive Proxy Statement on
Schedule 14A and can be reviewed on the EDGAR database on the Securities and
Exchange Commission's Web site at http://www.sec.gov, and may also be obtained
from the Company. The 2001 Plan is attached as Exhibit B hereto and can also be
obtained from the Company. Requests for copies of the plans should be directed
to:
Treasurer
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502
Telephone: (310) 965-8378
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 2001 PLAN.
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, 2002.
This appointment is subject to stockholder approval.
Upon appointment, Deloitte & Touche LLP will serve the Company and its
subsidiaries through the fiscal year ending January 31, 2002. Deloitte &
Touche's services to the Company will include examination of the Company's
consolidated financial statements, consultation on various tax issues and other
matters, and other services related to filings with the SEC.
A representative of Deloitte & Touche LLP will be present at the Annual
Meeting to respond to appropriate questions and to make such statements as he or
she 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, 2002.
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MISCELLANEOUS
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 August 7, 2001, 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 him or her, subject to community property laws where
applicable. The percentage of ownership in the following table does not include
the additional estimated 23,850 shares that may be issued to A&M #3 pursuant to
the Stock Subscription Agreement.
<Table>
<Caption>
PERCENTAGE OF
NUMBER OF SHARES ALL
BENEFICIALLY COMMON STOCK
NAME OWNED(1)(2) OUTSTANDING(3)
---- ---------------- --------------
Stephen Feinberg.......................... 7,099,282(4) 53.9%
450 Park Avenue, 28th Floor
New York, New York 10022
Antonio C. Alvarez, II.................... (5)
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
AND
Bryan Marsal.............................. (6)
c/o Alvarez & Marsal, Inc.
599 Lexington Avenue, Suite #2700
New York, New York 10022-4802
A&M Investment Associates #3, LLC......... 2,278,387(7) 17.3%
c/o Alvarez & Marsal, Inc.
599 Lexington Avenue, Suite #2700
New York, New York 10022-4802
A&M Investment Associates #4, LLC......... 385,542(8) 2.9%
A&M Investment Associates #8, LLC......... 16,000(9) *
--------- ----
Total for Antonio C. Alvarez, II and
Bryan Marsal......................... 2,679,929(5)(6) 20.4%
Robert C. Davenport....................... 0(10) 0
Jonathan Gallen........................... 435,195(11) 3.3%
Joseph B. Smith........................... 0 0
Joseph J. Radecki, Jr. ................... 0 0
Larry Gaines.............................. 20,000(12) *
Mark A. Velarde........................... 10,000(13)
Barbara C. Brown.......................... 16,800(14) *
All Directors and Executive Officers, as a
group
(8 persons)............................. 3,136,324 24.0%
</Table>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes sole or shared voting or investment power
with respect to securities. Except as otherwise noted below and subject to
community property laws where applicable, each person named reportedly has
sole voting and dispositive power with respect to all shares of Common
Stock shown as beneficially owned by such person. On August 7, 2001, there
were 11,001,421 shares of Common Stock outstanding.
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(2) The number of shares listed as beneficially owned by each named person (and
the directors and executive officers as a group) includes shares of Common
Stock underlying options, warrants and rights (including conversion rights)
exercisable as of or within 60 days after August 7, 2001, as follows:
<Table>
A&M Investment Associates #3, LLC......................... 1,199,151
Antonio C. Alvarez, II, Bryan Marsal
Jonathan Gallen........................................... 161,666
Stephen Feinberg.......................................... 72,687
Larry C. Gaines........................................... 20,000
Mark A. Velarde........................................... 10,000
Barbara C. Brown.......................................... 16,800
---------
All Directors and Executive Officers as a Group (9
persons)................................................ 1,480,304
</Table>
(3) The percent of Common Stock outstanding is based upon (i) the 11,001,421
shares of Common Stock issued and outstanding at August 7, 2001, plus (ii)
the 776,000 warrants issued under the Reorganization Plan, plus (iii) the
1,199,151 shares underlying the A&M Options, plus (iv) all employee stock
options that are exercisable within 60 days of August 7, 2001. In
connection with the Reorganization Plan, holders of Old Wherehouse's Senior
Subordinated Notes received three tranches of warrants to purchase shares
of Common Stock (the "Warrants"). The Tranche A Warrants represent the
right to purchase 576,000 shares of Common Stock at an exercise price of
$2.38 per share and have a five year maturity. The Tranche B Warrants
represent the right to purchase 100,000 shares of Common Stock at an
exercise price of $9.00 per share and have a seven year maturity. The
Tranche C Warrants represent the right to purchase 100,000 shares of Common
Stock at an exercise price of $11.00 per share and have a seven year
maturity. Each Warrant is exercisable for one share of the Common Stock.
(4) This information was obtained from a Schedule 13D-Amendment No. 2 filed
with the Commission regarding Mr. Feinberg's beneficial ownership as of
September 29, 1998. Ownership is described as follows: Cerberus Partners,
L.P., a Delaware limited partnership, owns 1,670,222 shares of Common Stock
and 4,959 Warrants; Cerberus International, Ltd., a corporation organized
under the laws of the Bahamas, owns 1,962,182 shares of Common Stock and
32,280 Warrants; Ultra Cerberus Fund, Ltd., a corporation organized under
the laws of the Bahamas, owns 156,583 shares of Common Stock and 7,291
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 own in
the aggregate 3,237,608 shares of the Common Stock and 28,157 Warrants.
(5) As disclosed on a Schedule 13D -- Amendment No. 2 filed with the Commission
on April 13, 1999, and on a Form 5 filed with the Commission on March 17,
1999, Antonio C. Alvarez, II is a managing member of A&M #3, A&M #4 (as
defined below), and A&M #8 (as 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 April 13, 1999, and on a Form 5 filed with the Commission on March 17,
1999, Bryan Marsal is a managing member of A&M #3, A&M #4 (as defined
below), and A&M #8 (as 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. 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 #3 is a Delaware limited liability company. The share total includes
A&M #3 Options to purchase 1,199,151 shares of Common Stock, exercisable
within 60 days of August 7, 2001. The A&M #3 Options are subject to
adjustment. Pursuant to the adjustment provisions of the Option Agreement,
on December 10, 1998, an interim adjustment was made as is described in
"Certain Relationships and Related Transactions" above.
(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").
20
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(10) Mr. Davenport is a managing director of Cerberus Capital Management, L.P.,
an affiliate 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 217,596 shares of Common
Stock, including 80,832 Warrants. 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
217,599 shares of Common Stock, which total includes 80,834 Warrants. As
such, Mr. Gallen may be deemed to be the beneficial owner of the shares of
Common Stock and Warrants 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.
(12) Mr. Gaines has a right to acquire 20,000 shares of Common Stock pursuant to
stock options exercisable as of or within 60 days after August 7, 2001 that
were issued pursuant to the Wherehouse Entertainment, Inc. 1998 Stock
Incentive Plan.
(13) Mr. Velarde has a right to acquire 10,000 shares of Common Stock pursuant
to stock options exercisable as of or within 60 days after August 7, 2001
that were issued pursuant to the Wherehouse Entertainment, Inc. 1998 Stock
Incentive plan.
(14) Ms. Brown has a right to acquire 16,800 shares of Common Stock pursuant to
stock options exercisable as of or within 60 days after August 7, 2001 that
were issued pursuant to the Wherehouse Entertainment, Inc. 1998 Stock
Incentive Plan.
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 Common Stock are
required to report their initial ownership of Common Stock and any subsequent
changes in that ownership to the Securities and Exchange Commission. Specific
due dates for these reports have been established and the Company is required to
disclose any failure to file by these dates. To the Company's knowledge, during
the fiscal year ended January 31, 2001, all such required reports were filed
with the Securities and Exchange Commission.
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.
21
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FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS
Enclosed with this Proxy Statement is the Annual Report of the Company for
the fiscal year ended January 31, 2001. 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 2001 ANNUAL MEETING DESIRES ADDITIONAL
COPIES OF THE COMPANY'S ANNUAL REPORT, THEY 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: Treasurer
Telephone requests may be directed to the Treasurer at (310) 965-8378.
PROPOSALS OF STOCKHOLDERS
The 2002 Annual Meeting of stockholders is expected to be held in September
2002. To be considered for inclusion in the Company's Proxy Statement for the
2002 Annual Meeting, proposals of stockholders intended to be presented at the
Meeting must be received by the Company's Treasurer at Wherehouse Entertainment,
Inc., 19701 Hamilton Avenue, Torrance, California 90502-1334, Attention:
Treasurer not later than April 30, 2002.
Any stockholder proposal submitted for consideration at next year's annual
meeting but not submitted for inclusion in the proxy statement that is received
by the Company after July 6, 2002, will not be considered filed on a timely
basis with the Company under Rule 14a-(c)(1). For such proposals that are not
timely filed, the Company retains discretion to vote proxies it receives. For
such proposals that are timely filed, the Company retains discretion to vote
proxies it receives provided (1) the Company includes in its proxy statement
advice on the nature of the proposal and how it intends to exercise its voting
discretion; and (2) the proponent does not issue a proxy statement.
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EXHIBIT A
WHEREHOUSE ENTERTAINMENT, INC.
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee is a committee of the Board of Directors. Its primary
function is to assist the Board in fulfilling its oversight responsibilities by
reviewing the financial information which will be provided to the shareholders
and others, the systems of internal controls which management and the Board of
Directors have established, and the audit process.
In meeting its responsibilities, the Audit Committee is expected to:
- Provide an open avenue of communication between the independent
accountants and the Board of Directors.
- Obtain the full board of directors' approval of this charter and review
and update the Audit Committee's charter annually.
- Recommend to the Board of Directors the independent accountants to be
retained, approve the compensation of the independent accountant, and
review and approve the discharge of the independent accountants.
- Discuss with the independent accountants their independence from
management and the Company and the matters included in the written
disclosures required by the Independence Standard Board. Additionally,
conduct a review of management consulting services provided by and
related fees paid to the independent accountants.
- Inquire of management and the independent accountants about significant
risks or exposures and assess the steps management has taken to minimize
such risk to the Company.
- Consider, in consultation with the independent accountants, the audit
scope and plan of the internal auditors and the independent accountants.
- Review with the independent accountants the coordination of audit effort
to assure completeness of coverage, reduction of redundant efforts, and
the effective use of audit resources.
- Consider and review with the independent accountants: -- The adequacy of
the Company's internal controls including computerized information system
controls and security. -- Any related significant findings and
recommendations of the independent accountants and internal auditor,
together with management's responses thereto.
- Review with management and the independent accountants at the completion
of the annual audit:
- The Company's annual financial statements and related footnotes to be
included in the Company's Annual Report on Form 10-K.
- The independent accountants' audit of the financial statements and their
report thereon.
- Any significant changes required in the independent accountants' audit
plan.
- Any serious difficulties or disputes with management encountered during
the course of the audit.
- The independent accountants' judgment about the quality, not just the
acceptability, of accounting principles and the clarity of the financial
disclosure practices used or proposed to be used.
- Other matters related to the conduct of the audit which are to be
communicated to the committee under generally accepted auditing
standards.
A-1
27
- Consider and review with management:
- Significant findings from completed internal audits during the year and
management's responses thereto.
- Any difficulties encountered in the course of their audits, including
any restrictions on the scope of their work or access to required
information.
- Any changes required in the planned scope of their audit plan.
- Review with management and the independent accountants each interim
financial report before it is filed with the SEC or other regulators.
Also, the committee shall discuss the results of the quarterly review and
any other matters required to be communicated to the Committee by the
independent accountants under generally accepted auditing standards. The
chair of the committee may represent the entire committee for the
purposes of this review.
- Review policies and procedures with respect to officers' expense accounts
and perquisites including their use of corporate assets, and consider the
results of any review of these areas by the internal auditor or the
independent accountants.
- Review legal and regulatory matters that may have a material impact on
the financial statements, related company compliance policies, and
programs and reports received from regulators.
- Meet with the independent accountants and management, in separate
executive sessions; to discuss any matters that the committee or these
groups believe should be discussed privately with the Audit Committee.
- Report committee actions to the Board of Directors with such
recommendations as the Committee may deem appropriate.
- Prepare a letter for inclusion in the proxy statement that describes the
Committee's composition and responsibilities, and how they were
discharged.
- The Audit Committee shall have the power to conduct or authorize
investigations into any matters within the committee's scope of
responsibilities. The committee shall be empowered to retain independent
counsel, accountants, or others to assist it in the conduct of any
investigation.
- The committee shall meet at least four times per year or more frequently
as circumstances require. The committee may ask members of management or
others to attend the meetings and provide pertinent information as
necessary.
- The committee will perform such other functions as assigned by law, the
Company's charter or bylaws, or the Board of Directors.
The membership of the Audit Committee shall consist of 3 independent
members of the Board of Directors who shall serve at the pleasure of the Board
of Directors. Members of the audit committee shall be considered independent if
they have no relationship to the Company that may interfere with the exercise of
their independence from management and the Company. All audit committee members
will be financially literate, and at least two members will have accounting or
related financial management expertise.
Audit Committee members and the committee chairman shall be designated by
the full Board of Directors. The duties and responsibilities of a member of the
Audit Committee are in addition to those duties set out for a member of the
Board of Directors.
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EXHIBIT B
WHEREHOUSE ENTERTAINMENT, INC.
2001 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;
(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.
B-1
29
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
and the Company's 1998 Stock Incentive Plan shall not, in the aggregate, exceed
800,000 SHARES (the "SHARE LIMIT"). The maximum number of Shares subject to
those Awards that are granted during any calendar year to any one 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. Each Award shall vest and become exercisable as
expressly provided by the Committee in the applicable Award Agreement (and, to
the extent consistent with the California Regulations, if applicable). 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.
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1.7 Transfer and Other Limitations on Awards; Exceptions.
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. 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
re-granting 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.
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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:
(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.
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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 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.
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
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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 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.
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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.
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,
re-capitalization, 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 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
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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
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 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.
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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 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 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.
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.
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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.
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.
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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.
"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 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
(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
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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.
"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.
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"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.
"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. 2001 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.
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41
"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.
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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
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.
A1-1
43
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.
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 2001 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."
A1-2
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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 Holiday Inn Hotel, 19800 S. Vermont, Torrance, California, on
Thursday, September 20, 2001 at 10:00 a.m. (local time), for the purpose of
considering and voting upon the matters on the other side of this card.
(PLEASE SIGN AND DATE THE REVERSE SIDE.)
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45
Please mark [X]
your votes as
indicated in
this example
1. ELECTION OF DIRECTORS.
FOR all nominees WITHHOLD
listed below AUTHORITY
(except as marked to vote for all nominees
to the contrary) listed below
[ ] [ ]
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 Joseph B. Smith
Joseph J. Radecki, Jr. Jonathan Gallen
Robert C. Davenport
FOR AGAINST ABSTAIN
2. RATIFICATION OF DELOITTE & TOUCHE LLP AS [ ] [ ] [ ]
INDEPENDENT PUBLIC ACCOUNTANTS AND
AUDITORS FOR THE FISCAL YEAR ENDING
JANUARY 31, 2002.
3. APPROVAL OF THE 2001 STOCK INCENTIVE [ ] [ ] [ ]
PLAN.
4. OTHER BUSINESS. In their discretion, the proxies are authorized to vote upon
such other business 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.
Dated: , 2001
------------------------
------------------------------------
Signature (if jointly held)
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Signature
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