$66,667,000
[LOGO]
GUITAR CENTER, INC.
11% SENIOR NOTES DUE 2006
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The 11% Senior Notes due 2006 (the "Notes") were issued by Guitar Center,
Inc. ("Guitar Center" or the "Company") pursuant to an Indenture (as defined
herein). As of the date of this Prospectus, there are $66,667,000 aggregate
principal amount of Notes outstanding. The Notes are general, unsecured
obligations of the Company. The Notes rank senior in right of payment to all
subordinated indebtedness of the Company and PARI PASSU in right of payment with
all other senior indebtedness of the Company, including the Company's
outstanding indebtedness under the 1997 Credit Facility (as defined herein), as
in place on the date hereof. The 1997 Credit Facility is secured by
substantially all of the assets of the Company. The Company may borrow up to
$40,000,000 under the 1997 Credit Facility. See "Description of the 1997 Credit
Facility." As of December 4, 1997, the Company has no outstanding Indebtedness
(as defined herein) other than the Notes.
The Notes mature on July 1, 2006. Interest on the Notes is payable in cash
semi-annually on January 1 and July 1 of each year. The Company is not required
to make any mandatory redemption or sinking fund payment with respect to the
Notes prior to maturity. The Notes are redeemable at the option of the Company,
in whole or in part, on or after July 1, 2001, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. Upon a Change of Control (as defined herein), the Company is
required to make an irrevocable and unconditional offer to repurchase all
outstanding Notes at 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase. See "Description
of Notes."
This Prospectus may be used by Chase Securities Inc. ("Chase Securities"),
in connection with offers and sales related to market-making transactions in the
Notes. Chase Securities may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is December 10, 1997.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-3, File No.
333-10491 (as amended, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securuties Act") with respect to the Notes offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Notes, reference is hereby made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at certain regional offices of the Commission located at 75 Park
Place, 14th Floor, New York, New York 10007 and Northwest Atrium Center, 500
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Room 1025, Washington, D.C. 20549, at prescribed rates. The
Commission maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that filed electronically with the Commission. The Company is
currently subject to the informational requirements of the Exchange Act of 1934,
as amended (the "Exchange Act") and, in accordance therewith, files reports,
proxy and information statements with the Commission. The Company is required by
the terms of the Indenture to furnish to the applicable trustee or transfer
agent and the holder(s) of the Notes annual reports containing consolidated
financial statements audited by its independent certified public accounts, with
quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year and with
current reports on Form 8-K.
2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission and are incorporated by reference herein:
a. Annual Report on Form 10-K for the year ended December 31, 1996 (the
"1996 Form 10-K");
b. Quarterly Reports on Form 10-Q for the periods ended March 31, June
30 and September 30, 1997; and
c. Current Report on Form 8-K dated April 16, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Notes shall be deemed to be incorporated
by reference herein and to be part hereof from the date of filing such
documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Copies of all documents which are incorporated by reference (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents) will be provided without charge to
each person, including any beneficial owner, to whom this Prospectus is
delivered, upon written or oral request and may be obtained from the
Commission's World Wide Web site (http://www.sec.gov). Copies of this
Prospectus, as amended or supplemented from time to time, and any other
documents (or parts of documents) that constitute part of this Prospectus under
Section 10(a) of the Securities Act will also be provided without charge to each
such person upon written or oral request. Requests should be directed to Guitar
Center, Inc., 5155 Clareton Drive, Agoura Hills, California 91301; Attention:
Chief Financial Officer; telephone: (818) 735-8800.
3
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN.
MARKET-MAKING PROSPECTUS
This Prospectus may be used by Chase Securities in connection with offers
and sales related to transactions that stabilize, maintain or otherwise affect
the price of the Notes offered hereby. Chase Securities may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale. See "Plan of Distribution."
THE COMPANY
Guitar Center is a leading retailer of guitars, amplifiers, percussion
instruments, keyboards and pro audio and recording equipment. Guitar Center
offers a unique retail concept in the music products industry, combining an
interactive, hands-on shopping experience with superior customer service and a
broad selection of brand name, high-quality products at guaranteed low prices.
The Company creates an entertaining and exciting atmosphere in its stores with
bold and dramatic merchandise presentations, highlighted by bright,
multi-colored lighting, high ceilings, music and videos. Management believes
that approximately 80% of the Company's sales are to professional and aspiring
musicians who generally view the purchase of music products as a career
necessity. These sophisticated customers rely upon the Company's knowledgeable
and highly trained salespeople to answer technical questions and to assist in
product demonstrations.
The Guitar Center prototype store generally ranges in size from 12,000 to
15,000 square feet (as compared to a typical music products retail store which
averages approximately 3,200 square feet) and is designed to encourage customers
to hold and play instruments. Each store carries an average of 7,000 core stock
keeping units ("SKUs"), which management believes is significantly greater than
a typical music products retail store, and is organized into five departments,
each focused on one product category. These departments cater to a musician's
specific product needs and are staffed by specialized salespeople, many of whom
are practicing musicians. Management believes this retail concept differentiates
the Company from its competitors and encourages repeat business.
The Company is a Delaware corporation with its principal executive offices
located at 5155 Clareton Drive, Agoura Hills, California 91301, and its
telephone number is (818) 735-8800.
STATUS OF THE OFFERING OF THE NOTES
In December 1996, the Company completed an exchange offer pursuant to which
$100 million aggregate principal amount of Notes was issued in exchange for an
equal amount of then-outstanding, unregistered 11% Senior Notes due 2006 of the
Company (the "Old Notes"). The Notes are substantially identical to the Old
Notes, except that the Notes are not restricted securities for federal
securities law purposes. The Company did not receive any proceeds from such
exchange offer.
In March 1997, the Company completed its initial public offering (the "IPO")
of Common Stock, $.01 par value ("Common Stock"). Immediately following the IPO,
the Company called for redemption, at a premium of 10%, an aggregate of $33.3
million principal amount of Notes. The Company used approximately $37.9 million
of the net proceeds from the IPO to redeem such Notes on April 19, 1997 and to
pay all accrued and unpaid interest with respect to the Notes called for
redemption. As of the date of this Prospectus, there are $66.7 million aggregate
principal amount of Notes outstanding.
4
THE NOTES
SECURITIES OFFERED..................... $66,667,000 million aggregate principal amount of
11% Senior Notes due 2006.
MATURITY............................... July 1, 2006.
INTEREST PAYMENT DATES................. January 1 and July 1.
OPTIONAL REDEMPTION.................... The Notes are redeemable at the option of the
Company, in whole or in part, on or after July 1,
2001, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the
date of redemption. See "Description of Notes --
Optional Redemption."
SINKING FUND........................... None.
RANKING................................ The Notes are general, unsecured obligations of the
Company. The Notes rank senior in right of payment
to all subordinate indebtedness of the Company, and
PARI PASSU in right of payment with all other
senior indebtedness of the Company, including the
Company's outstanding indebtedness under the 1997
Credit Facility. The 1997 Credit Facility is
secured by substantially all of the assets of the
Company. See "Description of the 1997 Credit
Facility." The Company may borrow up to $40 million
under the 1997 Credit Facility. As of December 4,
1997, the Company had no outstanding indebtedness,
other than the Notes.
CHANGE OF CONTROL OFFER................ Upon a Change of Control (as defined herein), the
Company will be required to make an irrevocable and
unconditional offer to repurchase all outstanding
Notes at 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any,
to the date of repurchase. A Change of Control will
not result from a sale of the Company or
substantially all of the Company's assets to a
person or group of persons who are Investors (as
defined herein) and the Holders (as defined herein)
would not receive the benefit of this provision in
the event of such a transaction. See "Description
of Notes -- Certain Covenants -- Repurchase of
Notes at the Option of the Holder Upon a Change of
Control."
5
CERTAIN COVENANTS...................... The Indenture contains certain covenants with
respect to the Company that, among other things,
limit the ability of the Company and any
subsidiaries of the Company to (i) incur additional
Indebtedness and issue Disqualified Capital Stock
(as defined herein); (ii) pay dividends or make
other distributions and certain investments; (iii)
create certain liens; (iv) sell certain assets; (v)
enter into certain transactions with affiliates; or
(vi) enter into certain mergers or consolidations
involving the Company. See "Description of Notes --
Certain Covenants."
RISK FACTORS
See "Risk Factors" in this Prospectus and "Risks Related to the Business" in
Item 1 of the 1996 Form 10-K for a discussion of certain factors that should be
considered by investors prior to purchasing any Notes.
FORWARD LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Forward-looking statements can
be identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "anticipate," "estimate," "continue," "plans," "intends" or
other similar terminology. See "Risk Factors."
6
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING SPECIFIC INVESTMENT CONSIDERATIONS. SEE "RISKS
RELATED TO THE BUSINESS IN ITEM 1 OF THE 1996 FORM 10-K" FOR A DESCRIPTION OF
OTHER FACTORS AFFECTING THE BUSINESS OF THE COMPANY.
POTENTIAL CONSEQUENCES OF SIGNIFICANT LEVERAGE; RECENT LOSS
The Company has significant financial leverage. As of September 30, 1997,
the Company had approximately $66.7 million of outstanding long-term
indebtedness, its ratio of total long-term debt to total capitalization was
approximately 80.1% and it had a stockholders' equity of approximately $16.6
million.
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company may not generate sufficient cash to service its debt obligations,
including obligations under the Notes; (ii) the Company's ability to obtain
financing for future working capital needs or other purposes may be limited;
(iii) a significant portion of the Company's cash flow from operations will be
dedicated to debt service, thereby reducing funds available for operations; and
(iv) the substantial indebtedness and the restrictive covenants to which the
Company is subject under the terms of its indebtedness, including the terms of
the 1997 Credit Facility and the Indenture, may make the Company more vulnerable
to economic downturns, may hinder its ability to execute its growth strategy,
may reduce its flexibility to respond to changing business conditions and
opportunities and may limit its ability to withstand competitive pressures. See
"Description of Notes."
The Company's ability to generate sufficient cash to meet its debt service
obligations will depend on future operating performance, which will be subject,
in part, to factors beyond its control, including prevailing economic conditions
and financial, business and other factors. While the Company believes that cash
flow from operations will be adequate to meet its debt service obligations,
there can be no assurance that the Company will generate cash in sufficient
amounts to meet such obligations. In the event the Company's operating cash flow
is not sufficient to fund the Company's expenditures or to service its debt,
including the Notes, the Company may be required to raise additional financing
through equity offerings, the refinancing of all or part of its indebtedness,
including the Notes, or sales of its assets. There can be no assurance that the
Company will be able to obtain any such additional financing or effect
satisfactory refinancings or asset sales on favorable terms, if at all.
For the year ended December 31, 1996, the Company had a net loss of $72.4
million. The results for such period reflect non-recurring deferred compensation
expense of $71.8 million and $11.6 million for transaction costs and financing
fees incurred in connection with the Recapitalization.
LIMITED TRADING MARKET FOR THE NOTES
The Notes are not listed on any national securities exchange and are not
admitted to trading on the National Association of Securities Dealers Automated
Quotation System. The Company has been advised by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Chase Securities that they presently intend
to make a market in the Notes. However, DLJ and Chase Securities are not
obligated to do so and any market-making activities with respect to the Notes
may be discontinued at any time without notice. If a trading market does not
develop or is not maintained, holders of the Notes may experience difficulty in
reselling the Notes or may be unable to sell them at all. If a market for the
Notes develops, any such market may be discontinued at any time. If a public
trading market develops for the Notes, future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the market for similar
securities and other factors, including the financial condition of the Company,
the Notes may trade at a discount from their principal amount.
7
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains and incorporates by reference certain
forward-looking statements relating to, among other things, future results of
operations, growth plans, sales, gross margin and expense trends, capital
requirements and general industry and business conditions applicable to the
Company. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include changes in external competitive market factors, changes in
the Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the music products industry or the economy in general,
the emergence of new or growing specialty retailers of music products and
various other competitive factors that may prevent the Company from competing
successfully in existing or future markets. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this Prospectus will in fact be realized.
RATIO OF EARNINGS TO FIXED CHARGES
Set forth below is the ratio of earnings to fixed charges for the Company
for the periods indicated:
FISCAL YEAR TWO MONTHS NINE MONTHS
ENDED ENDED FISCAL YEAR ENDED DECEMBER 31, ENDED
OCTOBER 31, DECEMBER 31, ------------------------------------------ SEPTEMBER 30,
1992 1992 1993 1994 1995 1996 1997
--------------- -------------- --------- --------- --------- --------- ---------------
Ratio of Earnings to Fixed
Charges(1)...................... 5.8x 13.8x 9.1x 11.6x 11.7x -- 1.3
- ------------------------
(1) For the purposes of calculating the ratio of earnings fo fixed charges,
"earnings" represents income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs and one third of lease expense, which management believes is
representative of the interest components of lease expense. Earnings were
insufficient to cover fixed charges by $72.3 million for the year ended
December 31, 1996.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of any Notes in any
market-making transaction in connection with which this Propsectus may be
delivered.
TRANSACTIONS WITH AFFILIATES OF CHASE SECURITIES
In connection with the Recapitalization, the Company entered into a bridge
facility (the "Bridge Facility") with GCMC Funding, Inc. ("DLJ Bridge") and
Chemical Bank, a predecessor of The Chase Manhattan Bank, an affiliate of Chase
Securities ("Chemical"), pursuant to which DLJ Bridge purchased for cash $51.0
million of notes of the Company bearing interest at 12.75% per annum and
Chemical loaned $49.0 million in cash to the Company with interest payable at
12.75% per annum. The Company applied the net proceeds of the private placement
of the Old Notes, for which Chase Securities acted as an initial purchaser, to
the retirement of the Bridge Facility. Chase Securities also acted as an
underwriter in the IPO. In connection with such transactions, Chemical and Chase
Securities received customary fees.
8
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
were issued pursuant to an indenture (the "Indenture"), dated as of July 2,
1996, by and between the Company and U.S. Trust Company of California, N.A., as
trustee (the "Trustee"). The following summaries of certain provisions of the
Notes and the Indenture are summaries only, do not purport to be complete and
are qualified in their entirety by reference to all of the provisions of the
Notes and the Indenture. Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to them in the Indenture. Wherever particular
provisions of the Indenture are referred to in this summary, such provisions are
incorporated by reference as a part of the statements made and such statements
are qualified in their entirety by such reference. The Indenture is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
The Notes are senior, unsecured, general obligations of the Company. As of
the date of this Prospectus, there are $66,667,000 aggregate principal amount of
Notes outstanding. The Notes are issuable only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
The Notes mature on July 1, 2006. The Notes bear interest at the rate per
annum stated on the cover page hereof from the date of issuance or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on January 1 and July 1 of each year, commencing January
1, 1997, to the Persons in whose names such Notes are registered at the close of
business on the December 15 or June 15 immediately preceding such Interest
Payment Date. Interest is calculated on the basis of a 360-day year consisting
of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes are payable, and
the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York. At
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at the addresses set forth upon the registry books of
the Company. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Until otherwise designated by the Company, the Company's office or agency will
be the corporate trust office of the Trustee presently located at the office of
the Trustee in the Borough of Manhattan, The City of New York.
OPTIONAL REDEMPTION
The Company does not have the right to redeem any Notes prior to July 1,
2001 (other than out of the Net Cash Proceeds of an Initial Public Equity
Offering, as described in the following paragraph). The Notes are redeemable for
cash at the option of the Company, in whole or in part, at any time on or after
July 1, 2001, upon not less than 30 days nor more than 60 days notice to each
Holder of Notes, at the following redemption prices (expressed as percentages of
the principal amount) if redeemed during the 12-month period commencing July 1
of the years indicated below, in each case (subject to the right of Holders of
record on a Record Date to receive interest due on an Interest Payment Date that
is on or prior to such Redemption Date) together with accrued and unpaid
interest thereon to the Redemption Date:
YEAR PERCENTAGE
- ---------------------------------------------------------------------- ------------
2001.................................................................. 105.500%
2002.................................................................. 103.667%
2003.................................................................. 101.833%
2004 and thereafter................................................... 100.000%
9
Notwithstanding the foregoing, prior to July 1, 1999, upon an Initial Public
Equity Offering for cash, up to 33 1/3% of the original $100 million aggregate
principal amount of the Notes may be redeemed at the option of the Company
within 60 days of such Initial Public Equity Offering, on not less than 30 days,
but not more than 60 days, notice to each Holder of the Notes to be redeemed,
with cash from the Net Cash Proceeds of such Initial Public Equity Offering, at
110% of principal amount (subject to the right of Holders of record on a Record
Date to receive interest due on an Interest Payment Date that is on or prior to
such Redemption Date), together with accrued and unpaid interest to the date of
redemption; PROVIDED, HOWEVER, that immediately following such redemption not
less than 66 2/3% of the original $100 million aggregate principal amount of the
Notes remains outstanding. Pursuant to this provision, the Company redeemed
$33,333,000 aggregate principal amount of Notes on April 19, 1997. As of the
date of this Prospectus, there are $66,667,000 aggregate principal amount of
Notes outstanding.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes do not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part of such
Holder's Notes (PROVIDED that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control Purchase
Date") that is no later than 35 Business Days after the occurrence of such
Change of Control, at a cash price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof, together with (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such repurchase date) accrued and
unpaid interest to the Change of Control Purchase Date. The Change of Control
Offer shall be made within 10 Business Days following a Change of Control and
shall remain open for 20 Business Days following its commencement (the "Change
of Control Offer Period"). Upon expiration of the Change of Control Offer
Period, the Company promptly shall purchase all Notes properly tendered in
response to the Change of Control Offer.
As used herein, a "Change of Control" means such time as: (a) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act
of 1934, as amended), other than any person or group comprised solely of the
Investors, has become the beneficial owner, by way of purchase, merger,
consolidation or otherwise, of 35% or more of the voting power of all classes of
voting securities of the Company and such person or group has become the
beneficial owner of a greater percentage of the voting power of all classes of
voting securities of the Company than that then held by the Investors; or (b) a
sale or transfer of all or substantially all of the assets of the Company to any
person or group (other than any group consisting solely of the Investors or
their Affiliates) has been consummated; or (c) during any period of two
consecutive years, individuals who at the beginning of such
10
period constituted the Board of Directors of the Company (together with any new
directors whose election was approved by a vote of a majority of the directors
then still in office, who either were directors at the beginning of such period
or whose election or nomination for the election was previously so approved)
cease for any reason to constitute a majority of the directors of the Company,
as the case may be, then in office, other than as a result of election and
removal of directors pursuant to the terms of the Senior Preferred Stock as in
effect on the Issue Date or the Stockholders Agreement as in effect on the Issue
Date governing the election and removal of directors.
As used herein, "Investors" means (i) Chase Venture Capital Associates,
L.P., CB Capital Investors, Inc., Weston Presidio Capital II, L.P., Wells Fargo
Small Business Investment Company, Inc. and any Person controlled by or under
common control with any of the foregoing but not Persons controlling any of the
foregoing, other than those Persons controlling the Investors as of the date the
shares of Senior Preferred Stock are first issued and (ii) the holders of the
Company's Common Stock (including Larry Thomas and Marty Albertson) who are
party to the Stockholders Agreement as in effect on June 5, 1996, members of
their immediate families and trusts for their sole benefit.
A transaction in which the Company is sold or its assets are transferred to
any person or group of persons who is or are Investors will not constitute a
Change of Control, thus Holders would not receive the benefit of the Change of
Control provisions in the event of such transaction. On or before the Change of
Control Purchase Date, the Company will (i) accept for payment Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit
with the Paying Agent cash sufficient to pay the Change of Control Purchase
Price (together with accrued and unpaid interest) of all Notes so tendered and
(iii) deliver to the Trustee Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof being purchased by the
Company. The Paying Agent promptly will pay the Holders of Notes so accepted an
amount equal to the Change of Control Purchase Price (together with accrued and
unpaid interest), and the Trustee promptly will authenticate and deliver to such
Holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; PROVIDED, that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. Any Notes not so accepted will
be delivered promptly by the Company to the Holder thereof. The Company publicly
will announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date. Any Note (or a portion
thereof) accepted for payment pursuant to the Change of Control Offer (and duly
paid on the Change of Control Purchase Date) will cease to accrue interest after
the Change of Control Purchase Date. There can be no assurance that the Company
would have available sufficient funds to repurchase the Notes in the event of a
Change of Control.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules and regulations promulgated thereunder and all other
applicable federal and state securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth below in this covenant, the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, issue, assume, guaranty, incur, become directly or indirectly liable
with respect to (including as a result of an Acquisition), or otherwise become
responsible for, contingently or otherwise (individually and collectively, to
"incur" or, as appropriate, an
11
"incurrence"), any Indebtedness or any Disqualified Capital Stock (including
Acquired Indebtedness), other than Permitted Indebtedness.
Notwithstanding the foregoing, if (i) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect on a PRO FORMA basis to, such incurrence of Indebtedness or Disqualified
Capital Stock and (ii) on the date of such incurrence (the "Incurrence Date"),
the Consolidated Coverage Ratio of the Company for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a PRO FORMA
basis to such incurrence of such Indebtedness or Disqualified Capital Stock and,
to the extent set forth in the definition of Consolidated Coverage Ratio, the
use of proceeds thereof, would be at least (x) 2.0 to 1, if such incurrence
occurs on or before June 30, 1997, or (y) 2.25 to 1, if such incurrence occurs
at any time thereafter (the "Debt Incurrence Ratio"), then the Company may incur
such Indebtedness or Disqualified Capital Stock.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other Person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such Person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company and its Subsidiaries will not, and
will not permit any of their Subsidiaries to, directly or indirectly, make any
Restricted Payment if, after giving effect to such Restricted Payment on a PRO
FORMA basis, (1) a Default or an Event of Default would have occurred and be
continuing, (2) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (3) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed the sum of (a)
50% of the aggregate Consolidated Net Income of the Company for the period
(taken as one accounting period), commencing on the first day of the first full
fiscal quarter commencing after the Issue Date, to and including the last day of
the fiscal quarter ended immediately prior to the date of each such calculation
(or, in the event Consolidated Net Income for such period is a deficit, then
minus 100% of such deficit), plus (b) 100% of the aggregate Net Cash Proceeds
received by the Company from the sale of its Qualified Capital Stock (other than
(i) to a subsidiary of the Company and (ii) to the extent applied in connection
with a Qualified Exchange), after the Issue Date.
Failure to satisfy the foregoing clauses (2) and (3) of the immediately
preceding paragraph, however, will not prohibit (v) Restricted Investments,
PROVIDED that, after giving PRO FORMA effect to any such Investment, the
aggregate amount of all such Investments made on or after the Issue Date that
are outstanding (after giving effect to the amount (as such amount is determined
by the Board of Directors reasonably and in good faith) of any such Investments
(whether made originally in the form of property or cash) returned to the
Company or the Subsidiary that made such prior Investment, without restriction,
in cash, except to the extent that the effect of such return increased
Consolidated Net Income of the Company, on or prior to the date of any such
calculation) at any time does not exceed $5 million, and failure to satisfy the
foregoing clauses (1), (2) and (3) of the immediately preceding paragraph will
not prohibit (w) a Qualified Exchange, (x) the payment of any dividend on
Capital Stock within 60 days after the date of its declaration if such dividend
could have been made on the date of such declaration in compliance with the
foregoing provisions, (y) the repurchase, redemption, or other acquisition or
retirement for value of any Equity Interests of the Company held by any member
of the Company's management pursuant to any management equity subscription
agreement, restricted stock agreement, stockholders agreement, stock option
agreement or other similar agreement, PROVIDED that, in the case of this clause
(y), the aggregate net consideration paid for all such Equity Interests so
reacquired shall
12
not exceed $1.0 million, or (z) the issuance of dividends on the Senior
Preferred Stock in shares of Senior Preferred Stock or accretion to the
liquidation value thereof pursuant to the terms of the instrument governing the
Senior Preferred Stock as such instrument was in effect on the Issue Date. The
full amount of any Restricted Payment made pursuant to the foregoing clauses
(v), (x) (except to the extent also covered by clause (z)) and (y), but not
pursuant to clause (w) or (z), of the immediately preceding sentence, however,
will be deducted in the calculation of the aggregate amount of Restricted
Payments available to be made referred to in clause (3) of the immediately
preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture provides that the Company and its Subsidiaries will not, and
will not permit any of their Subsidiaries to, directly or indirectly, create,
assume or suffer to exist any consensual restriction on the ability of any
Subsidiary of the Company to pay dividends or make other distributions to or on
behalf of, or to pay any obligation to or on behalf of, or otherwise to transfer
assets or property to or on behalf of, or make or pay loans or advances to or on
behalf of, the Company or any Subsidiary of the Company, except (a) restrictions
imposed by the Notes or the Indenture, (b) restrictions imposed by applicable
law and regulation, (c) existing restrictions under Existing Indebtedness
(assuming retirement of the Bridge Facility), (d) restrictions under any
Acquired Indebtedness not incurred in violation of the Indenture or any
agreement relating to any property, asset, or business acquired by the Company
or any of its Subsidiaries, which restrictions in each case existed at the time
of acquisition, were not put in place in connection with or in anticipation of
such acquisition and are not applicable to any Person, other than the Person
acquired, or to any property, asset or business, other than the property, assets
and business so acquired, (e) any such restriction or requirement imposed by
Indebtedness incurred under paragraph (e) of the definition of "Permitted
Indebtedness," PROVIDED such restriction or requirement is no more restrictive
than that imposed by the Credit Agreement as of the Issue Date, (f) restrictions
with respect solely to a Subsidiary of the Company imposed pursuant to a binding
agreement which has been entered into for the sale or disposition of all or
substantially all of the Equity Interests or assets of such Subsidiary, PROVIDED
such restrictions apply solely to the Equity Interests or assets of such
Subsidiary which are being sold or disposed of, (g) restrictions on transfer
contained in Purchase Money Indebtedness incurred pursuant to paragraph (c) of
the definition of "Permitted Indebtedness," PROVIDED such restrictions relate
only to the transfer of the property acquired with the proceeds of such Purchase
Money Indebtedness, and (h) in connection with and pursuant to permitted
Refinancings, replacements of restrictions imposed pursuant to clause (a), (c),
(d) or (g) of this paragraph that are not more restrictive than those being
replaced and do not apply to any other Person or assets than those that would
have been covered by the restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, customary provisions restricting subletting
or assignment of any lease entered into in the ordinary course of business,
consistent with industry practice shall in and of themselves not be considered
restrictions on the ability of the applicable Subsidiary to transfer such
agreement or assets, as the case may be.
LIMITATION ON LIENS SECURING INDEBTEDNESS
The Company will not, and will not permit any Subsidiary to, create, incur,
assume or suffer to exist any Lien of any kind, other than Permitted Liens, upon
any of their respective assets now owned or acquired on or after the Issue Date
or upon any income or profits therefrom.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, in one transaction or a series of related transactions
(that has or have, when taken together with all other such transactions over the
preceding 12-months, an aggregate fair market value in excess of $250,000 or for
aggregate net proceeds in excess of $250,000), convey, sell, transfer, assign,
or otherwise dispose of, directly or indirectly, any of their respective
property, businesses, or assets, including by merger or
13
consolidation (in the case of a Subsidiary of the Company), and including any
sale or other transfer or issuance of any Equity Interests of any Subsidiary of
the Company, whether by the Company or a Subsidiary of either or through the
issuance, sale or transfer of Equity Interests by a Subsidiary of the Company
(an "Asset Sale"), unless (1)(a) within 365 days after the date of such Asset
Sale, the Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are
applied (i) to the optional redemption of the Notes in accordance with the terms
of the Indenture, (ii) to the repurchase of the Notes pursuant to an irrevocable
and unconditional cash offer (the "Asset Sale Offer") to repurchase the Notes at
a purchase price (the "Asset Sale Offer Price") of 101% of principal amount,
plus accrued and unpaid interest to the date of payment, (iii) to the repayment
of amounts outstanding pursuant to the terms of the Credit Agreement (PROVIDED
that upon such application, the availability of amounts that the Company or its
Subsidiaries may be liable for pursuant thereto shall be permanently reduced by
a corresponding amount), or (iv) to the repayment of Purchase Money Indebtedness
secured by the assets which are the subject of such Asset Sale, or (b) within
365 days following such Asset Sale, the Asset Sale Offer Amount is invested in
assets and property (other than notes, bonds, obligations and securities of
Persons other than subsidiaries, which are received as a result of transactions
effected in compliance with the "Limitations on Restricted Payments" covenant)
which in the good faith reasonable judgment of the Board will immediately
constitute or be a part of a Related Business of the Company or such Subsidiary
(if it continues to be a Subsidiary) immediately following such transaction, (2)
at least 75% of the consideration for such Asset Sale or series of related Asset
Sales consists of cash or Cash Equivalents, (3) no Default or Event of Default
shall have occurred and be continuing at the time of, or would occur after
giving effect, on a PRO FORMA basis, to, such Asset Sale, and (4) the Board of
Directors of the Company determines in good faith that the Company or such
Subsidiary, as applicable, receives fair market value for such Asset Sale.
The Indenture provides that an acquisition of the Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in clauses (1)(a) or (1)(b) above (the
"Excess Proceeds") exceeds $5 million and that each Asset Sale Offer shall
remain open for 20 Business Days following its commencement (the "Asset Sale
Offer Period"). Upon expiration of the Asset Sale Offer Period, the Company
shall apply the Asset Sale Offer Amount, plus an amount equal to accrued and
unpaid interest, to the purchase of all Notes properly tendered (on a PRO RATA
basis if the Asset Sale Offer Amount is insufficient to purchase all Notes so
tendered) at the Asset Sale Offer Price (together with accrued and unpaid
interest). To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Asset Sale Offer Amount, the Company may
use any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture and following the consummation of each Asset Sale
Offer in compliance therewith the Excess Proceeds amount shall be reset to zero.
For purposes of (2) above, total consideration received means the total
consideration received for such Asset Sales, minus the amount of (a) non-
subordinated debt secured by the assets that were the subject of the Asset Sale
and assumed by a transferee, which assumption permanently reduces the amount of
Indebtedness outstanding on the Issue Date or permitted pursuant to paragraph
(c), (e) or (g) of the definition of "Permitted Indebtedness" (including that in
the case of a revolver or similar arrangement that makes credit available, such
commitment is permanently reduced by such amount), (b) Purchase Money
Indebtedness secured solely by the assets sold and assumed by a transferee and
(c) property that within 30 days of such Asset Sale is converted into cash or
Cash Equivalents and then applied in accordance with the terms of this covenant.
Notwithstanding the foregoing provisions:
(i) the Company and its Subsidiaries may, in the ordinary course of
business, convey, sell, transfer, assign or otherwise dispose of inventory
acquired and held for resale in the ordinary course of business and
consistent with past practice;
14
(ii) the Company and its Subsidiaries may convey, sell, transfer, assign
or otherwise dispose of assets pursuant to and in accordance with the
limitation on mergers, sales or consolidations provisions in the Indenture;
(iii) the Company and its Subsidiaries may sell or dispose of damaged,
worn out or other obsolete (to the Company or such Subsidiaries) real or
personal property in the ordinary course of business and consistent with
past practice so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Subsidiary, as applicable;
(iv) the Company or any Subsidiary may, for fair market value (as
determined reasonably and in good faith by the Board of Directors), convey,
sell, transfer, assign or otherwise dispose of assets to the Company or any
of its Subsidiaries; and
(v) cash and Cash Equivalents may be exchanged or sold for or in
consideration of cash or Cash Equivalents.
All Net Cash Proceeds from an Event of Loss shall be invested or applied
otherwise as set forth in clause 1(a) or 1(b) of the first paragraph of this
covenant, all within the period and as otherwise provided above in clause 1(a)
or 1(b) of the first paragraph of this covenant.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations promulgated thereunder and all other
applicable federal and state securities laws.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of its Subsidiaries
will be permitted on or after the Issue Date to, directly or indirectly, enter
into or suffer to exist any contract, agreement, arrangement or transaction with
any Affiliate (an "Affiliate Transaction"), or any series of related Affiliate
Transactions (other than Exempted Affiliate Transactions), unless it is
determined that the terms of such Affiliate Transaction (or Affiliate
Transactions) are fair and reasonable to the Company, and no less favorable to
the Company than could have been obtained in an arm's length transaction with a
non-Affiliate.
Without limiting the foregoing, in connection with any Affiliate Transaction
or any series of related Affiliate Transactions (other than Exempted Affiliate
Transactions) (i) involving value to either party in excess of $1.0 million, the
Company must address and deliver an Officers' Certificate to the Trustee
certifying that (x) the terms of such Affiliate Transaction (or Affiliate
Transactions) are fair and reasonable to the Company, and no less favorable to
the Company than could have been obtained in an arm's length transaction with a
non-Affiliate and (y) such Affiliate Transaction (or Affiliate Transactions) has
been approved by a majority of the members of the Board of Directors that are
disinterested in such transaction and (ii) involving value to either party in
excess of $5.0 million, the Company must, prior to the consummation thereof, in
addition to the Officers' Certificate delivered to the Trustee pursuant to
clause (i) of this paragraph, obtain a written favorable opinion as to the
fairness of such transaction to the Company from a financial point of view from
an independent investment banking firm or valuation firm of national reputation
for being knowledgeable with respect to such matters, PROVIDED that this clause
(ii) shall not apply to transactions between the Company or any of its
Subsidiaries and any Affiliate thereof that is an investment or commercial bank
of national reputation with capital and surplus of at least $500 million, in
connection with the rendering by such Affiliate to the Company or such
Subsidiary of investment or commercial banking (including lending) services.
15
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not, directly or indirectly,
consolidate with or merge with or into another Person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, or adopt a plan of liquidation,
unless (i) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a plan of liquidation, the
entity which receives the greatest value from such plan of liquidation is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the Indenture;
(ii) no Default or Event of Default shall exist or would occur immediately after
giving effect on a PRO FORMA basis to such transaction; (iii) immediately after
giving effect to such transaction on a PRO FORMA basis, the Consolidated Net
Worth of the consolidated surviving or transferee entity or, in the case of a
plan of liquidation, the entity which receives the greatest value from such plan
of liquidation is at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a PRO FORMA basis, the consolidated resulting, surviving or
transferee entity or, in the case of a plan of liquidation, the entity which
receives the greatest value from such plan of liquidation would immediately
thereafter be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"; and (v)
the Company has delivered to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that such consolidation, merger or transfer and, if a
supplemental indenture is required, such supplemental indenture, complies with
the Indenture and that all conditions precedent therein relating to such
transaction have been satisfied. The provisions of clause (iv) will not prevent
the merger of the Company with or into another Person solely for the purpose of
changing the jurisdiction of incorporation of the Company.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and, except in the case of a transfer of all or
substantially all of the assets of the Company and its Subsidiaries as a result
primarily of the lease to any party thereof, the Company shall be released from
the obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
or Unrestricted Subsidiaries will directly or indirectly engage to any
substantial extent in any line or lines of business activity other than that
which, in the reasonable good faith judgment of the Board of Directors of the
Company, is a Related Business.
RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK
The Indenture provides that the Company will not sell, and will not permit
any of its Subsidiaries to issue or sell, any Equity Interests of any Subsidiary
of the Company to any Person other than the
16
Company or a Wholly Owned Subsidiary of the Company, except for Equity Interests
with no preferences or special rights or privileges and with no redemption or
prepayment provisions.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder within 15 days after it is or
would have been (if it were subject to such reporting obligations) required to
file such with the Commission, annual and quarterly financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission, if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including, with respect
to annual information only, a report thereon by the Company's certified
independent public accountants as such would be required in such reports to the
Commission, and, in each case, together with a management's discussion and
analysis of financial condition and results of operations which would be so
required and, to the extent permitted by the Exchange Act or the Commission (if
it were subject to such reporting obligations), file with the Commission the
annual, quarterly and other reports which it is or would have been required to
file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes due
and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of the principal, or premium, if
any, on the Notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation, payment
of the Change of Control Purchase Price or the Asset Sale Offer Price, or
otherwise, (iii) the failure by the Company or any Subsidiary to observe or
perform any other covenant or agreement contained in the Notes or the Indenture
and, subject to certain exceptions, the continuance of such failure for a period
of 60 days after written notice is given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate principal
amount of the Notes outstanding, (iv) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any of its Subsidiaries, (v) a
default in any issue of Indebtedness of the Company or any of its Subsidiaries
with an aggregate principal amount in excess of $5 million, which default (a) is
caused by failure to pay principal of, or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided therein on the
date of such default, or (b) results in the acceleration of payment of such
Indebtedness prior to its express maturity and (vi) final unsatisfied judgments
not covered by insurance aggregating in excess of $5 million, at any one time
rendered against the Company or any of its Subsidiaries and not stayed, bonded
or discharged within 60 days. The Indenture provides that if a Default occurs
and is continuing, the Trustee must, within 90 days after the occurrence of such
default, give to the Holders notice of such default; PROVIDED, that the Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any
Subsidiary), then in every such case, unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the Holders of
25% in aggregate principal amount of the Notes then outstanding, by notice in
writing to the Company (and to
17
the Trustee if given by Holders) (an "Acceleration Notice"), may declare all
principal, premium, if any, and accrued and unpaid interest thereon to be due
and payable immediately. If an Event of Default specified in clause (iv), above,
relating to the Company or any Subsidiary occurs, all principal and accrued
interest thereon will be immediately due and payable on all outstanding Notes
without any declaration or other act on the part of the Trustee or the Holders.
The Holders of a majority in aggregate principal amount of Notes generally are
authorized to rescind such acceleration if all existing Events of Default, other
than the non-payment of the principal of, premium, if any, and interest on the
Notes which have become due solely as a result of such acceleration have been
cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
in the payment of principal of or interest on any Note not yet cured or a
default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Notes, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by, and the
Indenture shall cease to be of further effect as to, all outstanding Notes,
except as to (i) rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due from the trust funds; (ii) the Company's obligations with respect to such
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust; (iii) the rights, powers,
trust, duties, and immunities of the Trustee, and the Company's obligations in
connection therewith; and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have its
obligations released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, U.S. legal tender, noncallable U.S. government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such Notes on the
stated date for payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such Notes, and the
Holders of Notes must have a valid, perfected, exclusive security interest in
such trust; (ii) in the case of the Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by the Internal Revenue Service, a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of such Notes will not
18
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to such Trustee confirming
that the Holders of such Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under the Indenture or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee
an Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of such Notes over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; and (vii) the Company
shall have delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that the conditions precedent provided for in, in the case
of the Officers' Certificate, (i) through (vi) and, in the case of the opinion
of counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company under
the Indenture will be revived and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any supplemental indenture or modify the rights of the Holders; PROVIDED, that
no such modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of any Note, or reduce the principal amount
thereof or the rate (or extend the time for payment) of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or reduce the Change of Control
Purchase Price or the Asset Sale Offer Price or alter the provisions (including
the defined terms used therein) regarding the right of the Company to redeem the
Notes or the provisions (including the defined terms used therein) of the
"Repurchase of Notes at the Option of the Holder Upon a Change of Control"
covenant in a manner adverse to the Holders, or (ii) reduce the percentage in
principal amount of the outstanding Notes, the consent of whose Holders is
required for any such amendment, supplemental indenture or waiver provided for
in the Indenture, or (iii) modify any of the waiver provisions, except to
increase any required percentage or to provide that certain other provisions of
the Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Note affected thereby, or (iv) cause the Notes to become
subordinate in right of payment to any other Indebtedness.
19
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company or any
successor entity shall have any personal liability in respect of the obligations
of the Company under the Indenture or the Notes by reason of his or its status
as such stockholder, employee, officer or director.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any Person existing at the time such Person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with or otherwise
acquired by the Company or one of its Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"AFFILIATE" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, PROVIDED that, with respect to ownership of the Company and its
Subsidiaries, a beneficial owner of 10% or more of the total voting power
normally entitled to vote in the election of directors, managers or trustees, as
applicable, shall for such purposes be deemed to constitute control.
"ANCILLARY DOCUMENTS" means the amendment to the Company's Articles of
Incorporation creating the Junior Preferred Stock, the Restricted Stock
Agreements, the Shareholders Agreement, the Shareholder Registration Rights
Agreement, the Employment Agreements, the Management Stock Option Agreements and
the Plan.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of (a) the
product of the number of years from the date of determination to the date or
dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" has the meaning attributed to it in
Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue Date),
whether or not applicable, except that a "Person" shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time.
"BORROWING BASE" means at any time the sum of (i) 75% of Eligible
Receivables, plus (ii) 65% of Eligible Inventory.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"CAPITALIZED LEASE OBLIGATION" means rental or other payment obligations
under a lease of real or personal property that are required to be capitalized
for financial reporting purposes in accordance with GAAP, and the amount of
Indebtedness represented by such obligations shall be the capitalized amount of
such obligations, as determined in accordance with GAAP.
"CASH EQUIVALENT" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of
20
the United States of America is pledged in support thereof), (ii) time deposits
and certificates of deposit and commercial paper issued by the parent
corporation of any domestic commercial bank of recognized standing having
capital and surplus in excess of $500 million and commercial paper issued by
others rated at least A-2 or the equivalent thereof by Standard & Poor's
Corporation or at least P-2 or the equivalent thereof by Moody's Investors
Service, Inc. and in each case maturing within one year after the date of
acquisition and (iii) investments in money market accounts substantially all of
whose assets comprise securities of the types described in clauses (i) and (ii)
above.
"CONSOLIDATED COVERAGE RATIO" of any Person as of the date of the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
(the "Transaction Date") means the ratio, on a PRO FORMA basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; PROVIDED that for purposes of
this definition, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall be
assumed to have occurred on the first day of such Reference Period, and (iv) the
Consolidated Fixed Charges of such Person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a PRO FORMA basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
Person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that either (i) has the effect of fixing the
interest rate on the date of computation, in which case such fixed rate (whether
higher or lower) shall be used or (ii) has the effect of capping the interest
rate on the date of computation, in which case such capped rate (if lower) shall
be used.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
Consolidated Net Income of such Person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of (i) Consolidated Income Tax Expense,
(ii) Consolidated Depreciation and Amortization Expense, PROVIDED that
Consolidated Depreciation and Amortization Expense of a Subsidiary that is not a
Wholly Owned Subsidiary shall only proportionately be added to the extent of the
proportionate equity interest of the Company in such Subsidiary, (iii)
Consolidated Fixed Charges, (iv) all other non-cash charges, less the amount of
all cash payments made by such Person or any of its Subsidiaries during such
period to the extent such payments relate to non-cash charges that were added
back in determining Consolidated EBITDA for such period or any prior period, and
(v) for periods including and prior to June 5, 1996, salary paid to Raymond
Scherr as Chairman of the Company (to the extent such salary reduced
Consolidated Net Income).
"CONSOLIDATED FIXED CHARGES" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and its
Consolidated
21
Subsidiaries during such period, including (i) original issue discount and
non-cash interest payments or accruals on any Indebtedness, (ii) the interest
portion of all deferred payment obligations, and (iii) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptances
and letters of credit financings and currency and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such period, and (b) the
amount of cash dividends paid or scheduled to be paid by such Person or any of
its Consolidated Subsidiaries in respect of Preferred Stock (other than by
Subsidiaries of such Person to such Person or such Person's Wholly Owned
Subsidiaries). For purposes of this definition, (x) interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or a
Subsidiary of such Person of an obligation of another Person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP), plus, without
duplication and only to the extent not already included in net income, cash
dividends received by the Company from Unrestricted Subsidiaries (not in excess
of the Company's or such Subsidiary's proportionate share of the equity interest
therein) for such period, adjusted to exclude (only to the extent included in
computing such net income (or loss) and without duplication): (a) all gains and
losses which are either extraordinary (as determined in accordance with GAAP) or
are either unusual or nonrecurring (including any gain or loss from the sale or
other disposition of assets outside the ordinary course of business or from the
issuance or sale of any Capital Stock), (b) the net income, if positive, of any
Person, other than a Wholly Owned Subsidiary, in which such Person or any of its
Consolidated Subsidiaries has an interest, except to the extent of the amount of
any dividends or distributions actually paid in cash to such Person or a Wholly
Owned Subsidiary of such Person during such period, but in any case not in
excess of such Person's PRO RATA share of such Person's net income for such
period, (c) the net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, (d)
the net income, if positive, of any of such Person's Consolidated Subsidiaries
to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Consolidated
Subsidiary, and (e) the effect of non-cash charges resulting solely from the
issuance and/or lapse of substantial risk of forfeiture of Junior Preferred
Stock issued to members of the Company's management in connection with and at
the time of the Recapitalization.
"CONSOLIDATED NET WORTH" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to preferred stock of such Person) and its Consolidated
Subsidiaries, as would be shown on the consolidated balance sheet of such Person
prepared in accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity), (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of such Person and
its Consolidated Subsidiaries, and (b) amounts included in such stockholders'
equity resulting from upward revaluations and other write-ups in the book value
of assets of such Person or a Consolidated Subsidiary of such Person subsequent
to the Issue Date.
"CONSOLIDATED SUBSIDIARY" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of June 5, 1996,
between the Company and Wells Fargo Bank, N.A., and all refundings,
refinancings, amendments, modifications, replacements (solely with institutional
lenders of national reputation) and supplements thereto.
22
"DISQUALIFIED CAPITAL STOCK" means (a), except as set forth in (b), with
respect to any Person, any Equity Interest of such Person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time would
be, required to be redeemed or repurchased (including at the option of the
Holder thereof) by such Person or any of its Subsidiaries, in whole or in part,
on or prior to the Stated Maturity of the Notes and (b) with respect to any
Subsidiary of such Person (including with respect to any Subsidiary of the
Company), any Equity Interest other than any common equity with no preference,
privileges, or redemption or repayment provisions.
"ELIGIBLE INVENTORY" means the book value of all inventory owned by the
Company and its Subsidiaries as would be reportable on a consolidated balance
sheet prepared in accordance with GAAP .
"ELIGIBLE RECEIVABLES" means the face amount of all accounts receivable
owned by the Company and its Subsidiaries as would be reportable on a
consolidated balance sheet in compliance with GAAP.
"EQUITY INTEREST" of any Person means any shares, interests, warrants,
options, participations or other equivalents (however designated) in such
Person's equity, and shall in any event include any Capital Stock issued by, or
partnership interests in, such Person.
"EVENT OF LOSS" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"EXEMPTED AFFILIATE TRANSACTION" means (i) compensation paid to officers and
directors of the Company pursuant to the Ancillary Documents as in effect on the
date the shares of Senior Preferred Stock were first issued, (ii) any loans or
advances by the Company to employees of the Company or a subsidiary of the
Company in the ordinary course of business and in furtherance of the Company's
business, in an aggregate amount not to exceed $1 million at any one time
outstanding, (iii) transactions expressly contemplated by the Transaction
Documents (including, without limitation, the repurchase of shares of Junior
Preferred Stock and Common Stock held by employees), (iv) transactions with
employees of the Company (including but not limited to compensation arrangements
or loans and advances not referred to in clause (i) or (ii) that have been
approved by the Board of Directors, including a majority of the disinterested
directors, as being in the best interests of the Company) and (v) transactions
between or among the Company and one or more of its Wholly Owned Subsidiares and
between or among the Company's Wholly Owned Subsidiaries.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company outstanding on the
Issue Date after giving effect to the redemption of the Bridge Facility.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"INDEBTEDNESS" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such any Person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of the purchase price of any property or services, except
(other than accounts payable or other obligations to trade creditors (not the
result of borrowed money) which have remained unpaid for greater than 90 days
past their original due date) those incurred in the ordinary course of its
business that would constitute ordinarily a trade payable (including trade
payables due within 12 months representing special terms offered by vendors in
connection with new store openings, "special buy" situations or
23
promotional situations) to trade creditors (which in no event provide for
payment more than 12 months after delivery of goods or provision of services),
(iv) evidenced by bankers' acceptances or similar instruments issued or accepted
by banks, (v) relating to any Capitalized Lease Obligation, or (vi) evidenced by
a letter of credit or a reimbursement obligation of such Person with respect to
any letter of credit; (b) all net obligations of such Person under Interest Swap
and Hedging Obligations; (c) all liabilities and obligations of others of the
kind described in the preceding clause (a) or (b) that such Person has
guaranteed or that is otherwise its legal liability, or which are secured by any
assets or property (limited, in such case, to the lesser of the amount of such
Indebtedness or the fair market value of such assets or property) of such
Person, and all obligations to purchase, redeem or acquire any Equity Interests;
(d) any and all deferrals, renewals, extensions, refinancing and refundings
(whether direct or indirect) of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a), (b) or
(c), or this clause (d), whether or not between or among the same parties; and
(e) all Disqualified Capital Stock of such Person (measured at the greater of
its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends). For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value to be determined in good
faith by the board of directors of the issuer (or managing general partner of
the issuer) of such Disqualified Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act as a consequence of which the Common Stock of the
Company is listed on a national securities exchange or quoted on the national
market system of NASDAQ.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any Person in any other Person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (b) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); (c) other than guarantees of Indebtedness of the
Company to the extent permitted by the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," the entering into by
such Person of any guarantee of, or other credit support or contingent
obligation with respect to, Indebtedness or other liability of such other
Person; (d) the making of any capital contribution by such Person to such other
Person; and (e) the designation by the Board of Directors of the Company of any
person to be an Unrestricted Subsidiary. The Company shall be deemed to make an
Investment in an amount equal to the fair market value (as reasonably determined
in good faith by the Board of Directors) of the net assets
24
of any Subsidiary (or, if neither the Company nor any of its Subsidiaries has
theretofore made an Investment in such Subsidiary, in an amount equal to the
Investments being made), at the time that such subsidiary is designated an
Unrestricted Subsidiary, and any property transferred to an Unrestricted
Subsidiary from the Company or a Subsidiary shall be deemed an Investment valued
at its fair market value (as reasonably determined in good faith by the Board of
Directors) at the time of such transfer.
"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"LIEN" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired (excluding any option, warrant, right to purchase or
other similar right with respect to Qualified Capital Stock).
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary) expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less (i) the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its Subsidiaries in connection with such Asset Sale and (ii)
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against (a) any liabilities associated with the property or assets
disposed of in such Asset Sale, and (b) the after-tax cost of any
indemnification payments (fixed and contingent) attributable to the seller's
indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such Asset Sale (but excluding any payments,
which by the terms of the indemnities will not be made prior to the Stated
Maturity of the Notes).
"PERMITTED INDEBTEDNESS" means any of the following:
(a) Indebtedness incurred by the Company to any Wholly Owned Subsidiary,
and any Wholly Owned Subsidiary may incur Indebtedness to any other Wholly
Owned Subsidiary or to the Company; PROVIDED that, in the case of
Indebtedness of the Company, such obligations shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the
Notes and the date of any event that causes such Subsidiary no longer to be
a Wholly Owned Subsidiary shall be an Incurrence Date;
(b) Indebtedness incurred by the Company evidenced by the Notes and
represented by the Indenture up to the amounts specified therein as of the
date thereof;
(c) Purchase Money Indebtedness (including any Indebtedness issued to
refinance, replace or refund such Indebtedness so long as such Indebtedness
is secured only by the assets that secured the Indebtedness so refinanced,
replaced or refunded on a non-recourse basis) incurred by the Company and
its Subsidiaries on or after the Issue Date, PROVIDED that (i) the aggregate
amount of such Indebtedness incurred on or after the Issue Date and
outstanding at any time pursuant to this paragraph (c) (including
Indebtedness issued so to refinance, replace or refund) shall not exceed $5
million, and (ii) in each case, such Indebtedness when incurred shall not
constitute less than 50% nor more than 100% of the cost (determined in
accordance with GAAP) to the Company of the property so purchased or leased;
25
(d) Refinancing Indebtedness incurred by the Company with respect to any
Indebtedness or Disqualified Capital Stock, as applicable, incurred as
permitted by the Debt Incurrence Ratio contained in the "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"
covenant or as described in clause (b) of this definition or described in
this clause (d) or Existing Indebtedness (after giving effect to the
repayment of the Bridge Facility);
(e) Indebtedness incurred pursuant to the Credit Agreement (including
any Indebtedness issued to refinance, refund or replace such Indebtedness);
provided that, after giving effect to any such incurrence, the aggregate
principal amount of such Indebtedness then outstanding does not exceed the
greater of (i) $25 million and (ii) the Borrowing Base, which such amount
(in the case of (i) or (ii)) shall be reduced by the amount of any
Indebtedness outstanding pursuant to the Credit Agreement retired with Net
Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset
Sale;
(f) Disqualified Capital Stock issued as in-kind dividends on the
Senior Preferred Stock or accretion to the liquidation value thereof
pursuant to the instrument governing the terms of such capital stock as such
instrument was in effect on the Issue Date; and
(g) unsecured Indebtedness incurred by the Company (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate amount outstanding at any time (including any Indebtedness issued
to refinance, replace, or refund such Indebtedness) of up to $10 million.
"PERMITTED INVESTMENT" means Investments in (a) any of the Notes; (b) Cash
Equivalents; and (c) intercompany indebtedness to the extent permitted under
clause (a) of the definition of "Permitted Indebtedness."
"PERMITTED LIEN" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business,
PROVIDED that (i) the underlying obligations are not overdue for a period of
more than 30 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds,
deposits in connection with the purchase of real property, and other obligations
of a like nature incurred in the ordinary course of business; (e) easements,
rights-of-way, zoning, similar restrictions and other similar encumbrances or
title defects which, singly or in the aggregate, do not in any case materially
detract from the value of the property subject thereto (as such property is used
by the Company or any of its Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (f) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with respect
thereto; (g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security legislation; (h) Liens securing the Notes; (i) Liens securing
Indebtedness of a Person existing at the time such Person becomes a Subsidiary
or is merged with or into the Company or a Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, PROVIDED that such
Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any property or assets other than property or assets acquired in such
transaction; (j) Liens arising from Purchase Money Indebtedness permitted to be
incurred under clause (c) of the definition of "Permitted Indebtedness,"
PROVIDED such Liens relate only to the property which is subject to such
Purchase Money Indebtedness and PROVIDED, FURTHER, that cross-collateralization,
creation of "collateral pools" or similar arrangements
26
involving solely Purchase Money Indebtedness and the assets serving as
collateral therefor shall be Permitted Liens; (k) leases or subleases granted to
other Persons in the ordinary course of business not materially interfering with
the conduct of the business of the Company or any of its Subsidiaries or
materially detracting from the value of the relative assets of the Company or
any Subsidiary; (l) Liens arising from precautionary Uniform Commercial Code
financing statement filings regarding operating leases entered into by the
Company or any of its Subsidiaries in the ordinary course of business; (m) Liens
securing Refinancing Indebtedness incurred to refinance any Indebtedness that
was previously so secured in a manner no more adverse to the Holders of the
Notes than the terms of the Liens securing such refinanced Indebtedness
(provided that any Refinancing Indebtedness with respect to the Credit Agreement
need not have any limitation on when such Liens are granted or perfected),
PROVIDED that the Indebtedness secured is not increased, except to finance
accrued interest and the expenses of such refinancing, and the lien is not
extended to any additional assets or property; (n) Liens in favor of the Company
only; and (o) Liens imposed pursuant to the terms of the Credit Agreement.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of such Person to any
seller or other Person (i) incurred solely to finance the acquisition (including
in the case of a Capitalized Lease Obligation only, the lease) of any real or
personal tangible property which, in the reasonable good faith judgment of the
Board of Directors of the Company, is directly related to a Related Business of
the Company, (ii) which is incurred within 90 days of such acquisition, and
(iii) is secured only by assets so financed.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Equity Interests or Indebtedness of the
Company with the Net Cash Proceeds received by the Company from the
substantially concurrent sale of Qualified Capital Stock or any exchange of
Qualified Capital Stock for any Capital Stock or Indebtedness.
"REFERENCE PERIOD" with regard to any period means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference including accrued dividends
thereon, of the Indebtedness or Disqualified Capital Stock so Refinanced and
(ii) if such Indebtedness being Refinanced was issued with an original issue
discount, the accreted value thereof (as determined in accordance with GAAP) at
the time of such Refinancing; PROVIDED that (A) Refinancing Indebtedness
incurred by any Subsidiary of the Company shall only be used to Refinance
outstanding Indebtedness or Disqualified Capital Stock of such Subsidiary, (B)
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness or Disqualified Capital Stock to be so refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior, if
applicable, to the rights of Holders of the Notes than was the Indebtedness or
Disqualified Capital Stock to be refinanced and (C) Refinancing Indebtedness
shall have a final stated maturity or redemption date, as applicable, no earlier
than the final stated maturity or redemption date, as applicable, of the
Indebtedness or Disqualified Capital Stock to be so refinanced.
27
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than investments in Permitted Investments.
"RESTRICTED PAYMENT" means, with respect to any Person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such Person or any parent or Subsidiary of such Person, (b) any payment on
account of the purchase, redemption or other acquisition or retirement for value
of Equity Interests of such Person or any Subsidiary or parent of such Person,
(c) other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness, any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness, directly or
indirectly, by such Person or a parent or Subsidiary of such Person prior to the
scheduled maturity, any scheduled repayment of principal, or scheduled sinking
fund payment, as the case may be, of such Indebtedness and (d) any Restricted
Investment by such Person; PROVIDED, HOWEVER, that the term "Restricted Payment"
does not include (i) any dividend, distribution or other payment on or with
respect to Capital Stock of an issuer to the extent payable solely in shares of
Qualified Capital Stock of such issuer; or (ii) any dividend, distribution or
other payment to the Company by any of its Subsidiaries.
"STATED MATURITY," when used with respect to any Note, means July 1, 2006.
"STOCKHOLDERS AGREEMENT" means the agreement dated as of June 5, 1996, among
the Company and the stockholders listed on the various schedules thereto, as in
effect on the Issue Date.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company that is
subordinated in right of payment to the Notes in any respect.
"SUBSIDIARY," with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such Person, by such
Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, (ii) any other Person (other than a corporation) in
which such Person, one or more Subsidiaries of such Person, or such Person and
one or more Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest, or (iii) a
partnership in which such Person or a Subsidiary of such Person is, at the time,
a general partner. Notwithstanding the foregoing, an Unrestricted Subsidiary
shall not be a Subsidiary of the Company or of any Subsidiary of the Company.
Unless the context requires otherwise, Subsidiary means each direct and indirect
Subsidiary of the Company.
"TRANSACTION DOCUMENTS" means the Investor Agreement, the Bridge Financing
Agreement, the Securities Purchase Agreement, the Registration Agreement, the
Tax Indemnification Agreement, and the Ancillary Documents, in each case as such
documents are in effect on the date shares of Senior Preferred Stock are first
issued.
"UNRESTRICTED SUBSIDIARY" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); PROVIDED that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving PRO FORMA effect to such designation would there exist a Default or Event
of Default and (iii) any Investment therein shall not be prohibited by the
"Limitation on Restricted Payments" covenant. The Board of Directors of the
Company may designate any Unrestricted Subsidiary to be a Subsidiary, PROVIDED
that (i) no Default or Event of Default is existing or will occur as a
consequence thereof and (ii) immediately after giving effect to such
designation, on a PRO FORMA basis,
28
the Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio in the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." Each such designation shall be
evidenced by filing with the Trustee a certified copy of the resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions.
"WHOLLY OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more Wholly Owned Subsidiaries of the
Company.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Notes have been issued in the form of one or
more registered Notes in global form (the "Global Notes"). Each Global Note has
been deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary.
The Depositary is (i) a limited-purpose trust company organized under the
New York Banking Law; (ii) a member of the Federal Reserve System; (iii) a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code; and (iv) a "clearing agency" registered pursuant to Section 17A of the
Exchange Act. The Depositary holds securities that its participating
organizations (collectively, the "Participants") deposit with the Depositary.
The Depositary also facilitates the settlement of transactions in such
securities between Participants, such as transfers and pledges in deposited
securities through electronic computerized book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. The rules applicable to the
Depositary and its Participants are on file with the SEC. QIBs may elect to hold
Notes purchased by them through the Depositary. QIBs who are not Participants
may beneficially own securities held by or on behalf of the Depositary only
through Participants or Indirect Participants. Persons who are not QIBs may not
hold Notes through the Depositary.
The Company expects that pursuant to procedures established by the
Depositary, upon deposit of the Global Note, the Depositary will credit the
accounts of Participants with an interest in the Global Note, and ownership of
the Notes evidenced by the Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of Participants), the Participants and
the Indirect Participants. The laws of some states require that certain persons
take physical delivery in definitive form of securities that they own and that
security interests in negotiable instruments can only be perfected by delivery
of certificates representing the instruments. Consequently, the ability to
transfer Notes or to pledge the Notes as collateral will be limited to such
extent. For certain other restrictions on the transferability of the Notes, see
"Notice to Investors."
So long as the Depositary or its nominee is the registered owner of a Global
Note, the Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Securities, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a person having a beneficial
interest in Notes represented by a Global Note to pledge such
29
interest to persons or entities that do not participate in the Depositary's
system, or to otherwise take actions with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each Holder owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such Holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such Holder owns its interest, to exercise any rights of a holder
under the Indenture or such Global Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
Holders of Notes or a Holder that is an owner of a beneficial interest in a
Global Note desires to take any action that the Depositary, as the holder of
such Global Note, is entitled to take, the Depositary would authorize the
Participants to take such action and the Participants would authorize Holders
owning through such Participants to take such action or would otherwise act upon
the instructions of such Holders. Neither the Company nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the Depositary
or its nominee on the applicable record date will be payable by the Trustee to
or at the direction of the Depositary or its nominee in its capacity as the
registered holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of the Depositary. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days; or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depositary of
its Global Note, Certificated Securities will be issued to each person that the
Depositary identifies as the beneficial owner of the Notes represented by the
Global Note. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee, exchange
such beneficial interest for Certificated Securities. Upon any such issuance,
the Trustee is required to register such Certificated Securities in the name of
such person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and the Company and the Trustee may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company will have no
30
responsibility for the performance by the Depositary or its Participants of
their respective obligations as described hereunder or under the rules and
procedures governing their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and liquidated
damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Depositary. With respect to Notes represented by
Certificated Securities, the Company will make all payments of principal,
premium, if any, interest and liquidated damages, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are expected to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds. No assurance can be given as to the effect, if any,
of settlement in immediately available funds on trading activity in the Notes.
31
DESCRIPTION OF THE 1997 CREDIT FACILITY
GENERAL. The Company has entered into the 1997 Credit Facility with Wells
Fargo Bank, National Association ("Wells Fargo Bank"). The 1997 Credit Facility
provides for a $40 million revolving credit facility, including a sub-limit for
letters of credit of $10 million, and expires on July 1, 2004. Proceeds from the
1997 Credit Facility may be used to finance general working capital requirements
and certain permitted acquisitions, PROVIDED that outstanding borrowings with
respect to such permitted acquisitions may not at any time exceed an aggregate
of $30 million. The maximum amount available under the 1997 Credit Facility will
be automatically reduced by $10 million on each of July 1, 2000, 2001 and 2002.
This summary of the 1997 Credit Facility is qualified in its entirety by
reference to the 1997 Credit Facility which is incorporated by reference in the
Registration Statement of which this Prospectus is a part. Capitalized terms
used in this description that are not defined herein have the meaning given to
such terms in the 1997 Credit Facility.
SECURITY. Indebtedness of the Company under the 1997 Credit Facility is
secured by a security interest in certain assets and properties of the Company,
including accounts receivable, other rights to payment, general intangibles,
trademarks and inventory.
INTEREST. Indebtedness under the 1997 Credit Facility bears interest at a
rate based (at the Company's option) upon (i) in the case of Prime Rate Loans,
the Prime Rate; and (ii) in the case of Eurodollar Rate Loans, the Eurodollar
Rate for one, two, three, six, nine or twelve months, plus a maximum margin of
2.25% (subject to reduction depending on the ratio of Funded Debt to EBITDA).
MATURITY. The 1997 Credit Facility will mature on July 1, 2004. Loans made
pursuant to the 1997 Credit Facility may be borrowed, repaid and reborrowed from
time to time until such maturity date, subject to the satisfaction of certain
conditions on the date of any such borrowing.
REVOLVING CREDIT FACILITY FEES. The Company is required to pay Wells Fargo
Bank the $150,000 remaining unpaid portion of the facility fee required by the
Company's prior credit facility in installments of $50,000 at the end of each
fiscal year of the Company, commencing with the Company's 1997 fiscal year end,
PROVIDED that upon termination or cancellation of the 1997 Credit Facility, the
Company must pay in full the outstanding but unpaid balance of the $150,000
facility fee. The Company is also required to pay to Wells Fargo Bank a
commitment fee based on the average daily unused portion of the committed
undrawn amount of the 1997 Credit Facility during the preceding quarter equal to
0.25% per annum (subject to reduction if the average daily advances under the
revolving line of credit exceed $15 million during certain 12-month periods),
payable in arrears on a quarterly basis. In addition to a normal issuance fee
for each letter of credit issued, the Company is required to pay to Wells Fargo
Bank a letter of credit fee based on the aggregate unpaid face amount of
outstanding letters of credit equal to a maximum of 2.00%, payable in arrears on
a quarterly basis.
CONDITIONS TO EXTENSIONS OF CREDIT. The obligation of Wells Fargo Bank to
make loans or extend letters of credit is subject to the satisfaction of certain
conditions including, but not limited to, the absence of a default or event of
default under the 1997 Credit Facility, all representations and warranties under
the 1997 Credit Facility being true and correct in all material respects, and
that there has been no material adverse change in the Company's properties or
business.
COVENANTS. The 1997 Credit Facility requires the Company to meet certain
financial tests, including a maximum Net Funded Debt to EBITDA ratio, a minimum
EBITDA Coverage Ratio, a minimum level of profit, and a minimum annual increase
in Tangible Net Worth. In addition, the outstanding principal balance of the
1997 Credit Facility at the end of each fiscal quarter cannot exceed the
aggregate of 80% of the Company's accounts receivable and 70% of the Company's
inventory. The 1997 Credit Facility also contains covenants which, among other
things, limit: (i) the incurrence of additional indebtedness; (ii) merger,
consolidation or transfer of assets, (iii) guaranties of indebtedness of other
persons or
32
entities; (iv) loans or advances to other persons or entities; (v) investments
in other persons or entities; (vi) dividends or distributions with respect to
the Company's capital stock; (vii) pledge or grant of security interest in the
Company's accounts receivable, general intangibles or inventory; and (viii)
other matters customarily restricted in loan agreements. The 1997 Credit
Facility also contains additional covenants which require the Company to
maintain its properties, to maintain insurance on such properties, to provide
certain information to Wells Fargo Bank, including financial statements, notices
and reports and to permit inspections of the books and records of the Company
and its subsidiaries, and to comply with applicable laws.
EVENTS OF DEFAULT. Events of Default under the 1997 Credit Facility include
payment defaults, breach of representations, warranties and covenants (subject
to certain cure periods), cross-default to other indebtedness in excess of $2.5
million, dissolution of the Company, certain events of bankruptcy and
insolvency, and judgment defaults in excess of $2.5 million.
33
PLAN OF DISTRIBUTION
This Prospectus may be used by Chase Securities in connection with offers
and sales related to market-making transactions in the Notes. Chase Securities
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale. The Company will
not receive any of the proceeds of such sales. Chase Securities has no
obligation to make a market in the Notes and may discontinue its market-making
activities at any time without notice, at its sole discretion. The Company has
agreed to indemnify Chase Securities against certain liabilities, including
liabilities under the Securities Act, and to contribute to payments which Chase
Securities might be required to make in respect thereof.
Chase Securities and its affiliates have in the past provided, and may in
the future provide, investment banking services and general financing and
banking services to the Company and its affiliates. An affiliate of Chase
Securites beneficially owns 4,381,265 shares of Common Stock (net of certain
options granted to certain members of the Company's management).
LEGAL MATTERS
The validity of the Notes offered hereby was passed upon by Buchalter,
Nemer, Fields & Younger, a Professional Corporation.
EXPERTS
The financial statements and schedule of Guitar Center, Inc. as of December
31, 1996 and for the year then ended have been incorporated by reference herein
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Guitar Center, Inc. at December 31, 1995 and for
the two years ended December 31, 1995, incorporated by reference herein have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon incorporated by reference herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
In connection with the Recapitalization, Ernst & Young LLP was replaced on
July 24, 1996 by KPMG Peat Marwick LLP as the Company's independent certified
public accountants. The decision to change accountants was approved by the
Company's Board of Directors. The reports of Ernst & Young LLP on the Company's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
of the Company's financial statements for each of the two fiscal years ended
December 31, 1995, and the subsequent interim period ended June 30, 1996, there
were no disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or auditing scope and
procedures which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make reference to the matter in their
report.
34
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NO DEALER, SALESPEOPLE OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
Additional Information.................................................. 2
Incorporation of Certain Documents
by Reference.......................................................... 3
Summary................................................................. 4
Risk Factors............................................................ 7
Ratio of Earnings to Fixed Charges...................................... 8
Use of Proceeds......................................................... 8
Transactions with Affiliates of Chase Securities........................ 8
Description of Notes.................................................... 9
Description of the 1997 Credit Facility................................. 32
Plan of Distribution.................................................... 34
Legal Matters........................................................... 34
Experts................................................................. 34
[LOGO]
GUITAR CENTER, INC.
$66,667,000
11% SENIOR NOTES DUE 2006
-----------------
PROSPECTUS
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DECEMBER 10, 1997
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